Sign up for the new Globe Advisor weekly newsletter for professional financial advisors on our newsletter sign-up page. Get exclusive investment industry news and insights, the week’s top headlines, and what you and your clients need to know.
Gold has gained more glitter lately, even amid wild price swings.
COMEX gold futures for April delivery surged to more than US$1,900 an ounce since the start of this year before pulling back sharply on profit-taking. The yellow metal is now trading around US$1,885 an ounce – still well above last year’s low in September of about US$1,623.
Jeffrey Christian, managing partner of New York-based commodity research and consultancy CPM Group, says he expects the average annual price for the metal to hit a record high this year.
“We are looking for the average annual gold price [for futures] to maybe go up 3 per cent this year from 2022 to about US$1,860 per ounce,” he says. “Our expectation is that we’ll see an average annual price in 2024 of US$2,000.”
The World Gold Council reported that gold demand hit 4,741 tonnes last year – its highest since 2011 due to “colossal central bank purchases aided by vigorous retail investor buying.”
However, bullion ran into turbulence last week after a stronger-than-expected January U.S. non-farm payrolls report and the U.S. central bank hiking its key interest rate by a quarter of a percentage point. U.S. Federal Reserve Board Chair Jerome Powell also warned about further rate increases because inflation is still too high.
Mr. Christian says his firm remains bullish on gold – often seen as a safe-haven asset in uncertain times – because of expectations that the world still faces massive economic, financial and political problems.
“We are looking for lower growth and a potential recession in 2024 or 2025 in the U.S. and the industrialized world,” he says. “We might see lower interest rates and increased tension among countries.”
Gold climbed to an intraday high of about US$2,043 an ounce last March after Russia’s invasion of Ukraine but fell sharply as rising interest rates made higher-yielding bonds more attractive to investors. The metal rallied late fall amid bargain-hunting and expectations that the U.S. central bank would slow down rate increases.
Mr. Christian says that the collapse in cryptocurrencies should benefit gold too. He has even noticed a “flight to quality” globally to the largest and most respected gold exchange-traded funds (ETFs), such as SPDR Gold Trust GLD-A and iShares Gold Trust IAU-A.
“In December, the total amount of gold held by 20-some-odd ETFs declined by about 110,000 ounces, but the amount of gold held by the five largest ETFs rose about 180,000 ounces.”
For investors, he usually advises a diverse portfolio that includes physical gold as well as gold or gold mining ETFs and shares of large, better-run miners. However, he expects better capital appreciation with mid-tier companies that could become takeover targets.
John Ing, president, and chief executive officer of Maison Placements Canada Inc. in Toronto, says a new bull market for gold has begun, and that its spot price could hit a record high of US$2,200 an ounce this year.
That will likely happen mid-year during the debt-ceiling debate between the U.S. Democrats and Republicans, Mr. Ing says.
“It looks like they’re going to play a game of chicken,” he adds.
The U.S. government hit its US$31.4-trillion borrowing limit on Jan. 19. During the 2011 debt-ceiling drama, the U.S. had its credit rating downgraded for the first time, and the S&P 500 plunged 15 per cent.
Role of U.S. dollar, inflation and supply constraints
Mr. Ing, a veteran gold watcher, says he expects persistent inflation and a falling U.S. dollar to drive the gold price higher.
The U.S. debt spiral, and the surprising U.S. jobs number with unemployment dropping to 3.4 per cent – the lowest level since 1969 – indicates that “inflation is very much alive,” he says.
“My sense is that we are also only at the beginning of seeing the decline in the U.S. dollar.”
The U.S. Dollar Index, which measures the greenback against a basket of major currencies, has weakened to 103 from a 20-year high of 114 last September.
China’s central bank, which rarely announces its gold purchases, has done so recently as it ramped up its buying. It appears “they’re underlying the fragility of the U.S. dollar,” Mr. Ing says.
Although gold demand is picking up, supply is getting constrained so that will push up the price too, he says. There are fewer mines in production, and it can take up to 10 years to build one.
Among senior miners, he favours Agnico Eagle Mines Ltd. AEM-T, which has strong management that has made excellent acquisitions. Those include Kirkland Lake Gold Ltd. and the purchase of 50 per cent of Canadian Malartic mine from Yamana Gold Inc. that it did not own.
He also likes Barrick Gold Corp. ABX-T, whose joint venture with Newmont Corp. NGT-T in Nevada is the largest gold mine in the world, and B2Gold Corp. BTO-T with its low-cost Fekola mine in Mali.
Smaller players, such as Lundin Gold Inc. LUG-T, Eldorado Gold Corp. ELD-T, Dundee Precious Metals Inc. DPM-T and Centamin PLC CEE-T are also attractive and could be takeover targets, he says.
Jon Case, vice president and portfolio manager with Toronto-based CI Global Asset Management (CI GAM), has a more cautious outlook for the gold price for this year but is more bullish longer-term.
CI GAM’s view is that most of the U.S. dollar correction has occurred, and that should mean the same with the rise in the gold price, says Mr. Case, who oversees CI Precious Metals Fund.
“Gold should fluctuate in the US$1,800 to US$1,950 an ounce range, and I can see it slip back down to US$1,800,” he says.
The U.S. debt-ceiling debate, though, could be a catalyst to push gold higher, while falling interest rates could send the metal to new all-time highs above US$2,100 an ounce, he adds.
“Long term, we see real [interest] rates going lower to zero, and I can honestly see them going negative again,” he says.
‘Less exposure to cost inflation’
Although the recent surge in the gold price should help miners boost margins, he’s more concerned about inflation – ranging from higher construction and energy costs – eating away at margins.
“It’s going to be a very tough year for the gold-mining industry on cost containment,” he says. “We have positioned the fund toward royalty [and streaming] companies with less exposure to cost inflation.”
Mr. Case’s fund holds Osisko Gold Royalties Ltd. OR-T, Wheaton Precious Metals Corp. WPM-T and Sandstorm Gold Ltd. SSL-T, which make up 20 per cent of the holdings.
These companies have lower costs than producers because they don’t develop and operate mines. Instead, they provide financing for mines in exchange for cash or delivery of the metal.
Because all miners face higher costs, he owns producers with below-average risk relative to others. Among the large-cap miners, Agnico Eagle Mines is his top pick; Barrick falls into that camp too, he adds.
As gold equities have risen somewhat along with the gold price, that could spur more merger-and-acquisition (M&A) activity among miners, he says.
On Monday, Newmont, the world’s largest gold producer, launched a US$17-billion, all-share bid for Newcrest Mining Ltd., Australia’s largest gold miner.
“I expect that gold M&A will remain brisk this year,” Mr. Case says.
For more from Globe Advisor, visit our homepage.