Gold miners or spot gold: What's the better way to play this historic rally?

While the barbarous relic (gold) hit a new, all-time high this week, we see a number of drivers that point to continued gold price strength in 2024, including the shift in consensus beliefs on short-term interest rate expectations and a correction in the US dollar.

Gold has made fresh highs lately due to a confluence of a number of factors.

1. Stubborn inflation - Gold is often used as an inflation hedge, seen as maintaining its value in an environment where purchasing power is being rapidly eroded by rising prices and devalued currencies.

2. Geopolitical uncertainty - Gold is also seen as a safe haven in times of geopolitical unrest, the likes that we’re seeing now with the Russia's war in Ukraine and the Israel-Hamas conflict.

3. A weaker US dollar – The Greenback has weakened over the last few weeks, which is typically positive for gold.

The precious metal has also received strong demand from central banks.

In 2022, net central bank purchases of gold reached their highest level since 1967. The trend has carried over into 2023 too, with gold purchases by central banks totalling 799 tonnes for the first nine months of the year alone.

Chart 1: Central Bank gold demand

So can you still chase this rally? In this wire, we'll examine that pressing question.

The effect of interest rate cuts and real yields on gold prices

Our view is the drivers that have pushed up the price of the shiny metal are still firmly in place and do not look to be receding any time soon. For this reason, it is entirely plausible that the rush on gold will continue.

Broad economic weakness is generally supportive of gold prices. To this point, it has been said that gold is a ‘hedge’ against the US Government. This is a government that has in excess US$33 trillion of debt (over 120% of GDP). Meanwhile real GDP in the US for 2024 is forecast to be just 1.2%, a weak result which could drive investors away from other asset classes toward the safe haven of gold.

In addition, the Federal Reserve (the Fed) is still battling with sticky inflation. While interest rates hikes have dampened inflation somewhat, it is still well above the Fed’s 2% target. With services inflation remaining high, we do not expect inflation to fall further any time soon.

Despite this, markets are predicting that the Fed will cut rates in 2024. The consensus on rate cuts is driven by the belief from most investors that the US will avoid recession and achieve a “soft landing”, according to the Bank of America Fund Manager Survey. Either way, rate cuts will weaken the US dollar and bodes well for gold. An environment where rates remain high due to inflation also bodes well for gold. 

Chart 2: Gold typically performs inversely to the US dollar 

Further opportunities with gold miners

Offering different characteristics and benefits, there is room for both physical gold and listed gold mining companies in your portfolio. Gold miners provide leveraged exposure to gold, with gold miners tending to outperform gold bullion when the price rises and underperform if the gold price falls. Gold mining companies are also generally well-positioned to deliver profits and tend to be the preferred way to gain exposure to gold by investors who also enjoy income.

Gold bullion tends to have a lower volatility profile compared to gold mining companies in both bull and bear markets, offering return potential and defensive characteristics.

In our overall view, gold has more upside than downside as the continued physical demand for gold should create a floor.

For investors who are bullish on the gold price, gold miners offer the most upside. The gold mining sector’s balance sheets, cash flow generation and capital allocation strategies are as strong as they have ever been. At the same time, gold equities remain cheap relative to gold bullion.

In 2024, we see opportunity for gold to test and break through the all-time highs of $2,075 in 2020 and $2,135 more recently, on December 4. Gold equities are positioned to benefit from sustained, record high gold prices as investors look for leveraged, and diversified exposure to gold.

Chart 3: Gold equities remain cheap relative to the price of gold: Ratio of gold miners (GDX Index) to gold bullion price

You can learn more about our ASX-listed gold ETF products here:

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VanEck Gold Miners ETF (GDX)

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VanEck Gold Bullion ETF (NUGG)

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