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Here's Why Gold Stocks Rose

By Maxx Chatsko - Updated Jun 4, 2019 at 8:30AM

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Falling Treasury bond yields have injected optimism into the gold market.

What happened

Economists and Wall Street analysts have been paying close attention recently to the inverted yield curve, a rare occurrence in which short-term Treasury bond yields exceed long-term Treasury bond yields. That's probably a good idea, considering the phenomenon has been a rather reliable indicator that a recession is on the horizon. It has also served as a reliable indicator that investors will run to gold stocks and other precious metals investments.

That proved true on Monday. Many gold stocks started June trading with gains, and companies most in need of a boost enjoyed the largest increases. Shares of Hecla Mining (HL 5.88%), Eldorado Gold (EGO 7.31%), and Gold Fields (GFI 2.32%) rose as much as 15.3%, 13.7%, and 10.5%, respectively. Even shares of industry-leader Barrick Gold gained -- its market cap has expanded by roughly $2 billion in the last two trading days.

A pair of hands holding up stacks of gold coins and a green arrow pointing up.

Image source: Getty Images.

So what

Gold prices climbed back above $1,300 per ounce at the end of May, and kept rising Monday, thanks in large part to investors' increased focus on bond markets. Analysts are betting that declining Treasury yields will create a tailwind for gold miners this quarter, and perhaps the rest of the year, especially for those that have a higher all-in sustaining cost (AISC), and therefore need higher average selling prices to deliver profits.

For instance, Hecla Mining has struggled with a host of issues in recent years, from labor troubles at its Lucky Friday mine to underwhelming operating results from newly acquired assets in Nevada. While its revenue jumped 9% year-over-year in the first quarter, soaring costs resulted in a 91% decrease in gross profit. The company's high AISC of $1,760 per ounce of gold in the quarter was driven by an AISC of $3,056 per ounce at its Nevada operations.

Investors are a little more optimistic about Eldorado Gold. Upcoming elections in Greece, where the company's most promising gold assets are located, look likely to put a business-friendly political party in power. If that leads to deregulation and a reduction in red tape, then the business could enjoy a boost to both revenue and profit growth. Its shares have gained over 34% in the last five days.

Gold nuggets arranged in a circle on a table.

Image source: Getty Images.

Meanwhile, Gold Fields has managed to outpace various sources of uncertainty recently. Analysts have put concerns about worker fatalities at the company's mines aside, and appear to have shrugged off election results in the nations where it operates to instead cheer management's progress in cleaning up its balance sheet. At the end of May, the business repaid $250 million in debt notes due October 2020, which sets the stage for separate refinancing transactions to occur later this year. With AISC hovering near $1,000 per ounce of gold in the last five quarters, higher average selling prices could expedite those debt repayment efforts. Gold Fields shares have gained 27% in the last five days, and are trading at their highest level since 2016.

Now what

While gold stocks have been gaining recently as investors seek alternative investments to U.S. Treasury bonds, the reality is that gold stocks have simply not been very good investments over long periods of time. In fact, they rarely match the returns of the S&P 500. Therefore, there are solid reasons to believe today's gains -- and any future gains driven by an inverted yield curve -- will be short-lived.

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Stocks Mentioned

Hecla Mining Company Stock Quote
Hecla Mining Company
HL
$4.68 (5.88%) $0.26
Gold Fields Limited Stock Quote
Gold Fields Limited
GFI
$11.46 (2.32%) $0.26
Eldorado Gold Corporation Stock Quote
Eldorado Gold Corporation
EGO
$8.52 (7.31%) $0.58
Barrick Gold Corporation Stock Quote
Barrick Gold Corporation
GOLD
$20.72 (4.91%) $0.97

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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