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New Highs In Gold- More On The Horizon

Barchart - Mon Mar 14, 2022

Markets reflect the economic and geopolitical landscapes. On February 27, in an article on Barchart, I wrote, “Gold corrected and digested its move to a new all-time peak since August 2020. The yellow precious metal now looks ready to challenge that high and move to even higher highs. We could be at the beginning of an almost perfect bullish storm in the gold market as political and economic conditions make the metal that holds value highly attractive in the current environment.”

Last week, gold moved to a new record high, with the nearby April COMEX futures contract eclipsing the August 2020 $2063 high and rising to $2078.80 per ounce. April futures were sitting at the $1960 level on March 14, but the odds of higher highs are rising as gold has broken out to the upside in the US dollar and all currency terms. 

New highs in dollars and many other currencies

While the April contract reached $2078.80 on March 8, the continuous contract high was $2072 per ounce. 

The long-term chart dating back to the 1970s shows that last week’s peak was a new all-time high, eclipsing the August 2020 high by $9.00 per ounce. 

Meanwhile, gold has rallied alongside the US dollar index. 

The dollar index futures chart shows the index rose to its latest high on March 7 at 99.425. A rising dollar means that the index’s components, including the euro, British pound, Japanese yen, and other leading foreign exchange instruments, are falling, pushing gold higher in those currencies. While the US dollar gold price rose to a new record high, so did gold in most other currency terms. When gold rises in all currencies, it is a very bullish sign for the metal. It reflects the eroding purchasing power of all foreign exchange instruments that derive value from the full faith and credit of the governments that issue legal tender. 

Russia and China are soaking up domestic output

As soon as the US and Europe slapped Russia with sanctions after it invaded of Ukraine, the Russian central bank announced it resumed gold purchases from the domestic market. Russia is a leading world gold-producing country and has been building its gold reserves since 2014. US Senators are looking at ways to freeze Russia’s gold holdings, but the majority are likely sitting within its borders or in allied countries. 

China is the world’s leading gold producer, and it has been building gold reserves over the past years by purchasing domestic output. Reserve data is dubious in Russia and China as they consider reserve holdings and commodity production a matter of national security. 

Sanctions are weighing on the Russian economy, but the government has plenty of gold sitting in its vaults. Gold is a reserve asset with a much longer history than any of the fiat currencies in the global financial system. Owning physical gold transcends sanctions as it is an unfreezable asset. Gold is fungible and untraceable when melted and cast in new bars. Gold is money. 

A bifurcation between world powers supports gold- Inflation is additional fuel

February 24, 2022 will go down in history as the day Russia invaded Ukraine. However, February 4 was the actual watershed event as President Putin and Chinese President Xi met at the opening ceremonies of the Beijing Winter Olympics. The leaders shook hands on a $117 billion deal for commodities at that meeting. They pledged mutual support with “no-limits,” forging an alliance dividing the world into two ideological blocks. China, Russia, and their allies are on one side with the US, Europe, Japan, and their allies on the other. The bifurcation supports higher gold prices for at least three reasons:

  • The geopolitical split means the US dollar will decline in influence as the world’s reserve currency, supporting gold.
  • China and Russia are gold-producing countries that can mine more gold to build reserves. As gold moves into reserves, there are fewer supplies available for investors.
  • Gold is a barometer of geopolitical tensions, which are at the highest level since World War II.

Meanwhile, the latest February consumer price index data showed that inflation increased with CPI rising 7.9%, the fasted annual jump since 1982. On a month-over-month basis, CPI rose 0.8% in February compared to January after rising by 0.6% during the previous month. Core CPI, excluding food and energy, rose 6.4% in February, the fastest pace since 1982. The Fed will increase the short-term Fed Funds Rate this week, but any selling in gold on the back of rising interest rates will likely be a buying opportunity as inflation will keep real rates in negative territory for as far as the eyes can see. 

The impact of the war in Ukraine will continue to push inflation higher over the coming months. Russia is a leading commodity producer. War will interfere with crop production in Ukraine and Russia, and sanctions, embargos, and danger at ports and on the high seas will increase prices. Gold thrives in an inflationary environment. 

Gold mining stocks tend to outperform on the upside 

The most direct route for gold investment is to hold the physical metal. Russian gold is likely sitting in Moscow vaults and throughout the country. There may even be gold in values in China, now Russia’s closest ally. For investors, holding gold bars and coins provides 100% exposure to the metal’s price. 

While gold ETF products like GLD, IAU, BAR, and PHYS hold physical gold bullion in their portfolios, they are derivatives that track the metal’s price. Gold miners, who extract the metal from the earth’s crust, provide some leverage to the gold price as they invest substantial capital in mines and tend to outperform gold during bull markets and underperform when the price declines. 

Each gold mining company comes with idiosyncratic management risks and specific gold mining properties in specific countries and locations. There is no guarantee that a gold mining company will produce the metal when the price rises. I prefer a diversified approach to investments in gold mining to spread the risk of owning individual mining companies. 

GDX is a diversified ETF holding leading gold mining companies

The top holdings of the VanEck Gold Miners ETF (GDX) include:

The chart shows GDX holds an over 30% exposure to NEM and GOLD, the two leading North American multinational gold mining companies. At around the $37.35 level, GDX had over $12.3 billion in assets under management, trades an average of over 33 million shares each day, and charges a 0.51% management fee. 

April gold futures rose from $1780.60 on January 28, 2022, to $2078.80 on March 8, or 16.7%. 

The chart shows that GDX rose from $28.87 to $40.26 per share or 39.5% over the same period. GDX provided a leveraged return compared to gold and gold futures since late January, and that is likely to continue if gold’s price continues to make higher highs over the coming weeks and months. 

Since 1999, every dip in gold has been a buying opportunity, and I expect that trend to continue with inflation and geopolitical tensions pushing the metal’s price to a series of new all-time highs. 

Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.