As the Federal Reserve's interest rate cut approaches, the headwinds facing gold mining stocks are expected to reverse. Damo pointed out that in the first 100 days and 300 days after announcing interest rate cuts, the average performance of gold mining stocks was 10% and 27% better than gold, respectively.
Over the past two years, gold prices have repeatedly reached new highs, stimulated by a series of factors such as central bank purchases, geopolitical tension, and the continued expansion of the size of US debt. The cumulative increase in spot gold over 24 months was as high as 25%.
However, during the same period, the Gold Bugs Index, which represents gold mining stocks, rose only 8%, far below its historical peak in 2011.
Additionally, as shown in the image below,$SPDR Gold ETF (GLD.US)$und$VanEck Gold Miners Equity ETF (GDX.US)$The difference in growth over the past two years was huge. Green Line GLD rose more than 28% in 24 months, while gold mining stock GDX rose less than half of the former during the same period.
Morgan Stanley analyst Sandeep Peety and others said in a report released on May 12 that this trend is expected to reverse as adverse factors subside and consumer expectations restart. Furthermore, history shows that after the Federal Reserve cut interest rates for the first time, gold stocks generally outperformed gold.
The bank pointed out that in the past two years, some of the reasons for the poor performance of gold mining stocks were rising costs (the return on capital of gold mining stocks decreased by 4% in 2023-23 compared to 2021), poor operating performance, overspending on capital, and regulatory restrictions.
Also, judging from risk appetite, investors' demand to hold physical gold is strong, but their preference for gold mining stocks (risky assets) is average.
However, the factors unfavorable to gold mining stocks mentioned above are being reversed.
Morgan Stanley predicts that the return on capital of gold mining stocks is expected to increase by 5% in 2024 as inflationary pressure decreases, operating performance improves, and expectations are reset. Judging from historical data, compared to physical gold, gold mining stocks are more likely to benefit from these trends:
Economists at Morgan Stanley believe that the US may start a cycle of cutting interest rates as early as September. This raised questions from investors about how gold mining stocks performed during the interest rate cut cycle.
Historically, after cutting interest rates for the first time, gold and gold mining stocks tend to respond positively. However, in the first 100 and 300 days after the announcement of interest rate cuts, gold mining stocks performed better than physical gold by an average of 10% and 27%, respectively.
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