Gold riding high, more to come

With the gold price riding high at around US$2300/oz, more is yet to come as several bullish factors for the yellow metal have yet to occur, such as the US Federal Reserve cutting interest rates, delegates at the Deutsche Gold Messe conference in Frankfurt, Germany heard Friday.

At the start of the year, many analysts forecast the gold price would rise to $2300/oz by the end of the year, and with the yellow metal hitting that mark nine months early, Markus Bussler, editor of Der Aktionar, said fear could be the cause.

"It is not a good sign that in an environment that is not perfect for gold, the gold price is rising. High-interest rates and a strong US dollar are not good for gold, but big investors are positioning themselves in gold for what is to come. Gold is not being driven by the geopolitical hedge that people talk about or by the US dollar but by sentiment. Many people fear what is coming in the US presidential election and by US debt. No one can imagine what $34 trillion in debt looks like," said Bussler.

"This move in the metals has been shocking and surprising, and people are searching to find the factors behind it," Brien Lundin, editor of the Gold newsletter, told Mining Journal.

Lundin said central bank buying is not for investment reasons, and buying through China has been a big driver behind the gold price rise. The World Gold Council recently reported that global gold demand in the March quarter was up 3% year-on-year to 1,238t, marking the strongest first quarter since 2016. Central banks' net demand was 296t, the strongest start to any year on record.

"The buying has been so strong and against the current as the strong dollar even seems to help gold instead of being a bearish factor. There is something more going on where you see big money moving into the sector, and I think it's the general macro picture that there's too much debt in the world and that debt is not manageable with interest rates at current levels," said Lundin.

While many are wondering why the gold price raced to raced towards $2400/oz, when that was the target for the year for many observers, some think gold could go even higher.

"The last time gold was expensive was in 2021. Now, with the combined amount US debt and the US Federal Reserve balance sheet, gold would still be cheap at $4000/oz," Eric Strand, founder and portfolio manager of Sweden's AuAg Funds told Mining Journal.

Equities

Gold may be off to a flying start in 2024, but gold equities have been slow out of the blocks. "There is a general disappointment from investors by the performance in the equities. I have been showing in my presentations that the gold equities have been leveraging this move in gold but not quite as much as we would have liked," said Lundin.

Bussler and other speakers said they are unsurprised that investors have not warmed to gold equities despite the high metal price. "Is there anything to be excited about with Newmont or Barrick Gold in the past few years? Why would investors return to space if the top two producers do not look that good? There have not been enough success stories in the space to attract money. Investors now don't expect much from miners. Barrick is not even producing 1Moz per quarter now," said Bussler.

Bussler said the focus of gold producers on capital discipline and shareholder returns has misread investor expectations. "Gold companies don't invest in growth but pay out dividends and share buybacks. Did they get rewarded for this policy? No. Investors don't buy mining stocks because of dividends. Perhaps they want growth," he said.

"Typically, investors invest in mining stocks for capital appreciation, and because there wasn't an awful lot of that in recent years, big mining companies turned toward dividends to reward their shareholders and, frankly, themselves as big equity holders. 

That is a characteristic that lingers in the bear market environment. Now margins and free cash flow expand, there is an element of scepticism as people investing in the resource space and mining equities want growth," said Lundin.

However, the knock-on effects of rising metal prices on company balance sheets should drive their share prices higher. Strand said that gold stocks will outperform the metal, and the price action of some of the bigger gold equities over the past month, shows that this move may be underway. "I am hoping for some triple-digit gains this year," he said.

Mergers and acquisition activity is starting to gain pace, although far from the frenzied activity with competitive bids that come in a hot market. 

"M&A has disappointed me because we're not seeing the deals that create the kinds of rewards we invest in the sector for. I'm talking about junior companies getting taken out for a 15 or 20% price premium, rather than the bidding wars by the majors for the junior or mid-tier sector we would like to see," said Lundin.