Gold mining equities—solid performance in a volatile market

The gold and precious metals mining equities have rallied sharply off their March bottom to 15% higher year-to-date through June 1 and 77% in the last 12 months.1 They have meaningfully outperformed both stocks and bonds during those time periods. Recent changes in the macroeconomic and geopolitical environments have made both bullion and precious metals equities more attractive in the eyes of many investors. Those seeking a non-correlated asset class that can provide potentially attractive total returns in a volatile market may want to consider adding gold and precious metals equities to their overall portfolios.  

A challenging macroeconomic environment has created tailwinds for gold.  A convergence of factors has helped push gold prices higher over the last two years, although performance has not been linear. Gold is a hard asset that has typically performed well in a slower growth environment when equity markets are facing higher volatility, geopolitical turmoil is brewing and/or investors fear weakening currencies. Many of these factors have been manifesting themselves episodically since mid-2018. Because gold is a negative carry asset with no cash flow or dividend, it has traditionally performed well when real interest rates are stable or falling. The Federal Reserve (the Fed) cut rates three times in the second half of 2019 and then cut them to zero in mid-March while simultaneously launching a $700 billion quantitative easing program. Although we don’t know when the Fed will hike rates again, we do know that it left rates at the zero boundary for seven years in the wake of the global financial crisis.2 

Additional support for gold has come from massive fiscal and monetary stimulus implemented in response to the coronavirus pandemic. As the virus spread and the capital markets collapsed in March, gold tumbled more than 12% while the gold mining equities fell by 35%. Central banks raced to cut rates and provide liquidity in an effort to stabilize markets and support asset prices. Governments also enacted major spending programs to support their economies. Fortunately, these coordinated efforts worked. The selloff abated, the markets began to recover, and gold has since climbed 18% through June 1 while the gold miners have risen by 75% through that date. Although the longer-term impact of these hyper-accommodative policies is unclear, we do expect soaring budget deficits and bloated central bank balance sheets for the foreseeable future, both of which historically, have supported the price of gold.3

Furthermore, several astute commodity strategists have noted that the response of central banks to the pandemic could have the unintended consequence of normalizing what would otherwise be market risks borne by investors.4 In particular, they note that the size of major central bank balance sheets has been relatively stable at ~25% of GDP for the last decade. However, as economic output contracts sharply, fiscal outlays surge, and central bank balance sheets effectively double in size, fiat currencies could come under pressure, which could be bullish for gold. They note that gold has outperformed every G-10 currency as well as major emerging market currencies both this year and in 2019.5 The combination of all these factors helps explain why gold prices are up 14% year-to-date through June 1 and 33% over the last 12 months, meaningfully outpacing both US and global stocks and bonds.6  

Inflation is a potential wildcard. Market watchers have been predicting inflation in the US since the Federal Reserve first cut rates to zero and implemented QE1 back in 2008. They are still waiting—at least according to data from the Bureau of Labor Statistics. However, some strategists are now making the case that the country could finally face meaningful inflation. Their reasoning tracks as follows: We are currently in the midst of a deflationary shock, but looking ahead 1-2 years, there are significant inflation risks.7 This view is predicated on the expectation that unemployment remains at very high levels and the steep increase in economic inequality (either real or perceived) persists. Governments will likely respond by keeping fiscal stimulus in place long after the strict economic case for such measures expires. In short, excess government spending will be used to temper the social impact of the pandemic, lockdowns and riots. If fiscal support remains in place as demand recovers, and especially if new supply problems emerge, these strategists expect the US to face higher inflation.8 While it remains to be seen if this view proves correct, we would expect any bout of inflation to provide additional support for gold prices. This is especially true if the Fed is slow to raise rates in the face of inflation, which is a reasonable expectation since the Fed has made clear that it is targeting a 2% average inflation rate through the cycle even though inflation has remained stubbornly below that level.

What’s good for gold can often be very good for the gold mining equities.  With respect to gold and precious metals equities, the primary driver of their strong performance over the last year has been the rising price of gold and other precious metals. Because the mining equities have both earnings and operating leverage to metals pricing, the gold and precious metals equities have historically outperformed the price of gold by twofold to threefold when both bullion and precious metals mining stocks are rising. While that has not been the case so far this year as investors have shed risk (both gold and the XAU Index have climbed ~14% year-to-date through June 1), it certainly has been true since gold  hit a decade low of $1,051 per ounce on 12/17/15, and it was also true in 2019 when the XAU Index outperformed gold by more than 2.8x.9  (See Figure 1). 

There are other reasons for the recent solid performance of mining equities as well.  The health of the precious metals sector is significantly better than  the last cycle—balance sheets are stronger, miners are generating cash and management teams are staying more disciplined in terms of both capital expenditures and acquisitions.  Regarding the latter, management teams are pursuing sensible deals at fair prices using rigorous return metrics. As a result, shares of acquiring companies are often trading higher upon the announcement of new deals. 

In addition, there are reasons for investors to be encouraged about operating results for the gold and precious metals miners going forward. Many of the major producers have reported quarterly results recently, and companies with mines in the western hemisphere have tended to lower guidance for 2020 or withdraw guidance due to Covid-related mine shutdowns. However, for many companies, the shutdowns were due to government restrictions, not because of virus infections. Moreover, in the currently low production-cost inflation environment, efficient operators have the potential to capture significant margin expansion from even modest increases in the price of metals they produce. In other words, higher quality operators have significant leverage to rising metals prices, and have benefitted greatly over the last five years as the price of gold has risen by more than $600 per ounce while major input costs have declined. This dynamic has been amplified in 2020 as gold prices have appreciated while the costs of oil, diesel, natural gas, steel and copper have fallen sharply. Several companies noted on their quarterly calls that they were seeking to hedge certain input costs at multi-year or even multi-decade low prices. Looking beyond the near-term operational hurdles due to coronavirus, we believe that many miners could be poised to generate significant free cash flow going forward.

To be clear—we do not know whether the next $100 move in gold will be up or down—short term moves in precious metals are notoriously difficult to predict on a consistent basis. In addition, leverage can work both ways; when precious metals prices fall, the mining equities may decline by even more. We also recognize that ETF holdings of bullion are relatively high on a historical basis, and an accelerating economic recovery, falling volatility, rising real interest rates or a hawkish change in monetary policy would likely be bearish for the gold price. What we do know is that multiple factors have come together this year to push the gold price higher. We also know these factors are complex, varied and geographically dispersed—and what is good for gold is often very good for the gold mining equities. 

Figure 1: Performance of Gold Mining Equities vs Gold

Source: Morningstar Direct June 1, 2015-May 31, 2020. SPDR Gold Shares represents Gold.  PHLX Gold and Silver Index represents Gold Mining Equities. 

What about combining gold with the gold miners?  There are several reasons why investors might consider blending positions in both gold and the gold mining equities. For investors with a constructive view on precious metals prices, gold and precious metals equities have traditionally outpaced the upside performance of bullion because of corporate operating leverage and amplified earnings. Simply put, the defensive characteristics of gold blend well with the upside optionality of the gold equities. In addition, while both gold and the precious metals mining equities have low correlations to traditional stocks and bonds, mining equities exhibit even lower correlations, potentially making them attractive to investors seeking overall portfolio diversification.10 Furthermore, precious metals equities offer investors access to dividends, mineral diversification and the opportunity to benefit from corporate actions, none of which is available by investing in physical gold.

Making room in a portfolio.  In our view, gold and precious metals equities can be effective portfolio diversifiers and have the potential to deliver attractive total returns, but they are volatile and sector timing is difficult. Consequently, we favor a longer-term strategic allocation over a shorter-term tactical one. Investors need patience to capture the total return potential of this asset class, and we believe they need appropriately sized positions so that they can look beyond the day-to-day volatility of commodity prices and the price movement of precious metals mining stocks. For investors who allocate 10%-20% of their portfolio to alternatives as they pursue diversification and non-correlated return streams, we believe a position in gold and precious metals equities should represent a component of that allocation. 

Investors seeking information about Invesco Oppenheimer Gold & Special Minerals Fund can find additional information here.


1. Source: Bloomberg, 6/1/20.

2. Source: Bloomberg, 6/1/20.

3. According to the Congressional Budget Office, the federal budget deficit is expected to reach $3.7 trillion in 2020. In addition, some market analysts now expect that assets on the Federal Reserve’s balance sheet will reach $9.0 trillion by December 2020, double the prior peak of $4.5 trillion reached in the wake of the global financial crisis. See P. Swagel, CBO’s Current Projections of Output, Employment and Interest Rates and a Preliminary Look at Deficits in 2020 and 2021, 4/24/20; E Hyman, et al., Evercore ISI, Truly Massive Stimulus, 5/29/20.

4. Source: Michael Widmer, et al., BofA Global Research, The Fed Can’t Print Gold, 4/20/20.

5. Source: Michael Widmer, et al., BofA Global Research, The Fed Can’t Print Gold, 4/20/20.

6. Source: Bloomberg, 6/1/20.

7. See I. Frazer-Jenkins, et al., Bernstein Portfolio Strategy, Global Metals and Mining: Scrap 60/40 and Go Mining for Gold, 5/27/20.

8. See I. Frazer-Jenkins, et al., Bernstein Portfolio Strategy, Global Metals and Mining: Scrap 60/40 and Go Mining for Gold, 5/27/20.

9. Source: Bloomberg, 6/1/20.

10. The XAU Index has a correlation of 0.17 to the S&P 500 and 0.24 to the Bloomberg Barclays U.S. Aggregate Bond Index for the 10-year period ending 3/31/20.  The S&P GSCI Gold spot price has a correlation of 0.02 to the S&P 500 and 0.38 to the Bloomberg Barclays U.S. Aggregate Bond Index over the same period.  Source: Morningstar, 6/1/20.

Important Information

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Fiat currency is legal tender whose value is backed by the government that issued it.

The G10 currencies are the names given to a group of currencies that are among the most used and traded currencies in the world. The G10 currencies list includes the United States Dollar (USD), Euro (EUR), Pound sterling (GBP), Japanese yen (JPY), Australian dollar (AUD), New Zealand dollar (NZD), Canadian dollar (CAD), Swiss franc (CHF), Norwegian krone (NOK), Swedish krona (SEK).

Carry is defined as the profit investors gain from selling a certain currency with a relatively low interest rate and using the funds to purchase a different currency yielding a higher interest rate.

Changes in the value of two investments or asset classes may not track or offset each other in the manner anticipated by the portfolio managers, which may inhibit their risk allocation process from achieving its investment objective.

US equities are represented by the S&P 500 Index.

The Philadelphia Gold & Silver Index is an index of 30 precious metals mining companies that are traded on the Philadelphia Stock Exchange.

The PHLX Gold/Silver Sector Index (XAU) is a capitalization-weighted index composed of companies involved in the gold or silver mining industry.

The S&P 500 or Standard & Poor’s 500 Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies.

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Fluctuations in the price of gold and precious metals may affect the profitability of companies in the gold and precious metals sector.

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