Why Haven’t Precious Metals Equities Performed Better With Gold Prices Near All-Time Highs?3 Feb 2024 02:17
This is a question we get asked often. There are many nuances at play for precious metals equities. However, the biggest theme playing out in the segment has been that of outflows. Investors have been redeeming their holdings in precious metals equities for several years now. The widely followed VanEck Vectors Gold Miners ETF (GDX) has fewer units outstanding than it did five years ago. The same can be said about many other precious metals equity offerings. This has impacted smaller- and medium-sized equities the most due to their lack of liquidity. Thankfully, the fundamentals have been robust enough for many of these equities. Asset outflows typically produce negative returns, but in 2023, despite the outflows, we have seen positive performances out of several equities, large and small. Towards the end of the year, we saw some opportunistic M&As (merger and acquisitions) play out in our space with Marathon Gold receiving a bid from Calibre Mining and Osino Resources getting swallowed by the cash-rich Dundee Precious Metals. M&A, often involving hefty premiums are quite helpful in attracting eyeballs and capital into a sector. Heading into 2024, precious metals miners are well positioned with strong balance sheets and robust operating margins.
In a sector that has been starved from asset flows for over half a decade, a trickle of capital could be the long-awaited game changer. We are witnessing multiple divergences between fundamentals and investor behavior. Over the long term, fundamentals have a way of asserting themselves. The precious metals sector, starting from bullion all the way down to the equities, is marked by low investor sentiment and general disregard. Against this backdrop, the fundamental reasons to own gold, silver and precious metals equities has continued to strengthen. As the sentiment towards this space improves, our suspicion is that it will produce a doozy of a rally, particularly for those invested in the small- to mid-cap precious metals equities.
Will investors who have been selling their gold despite its rising importance on the world stage change their mind? I believe so. It is not inconceivable that in the not too distant future, when the focus shifts from yields to debt-service costs and spiraling debts, we will see investors wade back into the safety of gold. We could see some fireworks when investors begin competing with central banks and Asian buyers seeking to purchase gold. I can’t wait for this chapter to begin.
Authored by Shree Kargutkar, Senior Portfolio Manager, Sprott Asset Management LP
January 15, 2024
Hopefully he’s proven correct.
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