Two decades ago, rising gold prices launched a historic bull run in Canada’s gold mining sector. Now, bullion is popping to all-time highs again, but this time investors are fleeing gold miners’ stocks in droves.

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Even gold exchange-traded funds, which use investors’ money to acquire physical stockpiles of bullion, are contracting as gold prices rise, which is precisely the opposite of what many analysts expected.

The disconnect ties into a broader trend in which the profile of the largest buyer of gold has shifted: investors are fleeing the gold industry, dumping gold mining stocks and redeeming gold ETFs, while central banks around the world, particularly in China, have dramatically increased annual bullion purchases during the past two years.

The result is that the price of gold is shattering record after record, currently trading at US$2,150 per ounce and up 32 per cent since November 2022, but gold mining stocks are being crushed.

“The sentiment in this space has never been lower,” said Shree Kargutkar, a senior portfolio manager at Sprott Asset Management LP of Canada in Toronto who focuses on precious metals mining companies.

The sentiment in this space has never been lower

Shree Kargutkar

The VanEck Gold Miners ETF, a basket of the largest gold mining companies in the world, has declined 17.5 per cent since May. In the same period, shares of Toronto-based Agnico Eagle Mines Ltd. have dropped 7.4 per cent, while those of Toronto-based Barrick Gold Corp. and Denver-based Newmont Corp., which operates five mines in Canada, have fallen 23 per cent and 30 per cent, respectively.

In 2023, the total number of ounces held by gold bullion ETFs declined 8.7 per cent to 85.6 million ounces from 93.8 million ounces.

Historically, gold buying by such ETFs directly correlated with gold prices: net inflows came as gold prices rose, while net outflows were posted when gold declined.

Kargutkar said that dynamic broke apart in late 2022, which he and some other analysts attribute to broader geopolitical shifts: after the United States, European Union and other countries issued sanctions against Russia and froze its assets, all denominated in U.S. dollars, gold emerged as an attractive asset for countries looking to diversify their currency reserves.

By the end of the year, the People’s Bank of China had increased the size of its annual gold purchases, as had central banks in countries such as Poland. Although the central banks do not comment on the reasons for their purchases, some analysts said it was part of a broader effort to gain independence from the U.S. dollar as a pre-emptive protective measure in the event of a geopolitical rupture.

Central banks purchased 1,082 tonnes and 1037 tonnes in 2022 and 2023, respectively, compared to average annual purchases of 492 tonnes between 2012 and 2021.

In 2023, China reported a 225-tonne net increase in the size of its gold stockpile — its largest increase since 1977, according to the World Gold Council.

Paul Wong, a market strategist at Sprott Asset Management who studies the gold market, described it as a new era in which different factors are driving movements in the gold price.

“These are large, large buyers,” he said about the central banks, “and they are not price sensitive; they are geopolitically sensitive.”

These are large, large buyers ... and they are not price sensitive; they are geopolitically sensitive

Paul Wong

Bullion ETFs, by contrast, are more sensitive to interest rates and tend to have outflows in their gold stockpiles as interest rates rise.

The end result is that gold’s price in 2023 gained 13.1 per cent and hit a new all-time high average of US$1,942 per ounce. Last week, gold prices once again touched an all-time high, hitting US$2,192 per ounce before settling down to US$2,157 per ounce.

Looking forward, many analysts are expecting gold prices to surge even higher if interest rates in the U.S. begin to decline later this year, as expected.

“Gold has historically done well” when interest rates begin to come down, said Juan Carlos Artigas, head of research at the World Gold Council.

In his analysis of the 10 instances dating back to 1986 when the U.S. Federal Reserve cut interest rates, gold prices rose eight times and declined twice. On average, gold prices rose 8.6 per cent.

But whether gold prices rise or not, Kargutkar said gold mining companies have spent years trying to attract new investors, maybe even as far back as when the last gold price boom tapered off around 2012. He said comparing the combined cash flow of all gold mining companies against their share prices shows how the ratio has steadily declined in the past two decades, indicating a loss of investment.

“What we’re seeing is a lot of these miners are looking around and saying, ‘Wow, nobody wants to buy us, our valuation multiples have been completely destroyed, so we’re going to buy back our own shares, we’re going to start issuing a dividend,'” he said.

Today, the VanEck Gold Miners ETF has a dividend yield of 1.72 per cent, which Kargutkar described as a significant shift for the gold mining industry since it has historically eschewed issuing dividends to reserve cash for acquisitions or large capital projects.

Peter Toth, chief development officer at Newmont, said the price of gold is unrelated to what it costs to produce it. Rather, outside factors such as central bank purchases, interest rates and the strength of the U.S. dollar affect gold prices.

“We believe the best and only way through this decoupling of gold price with production costs is by holding a set of assets of outstanding quality,” he said in an email.

But within the gold mining sector, even as sentiment is touching new lows, there is always optimism that greener pastures lie around the corner.

“This is a better business than it used to be 15 years ago, we’re making more money, we’re more disciplined,” Ammar Al-Joundi, chief executive of Agnico Eagle, said. “Ironically, the share price isn’t following.”

He said gold may be reacting to new stimuli, such as central bank buying in the aftermath of the sanctions against Russia, and that net outflows from bullion ETFs may be a result of higher interest rates. He predicted that when interest rates come down, gold prices may pop and investors will return not just to gold bullion ETFs but to miners, too.

“I’m a pretty simple guy,” Al-Joundi said. “If the company makes a lot of money, the stock will follow.”

• Email: gfriedman@postmedia.com

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