Gold prices in 2024 have shattered previous records, climbing past $2,600 per ounce for the first time following an unexpected 50-basis-point interest rate cut by the Federal Reserve. Despite the surge in bullion, gold stocks have failed to keep pace, frustrating many investors in the precious metals sector.
Analysts at Goehring & Rozencwajg highlighted the disconnect between the rising price of gold and the stagnation in gold equities. “As gold soars past $2,500, one would expect gold stocks to experience a boom,” the analysts wrote. “Yet paradoxically, these stocks remain significantly undervalued.”
While gold has enjoyed a steady upward trend since 2015—now trading more than 30% higher than its 2011 peak—gold equities have lagged considerably. The NYSE Arca Gold Bugs Index (HUI), a benchmark for gold mining stocks, currently sits at 312, which is more than 50% below its peak in September 2011. Even more striking, the index is only 10% above its August 2016 level, despite the fact that gold was trading at just $1,300 per ounce at the time.
Central Banks and Interest Rates: The Cause of the Disparity
The analysts attribute this disparity primarily to interest rates and central bank policies. Real U.S. 10-year interest rates have risen from -0.40% in 2020 to 2.1% in 2024, leading many Western investors to offload gold and gold-related equities in response to higher real rates. Over the last four years, gold exchange-traded funds (ETFs) have sold off 31 million ounces, or 25% of their holdings. Similarly, the largest gold stock ETF, the GDX, has seen consistent outflows, with nearly 20% of its assets liquidated.
However, central banks have played a significant role in sustaining gold prices. Between 2020 and 2024, central banks around the world accumulated 106 million ounces of gold, more than offsetting the sell-off by Western investors. While central banks are actively purchasing gold bars, they have shown little interest in gold equities, leaving stocks undervalued in comparison to the metal itself.
Contrarian Opportunity for Value Investors
For value investors, this discrepancy represents a prime opportunity. “As contrarian value investors, we see extraordinary potential in this disparity and have been increasing our positions in gold equities,” the analysts stated.
Concerns have been raised by some investors that rising costs within the gold mining industry could explain this extreme undervaluation. However, the analysts at Goehring & Rozencwajg countered this notion, pointing to a deeper evaluation of the sector’s underlying health. They analyzed six major gold producers—Newmont, Barrick, Harmony, Goldfields, and Agnico Eagle—that collectively produce 17 million ounces of gold and hold 343 million ounces of proven reserves.
The analysis revealed that while gold mining companies faced significant challenges during past downturns, their valuations today are extremely favorable. The companies’ enterprise value per ounce of proven reserve, a critical measure of value, has dropped to historic lows, allowing investors to effectively purchase gold in the ground at a steep discount to current market prices.
A History of Boom and Bust
Gold stocks have experienced dramatic cycles in the past. After an eightfold surge in gold prices from 1980 to 2011, the HUI index rose sixteenfold. However, the euphoria of 2011 was followed by a sharp decline. By 2015, gold had dropped nearly 50%, and the HUI plummeted by 85%.
Despite these setbacks, the current market conditions are more favorable than previous lows, with gold prices now at record highs and profit margins for gold miners much healthier. Today, gold equities trade at just 0.60x their discounted cash flow (DCF) value and 0.38x their real option value—levels not seen since the late 1990s.
An Unprecedented Opportunity
Analysts believe that this moment presents a rare opportunity for investors. “Unlike in 2015, when gold stocks were undervalued but profit margins were slim, the margin of safety is much greater today,” they noted. With gold at all-time highs and gold mining companies generating strong profits, the potential for upside in gold equities is substantial.
Investor sentiment, however, remains muted. Despite the surge in gold prices, funds continue to flow out of gold stock ETFs like the GDX, with $1.5 billion in redemptions in 2024 alone. Analysts suggest that this widespread disinterest only reinforces the contrarian investment case for gold stocks.
“Gold equities today offer an unprecedented combination of low valuation and high potential returns,” the analysts concluded. “In an environment where gold is hitting new highs but gold equities remain deeply undervalued, savvy investors should take notice.”
