A surge in gold prices is pulling investors back into the gold market after months of relatively lackluster prices. The precious metal has been on a roll in recent months, increasing by close to 20% over several months to trade at more than $2,000 an ounce.
As the U.S. Federal Reserve consistently raised benchmark interest rates to help abate inflation, more investors ditched their gold for assets that would allow them to take advantage of increasing interest rates.
Gold prices were also impacted by an increasingly valuable greenback and reduced demand in China, which has ramped up gold purchases in recent months. With gold prices on the rise and predicted to peak at $2,500, mining executive Guy Desharnais advises generalist investors to remain cautious and pay special attention to each project’s management team.
The vice president of project evaluation at Osisko Gold Royalties said in a recent interview with Kitco News that investors go for projects led by management teams with good track records as such teams will ensure they do “significant due diligence” before bringing their projects to the market. Furthermore, he noted, having a preference for solid management teams can help generalist investors avoid projects afflicted with “cognitive biases,” which make them underrate the capital required or operational costs and overestimate the resources available in the project.
These biases cause up to two-thirds of new mining projects to either struggle or even fail, Desharnais added in his interview. He explained that such failures typically occur when people in the management teams make false assumptions that are then fed into and build their projects.
The aggregation of these assumptions can make everything go wrong in a project that seemed to be solid on the surface and can greatly cost generalist investors who don’t do their due diligence on management teams. According to Desharnais, management teams with proven track records have a higher likelihood of finding better projects while avoiding cognitive bias-related errors that could eventually tank a project.
Desharnais says that fewer failed projects coupled with an increase in success stories will likely improve investor sentiment about the gold market and bring in more investment capital. This will require plenty of due diligence from project management teams, coupled with educated investors willing to research gold projects and their management teams before investing.
An increase in investment capital would be extremely beneficial to gold and the mining sector in general as the industry has struggled to attract investors in recent years.
Major operators such as Newmont Corporation (NYSE: NEM) (TSX: NGT) in the specialty of mining gold can provide case studies of management teams that do extensive homework before undertaking a mining project.
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