Gold mining stocks are outperforming gold

As gold prices hit new highs to exceed its prior peak of around $1,900, investors may want to consider foregoing buying the physical commodity in favor of mining stocks, according to Barron’s’ Andrew Bary.

Gold’s strong surge

Gold is up nearly 30% since the start of 2020, making it one of the better performing investments this year. Investor appetite for exposure to gold is particularly visible through exchange traded funds, according to Bary. For instance, Friday’s trading session is highlighted by a record high of 106.7 million ounces across ETFs.

This represents an increase of more than 3 million ounces since the start of July and up 30% since January. The most recognized physical gold ETF, the SPDR Gold Trust (NYSE: GLD), traded the equivalent of 39.5 million ounces on Friday.

Gold typically moves in the opposite direction of the U.S. dollar. The greenback has lost nearly 10% of its value since the COVID-19 induced peak in March when nearly every asset class plunged.

Gold is also an asset class that is seeing support from nominal U.S. interest rates and negative real estates, Bary wrote. In fact, the 10-year Treasury inflation-protected securities are hovering around negative 1%.

Mining stocks are outperforming

Newmont Corporation (NYSE: NEM) is a global gold miner that is up more than 60% since the start of the year for good reason. The math behind the stock may explain the strong performance, according to Bary. For every $100 lift in the price of gold, Newmont’s free cash flow improves by $400 million annually. 

According to the company’s own estimates, when gold trades at $1,200 an ounce, free cash flow comes in at $1 billion. This implies at current gold prices, Newmont’s annual free cash flow will come in at $3.8 billion annually.

What about silver?

The price of silver is up more than 100% since its March lows, implying it is outperforming gold by a wide margin. After breaking above September 2019’s highs just shy of $20 an ounce, the price of silver shattered through the key resistance level and is now flirting with $25 an ounce.

The closely watched gold to silver ratio, that is how many ounces of silver are required to exchange for one ounce of gold, improved from a peak of 125 in March to around 80. 

Much like gold, some silver mining companies are outperforming the growth seen in the physical commodity. For example, Pan American Silver Corp. (NYSE: PAAS) is up more than 65% for the year — a strong gain by any measure but nearly double the 35% appreciation in the closely tracked silver ETF, the iShares Silver Trust (NYSE: SLV).