John Hathaway, managing partner at Sprott (TSX:SII,NYSE:SII), shared his thoughts on the disconnect between the gold price and gold stocks, explaining why it’s happening and what could make gold stocks start moving.
In his view, the rise of passive investing is one reason gold stocks have gotten stuck. Hathaway noted that this style of investing dominates the markets today, and it doesn’t favor smaller sectors like precious metals.
The popularity of exchange-traded funds (ETFs) is another factor. ‘I think it’s fair to say that the gold-backed ETFs have cannibalized demand for gold-mining equities,’ he said. ‘Before (gold ETFs existed) it was really difficult for equity investors to position in the macro thesis behind gold … without owning gold stocks.’
The gold price is already historically high, but Hathway said more momentum could push gold stocks up.
‘Is it US$2,100 (per ounce)? Is it US$2,500? Somewhere along the way higher gold prices will generate interest in gold-mining stocks because they’re leveraged to the gold price,’ he said. ‘At some point a higher gold price will lead to such incredible cashflow and profitability that even this tiny little space will catch somebody’s eye.’
Aside from a higher gold price, there are other elements that could drive interest in the gold space.
‘What would that be? I think it would be a reversion to mean, not just in the gold-mining space, but a reversion to mean in the external markets. We all know that the stock market basically has been driven by seven names … again, if you’re a contrarian it’s an easy trade to make — sell the Mag 7 like (Stanley) Druckenmiller just did and look for something that’s completely discounted,’ Hathaway said during the conversation. ‘That’s not just the gold-mining space, you can talk about oil and gas, you can talk about some cyclical names. So I think that’s one thing.’
The other is potential issues in the banking system, possibly in terms of commercial real estate.
‘In a way, you could have … the dot-com crash in 2000, 2001 and the global financial crisis in 2007, 2008 combining to turn consensus investment banking upside down. That’s the sort of thing that would lead investors to look for diversification, which gold represents,’ he said in closing. ‘I believe that that’s the scenario I would point to for the gold-mining industry and gold itself to come back into favor.’
Watch the interview above for more from Hathaway on gold and gold stocks.
Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.