Industry experts: The temporary easing of tension in the Middle East has curbed the upward trend in gold prices. Gold mining stocks hide opportunities, and the outlook for gold remains optimistic.

Source: HuiTong Net

Co-manager of the Gabelli Gold Fund (GOLDX), Chris Mancini, stated that the conflict is only delaying a gold rally, and gold mining companies can continue to generate substantial cash flow with high gold prices.

Geopolitics push up oil prices, hindering gold performance in the short term

Mancini explained that if the Iran situation and the oil transportation disturbances in the Strait of Hormuz had subsided by summer, gold might have already stood at $5,000 per ounce. Geopolitical conflict is driving up energy prices, which in turn fuels inflation, leading the market to strengthen its expectations that the Federal Reserve Chairman will continue to raise interest rates. However, rate hike expectations are currently the biggest short-term drag on gold. In his view,

He further explained that even if the Federal Reserve keeps raising rates to combat inflation, high borrowing costs and oil prices will ultimately weigh on economic growth. At that point, the Fed will have to readjust its monetary policy stance, opening the door for gold to rise.

Positive earnings outlook for gold miners in Q3, but cost pressures cannot be ignored

With the gold mining sector about to release third-quarter financial reports, Mancini anticipates the industry's overall profitability to be strong and free cash flow performance robust. However, rising energy and labor costs will be a drag, and some miners may fall short of market expectations. He said: “Profitability will be quite good in general, but many companies are unlikely to meet consensus expectations.”

He also reminded investors not to be misled by seemingly disappointing data, as underlying profitability in the industry remains strong. Labor inflation is even higher than diesel costs. With gold prices hovering near $4,000 an ounce, many miners are launching new projects and expanding capacity, increasing labor demand and wages. But this gold bull market, miners have not repeated the reckless expansion style of the early 2010s—capital spending on new projects is under control, costs are more manageable, and capital discipline is clearly superior to the previous cycle.

Gold mining sector valuations are low but lack attention from capital—dividends may be the key

Despite miners’ healthy balance sheets and ample cash flow, the gold sector still struggles to attract a broad base of capital. At the Denver mining conference, Mancini observed that while executives and gold-focused investors are optimistic, mainstream institutional investors show little interest. He said: “These stocks are already cheap, but regular institutional investors still lack the willingness to get involved.”

In the past, gold price surges were often followed by long-term declines, so many investors question the sustainability of high gold prices. He believes that besides sustained gold strength, mining companies need to improve shareholder returns. Currently, companies prefer buybacks, but the market responds tepidly; raising dividends is the more effective path to attract external capital. Taking Newmont as an example, the company is valued at about $120 billion and could allocate around $8 billion to buybacks and $1 billion to dividends this year. While the overall return is considerable, the dividend yield is too low to attract funds. Redirecting more capital towards dividends to achieve a high dividend yield would significantly increase the sector’s appeal and provide a differentiated advantage over holding physical, non-yielding gold.

Conclusion

Editor: Jiang Yuhan