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Gold stocks: primed to break their former high…starting now!

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By Brian Chu, Thursday, 29 August 2024

Gold breaks out…and gold shares are set to run because of this

In today’s Fat Tail Daily, Gold is now trading above US$2,500 per ounce, setting yet another record. Meanwhile, gold stocks remain subdued. Many are wondering why. Today I’ll reveal to you the key factor that could spark the next big bull run in gold stocks. Read on…

Here’s how it usually works when you invest in commodities.

The natural resource in question — be it iron ore, copper, soybeans or oil — goes into a bull market, with a rising price over time.

The associated shares then rally as the market prices in improving profits and margins for producers thanks to the rising commodity price.

That’s the gist, anyway.

Now ask any gold share investor today about what’s happening in their portfolio, and you might get a different response.

The gold price is marching up…and gold shares are lagging.

Confused? Many are. But it’s important to you understand what opportunity presents itself here.

That’s what I’ll try to do today.

Let me set the scene for you first…

Since late-2015, gold’s up by almost 150% in US dollar terms. You can see this big run up below:

Fat Tail Investment Research

Source: Refinitiv Eikon

What’s holding back gold stocks

Just by looking at that figure, it’s safe to assume gold’s run would deliver a windfall to gold stock investors, right?

As above, no. Check out how the ASX Gold Index [ASX:XGD] performed these last four years:

Fat Tail Investment Research

Source: Refinitiv Eikon

Remember what we went through globally during this period and let’s unravel the mystery.

What’s been the biggest issue plaguing markets in the last two years?

Inflation!

This plays for gold miners in the same way as other companies like industrials.

Why’s that?

Think about their inputs…like diesel, labour and energy! Their prices have increased.

Can you see what I’m driving at here?

The missing piece in the puzzle

An inflationary economy may be good for gold bullion as investors turn to gold to protect their capital and preserve purchasing power.

But gold miners are running a business. Inflation can squeeze their operating margins even as it helps their sales.

Herein lies the critical piece of the puzzle.

Investors aren’t paying for gold when they buy gold stocks. They’re buying investment potential. That comes from future cashflow and profits.

As I invest exclusively in gold shares for many years, I track important metrics like production costs and margins. The hard data speaks for itself.

Here in Australia, the average gold mining operating margin in percentage terms fell from 2020–22.

In fact, you’ll see below this margin reached its lowest point in the 2022 September, quarter to less than 30%:

Fat Tail Investment Research

Source: GoldHub Australia

No wonder gold shares can’t fire!

There’s good news though. Notice that the average operating margin recovered to as high as 36% in 2023. It gets better this year, with the margin rising to 42% in the most recent quarter.

Taking gold stocks back to their 2020 highs…
even beyond!

The last time gold producers delivered margins at this level was in 2020.

And this is what excites me, I hope you get my drift!

I’ll show you the ASX Gold Index figure again so you don’t need to scroll up:

Fat Tail Investment Research

Source: Refinitiv Eikon

Gold stocks made an all-time high in mid-2020. That’s around 12% higher than current levels!

How do you like that?

With gold at a record high, and margins improving to their former level, we have every reason to think gold shares will break out above this old 2020 high…

Could it happen in the coming year? The odds look favourable to me.

Of course, I can’t guarantee this. Gold stocks can be high risk investments.

But let’s add to that impending rate cuts from the US Federal Reserve, the first cut expected next month. That could give gold an extra boost.

Gold stocks might enjoy another lift in their operating margins. Should that happen, you’ve got a perfect setup for gold stocks to break out above the 2020 highs.

Your choice — watch from the sidelines
or get on the field

As I wrap up this article, I’m at the Australian Gold Conference presenting on these points.

If you’d like to go deeper into the opportunity here, consider signing up to The Australian Gold Report here.

Right now looks to be an opportunity to begin building a precious metals portfolio and accumulating some gold stocks just as they are primed to break out in a powerful way.

You can watch it unfold, or get into the action now!

God bless,

Brian Chu Signature

Brian Chu,
Editor, Gold Stock Pro and The Australian Gold Report

All advice is general advice and has not taken into account your personal circumstances.

Please seek independent financial advice regarding your own situation, or if in doubt about the suitability of an investment.

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Brian Chu

Brian Chu is one of Australia’s foremost independent authorities on gold and gold stocks, with a unique strategy for valuing big producers and highly speculative explorers. He established a private family fund that only invests in ASX-listed gold mining companies, being one of a few such funds in Australia, putting his strategy and research skills to the test under public scrutiny. He currently writes two gold-focused investment advisories.

In his Australian Gold Report, Brian helps you build long-term wealth in physical gold and a select portfolio of hand-picked stocks comprising mainly producers with proven revenue streams and appealing risk-reward profiles. He uses his original valuation metrics and a tried-and-tested investment strategy to help you to deliver sustained outperformance against industry benchmarks.

In his more specialised Gold Stock Pro service, Brian helps readers trade some of the most exciting, speculative gold mining plays on the ASX. He uses his proprietary system — based on the famous Lassonde Curve model, which tracks the life cycle of mining stocks. His aim is to help you navigate the gold and silver cycles, and to capitalise on the bull market for opportunities to deliver outsized gains.

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All advice is general in nature and has not taken into account your personal circumstances. Please seek independent financial advice regarding your own situation, or if in doubt about the suitability of an investment.

The value of any investment and the income derived from it can go down as well as up. Never invest more than you can afford to lose and keep in mind the ultimate risk is that you can lose whatever you’ve invested. While useful for detecting patterns, the past is not a guide to future performance. Some figures contained in our reports are forecasts and may not be a reliable indicator of future results. Any actual or potential gains in these reports may not include taxes, brokerage commissions, or associated fees.

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