Gold stocks have done well over the past year, with the VanEck Gold Miners ETF (GDX) up >50% and a number of its constituents up ~100%.

Miners have outpaced the underlying metal (up ~45%) over this period but still lag gold significantly over any long-term period, which poses the question: will gold stocks continue to play catch up or will the longer term trend prevail?

What’s driving gold prices higher?

At nearly $3,000/oz, gold futures have benefitted from a “perfect storm” of favourable macroeconomic variables, geopolitics, and market activity.

Post-pandemic, the negative correlation between long-term government yields and gold held firm, as a series of rate cuts was met with a leg higher for gold prices.

The relationship broke down after that though, with gold prices continuing their move higher in the face of an aggressive rate hiking cycle.

One potential reason for the move higher is the geopolitical backdrop, with conflicts in Ukraine and the Middle East, and rising tensions with China leading to uncertainty (and more emerging market gold demand from central banks).

So do gold prices have room to go higher?

In our view, the trade is getting crowded but that doesn’t mean it’s over.

Managed money long positions are close to peak levels, and could unwind in short order if the backdrop changes (ie. global conflict resolution)…

… and with physical demand from ETFs decelerating over the past 4 years, there may not be adequate demand to backstop a speculative unwind.

If gold can hold, there’s more room for producers

Canada has no shortage of gold miners and they look well-positioned if current prices can stay put or move higher.

We looked at a handful of Canadian-listed gold names, most of which currently enjoy extremely wide margins between the price they receive per ounce and the costs of producing it.

The basket has nearly doubled on average over the past year, with the strongest returns often coming from names that screen favourably above.

Despite such strong performance, multiples haven’t budged, as the street cranks their profit forecasts higher to reflect the strong price backdrop.