Are gold miners worth the risk right now?

With the gold price down 24% and gold miners sitting on unhedged positions, the question now is where the sector goes from here.

It has been a miserable time to be a gold investor recently. One-day wonders in relief rallies, and then the bullion price falls.

I have written before how I thought it would test the $4,000 level. And boy, did it! It sliced through it and then found its footing. Central banks are still buying, but retail buyers through ETFs have dried up. Alternatives are back. Why punt on gold when there is so much else to punt on? I suspect ABC Bullion is not quite as popular as it was. Strange how humans behave. It is a very British thing to see a queue and join it. Was that the same with the queues in Martin Place? Gold fever? It was infectious.

It did get a little silly, and there is one thing that we have all learnt in this brave new world of financial gaming markets: things overshoot. Things get irrational. Things are bought on momentum. If that momentum shifts, then the naysayers jump on it.

Gold is now down 24% since the Iran excursion began. My target last year was $4,000 by Christmas. It blew past that, and now it is back to that price. Digital gold cracked first, and now old-school gold has followed.

The appetite for these risk assets has waned. The whole point of gold has been that it is a hedge. If everything else goes to custard, then gold acts as a hedge – it is supposed to go up when everything else goes down. The same thesis failed in crypto. It just went down too. Absolutely no hedge at all.

During the Gulf War, gold was supposed to be a port in a storm. We didn’t really have much of a storm, and gold became a port that no one wanted to visit. It is a bit like Nassau. Underwhelming. So I am told anyway!

The case for gold is breaking down

Over the years, it has become Investment 101 that you should have some gold in your portfolio to hedge. But this correlation has broken down. There are other ways to hedge, and in a world of finite money (maybe infinite if you are building AI!), it flows to where it can maximise returns. And, at the moment, that is not gold.

The gold miners are still making good money. We all worried about how gold miners would spend all this bonanza cash they were accumulating. The answer is simple: it was good whilst it lasted, but nothing lasts forever. Now we should see the strong picking off the weaker in the sector.

That will happen. Hopefully, the price will settle around this level. You buy gold miners, so the theory goes, for leverage to the bullion price. We talked about this on Ausbiz yesterday. That works both ways. In the past, gold miners hedged their production. Locking in these high prices. According to those miners, investors didn’t want them to hedge and lock in prices. Well, of course not when the price is going up. But now I bet that there are a few that regret not hedging. Some still have hedging in place. It is usually a result of the banks that fund the projects asking that hedges be locked in. As production kicks in, the hedges tend to get unwound. Some regret that.

I ran an AI search (CrackGPT) on which gold miners are hedged to any extent. I was not surprised by the results. I could have come up with the same answer. Pretty much none.

Hedging strategies the miners ignored

My old buddy Sean Russo from Noah’s Rule is an expert on how to hedge gold prices, usually through the use of calls and puts. Buy some gold puts and finance that through the sale of calls. It limits the upside, but it does lock in the downside for no cost or a low cost. He is constantly surprised by how few use this strategy. The great thing about this option strategy is that you are not locked into a futures contract to deliver so much at a price. It gives flexibility. I suspect he will get a little more business in these times. Lots of miners are going to be interested in hindsight.

Where to for the sector?

Apart from the obvious. I remember when I tipped Newmont Corporation (ASX: NEM) as my stock of the year for 2025 at $60. Maybe some perspective is needed. It has still done very well.

The sector will be a buy again. Be patient, there is no hurry – when you are out of favour, you are out of favour. The fact is, the US is still US$39 trillion in debt, and most countries are living beyond their means. Central banks are still buying gold. If inflation starts to fall, the Fed will be more certain of holding rates, and gold will find its level. It will be interesting to see the huge piles of cash that the miners have built up. That is past glories. What does the future hold? Down for now.