With gold prices having marked new all-time highs recently, gold exploration and mining stocks may soon enter a strong bull market, in particular those few companies operating in favorable jurisdictions, lead by highly experienced management teams and backed by long-term shareholders.
“Gold has definitively broken out of the range it‘s been stuck in since the start of this decade, reaching a record $2,195 per troy ounce this month. While a surge of buying from China is likely behind the recent rally, some of the more conventional factors that typically propel the yellow metal are starting to fall into line. Fresh records beckon.“
While gold continues to trade at record highs, gold exploration and mining stocks have finally started to appreciate as well, albeit somewhat slower than many have expected. However, the underperformance of gold stocks relative to a rising gold price is a phenomenon which is not uncommon, in particular in the beginning (and also in the final phases) of a bull market.
“For those fretting about the underperformance of gold stocks vs gold since the start of the year – take a look at what happened in 2016. The GDX massively underperformed gold during the first weeks of the year before going up 150% in the next 6 months.“ (Source)
“Simply put, there is no historical analog for today’s gold, and gold mining sector market environment. Bob believes that sentiment on gold miners is at historical lows, meaning that the sector could see a ferocious rally... But the fact that everybody hates gold stocks means that there are going to be a lot of stocks up 500% and a fair number of stocks up 1000%.“
“Owning stock in the right mining companies is essential for any well-rounded gold investor. The right picks can yield higher returns than physical gold, given certain conditions.“
According to “Rising Rates and Robust Gold Demand?“ (February 2, 2024): “Although real interest rates continue to inch higher, and Westerners continue to sell gold, all this selling is being met by Central Bank purchasing. Once Western investors stop selling gold and begin accumulating, their buying will quickly bump up against Central Bank demand. The next leg of the gold bull market is likely to begin at that moment. We are getting closer and closer, and we continue recommending investors maintain significant precious metals exposure. Physical gold has significantly outperformed precious metals equities, as Western investors have been selling both physical and equities. Gold stocks (as measured by the GDX ETF) are down almost 30% from the 2020 peaks. Silver stocks, as measured by the SIL ETF, have pulled back even more – they have now pulled back 40%, and both represent excellent value.“
Excerpts from “Gold demand to hit record with central bank buying, WGC says“ (January 31, 2024): “Total gold demand hit a record last year and is expected to expand again in 2024 as the US Federal Reserve moves toward cutting interest rates, potentially aiding prices, according to the World Gold Council. Overall consumption climbed by about 3% to 4,899 tons last year, supported by strong demand in the opaque over-the-counter market, as well as from sustained central-bank buying, according to the WGC’s full-year report. That’s the highest total figure in data going back to 2010. “The landscape is appropriate for emerging central banks to continue to be net buyers,” Joseph Cavatoni, chief market strategist at the WGC, said in an interview… The comprehensive demand figure includes bullion for investment, jewelry, coins, central-bank buying, exchange-traded funds and OTC activity. In that latter market, participants including sovereign funds, high net-worth individuals, and hedge funds invest in gold bars, Cavatoni said. The precious metal rallied 13% last year, touching a record in early December, on the back of economic and political uncertainty, geopolitical tensions, and expectations that the Fed is poised to start easing policy after an aggressive hiking campaign to tame inflation. Investors typically want to own gold in a rate-cutting cycle as it benefits from lower Treasury yields and a weaker dollar…“
“Annual demand growth in the OTC market hit 753% last year, the most since at least 2011, WGC data showed. Investors are expected to continue accumulating gold at an accelerated pace this year, largely driven by the Federal Reserve’s expected pivot toward easing, according to Cavatoni.“
“Central-bank buying maintained a breakneck pace, with annual net purchases of 1,037 tons last year, just 45 tons shy of the record set in 2022, the WGC said in the report. It expects central-bank buying to top 500 tons this year. The expected OTC spree, as well as central-bank buying, will provide a key counterweight to softness elsewhere, especially exchange-traded funds. That provides strong upside for prices, with a case for $2,200 an ounce or more, according to Cavatoni.“
“Western investors are behaving as they have in the past rising real rate cycles: they are selling gold. We track eighteen physical gold ETFs, and the relationship between real rates and gold accumulation is clear. The last time real interest rates rose was between 2012 and 2016, during which period Western investors liquidated over 1,000 tonnes from the physical ETFs, causing gold to fall 45%. Since the summer of 2020, real rates have again surged, and Western investors have predictably shed 760 tonnes of gold. Somehow, gold remains near its all-time high. The difference is central banks. Over the last several years, central banks have gone on a massive gold-buying spree. Last year, central banks accumulated 1,136 tonnes – a record as far back as our dataset goes. This year, they have continued to accumulate. For the first nine months of 2023, the World Gold Council (WGC) reports central banks purchased an additional 800 tonnes of gold, with 337 tonnes coming in the third quarter alone. Year-to-date, central bank gold purchases are up 14% compared to last year…We believe strong central bank buying will continue… The last three periods of radical commodity undervaluation (late 1920s, late 1960s, and late 1990s) saw a significant change in the global monetary regime… After decades of excessive monetary growth and globalization, trade imbalances now dwarf the size of the global gold market. If a new monetary system emerged in which gold was used to settle trade imbalances, central banks would have to continue accumulating gold, driving prices higher.“ (Source: “Rising Rates and Robust Gold Demand?“, February 2024)
“After an estimated 7.6% decline in 2022, gold production is expected to increase by 3.9% to 121.2moz in 2023. Russia, Ghana and the US will be the key contributors to the growth in global supply in 2023... Meanwhile, gold production growth in the US will be supported by increases in output from Newmont’s Cortez and Turquoise Ridge mines. In contrast, gold production in China, the world’s largest producer, is expected to decrease slightly by 1.1% in 2023, linked to declining ore grades. Newmont, Barrick Gold, Agnico-Eagle Mines, Jiangxi Copper, AngloGold Ashanti, Polyus, Gold Fields, Newcrest, Kinross and Zijin Mining Group are the world’s largest gold producers, accounting for 26% of global gold production in 2022. Looking ahead, global gold mine production is expected to remain flat during the forecast period (2024-2030), at a CAGR of 0.9%, primarily due to the depletion of its gold resources in China alongside scheduled closures of several mines in China and Ghana.“
“Canadian miner Barrick Gold Corp said on Tuesday its full-year preliminary production of gold fell from a year earlier, even as output rose sequentially in the fourth quarter. The world‘s second-largest gold miner said in November its 2023 gold production was forecast to be lower than expected due to equipment issues at its Dominican Republic mine and lower output at two sites in the Nevada Gold Fields project. Barrick reported a 2.17% fall in 2023 gold output at 4.05 million ounces from a year earlier, which came below its forecast, and analysts‘ average estimate of 4.16 million ounces, according to LSEG data. Copper production also fell 4.76% to 420 million pounds. Analysts had estimated 433 million pounds of output.“ (Source: Reuters, January 2024)
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Rockstone Disclaimer: This article is for informational purposes only and does not constitute investment advice or a recommendation to buy or sell commodities. The author holds physical gold and silver, stored in Central Switzerland through Elementum International AG. The author does not hold any direct interests or financial instruments related to other commodities or companies mentioned in this article. All views and forecasts reflect the state of knowledge at the time of publication and are subject to change. There is no guarantee that future developments will unfold as described. Investing in commodities involves risks. Consultation with a licensed financial advisor is strongly recommended.
