Investors are likely asking themselves two questions at this time: is now the time to add gold to their portfolio, or did they miss the boat already, and on the other side, if they have already exceeded their gold exposure, is now the time to take profits?

FEE: Encourage Everyone That The Gold Price Goes Higher

The firm gold price we have witnessed since the start of the year (up c.20%) was initially supported by healthy Chinese retail demand. This led to imports from the most Westernized regions of the world, though again, the Central Bank of China itself confirmed that there would be no additions to reserves until May and June, thus this represents an increase in Western demand for physical gold. And we have not only witnessed some action in the east, but we also have seen the trajectory in the west change, with ETFs going from years of selling into buying gold.

While we have been transparent that the relationship between US rates and the gold spot price has recently decoupled, global inflation expectations have eased further with US & UK CPI falling to 2.9% & 3.1% (respectively), allowing for rate cuts before year-end. This should be positive for the gold price once the rate cuts materialize. Maven market Read more comment & market analysis Forex Keep your profits and increase your wealth.

Gold miners have underperformed, yet profitability and momentum are mounting

However, even as the gold price has ripped to the upside, the gold miners have continued to lag the spot price meaningfully, trading at some of the cheapest levels we’ve seen in years on earnings multiples / NAVs. This is due to earlier cost inflation problems facing the sector that have crammed producer margins even with the strength in the gilt since the COVID pandemic. These inflationary cost pressures are now easing and, in some cases, reversing, which should afford producers better cash generation, and that also at an elevated gold price into the second quarter of 2024.

So, after two consecutive quarters of a sustained lofty gold price, we are finally starting to see that is being reaped by gold miners. Emerald Resources – the fund’s largest position and reported 1H24 Net income of A$51.6m (1H23: A$26.2m). The same can be said for many other gold miners, resulting in better profitability and free cash flow as gold has kept on climbing.

We expect this more attractive free cash flow to become more visible in the gold mining space and a rerating of the unloved equities to follow.

How to play this possible rerating

Golden Prospect Precious Metals is a small and mid-cap focused precious metals fund; it is these companies that most benefit from reversing inflationary pressures. As the gold price climbs, these miners will often benefit much more than the larger mining companies, given that their profitability is much more sensitive to changes, whereby small increases in the gold price result in improvements in profit margin and valuations seen now.

Throughout the 2008 Financial Crisis and the COVID Pandemic, because that is when gold and the gold mining equities puzzled themselves. Its “gearing” (borrowed funds) profile also gives investors greater potential upside in terms of total return, as this will amplify your returns on the equities you have invested in when performance is positive. Golden Prospect has had a few large price rallies, including a trough to peak return of over 500%[4], or within the ears of the COVID pandemic the fund hit an over 300% increase in the share price, and most recently from October 2023 to time of writing this rallying over 45%[5]. With Chinese demand remaining strong, Western demand on the upswing and the fact that the gold price is at all-time highs while miners are close to all-time lows based on price to NAV multiples, we feel the risk-reward profile is favorable, with a solid bias to the upside.