In recent months, the dynamics of gold prices have captured significant attention, especially as they soared to unprecedented heights, reaching 2630 RMBInterestingly, the GDX Gold Mining ETF has mirrored this bullish trend, hitting record highs as wellHowever, a curious observation emerged within the top ten holdings of the GDX—the stock price of Zijin Mining deviated from the rising gold pricesWhereas other gold stocks surged in correlation with the gold price, showing resilience even when gold prices climbed, Zijin Mining’s performance stood in stark contrast.

This case serves as a microcosm of the larger A/H market for gold stocks, where despite the backdrop of record gold prices, both A/ and H-share gold stocks have recently experienced their largest declines of the year

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It raises an eyebrow—has the narrative surrounding gold that captivated the market two months ago lost its relevance?

The Rising Gold Prices and The Dwindling Copper Narrative

As gold continues to trend upward, the price of copper has taken a downturnThis situation is confounding, especially in light of how recent months had seen investors placing a strong bet on gold stocksSo, one must wonder, why this sudden departure in correlation between gold prices and stock performance of gold mining companies?

Two notable factors seem to be at play here, impacting the historical relationship between gold stocks and gold pricesFirst, with the rise in gold prices, copper has faced a decline

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Many domestic gold stocks rely heavily on copper revenues, with several companies having an equal ratio of gold to copper revenue—50:50. In some cases, copper revenue even constitutes as much as 60%. Thus, the significant drop in copper prices has served to diminish the positive impact of rising gold pricesFor companies more copper-reliant, the downward pressure has been even more pronounced.

It’s worth noting that during the first half of the year, investors were primarily focused on the trajectory of gold prices, downplaying the influence of copperThis was likely fueled by compelling narratives of gold achieving historical highs appearing more enticing and noteworthyCopper's price surge, which had also increased by 40%, was largely overlooked; yet it provided a substantial contribution to profits.

Yet come June, this upswing for copper abruptly shifted

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Prices plummeted by more than 20%, presenting a serious negative feedback loop for gold stocks—copper and gold seemed like a dual dynamic, with copper now lagging lamentably behindThis turn of events caught the market off-guard, emerging as a critical variable affecting gold stock valuations.

Reflecting on the forecasts made during the first half of the year, those concerning both gold and copper had transformed from skepticism to consensusThe the weakening correlation of gold's performance with U.Sdollar interest rates had propelled confidence further, especially amid expectations for Federal Reserve rate cuts and the supportive demand from central banks globally.

On the contrary, the outlook on copper has taken a decidedly negative turn

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Unlike gold, demand for copper didn’t display comparable strengthThe primary incentivizing factor for copper prices during the first half was the halting of operations by significant mining companies in South AmericaGoldman Sachs estimated that this would result in a 2% growth in copper supplies, contrasting sharply with the previous 6% predictions; marking it as the weakest year since 2020.

Additionally, both domestic and U.Seconomic data presented a worrying outlookTraditionally, one would expect copper inventories to decrease over the second quarterHowever, that has not been the case this year; rather, inventories exploded, climbing to the highest levels seen since 2016, defying expectations.

The combination of weakening economic data—both internationally and within the U.S.—alongside recession fears shattered the copper price speculation landscape

By June, copper prices began a steep descent, with Goldman Sachs subsequently revising their target anticipate for copper from an average of $15,000 per ton by 2025 down to $10,500.

The underlying dynamic showcases how precarious the market sentiment surrounding copper remainsThe previously ascending copper prices, buoyed primarily by anticipated interest rate cuts rather than solid fundamental growth, reveal the twofold perspectives prevalent in copper trading—one hedging against interest rates, with actual market demand remaining lackluster.

Returning to the landscape of gold stocks, in 2023, companies such as Zijin Mining and China Gold International experienced fluctuations reflective of the broader market actionsBetween May 20 and early August, while gold prices notoriously climbed by 2%, copper plummeted by 21%. Nonetheless, both Zijin and China Gold International saw their stock values tumble by approximately 20%.

Considering the substantial drop in stock prices, the recent record highs in gold prices, and a rebound in copper, could we see a valuation correction in this cycle?

The Moment for Gold Stocks to Rally?

Since the trough in early August, gold prices have risen by 10% while copper has experienced a similar rebound

Conversely, Zijin Mining only managed a 10% recovery—China Gold International fell further, with a drop of 17%, signaling significant disagreement within market sentiments.

Referring to the stock drops as unjustifiably excessive would not be entirely fairThe erosion in copper prices has offset gold price increases, making it a necessity to look beyond gold’s record highs.

Currently, with domestic and U.Sinterest rates at a low, alongside ongoing increases in gold prices and recent rebounds in copper, prospects for gold stocks gaining buoyancy again appear plausibleSignificant market corrections can occur—primarily due to broad investor sentiment, creating a phenomenon of pessimistic misvaluations; and due to simultaneous easing policies from the US and China, which could serve as a catalytic boost for copper's revival.

However, the extent of this rebound relies heavily on the specific revenue composition of each company

Companies heavily reliant on gold revenues will obviously experience faster recoveries than those with higher copper revenue stakes, which will require further copper rebounds to align.

As an illustrative example, Zijin Mining holds a 6:4 revenue margin favoring gold, while China Gold International sees copper accounting for 60% of their revenue and gold only 40%. This discrepancy further elucidates the divergence previously noted between domestic and U.Sgold stocks.

Examining their standing within the GDX ETF, Zijin Mining contrasts sharply with NME MiningNME's revenue figures reflect $8.4 billion overall in the first half, predominantly at $7 billion from gold, while the remaining $1.4 billion stemmed from other metals—demonstrating remarkable reliance on gold.

Other gold stocks comprising the GDX ETF also showcase a predominance of gold in their revenue, often exceeding 90%. For instance, AngloGold Ashanti reported $4.5 billion in revenues, with ancillary product revenue barely touching $100-200 million, hence aligning its stock price movements almost directly with gold prices.

In contrast, Zijin's overall revenue for the first half reached $150.4 billion, with copper accounting for about 29% and gold at 46.5%. The copper sector notably impacts margins, with a 49% gross profit margin—this means copper price declines exert outsized negative feedback on profitability.

A 6:4 revenue composition performs exceptionally well when both gold and copper prices rise, as the elasticity in copper price movements tends to be greater than that of gold

Market conditions echo that dynamic seen in earlier gold stocksPresently, however, tabled flexibility in profit margins from copper is temporarily out of play—yet there remains an avenue for potential recovery, particularly since both U.Sand Chinese economies face easing, slowly revitalizing the market narrative for copper pricing.

Turning the lens back to gold prices, the narrative of growth remains well-known and frequently discussedRecent observational insights have introduced elements challenging the prevailing consensus.

One golden researcher hinted that, despite appearances suggesting that central bank purchases of gold reserves have stalled, China’s central bank may be employing more obscure methods to accumulate goldOne theory advocated posits they could be importing gold bars to refine out of the public eye, circumventing conventional documentation tracking

This revelation may suggest capacity for an unexpectedly higher reserve than previously interpreted.

Additionally, analysts have surfaced claims suggesting the Saudi Arabian central bank has been quietly accumulating gold since 2022, with a cumulative total nearing 160 tons—should this be verified, Saudi Arabia would emerge as the world’s second most substantial central bank buyer after China.

On another front, the behavior of gold jewelry stocks reflects shifting consumption patternsEarlier this year, analysts predicted that soaring gold prices would sustain consumer demand for gold jewelry; early economic figures substantiated this expectationHowever, the narrative has shifted, with a notable decline in gold jewelry demand reported as consumers begin gravitating towards investment in gold bars instead, driven by fears of price corrections and inflated jewelry pricing.

This trend has hurt traditional retailers like Chow Tai Fook and Lao Feng Xiang, which saw significant drops in sales performance correlating to high gold prices, undershooting earlier forecasts significantly

Conversely, new entrants like Lao Pu Gold are capturing market share, emphasizing high-end gold luxury items, thereby boosting stock values unexpectedly.

Conclusion

Are recent fluctuations within gold stocks indicative of ill-advised misjudgments? Contextually, while the downward trends have merit, they arise largely from depressingly anxious market sentiments, yielding constrained rebound potential.

As valuation rectifications loom for gold stocks, given the backdrop of record highs in gold prices, the previously impactful copper market seems to have stabilized post-drop, ushering in renewed interestNonetheless, apprehensions about potential future gold price corrections linger, which could easily draw down associated gold stocks further.