Metal vs. miners: Gold’s rise creates opportunity

Key takeaways:

• Geopolitical risks, economic instability and equity market volatility are pushing some investors to seek out what they believe are more secure assets, such as gold.
• Sanctions and deglobalization of trade are creating opportunities to re-establish gold as a currency alternative for international transactions.
• New demand drivers have pushed gold prices higher, but we believe room remains for historical catalysts—such as US dollar weakness, falling yields or increased investor interest—to raise prices further.
• Despite strong earnings, gold-mining equities materially lagged bullion returns in 2024, potentially setting the stage for mining stocks’ outperformance if margins remain robust.

What’s driving gold’s sustained price strength?

Gold has long been perceived as an investment “safe haven” in times of political and economic uncertainty. However, under-the-radar structural forces shaping the gold market may better explain the metal’s recent upward trajectory in the face of factors that have proven to be headwinds in the past, including its historical inverse correlations to the trade weighted US dollar and higher real bond yields. Gold prices have risen with the emergence of new demand sources over the past few years, with central banks and international trading partners increasing their use of gold as a currency. However, we think traditional factors like US dollar weakness, falling yields and investor demand could drive prices even higher.

We also believe the underperformance of mining equites in 2024 creates a compelling investment opportunity in 2025. Mining equities materially lagged gold bullion returns last year, despite delivering solid earnings and cash flow gains due to higher spot gold prices.¹ We think this leaves mining stocks poised to potentially outperform physical gold—assuming gold either remains in its current trading range or moves higher. ²

Conclusion

Many gold producers have seen earnings and cash flow rise faster than their share prices, resulting in contracting valuation multiples despite improving business fundamentals and a positive outlook on future earnings growth. With equity valuations running significantly below market averages, investors appear skeptical about the sustainability of current gold prices. We believe this creates an opportunity for gold mining equities to appreciate even in a relatively flat gold-price environment, while still being well positioned to benefit if prices continue their upward trajectory.