The curious case of the underperforming gold equities: is the mother of all re-ratings now due?
What indeed?
Microcaps are on the floor, but it’s not just the junior end of the market that’s underperforming the gold price.
All the big action has left London now, of course, but across the pond in New York it’s worth noting that the biggest daddy of them all - Barrick - is down on a one-year view, only marginally up on a five-year view, and down again on a ten-year view.
Go back further on the chart of the world’s number one gold miner, and you will see quite clearly that it looks like its best days are well and truly behind it.
In 2011, when the Fed money printing operation was just getting into its stride, Barrick’s shares were US$30 higher than where they are now.
But the gold price?
The gold price started out that same year at less than US$1,500 and never even got close to US$1,900.
Now, it’s rocket-fueled and moving past Saturn at US$2,369.
Surely all boats will rise in a scenario like this?
But one reason why many boats appear not to be moving at all is that it’s only now becoming clear just how high and dry they were.
Sure, companies like Barrick will move up and down with gold, equities, economic news and other political and diplomatic uncertainties. With such sizeable cashflows and balance sheets, there’s room in their share prices for such manoeuvering. And the same is true further down the scale.
Companies like and , both of which have long and largely unblemished track records of smaller-scale production, have enjoyed a certain amount of share price strength of late.
Shares in El Dorado Gold are price at US$15.10 on the NYSE today, which is the same level they were at in 2005, when the gold price was under US$500 an ounce. Shares in the world’s second biggest miner, Newmont, are also currently trading at a level they were at in 2005, US$38.00 or thereabouts. And, also on the NYSE, shares in South Africa’s biggest gold company, Gold Fields, are only now just pushing past where they were in early 2006.
All of which goes to show that although Harry Anagnostaras-Adams might be right to be lamenting the fate of microcaps as he soldiers on with his efforts to bring Ethiopian and Saudi assets to fruition, this is not an isolated problem.
Could it be that the bottom has dropped out of the market for gold miners for good? Or conversely, are we just on the cusp of the mother of all re-ratings?
In the case of the microcaps – and KEFI’s current capitalization stands at £33m, so whether it qualifies is moot – there are additional factors at play. It takes a certain type of investor to come into the market at that level, and over the past twenty years, even as gold has steadily risen, these investors have been burned time and again by companies that have let them down.
Yes, there have been winners - depending on where you traded in and out - like Greatland (GGP), Solgold, European Goldfields, and others. But there have also been countless losers – can you believe we fell for Norseman Gold yet again?
Mercator Gold collapsed a road in Australia, Brancote was Aim’s first real success story, but no mine’s yet been built at its asset site in Argentina. Did Scotgold, Minmet, Pure Gold, Gabriel Resources, Avocet, Greystar or Petropavlovsk deliver for shareholders? Do you have confidence in the top-level management at Endeavour Mining?
Picking your way through the maze of hazards and risks presented to investors by the gold mining sector isn’t easy, and it’s not surprising that with bitcoin, ETFs and trading at the touch of the button that demand for the long-term commitment that mining really requires is thinner on the ground than it was.
Even so, it hasn’t all been doom and gloom over the past few decades.
In contrast to Barrick and El Dorado, Agnico Eagle is trading at four times where it was in 2005.
Since it listed in the early 2000s, share price is up by over 1,500% and, despite some troubles in recent years looks to be on an upward trajectory once more.
B2Gold’s track record hasn’t been too bad, while DRD Gold has had a very good run in rand terms since the start of the century, and has done pretty well over the past five years in US dollar terms too.
In the UK, a recent standout performer has been , still trading at six times the level it was at for most of the period between 2014 and 2020, and around double where it was at when it reached an earlier high in 2011.
But the problem is, of course, that shares in all these companies have also been much, much higher over the past twenty years. And if you bought in towards the upper end of the upticks, gold mining equities have turned out to be a big disappointment.
And given where the gold price is, investors are entitled to feel disappointed. It’s a conundrum that leads to an obvious question: are share prices really linked to physical gold at all any more?
It’s worth asking, because gold, whether physical, or at one remove through an ETF, has been a steady enough winner over the years. Bash the dollar, bash the economy, bash Trump, bash Biden, bash the Middle East, no matter, it all leads to gold strength.
And we have now arrived at the central dichotomy investors face when contemplating gold equities, and especially the microcaps about which Harry Anagnostaras Adams feels so much angst.
Gold is the safe-haven asset par excellence.
But microcaps are speculative assets, par excellence.
And the idea that there ought to be some correlation between these two different asset classes suddenly becomes fanciful when you look at it in those terms.
Disclaimer & Declaration of Interest
The information, investment views and recommendations in this article are provided for general information purposes only. Nothing in this article should be construed as a solicitation to buy or sell any financial product relating to any companies under discussion or to engage in or refrain from doing so or engaging in any other transaction. Any opinions or comments are made to the best of the knowledge and belief of the writer but no responsibility is accepted for actions based on such opinions or comments. Vox Markets may receive payment from companies mentioned for enhanced profiling or publication presence. The writer may or may not hold investments in the companies under discussion.