Physical gold has done a good job of holding its value during the COVID-19 pandemic. It should continue to do so as central banks flood the market with cheap money. But gold miner stocks should outperform physical gold. History shows that if you believe gold is about to rally, then you should own gold stocks, which provide leverage to gold prices. And don’t be fooled by the recent dip in gold mining stocks: Investors sold everything in March, including gold stocks, as many rushed into cash or were forced to abandon positions on margin calls.
Here are the 3 reasons why gold stocks should outperform physical gold and could rally in the next few years:
1. Gold miners rather start to focus on costs than on growth
Developing new gold mines is very expensive, as well as time-consuming and risky. Therefore, some of the smarter gold mining companies have adjusted their strategies to focus on producing the highest profit per ounce of gold produced, rather than producing as many ounces of gold as possible. This should lead to better shareholder returns.
Instead of buying an exploration or development company and building a gold mine, we’re seeing more M&A activity for the acquisition of producing assets.
The lack of a new gold supply is contributing to peak gold, meaning that gold mine supply likely reached its peak level in 2019. We’re likely going to see a rapid decline in gold supply starting as early as 2022, as there are very few new, large scale gold projects coming to production anytime soon.
2. Higher margins from low oil
The mining and processing of gold require the consumption of energy, including oil, as diesel gas is needed to operate heavy machinery and vehicles to transport gold ore. This is especially true with open-pit mines, where a haul truck or dump truck is required. So gold miners will improve operating margins due to lower prices in oil.
3. Undervaluation compared to gold
Gold mining stocks are undervalued compared to physical gold and have a long way to go to catch up to the recent gains made in gold prices.
Gold stocks, both gold miners and gold streaming and royalty companies, are a great opportunity. Gold stocks provide leverage to gold and will likely outperform. However, not every gold stock is worth owning and many mismanaged companies will underperform. Investors should be selective and focus on investing in the best assets and management teams.
Sven Franssen