With the war in Ukraine intensifying, investors turned to gold as a safe-haven asset. But while the price of gold rose, some ASX gold stocks are yet to catch up.
On Wednesday, veteran gold expert Brian Chu examined this question and the broader gold market in a wide-ranging interview.
Brian addressed questions like:
- What’s going on with gold?
- What is driving moves in the gold price?
- Gold may have rallied strongly but certain gold stocks have not…yet. Why?
- Does this present an opportunity in 2022?
Regarding the latter question, Brian thinks yes, an opportunity is there.
What’s going on with the gold price?
What is causing gold to move up from about US$1,700 an ounce to more than US$1,900 an ounce?
The expected answer would be the spectre of rising inflation and the weak outlook for the global economy due to supply chain issues.
But, as Brian points out, what we actually saw was the conflict between Russia and Ukraine causing gold to spike.
Gold is strengthening on the back of uncertainty exacerbated by the war in Ukraine and rising geopolitical tensions.
The economic argument for gold is not the driver for the recent price swing…
But for Brian, the economic argument is exactly what you should focus on.
In his view, the war between Russia and Ukraine is a cover story.
Most of the traders currently jumping on gold are trading on noise.
But when that noise subsides, the economic problems confronting the world and the US Federal Reserve’s announced interest rates hikes will regain the centre of attention.
As Brian put it: don’t follow the shiny bouncing ball, follow the right ball, and that’s the economic pressure on our economy.
That is what’s going to drive gold prices going forward.
What about ASX gold stocks?
When a commodity goes up in price, it’s often assumed producers of that commodity should go up too.
But is that happening in the gold market right now?
Brian thinks the proposition ‘as commodities rise so too do producers of that commodity’ is simplistic.
In fact, Brian began investing in gold stocks espousing that proposition…and got burnt a bit along the way.
There’s much more to gold stocks going up than the gold price.
As Brian explains in the interview, gold stocks are individual companies, each making complex decisions about running mines or exploring their land or looking for the right minerals.
For instance, the price of gold may be rising, but gold stocks don’t all operate with the same costs.
Some producers have more economical deposits or operating efficiencies. Others have labour and mining costs that a rising gold price can’t offset.
Again, there’s more to gold stocks going up than just the gold price.
In the interview, Brian explores this important point in great depth.
How to look at gold stocks
For Brian, you have to look at gold companies based on three different stages: those who are exploring, those who are building a mine, and those who are producing.
Normally, in a mining bull run, the smaller companies lead, and the larger companies follow.
The smart money gets a whiff of the action and starts with the speculative end of the market first — the explorers or developers.
This time around, however, the producers went on a run first as investors eyed off their larger profit margins.
The great gold lag…and the great opportunity
Gold is an uptrend and gold producers have benefited.
But gold explorers — traditionally the biggest movers when gold gets going — are yet to join the party.
Brian thinks the caution stems from the 18-month stagnation in gold and gold investments.
However, Brian has noticed that the gold explorers and developers are starting to get out of the gates, albeit with a bit of ‘stage fright’.
In the end, Brian considers gold and gold investments the places to be as safe havens…but also sources of opportunity.
For more of Brian’s thoughts, listen to the interview linked above.
And, if you’d like intel on the precise explorer stocks Brian is looking into, you can check out Brian’s premium gold stock trading service Gold Stock Pro.
For Daily Reckoning Australia