In the last blog, we took a look at the rising price of gold and what was driving it.
Following up from that blog, we will now take a look at the opportunity set that is provided by gold mining companies. If the value of the underlying product is selling, then ceteris paribus1 they should be able to generate more profit.
After the Pandemic we saw an increase in inflation which influenced energy and labour costs, the two main inputs for gold mining companies. This led to gold mining stocks lagging upward movement in the price of gold as investors waited to see the sustainability of the gold price move. Furthermore, in the last cycle, gold mining companies destroyed a lot of share capital doing transactions that were uneconomical. So it’s also fair to say that investors are cautious of the management of such companies.
Interestingly, from a valuation perspective, gold mining companies appear reasonably priced relative to other companies. Coupled with the fundamentals of gold investing in these companies, it might be a worthwhile case.
As always, all investments have risks and you should seek the counsel of your financial adviser to ensure that your strategy is appropriate for your goals and objectives.
- Ceteris Paribus is a Latin phrase meaning “all other things being equal”. ↩︎
Article by: Rob Coyte, CEO, Shartru Wealth Management