Gold has dropped from $5,247 per ounce near the end of February to just over $4,500 now.
Gold stocks are way down, and anyone seeking a bargain should at least give them a look.
The VanEck Gold Miners exchange-traded fund—home to some of the largest miners, such as Newmont and Barrick Mining—has slid 24% from its record high hit in late February.
These stocks follow the price of gold. The precious metal tumbled 13% over that same stretch after enjoying a multiyear rally that included gains of more than 30% in the past year. The stocks are so-called leveraged plays on the commodity—when the price of the commodity falls, the stocks fall harder. That’s because miners have many fixed costs, so lower gold prices squeeze their profit margins, if all else is constant.
The good news: This dynamic works in reverse, so if the price of gold rebounds, the mining stocks typically bounce back quickly. And a gold price rebound looks very much in the cards, making most gold stocks, if not all, appear attractive.
Gold has dropped from $5,247 per ounce near the end of February to just over $4,500 now. Buyers have consistently stepped in around $4,500 to prop up the price in the past several trading days. If, for whatever reason, gold breaks below that level, the next key support level is $4,376, where buyers aggressively came in at the end of March, causing a quick pop. These are signals that gold has potential to resume its long-term rally.
“We continue to respect gold’s longer-term uptrend and are monitoring for confirmation that support is holding,” writes Adam Turnquist, LPL Financial’s chief technical strategist.
That long-term uptrend has support from central banks, which grew heir gold purchases by 17% annually between 2021 and last year, according to the World Gold Council. As they continue to diversify their reserves away from the U.S. dollar, gold can climb. That partly underpins why J.P. Morgan strategists see the metal reaching $5,245 an ounce by 2027, for a roughly 16% gain.
That means gold stocks—given their outsize responses to the commodity’s price moves—have the potential for returns above 15% over that period. Sure, an investor can buy the gold ETF to capture the upside, but anyone that has particularly high conviction that gold can rally would want to buy the riskier gold miners, since they climb most when gold’s price rises. They’re often the smaller ones.
We identified mining companies that saw at least 90% of their first quarter revenue from gold sales and that have outperformed the gold mining ETF in the past year. They include AngloGold Ashanti, Kinross Gold, and Equinox Gold. All three stocks are up more than 70% in the past year, versus around 61% rise for the big gold mining ETF.
Another name to consider that’s essentially an exception to the list is Orla Mining, which is set to merge with Equinox in the third quarter. Orla stock has badly underperformed the industry in the past year, but it now trades extremely closely in \percentage-change terms to Equinox. When gold rose just over 1% on May 29, for instance, Equinox and Orla both advanced 7.6%.
According to the merger agreement, shareholders receive one Equinox share for every Orla share plus a negligible amount of cash, making the transaction almost a purely one-for-one all-stock deal. This means when the deal closes, one Orla share will be worth almost exactly the price of an Equinox share, which is why they’re trading in line with each other. So anyone who is bullish on Equinox is almost certainly bullish on Orla.
Give these stocks a look. Anyone who prefers to stomach a little less risk can just buy the ETF.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com