I'm an Investment Pro: This Is Why Gold Isn't Shining Right Now (Plus, an Alternative That Is)
Even if gold mining companies become less profitable, it will still be business as usual for gold royalty companies, which offer a cleaner way to maintain exposure to gold without taking on mining's operational risks.
Investors drawn to gold for its reputation as a safe-haven asset may understandably be disappointed lately.
As the conflict in Iran escalates and surging energy prices stoke fears of inflation, it feels like this should be the yellow metal's time to shine.
Instead, gold has recently fallen over 10% from its all-time high earlier this year. The VanEck Gold Miners ETF (GDX) is down nearly twice that much.
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If precious metals are a part of your long-term strategy, now isn't the time to abandon your allocation. However, some fine-tuning may be in order.
To understand how to go about doing that, we need to look at why gold is being pressured today and what the economic backdrop may look like in the near future.
What's getting the attention instead?
Rather than gold, it has been the U.S. dollar that has been the safe-haven asset of choice. As the value of the dollar increases, it of course requires fewer dollars to buy other assets, including gold.
Inflationary fears are fueling this dynamic. Roughly 20% of the world's crude oil and petroleum product shipments typically pass through the Strait of Hormuz. The north coast of the strait lies alongside Iran, and shipments have essentially stopped.
This has caused energy prices to spike and has the potential to put inflationary pressure on countless other goods and services.
This concern might seem counterintuitive — isn't gold considered a hedge against inflation? Over the long term, yes.
But for now, the market expects that looming inflation will keep short-term interest rates reasonably attractive. Bets for Federal Reserve rate cuts in 2026 have been slashed significantly. In fact, the Fed kept its rate unchanged at its recent meeting.
Traders are pricing in a single quarter-point rate cut this year, down from expectations of two to three cuts at the end of February.
Higher rates make gold less attractive
Pocketing a 4% supposedly risk-free return for longer than expected is tempting. It harkens back to the "T-bill and chill" strategy that was all the rage a few years ago. Of course, the higher-for-longer rates make the non-yielding yellow metal less attractive.
What happens with gold (and many other assets) going forward largely depends on the timing of a resolution to the conflict, or at least the reopening of the strait.
At Stansberry Asset Management, we'll continue to monitor the situation closely. Our views may change as circumstances change. That's the beauty of an active strategy — we can be nimble and change course if needed.
But at this time, we don't believe this conflict warrants a wholesale change to the long-term investment strategies of most investors.
That doesn't mean you can't be opportunistic. We're looking for situations where near-term concerns are creating attractive opportunities to own businesses we love for the long term. Gold is an area where we're finding such opportunities.
You might consider gold royalty companies
Kiplinger readers may recall that I highlighted the attractiveness of gold royalty companies last year. In short, these businesses provide financing to gold mining companies for their exploration and production projects.
In return, they get a specified return tied to the gold production of the mining operation they helped finance.
One of the benefits of gold royalty companies is that they benefit from a rise in gold price, as the miners do, but they are largely removed from many of the headaches that mining operators face. And, put simply, rising energy prices are a big headache.
Mining is an energy-intensive business. Massive-haul trucks, along with other mining equipment, burn huge amounts of diesel fuel. Processing uses up a ton of electricity (which is often generated from natural gas), as does ventilation in the case of underground mines.
Generally speaking, energy makes up 20% to 30% of operating costs for major miners. For juniors, it can be 30% to 40% or more, depending on ore grades (how much processing is needed), if they are operating in remote locations with little infrastructure and several other factors.
Business as usual
We don't need to get too into the weeds — the point is that when energy costs go up, the miners eat the cost, which makes them less profitable. Meanwhile, the royalty companies just get paid on what is pulled out of the ground.
Now, at some point, operating costs can become so high that it isn't worth the effort to pull gold out of the ground. That's when royalty companies could come under pressure. And that's part of the beauty of today's set-up — we are miles away from that being a reality.
The all-in sustaining cost (AISC) is a metric the gold mining industry uses to attempt to answer the question of how much it costs to produce an ounce of gold. The number will vary from one operator to the next and depends on many factors, but a ballpark AISC number today is about $1,500 per ounce. Even after the recent pullback, gold is worth around $5,000 per ounce.
There is still plenty of incentive for miners to pull the shiny metal out of the ground. If energy costs stay elevated, it may be a less profitable endeavor for them. For royalty companies, it will be business as usual.
If gold remains part of your long-term allocation — and we believe it should — then how you own it matters just as much as whether you own it at all.
In an environment in which energy costs are rising and margins for miners are under pressure, royalty companies offer a cleaner way to maintain exposure to gold without taking on those operational risks.
You still participate in the upside if gold moves higher. You're just less exposed to the headaches that come with pulling it out of the ground.
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