What August's rally means for gold mining stocks

Key takeaways

• Gold miners can benefit from expanding margins and cash flow when gold prices rise.
• The sector is generating strong free cash flow while valuations remain discounted.
• Mining companies build value over years and full market cycles, making an informed and patient approach important.

August gold market review

Gold had a strong August, gaining 9.67% to close at US$4,437.38 per ounce. The month saw two distinct legs higher: an initial jump in early August driven by hopes around a resolution in the Strait of Hormuz and the implications for the Fed's policy path, and a second move following US Treasury Secretary Scott Bessent's announcement of plans to significantly expand buybacks of longer-dated bonds, which pushed longer-dated Treasury yields and the US dollar lower. A lower US dollar has historically provided a tailwind for gold.

The broader backdrop remained supportive as well, with the People's Bank of China extending its gold buying streak to a 21st consecutive month in July, reinforcing the structural central bank demand story. Growing market concern over US federal debt also helped keep the debasement theme in focus.

One headwind for the gold price was Federal Reserve Chair Kevin Warsh's remarks at the Jackson Hole symposium. Warsh signalled the Fed would "have work to do" if inflation wasn't clearly moving back towards its 2% target, sending rate hike expectations for the 16 September meeting sharply higher and pressuring gold.

Gold miners amplified the move in the metal’s prices, with the NYSE Arca Gold Miners Index (AUD) up 30.05% for the month.

We recently shared our views on the steps gold mining companies can take to help put gold equities on the radar of more investors. We remain of the view that owning miners is worth it despite the additional complexity and risk.

At the heart of it, we were talking about the need to build trust in gold equities as the right vehicle to get exposure to the gold market. Many of these companies have already done, and continue to do, the hard work of rebuilding that trust. The question now is whether investors have done the work to understand this sector.

Investing in gold mining equities: Risks, rewards and long-term value

Gold mining equities are not the same as owning gold. Miners are leveraged, operationally complex businesses where rising gold prices can amplify returns, but where company-specific risks such as mine jurisdiction, management quality and cost structure all play a critical role in outcomes. For investors considering exposure to this sector, the issues investors need to consider go well beyond the direction of the gold price.

The sector has done the work, but valuations remain discounted

August's rally offered a glimpse of what this sector can do, but the longer-term case for gold mining equities rests on something more durable. The sector is, in our view, in the strongest shape ever. By most valuation metrics (price to cash flow, price to net asset value, relative to their own history, relative to gold and relative to the broader equity market), gold mining equities remain deeply discounted at a moment when the underlying businesses are generating some of the strongest levels of free cash flow in their histories.

There's a reasonable case that the market is still pricing these companies based on who they were rather than who they are. That may persist for a while, but we don't think it will persist forever. At some point, we expect the valuation gap to narrow. For investors willing to engage with it thoughtfully, the gold mining sector may look more compelling than ever.