The long-standing relationship between gold prices and gold mining stocks is showing signs of strain, leaving investors perplexed about the underlying causes. Despite the substantial surge in the value of the SPDR Gold Shares ETF, which mirrors the price of gold, gold mining ETFs have failed to keep pace, prompting a reevaluation of the factors influencing this disparity.
While the SPDR Gold Shares ETF has soared nearly 10% this year, spurred by concerns over inflation and global economic instability, ETFs like the iShares MSCI Global Gold Miners and VanEck Gold Miners have experienced meager gains, increasing only by 2.28% and 1.7% respectively.
Data analysis from VettaFi reveals that the correlation between gold prices and gold miners’ shares has weakened to 0.6 in 2023, diverging significantly from its historical average of 0.8 over the past decade. This unexpected detachment between the two sectors has left experts scratching their heads, searching for plausible explanations.
According to Imaru Casanova, portfolio manager at VanEck, one of the contributing factors could be the substantial gold purchases made by central banks globally over the past few years. The massive inflow of gold into central bank reserves, reaching a record high not seen since 1950, has boosted the price of gold but hasn’t necessarily translated into improved fortunes for gold mining companies.
Roxanna Islam, associate director of research at VettaFi, highlighted production shortfalls as another critical factor impacting gold mining stocks. The inability of certain gold mining companies to meet production targets, coupled with significant spending on exploration and production, has exerted downward pressure on their stock prices.
Even prominent industry players like Newmont Corp. and Barrick Gold have faced production challenges, with Newmont likely falling short of expectations due to a recent strike at its Penasquito mine in Mexico. Barrick Gold, despite reporting a modest increase in gold production in the third quarter, has admitted that its overall output for the year will not meet projections.
Amidst the backdrop of a broader market downturn and a waning investor appetite for stocks, the performance of gold mining stocks seems to be closely mirroring the overall market sentiment rather than the bullish trend in gold itself. As gold miners grapple with production hurdles, investors are closely monitoring market dynamics for clues on when this disparity might start to reconcile.