Over the last several years, gold has reasserted itself as a safe-haven investment against a backdrop of inflation, geopolitical turmoil and growing distrust of traditional fiat currencies.
Since the pandemic, gold has surged from lows around the US$1,600 per ounce mark to nearly US$3,500.
A significant portion of the gains have been attributed to unprecedented purchases from central banks, particularly China, with western investment only recently adding momentum.
Yet despite gold’s phenomenal price rise, gold equities haven’t followed suit.
Why did gold stocks stall?
Up until mid-2024, many gold producers were facing structural challenges, and balance sheet issues were one of the primary factors holding investors back from putting money into gold equities.
Between 2020 and 2023, average all-in sustaining costs rose from US$950 to US$1,300 per ounce. The increase was driven by rising prices for energy and other essential materials needed in the mining process.
Additionally, supply chain disruptions caused delays in shipping equipment to mining sites, and in delivering mined materials to refiners and vendors. On a similar note, increasing travel and accommodation costs, along with challenges due to new on-site health and safety protocols, impacted the labor force.
A sharp increase in worker shortages due to lockdowns and illnesses also contributed to higher costs, as operators were forced to raise wages to attract and retain skilled workers throughout the pandemic. Aside from that, recent decades have brought greater reliance on computer-controlled equipment and autonomous fleets. A shortage of semiconductors provided further challenges for operators as prices for new components became more costly.
Essentially, costs rose more rapidly than the price of gold, dramatically reducing the profitability of producers.
“The thing about commodities is that the producers of the commodities are price takers,’ Winmill said.
‘So whatever the price is, that’s what they get. They can’t really add something special to their ounce of gold or their ounce of silver. They take whatever the market will give them for that ounce.’
Is now the time to invest in gold stocks?
As mentioned, gold has been on a record-setting run, with central banks playing a key role in its move.
China has increased its gold holdings by more than 1,000 metric tons in recent years in response to global sanctions following Russia’s invasion of Ukraine in February 2022. The US provided further impetus in this direction by cutting Russia off from the SWIFT money transfer system and seizing dollar-denominated assets.
“We think central banks around the world are saying, ‘Hey, we want to buy gold now, because for 3,000 years, there’s always been a buyer. We won’t depend on another party to redeem our bond or buy our asset,” Winmill said.
Central banks have also been adding gold to minimize risks associated with political whims, currency devaluation and growing deficits, particularly in countries like the US, where the federal debt has ballooned to US$34 trillion.
Gold purchases from central banks have resulted in incredible momentum, helping to set new records in 2024. Support during that time came from investment inflows from Asian investors, while western investors remained on the sidelines until late 2024 to early 2025. Coinciding with their return was considerable uncertainty, as the Trump administration’s trade policy had investors looking to gold as a hedge, pushing the price toward the US$3,500 mark in April.
A higher gold price means higher profit margins for producers, making equities more attractive.
“In the 25 years I’ve been managing a gold fund, I’ve never seen these kinds of profit margins in the offing, and it’s really exciting,’ Winmill said during the conversation. ‘I mean, Canada has 2.6 percent inflation, but that really doesn’t make much difference when the gold price is up over 40 percent and going higher.’
He described a situation where production costs have plateaued between US$1,600 and US$1,800 per ounce, while gold has surged to US$3,400. “All that difference between … that’s all pure profit,” Winmill said.
What qualities to look for in a gold stock?
Before investing in a gold stocks it’s important to understand company risks and how they are being minimized.
Among the more unpredictable risks is jurisdiction. Gold companies often do not have the luxury of operating in low-risk regions like Canada or the US, and may have to contend with unstable regimes.
According to Winmill, companies are turning to sovereignty risk insurance as a means of derisking their investments.
“If the local government seizes all of your mines and a US$100 million investment goes up in smoke … if you have sovereignty risk insurance, you can go to the insurance company and say, ‘Hey, we were expropriated, pay us US$100 million so we can pay off our bank,’” the expert explained.
On a more fundamental level, Winmill suggested avoiding companies without free cashflow.
“I would stay away, in my opinion, from any company that does not have free cashflow, because if you have free cashflow, time is on your side. If you don’t have free cashflow, every day that goes by you are getting poorer,’ he said.
Winmill also advised looking to companies led by individuals with a strong track record in the industry.
He said he doesn’t prefer companies managed by geologists, who tend to get overly enthusiastic about chasing discoveries, or by accountants, who can get too absorbed in the costs.
“You need a balanced approach,” Winmill stated, adding that it takes a team to develop a mining company and deal with deposits that can be very complicated.
When he reviews the industry, he is able to find only a handful of investible companies that meet the parameters of having free cashflow, quality management, great deposits and less political risk.
How can investors avoid risk?
Winmill also noted that mutual funds, like the fund he manages, can be helpful in reducing risk.
“They tend to have many, many holdings. So you buy one fund and you get the benefit of a diversified strategy,” Winmill said. He manages the Midas Discovery fund, whose top holding is Agnico Eagle (TSX:AEM,NYSE:AEM). Rounding out the top three are Lundin Gold (TSX:LUG,OTCQX:LUGDF) and Northern Star Resources (ASX:NST,OTC Pink:NESRF).
Other benefits of funds include professional, continuous management. Fund managers spend their days researching companies and projects, which individual investors may not have the time for.
Another suggestion that Winmill gave for those looking to benefit as the gold price and gold equities rise is to look at royalty companies, which tend to maintain greater upside potential while minimizing risk.
Royal Gold (NASDAQ:RGLD) is one of the Midas Discovery fund’s top 10 holdings.
Securities Disclosure: I, Dean Belder, hold no direct investment interest in any company mentioned in this article.