Gold holders losing money despite 2022 being its year to shine

Inflation and volatile markets suggest gold should be a winner this year, but it’s not working out. Here’s why.

The yellow metal is down 9 per cent over the last year with much of those losses coming in the past few months.

This should have been gold’s year to shine.

Many of the elements that traditionally boost gold were in play: persistent inflation, war, a weak stockmarket. Yet the yellow metal is down 9 per cent over the last year (6 per cent in Australian dollars), with much of those losses coming in the past few months.

While that beats the sharemarket swoon year to date, gold holders are still losing money.

Gold-mining funds and exchange-traded funds are bleeding more, with many of them off by 20 to 30 per cent this year. Those losses are even worse if measured from the spring highs reached after Russia’s invasion of Ukraine in February. (In contrast the $2.6bn ASX-listed GOLD exchange traded fund is only down from around $24.50 to $23.80 over the same period).

“(There are) all the classical, historical reasons why you own gold. So, for sure, the performance here today is disappointing in this environment,” says Imaru Casanova, deputy portfolio manager of the $598m VanEck International Investors which invests in goldmining companies.

Blame a stronger US dollar and the Federal Reserve’s aggressive monetary tightening, particularly since June, when the Fed started lifting short-term rates by 0.75 percentage point at each meeting. Rising rates diminish gold’s allure as a haven investment versus U.S. Treasuries because the metal has no yield. The dollar, which had been slowly rising since June 2021, went on a tear with the Fed’s action. Gold is US dollar-denominated, so when the greenback rises, gold often falls.

Adding to gold’s woes: The Fed’s hawkishness convinced market participants that the central bank has inflation under control, causing gold’s pronounced tumble in the second and third quarters, Casanova says.

International gold miners remain profitable, but the combination of rising costs and dropping gold prices have reduced margins.

Thomas Kertsos, portfolio manager and senior research analyst at the First Eagle Gold says “The market is telling you the Fed is going to control inflation without a hard landing … and that’s why the gold price has behaved as it has,” he says.

The funds that own gold miners have been hit harder because mining companies are effectively leveraged bets on the price of gold. That helps them outperform when gold prices rise, but hurts them when prices fall. Mining companies’ operational costs are up because of inflation and supply-chain issues, and they can’t pass along those costs to customers, says Christopher Mancini, associate portfolio manager at the $260m Gabelli Gold fund.

International gold miners remain profitable, but the combination of rising costs and dropping gold prices have reduced margins. VanEck calculates that the mining-industry average for all-in costs — including total costs for production, exploration, sustaining capital, and administration — is about $US1250 an ounce. So, at current gold prices of about $US1640, gold miners are still making about $US400 on every ounce. By contrast, when gold was at $US2000 an ounce in March, they were making closer to $US750 an ounce.

Most of the North American senior and intermediate-size miners, which include names such as Newmont, Barrick Gold, and Agnico Eagle Mines, remain in solid financial shape. Casanova says they continue to have strong free cash flow, and are paying dividends and

Casanova says the gold miners are being prudent about growth and look attractive from a balance-sheet and valuations perspective. “The companies will be in good shape as long as the gold price holds here,” she says.

Not all investors think it’s the right time to buy. Phil Kosmala, managing partner at Taiber Kosmala, an investment consultant for institutions and registered investment advisors, has invested in gold and goldmining companies on and off for 20 years, but he’s staying on the sidelines. Company valuations may be cheap, but that isn’t enough of a reason to buy when gold prices are under pressure.

Instead, Kosmala is waiting for signs that the U.S. economy will slow or tip into recession because of the Fed’s aggressive tightening. Historically, gold does well at those times because of its perceived status as a haven. He would also like to see the dollar retreat and real interest rates shrink. “We’d like to see all three of those for us to start looking more favourably upon gold,” he says.

Gold bugs say that what really could brighten the metal’s fortunes is if market participants think the Fed has lost its grip on inflation.

That’s what happened in 1979-80: Inflation grew out of the Fed’s control, and gold skyrocketed to about $US850 an ounce, equivalent to more than $US3000 today.

But the ’70s weren’t all shiny for the metal. From 1975 to 1976, Kertsos says, gold miners were stressed financially, and the metal’s price fell sharply when investors decided that the Fed had tamed inflation. It hadn’t.

And inflation kicked up again, coupled with a recession and an oil crisis, lifting gold. Kertsos isn’t suggesting that gold is at an inflection point like it was in 1976, but the macroeconomic patterns of the time bear watching today.

“There’s no perfect paradigm. Mark Twain said history doesn’t repeat itself, but it rhymes,” he says. “Today, we have similar dynamics.”

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