CONTRIBUTORS
Steve Land, CFA
Portfolio Manager, Research Analyst
Franklin Equity Group
Key takeaways:
- Geopolitical risks, economic instability and equity market volatility are pushing some investors to seek out what they believe are more secure assets, such as gold.
- Sanctions and deglobalization of trade are creating opportunities to re-establish gold as a currency alternative for international transactions.
- New demand drivers have pushed gold prices higher, but we believe room remains for historical catalysts—such as US dollar weakness, falling yields or increased investor interest—to raise prices further.
- Despite strong earnings, gold-mining equities materially lagged bullion returns in 2024, potentially setting the stage for mining stocks’ outperformance if margins remain robust.
What’s driving gold’s sustained price strength?
Gold has long been perceived as an investment “safe haven” in times of political and economic uncertainty. However, under-the-radar structural forces shaping the gold market may better explain the metal’s recent upward trajectory in the face of factors that have proven to be headwinds in the past, including its historical inverse correlations to the trade weighted US dollar and higher real bond yields. Gold prices have risen with the emergence of new demand sources over the past few years, with central banks and international trading partners increasing their use of gold as a currency. However, we think traditional factors like US dollar weakness, falling yields and investor demand could drive prices even higher.
We also believe the underperformance of mining equites in 2024 creates a compelling investment opportunity in 2025. Mining equities materially lagged gold bullion returns last year, despite delivering solid earnings and cash flow gains due to higher spot gold prices.1 We think this leaves mining stocks poised to potentially outperform physical gold—assuming gold either remains in its current trading range or moves higher. 2
Conclusion
Many gold producers have seen earnings and cash flow rise faster than their share prices, resulting in contracting valuation multiples despite improving business fundamentals and a positive outlook on future earnings growth. With equity valuations running significantly below market averages, investors appear skeptical about the sustainability of current gold prices. We believe this creates an opportunity for gold mining equities to appreciate even in a relatively flat gold-price environment, while still being well positioned to benefit if prices continue their upward trajectory.
Endnotes
- Source: Bloomberg, L.P. Data compares gold’s spot price versus the FTSE Gold Mines Index. The FTSE Gold Mines Index is designed to reflect the performance of companies that primarily derive their revenue from the mining of gold. To be included in the index, a company must consistently produce a minimum of 300,000 ounces of gold per year and derive at least 51% of its revenue from mined gold. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results
- Source: Bloomberg, L.P. From the beginning of February to mid-March 2025, the trading range for spot gold was approximately US$2,850 to US$2,950 per ounce.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal.
Commodity-related investments are subject to additional risks such as commodity index volatility, investor speculation, interest rates, weather, tax and regulatory developments.
To the extent the portfolio invests in a concentration of certain securities, regions or industries, it is subject to increased volatility. International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
Derivative instruments can be illiquid, may disproportionately increase losses, and have a potentially large impact on performance.