Australian Gold Stocks Undervalued

Feature Stories | Dec 09 2021

With the outlook for the gold price positive, analysts find Australian gold stocks underperforming on a historical basis, and outline their preferred exposures among large and small producers and developers

-Outlook positive for the gold price
-Australian gold miners typically outperform internationally
-But have recently underperformed
-Plenty of miners to choose from, with Northern Star the favourite

By Greg Peel

In the four big equity market sell-offs since 2007, physical gold not only generated positive returns, notes stockbroker Wilsons, but significantly outperformed (non-gold) equities during these risk-off events. Across those four periods, Australian gold equities outperformed the market by 40-100% over a 12-18 month period.

While each risk-off event has subtle differences, gold equities do best when fear of higher inflation, and the central bank’s subsequent response, is the overriding narrative, Wilsons notes.

During the high-inflation period of the 1970s, gold equities outperformed the market by 100%.

If a risk-off event is not inflation-driven, the gold price does initially stumble. At times of panic there’s a “sell everything” mentality, and if investor portfolios are under pressure, and subject to margin calls if leveraged, then gold is sold to cover such obligations. But once the initial stage of the crisis has passed, gold equities outperform the broader market in all scenarios analysed by Wilsons.

Subsequent rallies in gold equities are historically powerful, both in size and speed.

Valuation

Australian gold equities have significantly outperformed global gold equities over the long term, notes Wilsons, largely due to stronger production growth. Since 2006, Australian miners have outperformed global miners by 60% in Australian dollar terms.

But since 2019, they have underperformed by -20%, matching two prior periods of underperformance in 2008-09 and 2011-13. The numbers are nevertheless distorted by the sheer size of Newcrest Mining’s ((NCM)) comparative market cap, such that Newcrest dominates the local gold mining index, and has performed poorly over the period.

Yet the next big miners Evolution Mining ((EVN)) and Northern Star Resources ((NST)) have also contributed to underperformance.


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