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Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by Golden Prospect Precious Metals. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
Gold has reached a new all-time high and broke through the US$2,600/oz level, following the Federal Reserve's first rate cut in more than four years. This surge, marking a 26% rise Year to Date, is driven by expectations of further rate cuts, as they reduce the opportunity cost of holding non-yielding assets like gold. The big question is: can gold climb even higher and where is the best value opportunity to benefit from these already historic highs?
Gold Price per troy oz year to date
Source: World Gold Council
Gold’s rally and supportive causes
The Fed’s shift to a more dovish stance is undoubtedly a catalyst, combined with continued foreign central bank buying from China, Russia, and India, as well as the increased retail demand from China and India for physical gold as well. We have also seen the renewed interest in physically backed gold ETFs. After months of consistent selling, these funds have flipped to net-buying over the last three months, adding a significant source of demand. Beyond monetary policy, geopolitical tensions also continue to rise – such as the ongoing conflicts in Ukraine and the Middle East and the upcoming US presidential election – which continue to drive buying in gold as a safe haven asset.
Gold producers lagging
Interestingly, whilst gold prices have continued to climb, gold miners share prices have significantly lagged. Many producers are trading at historically low price-to-NAV multiples. This disconnect can be attributed to past inflationary pressures that hurt the miners’ profitability, particularly during the COVID-19 pandemic, however we are now seeing a reversal in these pressures.
Cost inflation has eased, and we are starting to see cost deflation filter through to producers. As a result, upcoming quarterly results could surprise to the upside, improving profitability and free cash flow. This could set the stage for a massive re-rating of the sector, and is in our eyes, where the value lies.
Where do we see the best value?
For investors looking to capitalise on this opportunity, small and mid-cap miners offer the greatest potential upside amidst rising gold prices. These companies are more sensitive to price changes, with smaller increases in gold leading to substantial improvements in their margins. Funds like Golden Prospect Precious Metals, which focus on these miners, have historically outperformed during periods of gold price rallies, such as during the 2008 Financial Crisis and the COVID pandemic.
With gold continuing to break new records, central bank demand reaming strong and miners trading at very attractive valuations, this strategy offers compelling upside potential.
golden prospect precious metals share price
Source: Golden Prospect Precious Metals Fund