Gold 2.0

The gold price appears to have stabilised over and around $2,000 per oz. The risk of a marked decline is quite low due to a) continuing geopolitical uncertainties, which indicate a degree of safe haven demand, b) demand growth from sectors such as electronics, and improved liquidity of gold holdings (e.g., the gold loans market in India), c) steady and growing central bank buying, with the % of reserves indicating scope for more (e.g., China’s % allocation has doubled in the last eight years but is still only around 5% of its foreign currency reserves), and d) interest rates expected to have peaked, with expected future lower rates providing less yield competition to gold.

However, at the current prices there may be limited near-term upside for gold prices (refer our theme under review “Gold and Silver”), but an emerging opportunity in gold miners, whose profitability can benefit from operating leverage.

The rationale for gold miners is summarised as:

• Gap with gold performance: Gold stocks typically do not have a high correlation with the gold price, given the additional factors at play, and often under or overperform in different time periods. Gold miners have now under performed gold for over 2-3 years now, and the divergence is high compared to past trends, supporting a relative pick-up in the gold stocks’ performance.
• Positive production costs trend outlook: Miners have been weighed down by issues such as inflation and borrowing costs which are likely to abate to some degree going ahead in most economies in the medium term.
• No significant supply issues: Gold production is increasing in many countries and mines (2024 likely to be a record year), along with recycling supply growth. With the gold price already well supported, we prefer to see robust supply rather than shortages to support the theme, and indications are for no abnormal supply constraints.
• ESG less of a downward weight: The anti-ESG case against gold miners has weaker legs now as many progressive miners have adopted good environmental and social practices, and on the other hand gold demand could benefit from applications in green technologies such as solar.

Note that apart from the gold price dropping, the biggest risk of this theme is the company specific circumstances of miners such as location, financial stability, profitability, and operational issues etc., and therefore there may also be many losers in this universe.

With gold having delivered attractive returns over the past 1-2 years, looking ahead the outlook for mining stocks is a promising theme in the medium term.