As the saying goes, "When the cannon sounds, Gold is worth ten thousand taels."

Driven by the safe-haven sentiment triggered by geopolitical tensions, the gold price has broken through the $2400 per ounce barrier.

Investors are also starting to pay attention to investment categories related to gold, such as spot gold and Efund Gold ETF. For U.S. stock investors, there is another potential choice: gold mining stocks.

However, against the backdrop of gold prices hitting historic highs, the performance of gold mining stocks has not been satisfactory. The price of the index tracking gold mining stocks, the NYSE Arca Gold BUGS (HUI), is only half of its 2011 peak.

Why is it that the stock prices of gold mining companies are not keeping up with gold prices? Are gold mining stocks undervalued?

This article will explore gold mining stocks, analyze the relationship between gold mining stocks and gold prices, introduce the considerations for investing in gold mining stocks, and identify the leading stocks, while also sharing how to invest.

The relationship between gold mining stocks and gold prices.

Gold mining stocks refer to publicly listed companies that are engaged in gold mining.

Generally speaking, when Gold prices rise, the stock prices of Gold mining companies are likely to rise as well, and they may even rise more; the opposite is also true. The reason is the leverage relationship between Gold prices and the profit from Gold mining operations.

For a simple example, if the current Gold price is $2400 per ounce, and the production cost for the mining company is $2000 per ounce, then the profit would be $400 per ounce.

When the Gold price rises from $2400 to $2500, the increase is 4.2%. Assuming the company's production costs remain unchanged, the company's profit will rise from $400 to $500 per ounce, an increase of 25%.

Thus, it can be seen that the rise in Gold prices will significantly increase the profits of Gold mining stocks (assuming production costs remain unchanged), and the stock prices of Gold mining companies may also increase due to the improvement in operational performance, and vice versa.

Looking at the historical trends of Gold prices and Gold mining stocks, similar situations have indeed occurred.

The VanEck Gold Miners Equity ETF (GDX) is the largest ETF tracking Gold mining stocks by asset size, and one can observe its price trend in relation to spot Gold (XAUUSD).

From 2012 to 2015, Gold prices underwent a bear market, falling from over $1700 per ounce to $1000, during which GDX's decline was significantly greater than that of Gold prices.

Starting in 2016, Gold prices began to rebound. From 2016 to 2019, Gold prices rose from about $1000 per ounce to over $1600 per ounce, during which GDX's increase was far greater than that of Gold prices.

Strangely, since 2020, Gold prices have steadily risen, breaking historical highs in 2024, but the performance of Gold mining stocks has not kept up and has even underperformed Gold prices.

According to a report by MarketWatch, the main reason for the mediocre performance of Gold mining stocks is the rising production costs. Since the beginning of 2020, miners' production costs have increased by 35%, mainly due to rising labor costs, which is why Gold prices are reaching new highs while Gold mining stocks have not followed suit.

So, under the backdrop of rising Gold prices, are Gold mining stocks undervalued?

According to a report by Barron's, John Hathaway, a senior portfolio manager at Sprott Asset Management, believes that Gold mining stocks may currently be undervalued, and that the total market cap of the entire Gold mining industry is about $300 billion, which is even lower than the market cap of a credit card giant, MasterCard (MA).

According to her calculations, Gold mining stocks are currently discounted relative to Gold prices, and there is potential for mean reversion in the future, which may provide investment opportunities for Gold mining stocks.

What are the leading companies in Gold mining stocks?

Investors can easily find Gold-related Gold mining stocks on Futubull.

Currently, the top three companies in this industry by market cap are Newmont (NEM), Agnico Eagle (AEM), and Barrick Gold (GOLD).

Notably, Newmont and Barrick Gold have seen their stock prices decline this year. However, according to an article in Barron's, Analysts believe that despite the poor performance at the start of the year, both Newmont and Barrick Gold will still be potential beneficiaries as gold prices rise.

Therefore, the focus here is on these two companies, NEM and GOLD.

1. Newmont (NEM)

Newmont is headquartered in Colorado and is one of the world's leading gold producers. As of the end of 2023, Newmont's gold mineral reserves totaled 0.136 billion ounces.

In addition to gold mines, Newmont also has Copper, Silver, Zinc, etc. However, most of the company's revenue comes from gold, so the company's financial performance is closely related to gold production and pricing trends.

In terms of production and costs, the Q4 Earnings Report released on February 22, 2024, indicates that in 2023, 5.5 million ounces of gold were produced at a cost of $1,444 per ounce, with production decreasing by nearly 7% compared to 2022, while costs increased by 16%.

However, the company expects that the situation will improve in 2024, with the total Gold production for the year projected to increase to 6.9 million ounces, a significant jump of 25% compared to 2023, while costs are expected to remain at $1,400 per ounce.

NEM's stock price has dropped 6% since the beginning of the year, not keeping pace with the rise in Gold prices, which may be due to the company's reduction of the dividend for 2024. The dividend for NEM in 2023 was $1.6 per share, while the dividend for 2024 is only $1 per share.

Additionally, the company has a relatively conservative outlook for Gold prices in 2024, having projected in their February Earnings Reports that this year's average Gold price will be $1,900 per ounce, which is much lower than the Gold prices over the past month.

Therefore, if Gold prices can remain above $2,000 per ounce for most of 2024 (currently trending towards $2,500), and the company's Business development plans proceed smoothly, Newmont may achieve better profit margins.

2. Barrick Gold (GOLD)

Barrick Gold is also one of the largest Gold producers in the world, primarily engaged in the exploration, development, production, and sale of Gold globally.

In terms of production and cost, the Q4 2023 Earnings Report released on February 14, 2024, shows that the company produced 4.054 million ounces of Gold in 2023, with a cost of $1,335 per ounce, maintaining production levels from 2022, while costs increased by 9%.

Although this data does not look too bad, this performance significantly fell short of the company's initial expectations, which anticipated an annual production of 4.2 million to -4.6 million ounces in 2023. Therefore, after Barrick Gold released preliminary production data on January 16, the stock price dropped sharply by 9.5% that day.

Although the company's stock price began to rebound in March with the surge in gold prices, it has still fallen by 5.5% year to date.

Regarding the outlook for 2024, the company has provided guidance that is not very optimistic. The company expects Gold production in 2024 to be between 3.9 million and -4.3 million ounces, while costs are expected to be between $1,320 and $1,420 per ounce. This means that production is not expected to increase significantly, while costs may continue to rise.

However, it is worth noting that Barrick Gold also has a rather conservative forecast for gold prices in 2024, expecting them to be around $1,900 per ounce. Therefore, if gold prices remain at the current high of $2,400 per ounce, the company's revenue could exceed earlier expectations.

How to track the trends of gold mining stocks.

Of course, in addition to paying attention to leading stocks in the gold mining industry, you can also understand the overall trends of the industry by tracking gold mining stocks' ETFs.

According to data from ETF Database, the chart below shows the top five gold mining stock ETFs ranked by asset size. Among them, the largest gold miners equity ETF, VanEck (GDX), has an asset size of 13.76 billion USD, far exceeding the second-ranked GDXJ.

GDX tracks The NYSE Arca Gold BUGS (HUI) Index, thus reflecting the overall trend of gold mining stocks, with constituent stocks including Newmont, Agnico Eagle, and Barrick Gold among leading companies. Since the beginning of this year, GDX has increased by 8.19%.

Although these ETFs all track gold mining stocks, the different methods of compilation may lead them to show different trends.

Additionally, it should be noted that past performance is not the only indicator for evaluating ETFs. Liquidity, fees, and other Indicators should also be considered, along with a comprehensive analysis of various factors. Furthermore, past performance cannot predict future results, and investments must be approached with caution regarding market risks.

Risks of Gold Stocks

1. Price Volatility: Gold stocks are generally directly affected by fluctuations in Gold prices. An increase in Gold prices may boost stock prices, while a decrease in Gold prices may lead to a decline in stock prices.

2. Political and Economic Risks: Gold mining projects may be impacted by factors such as government policies, taxes, permit approvals, and local Community opposition, which could negatively affect stock prices.

3. Operational Costs: The costs of mining Gold can vary, and high costs may reduce company profits, subsequently affecting stock prices.

4. Macroeconomic Factors: Economic cycles, interest rate changes, and monetary policies can also influence the performance of Gold stocks.

Risk Disclosure: This content does not constitute a research report, is for reference only, and should not be used as the basis for any investment decision. The information contained herein is not a comprehensive description of the securities, markets, or developments mentioned. Although the sources of information are considered reliable, the accuracy or completeness of the above content is not guaranteed. Furthermore, there is no guarantee regarding the accuracy of any statements, viewpoints, or forecasts provided in this article.

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