Gold stocks are on the move again, and investors have noticed. Gold stocks have roared ahead of the broader market in the first quarter, as risks from the Russian invasion of Ukraine and continued economic fallout shake confidence.
However, in times of uncertainty, gold has historically been seen as a safe haven for investors. So it’s no surprise that gold stocks are some of the biggest beneficiaries of the current market environment.
The Russian invasion of Ukraine and the resulting sanctions have roiled markets and led to a flight to safety. Gold has surged as a result, and gold stocks have followed suit. With tensions still high, there’s no telling how far gold prices could go in the near future. And with gold stocks typically outperforming the metal itself, there’s still plenty of upside potential for investors who are willing to take on the risk.
For gold stocks, there are two major effects based on their correlation with gold prices: mirroring and amplifying. Gold stocks will often mirror gold prices quite closely because they are leveraged to the price of gold. This is seen as a good thing by investors because it means that gold stocks will move more than the underlying commodity itself. The other effect of this correlation is amplification, which can be both good and bad for investors.
While there has been no news catalyst for gold’s recent surge beyond the recent and chaotic invasion, the yellow metal has been climbing steadily since December on safe-haven demand. Gold stocks have followed suit, with many miners surging more than 20% so far this year.
This trend has followed across the board, from developers to producers, to explorers. Collective Mining (TSXV:CNL), a gold exploration company with two significant projects in Colombia, recently began drilling at its Apollo target. The company announced that it has four new targets that will be the focus of its drill program, with a large amount of potential for each target.
Collective Mining has outperformed many gold stocks so far this year, and has seen a 30% gain in the six month period from October 14, 2021, to April 13, 2022. This is a significant gain for the company and reflects its success with its drill program to this point.
Considering how volatile markets have been, gold stocks have been a safe haven for investors. With tensions still high and no end in sight, gold stocks seem poised to continue their outperformance in the near future.
Gold mining stocks can be categorized many ways, but one of the best is to determine at which point of the mining process the company is working. For example, explorers like Collective Mining have significant upside due to their large potential as they make discoveries and report new assay results.
Developers are a step after explorers, as they have found gold but haven’t yet started mining. These companies have de-risked their projects to some degree, but they require significant amounts of capital to get started.
Producers are the companies that are already mining and have cash flow coming in. They tend to be less risky but also have less upside potential than developers or explorers.
Depending on your risk tolerance, there are many different ways to play the gold mining sector. Considering the ongoing economic risks in Europe, the uncertainty of the economic recovery from the pandemic in the developing world, and other factors, gold and gold stocks continue to be a favourable option for investors.
If the first quarter of 2022 is any indication with many miners jumping over 20% or more, the full-year returns for many gold stocks could be far higher. Of those returns, it is likely to be the explorers that have the most upside potential.
HedgeThink.com is the fund industry’s leading news, research and analysis source for individual and institutional accredited investors and professionals
