Missed the gold and silver rally? Metal mining stocks may be a way to catch up.

By Myra P. Saefong

Gold prices climb to a record and silver settles at its highest since 2013

An index that tracks metals mining shares has climbed its highest in almost two years, with room to run even higher as companies that mine precious metals continue catching up to gold's rise to record-high prices, and silver's climb to 11-year highs.

The NYSE Arca Gold Miners Index XX:GDM, which mainly tracks the performance of companies in the gold-mining industry, was up 17.2% this year as of Friday, with over half, or 9.6%, of that gain scored so far in the month of May, according to Dow Jones Market Data.

The index closed 1,027.54 Friday, the highest closing value since April 22, 2022.

Gold futures (GC00) (GCM24) already edged up about 5% this month to trade 16.7% higher on the year as of Friday, while silver futures (SI00) (SIN24) advanced 17.3% this month to push 2024 gains to 29.8%.

Read: Silver posts highest close in 11 years, gold at 3-week high as CPI data show slowdown in inflation

Both gold and silver have increased in price as inflation "stays sticky," and the market sees signs that the economy might be weakening, which could lead to a stagflationary environment, said Chris Mancini, associate portfolio manager of The Gabelli Gold Fund GOLDX.

Stagflation describes a situation of slow economic growth, high unemployment, and rising prices, but the labor market has yet to fall apart.

Precious metals can function a hedge against inflation and investors tend to look to gold, in particular, as a safe-haven asset in times of economic uncertainty.

Read: Gold and copper are breaking records. Silver is at an 11-year high. But the narratives vary.

Gold, silver and the Fed

Many analysts have attributed 2024's gains in precious metals to expectations for interest-rate cuts by the Federal Reserve later this year.

"Precious metals are non-interest bearing assets so expectations of lower interest rates lend support to both gold and silver prices," said Chris Gaffney, president of World Markets at EverBank. High interest rates, on the other hand, "increase the cost of holding non-interest bearing assets and give investors more attractive opportunities to invest their cash."

If the Fed decides on only one rate cut, or ends up not cutting rates this year, that would "limit upside for both gold and silver," he said.

If the U.S. economy remains resilient, forcing the central bank to hold off on cuts, silver could actually benefit, given that it's an "industrial precious metal" and typically performs better than gold in times of global economic strength. Under that scenario, silver should outperform gold, he said.

See: Powell says he expects inflation to move down but isn't completely confident in this forecast

More gains in store

Both metals should perform well through the end of 2024, as most of the factors that have led to the run up in prices remain, including geopolitical uncertainty, record debt levels, expectations of lower interest rates, and lots of uncertainty regarding financial markets, said Gaffney.

He reiterated his expectations that silver would outperform gold if U.S. rates remain higher for longer due to solid U.S. and global growth, and "stubborn" inflation. Gold, he said, would outperform silver if there's any "uptick in geopolitical concerns" with an expansion of the Gaza conflict, or a new conflict with China, a global economic slowdown, or aggressive interest-rate reductions.

Michael Cuggino, president and portfolio manager of the Permanent Portfolio Family of Funds, said that in addition to geopolitical risks, the upcoming U.S. presidential election, strong central-bank buying around the world, and retail interest - whether for investment or personal use - also provide support for gold and silver prices.

Read: Why global gold demand marked its best first quarter in 8 years

Also, given the daily decline in the value of the U.S. dollar's buying power, not to mention that of other currencies, "we expect that both metals may have much further to go over the long term," said Cuggino. The ICE U.S. Dollar index DXY has fallen by 1.6% so far this month.

Catching up

Both gold and silver posted impressive gains in recent weeks that have lifted prices for the metals to notable price highs.

Gold futures settled at $2,417.40 an ounce Friday to post a fresh record-high settlement. The record intraday high for a most-active contract stands at $2,448.80 from April 12.

Silver has also rallied, with futures prices settling at $31.259 Friday, the highest finish since Feb. 8, 2013.

Against that backdrop, the year-to-date percentage gain of 17.2% in the NYSE Arca Gold Miners Index nearly matches that of gold futures this year.

Precious-metals mining shares had underperformed the price of gold "pretty dramatically" early on in 2024, said The Gabelli Gold Fund's Mancini.

Over the past 12 months, the NYSE Arca Gold Miners has climbed by 12.1%, but that pales in comparison with a 30.8% rise in silver futures and 21.8% gain for gold futures.

The cost of production had increased during the COVID-19 pandemic, by about 35% from $1,000 per ounce of gold to $1,350, he said. Costs rose as mining became more difficult during the pandemic with social distancing policies and "any potential benefit to margins to increasing prices was eroded in the increased costs."

Production costs are stabilizing, but have not come down and "probably won't," said Mancini.

However, with gold rallying upwards from $2,000 per ounce, the mining company shares have "outperformed the metal on the upside," he said. If production costs stabilize and the price of gold stays here or moves higher, the companies will "generate significant amounts of free cash flow and the stocks will react very well," he said.

Lagging indicators

Cuggino, meanwhile, referred to the mining companies as "lagging indicators."

Mining company businesses "rely on ramping up or down their operations based on the demand and forecasted valuation of their primary raw material, and these moves take a long time to execute," said Cuggino. He noted that the Permanent Portfolio Family of Funds does not in invest in gold and silver miners, but has full positions in the metals, themselves.

There are "complexities" involved in finding, developing, financing, negotiating, and extracting from the creation or shut down of a mining operation, said Cuggino. "The more these companies see demand and value as being sustainable and consistent, the more they will likely produce and develop."

The associated cost and expense of increasing production have climbed since the last time many of these companies undertook such activity, he said, adding that there may be more merger and acquisition activity among these companies going forward as a result of these factors.

While miners generally underperformed the prices of metals, themselves, over the past this year, they are cyclical, like other commodity-related stocks, and are "currently attractive as long-term, total-return investments as many pay healthy dividends," Cuggino said.

-Myra P. Saefong

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05-18-24 0852ET

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