Investing in gold miners
Exploring the commodity as prices continue to soar.
Mentioned: Barrick Gold Corp (GOLD), Agnico Eagle Mines Ltd (AEM), Kinross Gold Corp (KGC), Newmont Corp (NEM)
I came up with the idea for this article when I came across a piece of gold jewellery that had been gifted to me several years ago. As I brushed the dust off this small object, I decided that the gold market was worth exploring and I was surprised by what I found.
This piece of jewellery that I had kept at the bottom on my draw for years, had silently collected returns that rivalled my investment portfolio over the same period.
2024 has undoubtedly been the year for gold with demand in value terms reaching previously unseen levels.
Gold as a physical asset
In many Asian countries like China and India, physical gold in the form of jewellery or gold bars have been symbol of wealth and prosperity. Furthermore, gold is treated like an insurance policy in an unstable geopolitical environment, an example being the Indian Currency Crisis in 2016.
The highest consumers of physical gold are Indian women who hold ~11% of the world’s gold, surpassing the combined reserves of the United States, the International Monetary Fund (IMF), Switzerland and Germany. Having gold in physical form is not only a cultural practice but also forms a type of social security for worst-case scenarios.
Role of gold during financial instability
Gold is typically a safe-haven commodity during times of political and financial volatility. Rising interest rates and gold prices typically have a negative correlation, with lower rates making alternative investments less appealing.
The US Federal Reserve held interest rates steady in its January 2025 meeting after three consecutive rate cuts in the final months of 2024. Other major institutions such as the European Central Bank lowered rates, with the Bank of England expected to follow as the UK economy stagnates. Investors remain bullish amidst elevated prices as several major institutions begin the path towards monetary loosening.
Gold production has rebounded from the covid-19-induced output constraints, and Morningstar forecasts a more modest future supply growth across our coverage universe. In our 2024 Q4 Mining Industry Pulse, analyst Jon Mills, stated that Gold remained strong along with most other commodities that saw a rebound after the Chinese stimulus announcements.
Why have prices been elevated?
The gold price continues its record-breaking run after hitting highs of USD $2,870 per tonne this week. Mills cites several tailwinds for the surging commodity such as geopolitical tensions and the US government’s deteriorating fiscal balance.
There has also recently been a reported mass transfer of bullion from The Bank of England to New York amid fears over Trump’s tariffs. This has left the United Kingdom in a sudden shortage with an estimated movement of 393 tonnes into New York’s Comex commodity exchange, since Trump’s election victory in November.
Central bank purchases remain elevated on rising geopolitical tensions. In light of the US imposed sanctions on Russia following the Ukraine invasion, central banks may be seeking to diversify their reserves away from the US dollar. This can largely be attributed to the West’s attempts to confiscate Russian assets held in western banks. The chart below shows elevated purchases particularly for emerging market players. Peter Kinsella, Global Head of Forex Strategy at Union Bancaire Privée, states that “any country that finds itself in strong political disagreement with the West could implicitly run the risk of seeing its assets confiscated.”
As discussed above, gold traditionally performs well during periods of uncertainty. The US government continues to run a large budget deficit sparking concern around the globe. A report from Bank of America shows that the US is now facing the largest deficit pressure since World War 2. The Trump Administration’s policy direction is riddled with uncertainty, however consensus points towards an inflationary outcome. The arising fiscal uncertainty undermines confidence in the economy and is bullish for the price of gold.
ETFs tend to be the marginal buyers or sellers of gold, Gold ETFs are also a tailwind as Western ETF demand turns positive for the first year since 2020, supporting prices.
How to use gold in a portfolio
Gold has historically showed low or negative correlation with many traditional asset classes. This means it can provide a great option for long-term investors seeking to optimise their portfolio and improve risk-adjusted returns or lower portfolio volatility. However, it is important to note that there are exceptions to this and furthermore, periods in which gold moves in congruence with other assets.
The commodity is also often regarded as an inflation hedge; however, in the last few years this has not born out. In 2020 when inflation levels sunk during the covid lockdown, the price of gold interestingly increased that year. As inflation surged from 2021 to 2023, gold prices remained reasonably flat, only to rise again in 2024 as inflation targets fell back into range globally.
Ultimately, consensus suggests investing in gold as an insurance policy rather than a core portfolio holding.
Our cheapest gold miners
One way to profit from rising gold prices is to purchase the shares of gold miners.
The gold miners below currently screen as the cheapest within Morningstar coverage.
Newmont Corp NYSE: NEM ★★★★
- Fair Value Estimate: USD $52
- Last Price: USD $44.96 (at 06/02/25)
- Price to Fair Value Estimate: 0.86 (Undervalued)
- Uncertainty Rating: Medium
- Moat Rating: None
As the world’s largest gold miner, Newmont Corp (“Newmont”) boasts a portfolio reflecting three major deals from recent years. These include purchasing Goldcorp, combined its Nevada mines in a joint venture with competitor Barrick Gold Corp, and of course purchasing Australian competitor Newcrest Mining in November 2023.
Morningstar recently lifted our fair value estimate by 4% for Newmont, as gold prices soared amidst lower interest rates, geopolitical uncertainty and positive inflows into ETFs from Western investors.
Unsurprisingly, as a commodity producer, Newmont is a price-taker and needs low-cost mines with long lives and a low installed capital base to justify an economic moat. The company currently sits in the middle of the cost curve, but we expect some improvement.
Newmont’s adjusted return on invested capital (“ROIC”) is similar to its weighted average cost of capital (“WACC”). Given its large capital base, it is unlikely that the firm will continue to generate economic returns in excess of its cost of capital.
Morningstar’s commodity price forecast for gold is USD 1,820 per ounce from 2029. Our fair value uptick now assumes that gold averages around USD 2,800 per ounce till 2027, up from USD 2,680 per ounce.
Our Uncertainty Rating remains medium reflecting the cyclical nature of commodity prices, operating leverage and high capital intensity, partly offset by a strong balance sheet.
Newmont is in the middle of a significant capital investment cycle however its sound financial health mean it is likely to fund its development projects with cash on hand, undrawn credit facilities and internally generated cash flows.
Gold is a unique commodity unlike most that are consumed, almost all the gold ever mined still exists. This means gold is often subject to the whims of investors who typically move as a herd.
Barrick Gold Corp NYSE: GOLD ★★★★
- Fair Value Estimate: USD $23
- Last Price: USD $17.15 (at 06/02/25)
- Price to Fair Value Estimate: 0.75 (Undervalued)
- Uncertainty Rating: Medium
- Moat Rating: None
Barrick Gold Corp (“Barrick”) comes runner up to its competitor Newmont as the second-largest gold miner in production. Like Newmont, Morningstar also lifts our fair value estimate for Barrick to USD $23 per share given higher gold prices.
Like most commodity producers, Barrick does not meet the requirements to justify an economic moat. The company’s average all-in sustaining cost of roughly USD 1,340 per ounce in 2023 places Barrick toward the upper end of the second quartile of the gold cost curve. Notably, it’s 45% owned Kibali mine in the Democratic Republic of Congo is a low-cost mine placed around the 15th percentile; however, this only accounts for 7% of the forecast gold production for midcycle 2028.
We assign a medium Uncertainty Rating to Barrick as it is highly leveraged to gold prices, which are a key determinant of future returns for shareholders. Another key driver is likely to be the firm's investments, given the capital-intensive nature of the industry and challenges of investing with a backdrop of cyclical gold prices. While increasing copper production over the next decade provides material diversification to Barrick, a reduction in Chinese fixed-asset investment, lowering demand for copper, may also have some impact.
The miner’s ROIC of ~4% in the 10 years ended December 2023, falls well below its WACC of ~8%. We estimate that Barrick will continue to a generate mid-single digit ROIC midcycle 2028. The balance sheet health is sound with minimal leverage at end-June 2024.
Recent performance
Both Newmont and Barrick have significantly underperformed from a share price perspective, compared to their peers Agnico Eagle and Kinross Gold. The two largest global gold producers share interests in the form of their joint venture Nevada Gold Mines.
The disappointing share price performance reflects a recent pattern of missed production targets and higher operational costs from both gold players. Investors appear to have soured over their inability to fully capture surging bullion prices. There have since been material downgrades to production guidance and increases in costs with Newmont’s five-year outlook slashed.
Considerations
It can be argued that the price of gold is largely driven by speculation.
Because gold doesn’t drive cash flow in the form of dividends or make a profit/loss, it’s price can be driven purely by investor sentiment and perception of value.
Gold stocks on the other hand present a better proposition, despite being highly leveraged to the commodity price. Miners have expansion capabilities and can flex production to provide an upside that physical gold can’t.
Importantly, gold stocks tend to fluctuate more than the price of physical gold due to operational and market conditions, therefore leave them more susceptible to large price swings.
Related articles:
- The most overvalued commodity sector right now
