What drove gold’s surge - and the miner L1 Capital thinks is mispriced

Gold investors woke on Thursday to one of the sharpest moves in the precious metal this year.

Spot gold surged more than 3% during Wednesday’s US session, while the S&P/ASX All Ordinaries Gold Index (XGD) jumped 8.4% on Thursday. The catalyst was an unusual move from the US Treasury, which said it would double the size of liquidity-support buybacks for longer-dated government bonds.

The announcement came after the 30-year Treasury yield reached 5.34% on Tuesday, its highest level since 2007. It subsequently fell by almost 10 basis points, while the US dollar index dropped around 0.8%.

For Raphael Lamm, Co-Chief Investment Officer of L1 Capital and Portfolio Manager of L1 Gold Fund Limited (ASX: LGF), the Treasury’s reason for intervening matters more than the fall in yields itself.

“What gold responded to was not the fact that yields are going higher, because typically, when real yields go higher, there’s an inverse correlation with gold,” Lamm says.

Instead, he argues investors are responding to the forces pushing long-term yields higher, including concerns around the amount of debt the US needs to issue and whether demand will be sufficient to absorb it.

The Treasury increased planned buybacks of securities with maturities of 10 to 30 years from US$2 billion to at least US$4 billion per operation. The move came in the same week total US government debt passed US$40 trillion.

Lamm sees an increasingly uncomfortable trade-off for policymakers.

“They can choose between having affordable interest or a stronger USD. Obviously, if they’re going to try to reduce borrowing costs, the reality is that’s going to undermine, in some respects, the US dollar.”

Why was the move so large?

Lamm says positioning had swung from exuberant earlier this year to deeply negative after gold’s recent correction. Gold ETF flows reversed sharply, while some miners fell 20% to 30% despite a materially smaller fall in bullion.

That left the sector primed for a sharp reversal when the narrative changed.

“I think it’s positioning, and part of it is a shift from what was a little bit of exuberance in the market, down to really negative, to something that’s a little bit more positive again, with the narrative restoring,” Lamm says.

“But that sentiment is also being driven by those fundamentals.”

For miners, their usual operational leverage to the gold price was amplified by what Lamm describes as a “catch-up” after the earlier sell-off.

The level of yields matters less than why they move

Looking six to 12 months ahead, Lamm says US fiscal policy, bond yields and the inflationary consequences of geopolitical developments are likely to matter more for sharp moves in gold than central-bank buying.

Central banks, he argues, are increasingly providing a base level of demand, but are unlikely to produce the explosive moves seen this week.

“What’s going to produce those really sharp run-ups isn’t central-bank buying,” Lamm says. “It’s more likely to be ETF and physical buying associated with people positioning around rates, inflation and US policy.”

Lamm doesn’t think lower yields are necessarily better for gold.

“I almost think the yield itself matters less than why the yield is doing what it’s doing,” he says.

Lamm argues gold could perform well at either extreme. A sharp fall in yields would lower the opportunity cost of holding a non-yielding asset. But a sharp rise in long-term yields driven by concerns about US deficits, debt issuance or confidence in the monetary system could also support gold.

“I think it’s in the extremes that gold is going to perform really well."

What could change the thesis?

A meaningful improvement in the US fiscal position would make Lamm less constructive. He also points to the possibility of an alternative reserve system emerging that reduced countries’ incentive to accumulate gold instead of US dollars. However, Lamm stressed that he believes that is extremely unlikely in the short term.

But L1’s approach to gold equities is designed to rely less on a bullish call on bullion itself.

“Across our portfolio, the implied or ‘need-to-believe’ gold prices embedded in the valuations of a number of companies remain well below the current spot price,” Lamm told us.

“This creates the potential to generate attractive returns through bottom-up stock selection even in an environment where the gold price simply remains around current levels.”

L1 also holds a physical-gold short against its equity book, which Lamm says can provide some protection if bullion falls materially.

Why L1 is favouring producers

The proposed acquisition of Ausgold (ASX: AUC) by OceanaGold (ASX: OGC) has provided a recent win for L1, which accumulated Ausgold at around $0.50 a share before the $1.36-a-share implied takeover offer.

But Lamm says Ausgold is not particularly representative of the fund’s core exposure.

“The core focus of the fund is on cash-flow-producing stocks,” he says. “The vast majority is in cash-flow producers. Then we’ve got a smaller part of the book in what we think is the really compelling developer space.”

Producers have already spent much of the capital required to build their mines and are generating cash at current gold prices. Developers still face construction risk and an increasingly expensive cost environment.

“We think the biggest windfall in the space is going to be from the guys that have already spent the capex and now get to reap the rewards,” Lamm says.

The stock L1 is “super excited” about

One holding that fits that description is Eldorado Gold (TSX: ELD; NYSE: EGO), a diversified producer with assets across Canada, Türkiye and Greece.

The company has been a difficult name for investors to love, largely because permitting problems, delays and cost overruns have dogged its Skouries copper-gold project in Greece for more than a decade. Lamm thinks that difficult history has left the stock mispriced.

“I think the market is just really scarred, particularly the TSX investors,” he says. “Eldorado Gold is maybe a dirty name there.”

Skouries was approximately 97% complete at the end of June. Eldorado expects first concentrate production in the September quarter and commercial production in the December quarter. Company guidance points to 150,000–180,000 ounces of gold production from Skouries in 2027, alongside 50–70 million pounds of copper.

The copper by-product is central to L1’s thesis because it can offset much of the mine’s cost base.

“What you’re getting is 180,000 ounces of gold for free,” he says. “This will be one of the world’s top-margin assets, generate a ton of free cash flow.”

He also sees downside protection in Eldorado’s five other producing assets.

“Even if there are a few problems with it that last another six months, you’ve got five other assets that are producing and making a ton of cash flow right now anyway,” Lamm says.

“We just think it’s literally months away from that inflection point that we think will result in a material re-rate.”

That leaves L1 looking for miners where improved cash flow or company-specific catalysts can drive returns without relying on another major rise in bullion.

Learn more

The L1 Gold Fund provides investors with exposure to an actively managed portfolio, predominantly focused on securities in the gold sector, with opportunistic investments in other precious metals. Find out more here.