One of the most ingrained schools of thought in the market is that which states that investment in gold and these assets closely linked to their evolution are not correlated with other financial assets and, therefore, they can be considered as effective diversifiers when making an overall portfolio allocation.
This is why investments in gold-linked funds have soared at times when investors were clearly looking to decouple from the trend. A decision that has often been made in ignorance of the fact that the underlying gold funds are usually the major gold mining companies and not the evolution of the commodity itself.
“We are seeing a renewed interest in companies operating in the sector of gold. Indeed, producers of precious metals are the main beneficiaries of the rise in gold prices,” underlines Charlotte Peuron, equity fund manager at Crédit Mutuel Asset Management, who assures that currently, Companies are achieving very good financial results because their costs are controlled and their sales prices are increasing.
As a result, companies are generating very high, even historic, margins. “In fact,” says Peuron, “for a selling price of $2,500 per ounce of goldCorporate margins could reach 59% over cash flow and 45% over total sustained cost (AISC) on average.” Over the past few quarters, companies have generated a comfortable margin free cash flow and return profits to shareholders in the form of dividends or share buybacksCompanies also reinvest this cash in mineral exploration to increase their reserves or, in some cases, to accelerate the construction of new mines.
According to data collected from Set of factsThe 8 mining companies in Europe and North America most closely linked to the gold metal (extraction, production or even sale of this mineral to other companies for subsequent placement with retailers) have managed to make 2024 one of the most prolific in recent years. In fact, the average investment firm expects these companies to multiply their net profits by almost three in 2023 to reach 15,000 million euros.
A trend that will also continue towards 2025 since forecasts predict a 30% increase in profits for that year, reaching the 20 billion euros.
“The advantage of investing in gold companies, particularly during periods when the price of the underlying asset is rising, is that you can capture operational and financial leverage, as well as growth in their production and reserves. For investors in these companies, it also means benefiting from merger and acquisition premiums, which buying a gold coin cannot offer,” specifies Crédit Mutuel Asset Management.
In this sense, experts expect that the main companies in the sector (with Barrick Gold and Freeport-McMoRan among the best recommended by experts) will achieve in the next twelve months a revaluation of their shares greater than expected. 13%which would mean outperforming the S&P 500 over the same period, which analysts expect will revalue by 10%.
This is hardly surprising considering that there are ample reasons to believe that demand for gold will continue to rise and that the conditions are ripe for the golden metal to explore new frontiers. This is according to Oliver Taylor, multi-asset fund manager at Schroders, and Joven Lee, multi-asset strategist at Schroders, who aim to US real yields, dollar developments, Western demand, Eastern households and central banks as the main drivers of the positive development of metal in the materials market.
Schroders experts also point out the geopolitical risks and of currency devaluation as well as other factors that could push up the price of the metal in the coming months. “In times of uncertainty, investors tend to turn to safe havens to protect themselves against geopolitical risks: the war between Russia and Ukraine and tensions in the Middle East are no exception. dollar,” they say.
