The gold price has traded at historically high levels in 2023, but investors are still waiting for gold stocks to catch up. Is now a good time to invest?
Gold has attracted attention this year, staying above the coveted US$2,000 per ounce mark for sizeable periods.
While this movement has excited market watchers, some investors are disappointed that gold stocks haven’t followed suit. Gold equities are generally expected to provide outsized gains compared to the metal, and investors are waiting for a breakout.
What’s weighing on gold stocks, and is now a good time to invest? The Investing News Network (INN) asked experts those questions, as well as what it will take for gold companies to move. Here’s what they had to say.
Why aren’t gold stocks rising?
Gold investors are often told to build a position in bullion before looking at stocks, but with the physical metal trading at historically high levels and gold stocks lagging, many experts see opportunities in the equities.
“You’re going to have to take a strong, hard look at companies that are exposed to mining for gold, and these companies are currently trading at levels that are super, super low,” said Shree Kargutkar, managing partner at Sprott (TSX:SII,NYSE:SII).
However, these low levels have left some market participants feeling let down instead of optimistic. One expert told INN this sentiment may have to do with a misunderstanding of how the industry operates.
“A big misconception with gold stocks for the past few years has been the investors … becoming very frustrated because the stocks continue to go lower and the gold price continues to go sideways,” David Erfle, founder of JuniorMinerJunky, said.
According to Erfle, higher costs are a big part of the problem. “Everything to get the gold, to discover the gold, to de-risk the project, to produce the gold — everything has gone up,” he told INN.
Both experts also pointed to a lack of interest in gold stocks as an issue — but more on that later.
Is now a good time to invest in gold stocks?
Although the gold price has pulled back below US$2,000 and gold stocks have yet to take off, many experts are optimistic about the resource sector as a whole, and anticipate real payouts in the future.
For Erfle, the current landscape should not make investors shy away, but instead should excite them, especially as disappointed market participants exit the space in search of greener pastures.
“The sector frustration and the low liquidity is an opportunity that people need to realize,” he said.
However, Erfle warned investors to not simply get caught up in a buying spree.
“You just can’t trade on margin, you have to accumulate things on weakness. If you start to buy strength before (a) breakout, you’re going get frustrated and you’re going lose money,” he said.
Kargutkar told INN he is similarly encouraged by gold company valuations as they stand right now.
“A lot of these companies have a reasonable amount of growth in front of them, they’re trading at three or four times price to cash flow,” he said. At the same time, trading levels are low, which is indicative of investor appetite.
“These companies are healthy to have very robust balance sheets,” Kargutkar said. “Generally speaking, they have been good (to) shareholders, and they’re trading at depressed level multiples today.”
Of course, gold stocks aren’t for everyone, especially those with a low tolerance for risk. Lobo Tiggre, editor and founder of IndependentSpeculator.com, told INN that while gold equities offer the biggest potential gains, those who can’t handle volatility should consider sticking with more stable ways of getting exposure to the yellow metal.
“You kind of have to buck up on these things; if you can’t handle the heat, you really shouldn’t be a speculator,” he explained in an interview. “Maybe just buy a gold exchange-traded fund or something and ride the metal itself and don’t worry about the stocks. Maybe you’ll sleep better — maybe that’s better for you.”
The missing puzzle piece for gold stocks
According to the experts INN spoke with, a big reason gold stocks aren’t seeing much movement at this point is that the sector is missing a critical element: the generalist investor.
“The average investor is not really invested in gold,” Kargutkar said, pointing to a lack of appetite for the resource industry.
Erfle told INN the market needs these generalist investors to be active in the space to maintain healthier trading volumes. “Investment demand will bring the retail investor back into the sector, which is what we need,” he said.
He said major gold companies are well aware of this, since they have, in his opinion, cleaned up their balance sheets, in some cases paying dividends, consolidating and creating bigger operations in an attempt to woo these investors.
“They’re trying to attract that generalist investor capital that’s been gone for the past decade,” Erfle told INN. “They realize that they need to.” In his view, the support this type of investor brings to mining stocks is invaluable and helps provide momentum when combined with interest from more specialized investors. Capital from generalist investors could also help mitigate economic challenges for gold companies, he said.
Investor takeaway
While gold stocks haven’t experienced the same upward movement as gold itself, experts remain optimistic about the sector, with many believing that current gold company valuations present good entry points for investors.
However, market participants should continue to do their own research before jumping into the sector, and should keep in mind that it may be difficult for gold stocks to gain momentum without interest from generalist investors.
