Gold Stocks: Should Investors Consider Buying Them?

TradingKey - While global stock markets and Bitcoin are close to all-time highs, there are also other assets out there that investors should consider.

One of those assets is gold, which has had an incredible run in 2024. Last year, the price of the “yellow metal” rose by more than 30% and outperformed the return investors would have received from the key US benchmark; the S&P 500 Index.

However, while stocks and bonds both provide a return (either in the form of dividends from cash flow or coupon payments from debt), gold “won’t do anything, except look at you” – in the words of investing guru Warren Buffett. 

But what about the stocks of gold-related companies, like gold miners or explorers? Are they worth buying for investors as a proxy for the price of gold?

Gold stocks still directed by fundamentals

Just like individual companies in any sector – whether it’s healthcare or technology – the companies involved in gold mining won’t provide similar returns profiles to each other.

Why is this the case? Well it depends on a number of factors, primarily gold companies’ gold reserves, margin profiles, and – of course – profitability. These can vary wildly from company to company and, before investors purchase gold stocks, it’s important to understand the individual fundamentals of each.

In other words, due to all these variables, gold stocks cannot be bought as a direct proxy for the price of gold.

How gold stocks can differ

As a prime example of this, last year the price of gold rose by close to 35%. Meanwhile, Barrick Gold Corp (NYSE: GOLD), the world’s second-largest producer of gold by volume, actually saw its share price fall close to 13% in 2024.

That was mainly down to disappointing 2024 production guidance from management as well as cost factors, which adversely impacted Barrick’s operating margin profile. In this environment, most investors would expect scale to have an impact on investor returns (i.e. larger gold miners will provide economies of scale and deliver higher profitability, leading to higher shareholder returns).

However, the reality is actually far from that presumption. Indeed, last year the world’s largest gold miner – Newmont Corporation (NYSE: NEM) – actually saw its share price fall 9% for the year. Instead, smaller gold companies can provide more interesting opportunities for investors.

Canadian gold miner = hidden gem

One example of this would be Canada-headquartered gold miner Kinross Gold Corp (NYSE: KGC), which has been on an exceptional run over the past few years. Last year, the company’s share price was up over 60%, far outpacing the price of gold.

Kinross among most operationally-efficient gold miners in 2024

Source: Kinross Gold investor presentation, as of November 2024. Note: YTD = 1 January to 30 September 2024 period

What was the main reason for this? Operational efficiency when it comes to producing gold. As readers can see from above, Kinross is exceptionally good at producing efficient free cash flow despite its lower gold volume output.

The company’s operating cash flow illustrates that well. Despite only posting revenue of US$1.43 billion in Q3 2024, Kinross managed to deliver operating cash flow of just over US$733 million for the period. 

Compare that to Barrick Gold. The large gold miner posted revenue of US$3.37 billion in Q3 2024 and operating cash flow of US$1.18 billion – investors can see that Kinross’s operating margin profile is much more attractive than its larger peer.

Look to fundamentals with gold stocks

For investors who do want to buy gold stocks, with many of them paying dividends as well, then they would do well to look at smaller, more efficient producers rather than just looking at total gold output.

Indeed, this trend seems to hold longer term too. Shares of Kinross are up 129% over the past five years while Newmont’s stock price is down 7.4% and Barrick Gold’s shares are down 11.3% over the same period. 

That delta in performance is a perfect illustration of why investors – even in gold stocks – need to do their research on individual companies and their operating profile.