Which U.S. stock sector has risen the most this year? It's not AI, nor Bitcoin concept stocks, but gold mines!

Amid the halo of tech giants and cryptocurrencies, the biggest winner in the U.S. stock market this year quietly comes from a "neglected" traditional industry—gold mining.

With gold prices soaring 52% since January and breaking the $4,000 per ounce barrier this week, gold mining companies have seen an even more intense surge in their stock prices. The S&P Global Gold Mining index has surged 129% this year, becoming the best-performing sector among S&P industry indices. The risks of a U.S. government shutdown, continued purchases by central banks, and concerns over sovereign debt expansion have collectively ignited this round of precious metal bull market.

For industry giants like Agnico Eagle, Barrick Mining, and Newmont, the rise in gold prices means substantial profits are on the horizon. Since the daily production costs for mining companies are largely fixed, the additional revenue brought by rising gold prices can almost be converted into pure profit. Imaru Casanova, a portfolio manager at investment firm VanEck, candidly stated:

"It's been a fantastic year for gold mining stocks. They have so much cash that they don't know what to do with it."

Gold Stocks Outperform Tech Giants

The reason gold mining stocks can outperform gold itself lies in the profit leverage effect of their operating model. Higher gold prices can directly enhance profit margins, thereby amplifying stock prices.

Data shows that since the beginning of the year, Newmont's stock price has risen by 137%, Barrick by 118%, and Agnico Eagle by 116%. Even Zijin Mining International, which went public on September 30, has seen its stock price double, becoming the second-largest IPO of the year. In contrast, star companies in the AI sector, such as Nvidia, have risen by 40%, Oracle by 72%, Alphabet (Google's parent company) by 30%, and Microsoft by 25%.

During the same period, Bitcoin's price increase was only 31%. This has brought the gold mining industry, once regarded by some investors as a "value destroyer," back into the spotlight.

A Historical Warning: Investors Worry About the Industry Repeating Past Mistakes

Despite the market's prosperity, seasoned investors still vividly remember the industry's past "bad records." During the last gold bull market (which peaked in 2011), soaring gold prices brought enormous profits but also fueled massive corporate mergers, a sharp increase in executive compensation, and rising production costs.

What followed was a brutal reckoning. From the peak in 2011, gold mining stocks plummeted 79% over the next four years. Imaru Casanova from VanEck pointed out:

"A large amount of value was destroyed at that time. This memory remains vivid in the minds of investors. The mistakes made by these companies in the previous cycle, along with some skepticism, lead people to wonder if these mistakes will happen again?"

George Cheveley, portfolio manager of the gold mining fund at asset management company Ninety One, also stated that this long "unpopular" industry is essentially cyclical, often "making big money in a short period," and for this reason, "it can indeed become excessive."

Capital Allocation Becomes a Key Challenge

In the face of anticipated capital inflows, the management of gold mining companies is facing the challenge of how to best allocate capital. BMO Capital Markets predicts that the sector's free cash flow will reach $60 billion next year.

Changes at the board level also reflect the pressure to improve returns. Newmont and Barrick both announced new CEO appointments last week. BMO Capital Markets analyst Matthew Murphy stated that Barrick's unexpected replacement of CEO Mark Bristow may "be related to the stock price's relatively poor performance compared to peers."

Evy Hambro, head of thematic and sector investment at BlackRock, suggested that companies prioritize dividends over stock buybacks. He believes:

"Given that gold mining companies are finally enjoying strong profit margins, returning capital to long-suffering shareholders should be a key priority."

However, the temptation of mergers and acquisitions may be hard to resist. Due to the scarcity of new gold mines, producers may seek to supplement their depleting reserves through M&A. Analysts believe that the model of recent all-stock merger transactions like those of Anglo American and Teck Resources may become a template for future M&A.

Another concern for shareholders is executive compensation. The salaries of gold mining company CEOs are already higher than those of executives at other mining companies, and investors worry that they may attempt to extract more cash as they have in the past.

Marcelo Kim, partner at Paulson & Co and chairman of gold miner Perpetua Resources, acknowledged that the situation has improved, but still warned against excessive behavior:

"I hope no one receives a crazy compensation package just because gold prices are rising, as they have nothing to do with it."