As gold hits new highs and money printing smashes all past records, what’s next for the gold sector

2020 has been a great year so far for gold and for gold investors. Gold is up 28% the past 1 year and most gold companies are up more than 50%. So the big question now is, can the gold rally continue?

We can see from the chart below that the gold rally really accelerated starting in early 2020 as COVID-19 started to become an issue. This is partly because of gold’s tradition as a safe haven but also as a hedge against inflation as the global money printing presses were ramped up as governments attempted to support the economy in the face of a severe global pandemic and associated lockdowns.

As a result US$33.7 billion of money flow into gold ETFs so far in 2020 has surpassed the previous all time yearly high of US$24 billion in 2016; and we are only half way through 2020!

The gold price is up 28% over the past 1 year

Gold demand grew slightly in Q1 2020 driven by the large pickup in demand from gold ETFs. This shows that both retail and institutional investors have been flocking to gold. Somewhat surprisingly central bank gold purchases decreased slightly in Q1, 2020. Demand for gold jewelry reduced as expected due to lockdowns. As global economies reopen I would expect there to be some pent up demand from the jewelry segment.

Gold demand grew slightly in Q1 2020 led by demand from gold ETFs

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Gold supply is a constant struggle as each year existing mine reserves decrease. In the past decade lower budgets for exploration has meant less gold has been discovered, particularly large gold discoveries. The pipeline is increasingly short of large, high-quality gold reserves needed to replace ageing major gold mines.

S&P Global Market Intelligence reports major gold discoveries are on the decline

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The IMF recently released a report “A crisis like no other, an uncertain recovery.” The report stated:

Global growth is projected at –4.9 percent in 2020, 1.9 percentage points below the April 2020 World Economic Outlook (WEO) forecast. The COVID-19 pandemic has had a more negative impact on activity in the first half of 2020 than anticipated, and the recovery is projected to be more gradual than previously forecast. In 2021 global growth is projected at 5.4 percent. Overall, this would leave 2021 GDP some 6½ percentage points lower than in the pre-COVID-19 projections of January 2020. The adverse impact on low-income households is particularly acute, imperiling the significant progress made in reducing extreme poverty in the world since the 1990s.”

Globally government money printing continues at a record pace, led by the USA. For example in April 2020 it was estimated that spending for COVID-19 will nearly quadruple the 2020 US budget deficit to a record US$3.8 trillion, or 18.7% of US economic output. By the end of May 2020 the Fed’s balance sheet increased to over US$7 trillion, of which over 40% of this has been added in 2020 alone.

By a way of comparison QE1 during the GFC resulted in a US$458 billion increase in money supply. It is frightening to think where we will be by end of 2020, as we have literally printed our way out of trouble.

The verdict

In late April we published “Is $3000 gold possible?” At that time there was ~3 million COVID-19 cases globally and 206,997 deaths. Fast forward to today and we are now about to reach 11 million cases and are at 524,036 deaths. The last 1 million new cases have been added in only one week. If we continue to add at 1 million per week, we will add another 26 million new COVID-19 cases in H2 2020 alone. From a COVID-19 perspective the case for holding gold is only getting stronger.

A combination of strong gold demand particularly from gold ETFs, building pent up jewelry demand, and struggling gold supply suggests the outlook for gold in H2 2020 continues to look strong.

Gold does well in uncertain times and we certainly have that. We have an out of control global pandemic, a brewing trade war between the US and China with relations deteriorating by the day, strained relations between China and multiple countries, record levels of unemployment, a -4.9% global 2020 GDP projection, unprecedented money printing, and an enormous amount of fear and uncertainty.

I think gold will continue to do well until we get the above issues resolved. Gold miners that can make good discoveries and grow their resources will continue to have a stellar 2020. As for US$3,000/oz gold by October 2021, it is very possible and the idea is supported by the Bank of America and many others.

Gold miners on our radar at InvestorIntel include:




Is $3000 gold possible? A look at the ‘for and against’, and Australian gold miner Alkane Resources

2020 has seen unprecedented levels of global economic disruption due to the COVID-19 (coronavirus) pandemic. This has seen share markets collapse and the gold price rise 15% in just a few months. Some say this is just the beginning of the gold bull run, with Bank of America now forecasting gold prices could reach US$3,000/oz, which is almost double the current price of US$1,721/oz.

Today we look at the arguments for and against US$3,000/oz gold.

Gold 1 year price chart – Gold = US$1,721

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The case for US$3,000/oz gold

  • COVID-19 has so far caused 2,994,958 confirmed cases and 206,997 deaths, and is severely disrupting the global economy. Some countries are now re-opening their economies; however the risk remains high of a second wave of infections. We may still be a long way away from herd immunity, successful treatments, and a successful vaccine.
  • Goldman Sachs recently stated: The downturn will be 4 times worse than the Global Financial Crisis (GFC). In the U.S., second-quarter activity likely dropped 35% while unemployment could hit 15%.
  • The IMF forecasts global GDP to be minus 3% in 2020, then recover to +5.2% in 2021, assuming pandemic fades in the second half of 2020.
  • The coronavirus health crisis may be followed by a coronavirus debt crisis. Global governments have responded to the COVID-19 with massive stimulus, and hence trillions of dollars in new money printing.
  • Bank of America (BoA) forecasts gold to hit US$3,000/oz by October 2021, in a report titled: “The Fed can’t print gold.” BoA states that with an official recession looming, monetary authorities are poised to buy record amounts of financial assets and double the sizes of their balance sheets.
  • Global gold supply is struggling to increase each year as it becomes harder and more costly to find and mine gold.
  • Gold performs best when rates are low, and right now we have historic low interest rates.
  • Historically gold has proved to be the best storage of wealth.

The case against US$3,000/oz gold

  • Lower jewelry demand in India and China may put downward pressure on the gold price. Gold jewelry represents the largest source of annual demand for gold. Though it has declined over recent decades, but it still accounts for around 50% of total demand.
  • A stronger US dollar may mean a lower USD gold price.
  • We may recover quickly from COVID-19, and stock market sentiment could improve, thereby lowering sentiment towards gold investment.

Viewpoint

I think BoA hit the nail on the head with their report title: “The Fed can’t print gold.” Gold’s scarcity and centuries long history as a preserver of wealth means investors will always seek gold as a safe haven. The global supply of new gold struggles to increase YoY, yet the supply of new fiat currencies such as the USD continues to flood the market, as printing presses work 24/7 to print new dollars.

Investor’s takeaway

Investors would be wise to have some gold in their portfolio, as a hedge against a collapse in paper money and the global economy. Physical gold is always the safest and purest way to play. Next can be the gold backed ETFs, followed by gold miner ETFs, and finally gold miners.

Smaller gold producers with exploration upside

For investors wanting to leverage their gold exposure, investing into gold producers and successful explorers can achieve this. One example that comes to mind would be Alkane Resources Ltd. (ASX: ALK). Alkane Resources has gold production at their Tomingley Gold Mine, successful gold exploration, and a 100% ownership of the Dubbo Rare Earth Project. They are very well funded to achieve success with cash, bullion and investments of A$91.7 million.

Alkane Resources Tomingley Gold Mine forecast to produce 30-35,000 oz Au at AISC A$1,250-$1,400 in FY 2020

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Alkane Resources has very significant exploration upside at their Kaiser-Boda target zone (part of the Northern Molong Porphyry Project)

Apart from a producing gold mine (Tomingley Gold Project) and their Tomingley corridor exploration projects; Alkane Resources has very significant exploration upside at the Kaiser-Boda target zone (within the Northern Molong Porphyry Project), which has been mapped over a north-south strike length of a massive 6km long and 1km wide.

Alkane Resources recently announced: “Further extensive porphyry Gold-Copper mineralisation at Boda“. What’s striking about this announcement was the long length of mineralisation, and it started near surface. For example, 965.7m grading 0.21g/t gold, 0.11% copper from 7.3m, and 153.0m grading 0.40g/t gold, 0.13% copper from 480m. In March 2020, Alkane Resources announced another very long drill result also at the Kaiser-Boda target zone. Drill hole KSDD007 resulted in 1,167m @ 0.55g/t Au, 0.25% Cu from 75m. Another was KSDD003, 507m @ 0.48g/t Au, 0.20% Cu from 211m.

Gold copper porphyry style deposits can be very large making them economic despite lower gold grades, due to efficiencies of scale and copper by-products credits.

Alkane Resources’ Managing Director, Nic Earner, stated:

“We’re delighted to confirm further extensive mineralisation at the Boda Prospect. Our drilling to date demonstrates broad, ore-grade mineralisation over at least a 300m north-south by 400m wide zone with over 800m depth, with the mineralisation open along strike and at depth, and a significant higher grade core with exceptional characteristics.”

A summary image of Alkane Resources extensive exploration projects and mine in Australia

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Closing remarks

There has probably never been a better time to buy gold or a quality gold miner. For investors wanting higher risk and reward the small gold producers, with growing production and exploration upside offer an exciting opportunity.

As financial and debt markets melt down, very few sectors will show positive returns, let alone a chance to double or triple. And remember gold is very rare, and as BoA says: “The Fed can’t print gold.”

And ‘yes’, US$3,000/oz gold by October 2021 is very possible.




Trade war fears and a 6 month low gold price means it may be a good time to invest in the gold sector

Gold is well known as an investment safe haven, which acts as a store of wealth over time. Gold often does well in bad times, but this is not a given. This past month the fear (volatility) index rose and investors withdrew record amounts of money out of equity funds, moving back into US Treasury Bills (cash). Added to this the oil price stealth bull run, has inflation fears rising to the surface again. Is it time to add some gold to your portfolio?

Below is a one year graph of the CBOE Volatility Index (‘the fear index”) showing the recent June upwards spike to be quite small compared to last February 2018 when investors were worried about inflation and rising US interest rates. This time the fear is about Trump’s tariffs and trade wars. The way things are going many fear it may get a lot worse before it gets better.

The late June 2018 spike in the CBOE Volatility Index (‘the fear index”)

VIX spike in June smaller than last February 2018

The gold spot price has recently dropped to a 6 month low, which may be an opportune time to buy given the increased level of risk right now with a global trade war potentially just in the early stages of intensifying. Looking at the charts below gold has mostly met downside resistance at US$1,200-1250/Oz. At the current gold spot price of US$1,253 now is a good time to take another look at the gold sector.

Gold price charts for 1, 5, and 28 years

Popular gold metal and gold miners funds

Funds such as the SPDR Gold Trust ETF (NYSEARCA:GLD) and the iShares Gold Trust ETF (NYSEARCA:IAU) give exposure to the gold metal price. These do well if the gold spot price rises and vice versia.

Funds such as iShares MSCI Global Gold Miners ETF (NYSEARCA:RING) and VanEck Vectors Gold Miners ETF (NYSEARCA:GDX) give exposure to a basket of gold miners. These will do well if the gold miners in the indexes do well. They give most exposure to the larger market cap gold miners such as Newmont Mining, Barrick Gold , Newcrest Mining, Goldcorp, and Agnico Eagle Mines.

Buying gold miners directly

Experienced investors will tell you when assessing gold miners you should consider many factors such as resource size (inferred, indicated, reserves), gold grade (nice if above 0.75 g/t), strip ratio or access to the gold, by-products, licensing and permitting, location access and infrastructure, management, and country risk. For me size, grade and location are key, with some exploration upside, and at a fair or cheap valuation.

In conclusion, gold has several benefits in a portfolio and can serve as a hedge against other risks and hence be a type of wealth storage or insurance. Investors should remember that gold can still go down in times of fear, and that the junior miners often have many risks associated with them.

With overvalued US equity markets, jittery investors, politicians stirring up trade wars, and gold at a 6 month low, now would be a good time to make sure you have some gold insurance.




The Great Incredible Gold Subsidy

“Every individual is a potential gold buyer, although he may not need the gold. It may be added to the store of personal wealth, and passed from generation to generation as an object of family wealth. There is no other economic good as marketable as gold.” Hans F. Sennholz (Austrian School economist and editor of the 1975 book, Gold is Money).

I was amused by this week’s headline on Bloomberg, “The 500 Tons of Gold That Show Global Rise in Investor Angst.” According to that article, global gold holdings have risen by:

“more than 500 metric tons since bottoming in January in a signal of investors’ rising concern about slowing growth, a Federal Reserve that’s probably on hold and the ructions caused by Britain’s vote to quit the European Union.”

Gold in exchange traded funds rose 6.6 tonnes on Friday to 1,959.1 tonnes, up from 1,458.1 tonnes on January 5th, 2016. Again according to Bloomberg:

Bullion prices climbed to the highest level in more than two years in June as investors absorbed the implications of the U.K. result, adding to a rally that’s been driven by the Fed’s hesitation in raising borrowing costs and the spread of negative rates in Europe and Japan.”

Well, I suppose after an hysterical, four month-long “Project Fear” campaign mounted by British Prime Minister David Cameron and the Remain side in the United Kingdom referendum on European Union membership — a campaign aided and abetted by leaders from all around the planet — the majority vote for Brexit would likely generate some nervousness, and even more investor “angst”. Still, the gold Exchange-Traded Funds have some way still to go to regain their peak in 2012 of 2,632.5 tonnes.

But all of this misses the point.

In 1971, President Nixon was forced to abandon the dollar’s convertibility link to gold at the then official price of $42 per troy ounce. In theory, all the west’s currencies had a fixed link to the dollar with the greenback being convertible into gold for the west’s central banks at the official rate. A two-tiered gold market had existed since 1968, with an official rate used by the central banks and a free market rate used by everyone else. Needless to say, the free market price went higher than the official price.

By agreement, central banks were not allowed to buy gold in the free market, though by late 1974 they could sell their gold reserves there if they wished. Few wished to sell gold at all, although some chronically mismanaged countries like Italy raised loans against their gold holdings, in Italy’s case from the then West Germany. In the event of an actual physical gold transfer between debtor and creditor, the International Monetary Fund insisted the transfer take place using the official lower price. It was, and has been since 1971, a recipe for today’s fiat money disaster.

At a stroke, and without consultation, the dollar and all the lesser currencies, became “fiat” currencies, exactly the same as with the communist currencies. The last systemic link to order, i.e. gold, was lost, and disorder took its place, lately in spades. Politicians and central bankers everywhere became profligate money spenders and money issuers. The free lunch had arrived, deficits didn’t matter anymore.

Of course it was a Great Big Error and money supply ballooned everywhere, and has never stopped ballooning since. Instead of devaluing the dollar against gold in 1971 and keeping discipline, the world took off like a rocket on forever-devaluing fiat currency.

Now comes the really interesting bit, how gold has reached getting a subsidy of $67,000/oz by some measure, $47,600/oz by another measure, and $3,982/oz by the narrowest measure (the one I have chosen). I’ve opted to use the USA’s figures, but the global fiat money problem is obviously much larger.

In August 1971 when America went off the gold link, M1 money supply (narrow money) according to the Federal Reserve was $226.5 billion, the currency component part of M1 was $51.3 billion. America held gold reserves totalling $262 million ounces. Each ounce of gold covered $195.80. At the official price of $42, each ounce had a deficit of $153.80.

Fast forward through wars, bubbles and busts to June 20, 2016. The M1 currency component has ballooned to $1.3839 trillion. The gold position, we are told, is still 262 million ounces, though it has never been audited since the 1950s (and then only partially). Each ounce of gold now covers an impressive $5,282. With the gold price itself suppressed to $1,300/oz this means that, when the whole system crashes, each ounce of gold is carrying a subsidy of $3,982. Not too shabby considering the state of the world.

But by other monetary measures it gets even better. Though the Fed dropped M3, their widest monetary measure, back in 2006, privately-assembled M3 measures are available for use. At the end of December 2015, M3 was estimated at about $18 trillion. Each ounce of gold now covered by $68,702; deduct the present price of the metal and each ounce is carrying a gold subsidy of an incredible $67,402.

The central bankers seem to think that this state of affairs can go on forever, growing like Topsy to the sky. I think the whole system blows up long before then, releasing the gold subsidy — an interesting long term investment, I think. Gold flows from west to Asia’s east in anticipation that the subsidy will one day get released.

To finish, a couple of other apposite quotations:

“It was a confusion of ideas between him and one of the lions he was hunting in Kenya that had caused A. B. Spottsworth to make the obituary column. He thought the lion was dead, and the lion thought it wasn’t.” P. G. Wodehouse.

 “If we went back on the gold standard and we adhered to the actual structure of the gold standard as it existed prior to 1913, we’d be fine. Remember that the period 1870 to 1913 was one of the most aggressive periods economically that we’ve had in the United States, and that was a golden period of the gold standard. I’m known as a gold bug and everyone laughs at me, but why do central banks own gold now?” Alan Greenspan. June 28, 2016.