Rick Rule on the disconnect between gold price and equities

Q: Gold is now at an all-time high, but the majority of gold stocks are around 5-year lows.  Can you explain the disconnect?

Rick Rule: Absolutely.  And first of all, gold is only in all-time highs in nominal terms.  In real terms, against the U.S. dollar at least, gold is not at all-time highs.  And people need to understand that when they think about where gold might go.  The second thing is, with regards to the underperformance of the gold price, it's worth noting that the buying of gold is not widespread.  You are not seeing retail buying of gold except in China and India.  The gold purchases that you're seeing are central bank purchases.  And those central bank purchases are really looking for an asset that could be a medium of exchange outside the U.S. dollar.  It's the weaponization of the dollar, rather than the fear of inflation, that is the driver of gold itself.  These gold buyers, central banks, are not buyers traditionally of gold equities, or equities at all, for that matter.  So it makes perfect sense... to say that the gold bull market and the market in gold stocks thus far is disconnected because while the buyer has a need for gold to circumvent the U.S. dollar, the buyer doesn't have a need for gold stocks.

But there's a second reason that I think is worth discovering and that is the chronic underperformance of gold mining companies as businesses for the last 50 or 60 years.  Lucijan, if you were as old as I, which I can tell you're not, you would remember the decade of the 1970s when the gold price went from $35 to $850, the best bull market for gold stocks probably in recorded history.  The hangover from that, if you will, is that the gold stocks the most in that bull market were the ones that exhibited the most leverage to gold.  And the most leveraged companies, ironically, are the most marginal.  If you're a high cost producer and the gold prices goes up, your margin increases faster, ironically, than a more efficient producer.  When the investor, which they have now for the last... 50, 60 years, looked at gold investments, they looked for the most leverage, which is to say the most marginal.  And the industry became very very marginal.

If you look back to the decade 2000 to 2010, the gold price in U.S. dollars was up more than seven-fold and yet free cash flow per share among the XAU [PHLX Gold and Silver Sector Index] in the U.S. declined!  It took real skill to screw up a market where the selling price of your product increased seven-fold and you reduced free cash flow per share.

So the expectations that the investment community has around gold mining companies are extraordinarily low.  From my point of view, that's good news.  It's good news because I don't have much competition on the bid for gold mining stocks.  And I would suggest to you that some investor expectations have become more rational.  I would suggest that most of the management teams that presided over the destruction of capital in the period 2000 to 2010 have been allowed to pursue other employment opportunities.

So I think that the gold industry is held in ill-repute, ironically, right at the beginning of its renaissance and I regard this as a particular opportunity.

~ Rick Rule, interview with Lucijan Valkovic, 7:20 mark, March 28, 2024

Jim Grant on Asian central bank buying of gold

Not everyone cheered when Western authorities immobilized some $350 billion of Russian foreign-currency reserves following the Putin-ordered invasion of Ukraine.  Nor does everyone agree with recent Western proposals to commandeer that cash to shore up Ukraine's defenses.  China, in particular, has withheld its applause, and it may not be coincidental that March marked the 17th consecutive month of Chinese gold purchases.  [The People's Bank of China bought a record 735 tonnes of gold in 2023 according to The Gold Observer.]  Even such central banks as Singapore and Poland, the governments of which harbor no known extraterritorial ambitions, have been stocking up on the legacy monetary asset, the World Gold Council reports.

"The U.S. is essentially throwing its weight around, maybe a little too much," Pierre Lassonde, a cofounder of Franco-Nevada Corp. and a dean of the Canadian mining community, opines to deputy editor Evan Lorenz.  "Looking at the finances of the United States and the enormous budget deficits, just interest on the debt is more than the defense budget.  The dollar used to be called TINA, i.e., There is No Alternative.  Gold is the new alternative.  I call here GINA."

~ Jim Grant, "Gold rush," Grant's Interest Rate Observer, April 11, 2024