Gold Stocks Poised to Outperform as Market Waits for Next Catalyst

• The market has reached a quiet point after absorbing tariff news, with many investors waiting for the next significant development before making moves.
• Q1 reporting season is underway, with gold companies like Agnico Eagle showing impressive performance ($6.7M daily free cash flow at $2,900 gold price).
• Generalist investors are beginning to notice gold stocks, with Newmont (up 45%) being the third-best performer in the S&P 500 year-to-date.
• The investment cycle typically sees generalists first buying large-cap gold stocks, then capital flowing down to mid-caps, developers, and eventually explorers.
• Olive Resource Capital maintains over 50% of assets in gold and PGMs, and sees potential in PGMs as an undervalued sector due to fundamental supply/demand imbalances.

The investment landscape in early 2025 has entered a period of relative calm following an eventful first quarter. After absorbing the initial impact of new tariff policies from the Trump administration, markets appear to be in a holding pattern, waiting for the next significant catalyst. As highlighted in a recent discussion between Samuel Pelaez, President & CEO, and Derek Macpherson, Executive Chair, at Olive Resource Capital, this temporary lull provides an opportune moment for investors to reflect on market positioning and evaluate potential opportunities, particularly in the gold sector.

The current market environment is characterized by headline-driven trading behavior, with investors quickly reacting to news rather than focusing on fundamental value. However, this short-term approach often misses the underlying strength in sectors that are demonstrating consistent growth and profitability, such as gold. As Pelaez noted, 

"The market has become sort of addicted to trading on headlines." 

This pattern may create opportunities for medium to long-term investors who can look beyond daily fluctuations.

Gold Sector Performance & Fundamentals

Q1 reporting season has revealed impressive performance metrics from leading gold producers. Agnico Eagle, widely regarded as one of the best-operated gold companies in the sector, reported generating $6.7 million in daily free cash flow during Q1 at an average gold price of $2,900. With gold prices having risen to approximately $3,400 at the time of the discussion, this suggests potential daily free cash flow exceeding $10 million under current conditions, demonstrating the significant operating leverage gold producers have to the metal price.

This performance stands in stark contrast to the volatility and uncertainty facing companies in other sectors dealing with tariff impacts and earnings pressures. As Macpherson highlighted: 

"At an average price of $2,900 gold in Q1, [Agnico Eagle] were generating $6.7 million in free cash flow a day. It's a pretty impressive number, but that's at $2,900 gold. We're at $3,400. If all else being equal, they're generating north of 10 [million daily]."

The fundamentals driving gold stocks are particularly attractive to professional investors. Year-over-year revenue growth for Agnico Eagle reached 36% in Q1, a growth rate that, according to Pelaez, "puts it up there with the fastest growing companies in the world. It's beyond, you know, the most successful tech companies at the peak were growing 20% a year." This combination of high growth rates and substantial free cash flow generation at current gold prices presents a compelling investment case.

Valuation Metrics & Investor Interest

Despite the strong performance of gold prices and leading gold equities, current valuations remain attractive relative to historical norms. Agnico Eagle, for instance, may be trading at "one of the most attractive entry points in a valuation perspective that you've seen in years, potentially ever," according to Pelaez, with an estimated free cash flow multiple around 10-15 times. These metrics are drawing attention from generalist investors who previously had limited exposure to the gold sector.

The S&P 500 performance rankings further illustrate this trend, with Newmont ranking as the third-best performing stock year-to-date, up approximately 45%. This outperformance is creating a virtuous cycle of increased attention and capital flows toward the gold sector, particularly among institutional investors who follow momentum and growth metrics when allocating capital.

Investment Cycle Dynamics in the Gold Sector

A key insight for investors considering gold exposure is understanding the typical investment cycle within the sector. As Macpherson explained, the pattern typically begins with generalist investors purchasing large-cap gold producers, followed by capital flowing down to mid-caps, developers, and eventually exploration companies.

"Usually what happens is the generalists come in and start buying the large caps... inevitably as money flows, there isn't a lot of space, and so you get outsized moves of the large caps. And then what happens is the resource funds who see their weighting of large caps go up... they can actually go down cap, and then that's where you start to see [the cycle spread]." 

This cycle appears to be in its early to middle stages in the current market, with large-cap producers showing strong performance while many mid-cap and development-stage companies have yet to fully participate in the rally. This suggests potential opportunities in these segments as the cycle progresses, particularly for investors with sector expertise who can identify quality assets before broader market recognition.

Compass, Episode 13

Macroeconomic Factors Supporting Gold

Several macroeconomic factors continue to support the gold investment thesis. The discussion highlighted upcoming debt ceiling negotiations and budget discussions in the U.S. Congress as potential sources of market volatility in the coming 60 days. These events, coupled with ongoing inflationary pressures and geopolitical uncertainties, typically create favorable conditions for gold as a safe-haven asset. As Pelaez observed,

"The US Congress is going to have to sit down in next 60 days to discuss the 2025 budget which they don't have... and that also includes the raising of the debt ceiling. That's going to be incredibly volatile, I'm sure, in terms of headlines." 

Such fiscal uncertainties, especially when occurring alongside monetary policy challenges, historically benefit the gold sector.

Additionally, the potential for a temporary rebound in the U.S. dollar, which was described as "significantly, maybe massively oversold," could create short-term volatility in gold prices. However, both discussants viewed this as a potential buying opportunity rather than a fundamental change in trend, noting that any correction would be unlikely to "materially affect the trajectory that we are on."

Portfolio Positioning & Strategic Allocations

Olive Resource Capital maintains approximately 50% of its assets in gold and platinum group metals (PGMs), reflecting strong conviction in these sectors. The company has been consolidating its portfolio to focus on highest-conviction names, a strategy that provides both downside protection during periods of volatility and greater upside potential when market conditions improve. Pelaez explained:

"We have been investing into fewer and fewer companies. We have been consolidating our portfolio into the names that we have the greatest conviction in." 

This approach reflects a deliberate strategy of quality over quantity, focusing on companies with strong management teams, quality assets, and attractive valuations.

The discussion also noted potential opportunities in the PGM sector, which is currently out of favor but facing fundamental supply constraints with production dominated by South Africa and Russia. The lack of broker interest in PGM companies was cited as a contrarian indicator suggesting potential value, with Macpherson noting:

"When was the last time you got a call from a broker or from anybody to pitch you a PGM project or a PGM company? That's typically a good indication that the market is oversold."

Investment Implications & Positioning Strategy

For investors looking to position themselves in the gold sector, several strategic considerations emerge from this analysis:

• Quality Focus: Prioritizing well-managed producers with strong operating histories, which combine operating excellence with attractive growth profiles.
• Cycle Awareness: Understanding where we are in the gold investment cycle can help inform allocation decisions between large-cap producers, mid-tier companies, developers, and exploration firms.
• Entry Point Management: Using periods of consolidation or short-term volatility as potential opportunities to establish or add to positions in favored names.
• Broader Resource Exposure: Considering complementary positions in related sectors like PGMs that may be at earlier stages in their investment cycles but demonstrate favorable fundamental supply-demand characteristics.
• Patience and Conviction: Maintaining a medium to long-term investment horizon that looks beyond headline-driven market movements to focus on fundamental value creation.

For Investors

The current investment environment for gold appears particularly favorable, combining strong fundamental performance, attractive valuations, and supportive macroeconomic conditions. While gold prices and leading equities have already appreciated significantly, the analysis suggests the sector remains in the early to middle stages of its investment cycle, with generalist investor participation still developing.

As Macpherson summarized their outlook: 

"For our portfolio... we already have pretty good gold exposure... we're looking at consolidations and pullbacks in the space and our favorite names as opportunities to add." 

This balanced approach - maintaining substantial exposure while looking for selective opportunities to increase positions - reflects a constructive but disciplined stance on the sector.

With ongoing fiscal challenges, potential monetary policy adjustments, and geopolitical uncertainties likely to persist through 2025, the fundamental case for gold as both a portfolio diversifier and growth opportunity remains compelling. Investors who can look beyond short-term price movements to focus on quality assets and management teams appear well-positioned to benefit from the ongoing development of this investment cycle.