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The ongoing war in Iran and disruptions to global energy supplies are intensifying inflation pressures, keeping central banks restrictive and weighing on gold. Chris Mancini of the Gabelli Gold Fund (GOLDX) argues that this obstacle is delaying, rather than destroying, gold’s rally.

In an interview with Kitco News, Mancini said gold would probably already be trading at $5,000 an ounce if the Iran conflict and disruptions to oil shipments through the Strait of Hormuz had been resolved during the summer.

Higher energy prices are fueling inflation and raising expectations that the Federal Reserve will continue increasing interest rates. That combination has created a difficult environment for gold, but Mancini views the pressure as temporary rather than a fundamental threat to its long term outlook.

Even if the Federal Reserve keeps raising rates to contain inflation, Mancini expects higher borrowing costs and elevated oil prices eventually to hurt economic growth. Such damage could force the central bank to reconsider its monetary policy stance.

Gold investors may still be waiting for another rally, but mining companies remain positioned to benefit from historically elevated prices despite rising operating expenses. With third quarter earnings approaching, Mancini expects strong profits and substantial free cash flow across the sector.

"I think the big picture is that it's going to be very good earnings, but they'll probably miss a lot of consensus estimates," he said.

Higher energy and labor expenses could cause some producers to fall short of analysts’ expectations. Mancini nevertheless urged investors to look past disappointing headline figures and concentrate on the mining industry’s underlying profitability and capacity to produce cash.

"I think that the big picture, if you take a big step back, is that they're still going to be generating lots of free cash flow and reporting really good earnings," he said.

Diesel prices are producing meaningful headwinds for miners, though Mancini identified labor as the larger cost pressure. Labor inflation is being driven partly by increased development activity as companies pursue new projects and production expansions while gold trades near $4,000 an ounce.

Mancini does not see the reckless spending that defined the previous gold bull market in the early 2010s. During that cycle, companies faced intense pressure to demonstrate production growth and often pursued costly, technically challenging projects regardless of their economic viability.

"The companies haven't yet gone to trying to build these really extravagant, high-cost, high-capital projects," he said. "So the costs should be more contained this time around than they were last time."

Companies are now generally pursuing more manageable projects requiring less capital, according to Mancini. He considers this stronger capital discipline one of the most important differences between the current bull market and the previous cycle.

Despite stronger balance sheets, substantial free cash flow and more responsible spending, gold mining equities continue struggling to win broader investment interest. Mancini said sentiment at a recent Denver mining conference was positive among executives and dedicated gold investors, but generalist investors showed little enthusiasm.

"These stocks are really cheap, but there still wasn't any interest, I don't think, from generalists," he said.

Many investors remain doubtful that elevated gold prices can last, reflecting earlier cycles in which sharp rallies gave way to prolonged declines. Mancini said a sustained recovery in gold prices would be an important first step toward attracting a broader class of investors.

He also believes mining companies should reconsider how they return capital to shareholders. Although producers have spent heavily on share repurchases, Mancini argued that larger dividends could prove more effective with investors who have traditionally avoided mining stocks.

"I don't think the market pays attention to buybacks. I think the market will pay attention to dividends," he said.

Mancini pointed to Newmont as an example, estimating that the company has a market capitalization of roughly $120 billion and could repurchase approximately $8 billion of shares this year while paying about $1 billion in dividends.

Those combined capital returns could equal roughly 8% of Newmont’s market capitalization, yet investors focused on the dividend yield see a much smaller return. Mancini argued that shifting more cash from repurchases to dividends would make the sector’s value harder to ignore.

"If they were to see an 8% dividend yield, they'd be like, wait a second, what's going on here? That's a big dividend. That's a big yield," he said.

Larger dividends could also help mining shares distinguish themselves from physical gold, which offers no yield while interest rates remain elevated. Mancini said the timing of gold’s next major rally is uncertain, though deterioration in the labor market could become an important catalyst.

If the October employment report, due in early November, shows the United States losing 100,000 jobs, Mancini said gold could spike as investors anticipate a pause in Federal Reserve tightening. Until then, elevated energy prices and restrictive policy remain roadblocks to his expected $5,000 destination.

DISCLAIMER: GoldInvestors.news is not a registered investment, legal or tax advisor or broker/dealer. All investment/financial opinions expressed by GoldInvestors.news are from the personal research and experience of the owner of the site and are intended as educational material. Although best efforts are made to ensure that all information is accurate and up to date, occasionally unintended errors and misprints may occur.