In Gold We Trust.

Not for the first time in the long history of the lustrous metal, gold is living up to its status as both a store of value and a safe harbour in times of markets and geopolitical foment.

For investors, the question is not so much whether they should have at least some exposure to the yellow metal – but how.

At the time of writing the spot bullion price had surged through the $US1800 an ounce level, up 20 per cent year to date. In $A terms gold is trading well over the $2500/oz level and has appreciated by a similar amount.

Source: goldprice.org

For those who prefer the longer term perspective, the Perth Royal Mint claims that since 1971 gold has outperformed both stocks and bonds in periods when Australian interest rates have been below 2 per cent.

And in the five worst calendar years for shares, gold rose 9 per cent while equities fell an average 12 per cent.

Calidus Resources (CAI) managing director Dave Reeves

I don’t claim to be a fortune teller but I think gold’s in a good place for the next couple of years,” says Calidus Resources (CAI) managing director Dave Reeves. “I certainly don’t see it dropping in the foreseeable future.”

Auteco Minerals (AUT) executive chairman Ray Shorrocks notes that gold always has been viewed as a hedge against volatile markets, with the “very very” low interest rates and low investment returns elsewhere adding to the metal’s current appeal.

Auteco Minerals (AUT) executive chairman Ray Shorrocks

“I don’t see that changing any time soon,” he says. “From our point of view it’s a great environment to be invested in gold.”

Westgold Resources (WGR) executive chairman Peter Cook says that given the economic misery it’s easy to justify a bullion price of $US5000 – or even $US10,000 – an ounce.

Westgold Resources (WGR) executive chairman Peter Cook

  “Aussie gold could easily have a ‘3’ ($A3000/oz) in front of it by the end of next year and US gold could have a ‘2’ ($US2000/oz) in front of it, just driven by the macroeconomics,” he says, adding that the metal could come under some pressure as gold-holding nations sell down reserves to obtain liquidity.

 Apart from investors’ general nervousness about the devastating effect of the coronavirus, the rush to gold is at least partly attributable to the rock-bottom yields on safe cash investments such as US government bonds.

The metal historically has moved inversely to bond yields, because low interest rates negates gold’s disadvantage of not generating income.

Gold is also synonymous with protecting against high inflation which isn’t exactly a problem at the moment. With governments printing money like confetti, this could change but in the current climate we’re a long way off the Weimar Republic scenario of customers fronting up to butcher shops with wheelbarrows of cash.

 “With around 40 countries having zero to negative real interest and with record flows into exchange traded funds (ETFs), everything looks very positive for the gold market,” says Manuka Resources (MKR) executive chairman Dennis Karp.

 

Manuka Resources (MKR) executive chairman Dennis Karp

Westgold’s Cook says gold is an unusual commodity, in that it’s more demand than supply driven. About 95 per cent of the gold ever mined is still around, which means short term supply variations are less material than changes in copper or iron ore output.

Supply has been largely flat for the decade, with the main producing nations’ production waxing and waning.

Cook notes the demand dynamics have changed, with North American and European investors and central bank purchasing supplanting Chinese and Indian jewellery demand. 

According to the Australian government’s Resources and Energy Quarterly, world gold demand increased by 1.2 per cent in the March quarter to 1084 tonnes despite demand for jewellery – notably from Chinese and Indian consumers – tumbling 40 per cent.

The uptick is attributed to inflows into gold backed exchange traded funds, with official government and central bank buying easing 7.6 per cent. World gold consumption is forecast to grow at an average annual 4.2 per cent in 2021 and 2022 to 3892 tonnes, driven by recovery in jewellery demand (especially in the Indian wedding season).

With the golden tea leaves auguring well, how should local investors gain exposure to such a desirable commodity if only as a hedging tool in their broader portfolio?

While holding physical bullion is the purest gold exposure, it’s not practical for insurance and security reasons. The creditors who lent $US2.8 billion ($4bn) to the Nasdaq-listed Chinese gold processor Kingold recently learned the hard way when they discovered 83 tonnes of ‘gold’ held as collateral was actually gilded copper.

In recent years, gold-linked ETFs have been an easy way to gain exposure. ETFs can either be entirely synthetic (derivative) based structures that track the gold price movement, or else physically backed by gold to hold the investment.

According to Crestone Wealth Management asset allocation specialist Rob Holder, ETFs are an “intuitive” investment for investors accustomed to buying and selling shares. But risks include counterparty default, unfavourable currency movements and the traded ETF price deviating from the underlying gold price.

By directly holding ASX listed gold stocks, investors can reap potentially higher returns than holding bullion or a derivative that tracks the value of the physical metal.

The local sector currently is in a golden patch, despite setbacks such as Gascoyne Resources and Coolgardie Minerals entering administration and production glitches elsewhere.

While $A-denominated physical gold has gained 3 per cent since the coronavirus meltdown on Feb 21, the ASX gold index has surged 22 per cent.

“It’s fantastic to be operating in Australia in today’s environment,” says Manuka’s Dennis Karp. “The Aussie gold margins are great.”

 

The joy is being shared not just among the producers, with investors ascribing high valuations to developers and even explorers without a certified resource. Miners are also benefiting from benign labour inflation and lower fuel costs flowing from the oil price plunge.

Australia also enjoys a reputation as a safe jurisdiction and clean source of supply when the focus is on child labour and destructive artisanal mining methods in developing countries.

Locally, interest has centred not just on the traditional eastern goldfields around Kalgoorlie, but the emerging Pilbara province and the revived Victorian goldfields, where a slew of explorers including Kalamazoo Resources (KZR) hope to emulate the success of Canadian giant Kirkland Lake’s Fosterville mine.

In the (almost) coronavirus-free ‘bubble’ of WA,  discoveries such as Hemi in the Pilbara, Tropicana in the Fraser Range and Newcrest Mining’s Havieron gold-copper project in the Paterson Province highlight the state’s ongoing gold potential.

Rumble Resources managing director Shane Sikora

“This is a great investment place not only because of that, but we have world class discoveries with world class service providers,” Rumble Resources managing director Shane Sikora says.

The seventh biggest domestic gold producer, Westgold has seven underground mines and three processing plants in the Murchison district, which has been less worked than the mainstay Kalgoorlie region further south.

Now flirting with a $1 billion market cap, Westgold in 2016 demerged from tin producer Metals X to become a pure-play gold company.

In the current year Westgold expects to produce 275,000 -300,000 ounces. “We are really focused on our underground mines,” Cook says. “Old mines don’t die, they just get deeper.”

Overall, the company has 90 separate ore bodies and we are planning to mine 15 in the next ten years.

 He says the biggest, Big Bell, will add 100,000 ounces in its own right.

Another project oozing with promise, Westgold’s Great Fingal produced 1.25 million ounces at an average 21 grams a tonne before closing as the world descended into war in 2014. “That’s probably our best mine to develop in terms of margins,” Cook says.

“We have the capacity to go to 350,000 ounces based on the infrastructure we have and that comes from higher grades and more underground production.”

 

Meanwhile, Westgold expects steadily increasing cash flow as it moves from development to production. Management expects earnings before interest tax depreciation and amortisation (ebitda) $180 million this year, rising to $250-300m next year.

“In the last three years have re-invested most of what we made,” Cook says. “We have all these things up and running now so we are running out of money to spend it on.”

At the exploration end, Rumble Resources’ strategy entails acquiring low-cost projects with the option to purchase them after “drill to kill” campaigns validate their potential.

 “We don’t want to buy projects up front because it’s costly and dilutive,” Sikora says. “This approach gives us the chance to test multiple projects and advance the ones that stack up.”

 

Rumble’s main focus is the Western Queen project in the Yalgoo field near Geraldton, a project that historically has produced 215,000 ounces across two mines (880,000 tonnes at an average 7.6 grams a tonne).

While Ramelius Resources currently owns the project, Rumble has entered into an option to fully acquire it.

Rumble is confident of expanding on the current resources (inferred and indicated) of 120,000 oz (962,000t at 3.9 g/t). The company has embarked on a 12,000 metre drilling campaign targeting resources extensions beneath the Western Queen Central Pit and to test multiple high-grade shoots throughout the project.

“Based on the recent drilling zeroing in on the high-grade gold shoots, Rumble has confidence in this drill program we are on the verge of making multiple, significant, high-grade gold discoveries and resource expansions.” Sikora says.

 

In joint venture with AIC Mines (A1M), Rumble also has the Lamil project in the Paterson Province – on strike with Newcrest Mining’s 32 million ounce Telfer mine and with a Telfer like “aeromagnetic signature”.

 “You could imagine what a discovery the size of Telfer would do for our company,” Sikora says.

On the other side of the country the buoyant gold climate also bodes well for Manuka Resources, which listed on Tuesday July 14 after raising $7 million in an oversubscribed initial public offer (IPO).

Manuka’s key assets are in the NSW Cobar Basin the Wonawinta silver project and the acquired Mt Boppy gold mine, both of which are fully permitted. Wonaminta also includes an 850,000 tonnes a year plant that processing gold from Mt Boppy.

Karp says the company is fortunate being in the Cobar Basin, part of the NSW hotspot of the Lachlan Fold, which has produced “exceptional results” from neighbouring projects. The Basin is known for its deep continuing systems.

He adds that both projects have substantial plant and infrastructure that otherwise would have cost up to $200 million – and many years – to build.

“But what excites us most about our project is the exploration upside; while the cream has been on the top, to date, we have good reason to expect these to continue to depth, consistent with the Cobar Basin,” he says.

The IPO funds will not be used to repay debt, but rather will be specifically targeted towards exploration.

 “That’s very much our focus and we will have drill rigs on site at both locations from early August onwards.”

 

Meanwhile near-term developer Calidus Resources is striving to join the ranks of WA gold producers with its Warrawoona project in the hotly prospective Pilbara region.

Warrawoona project in the hotly prospective Pilbara region

The project currently hosts a resource of 1.5Moz with a reserve of over 0.5Mozs. Assuming an $A2500/oz gold price and a $1251/oz ‘all-in’ cost of production, the mine would produce average annual earnings before interest, tax, depreciation and amortization of $97 million a year over an eight-year initial mine life.

Calidus chief executive Dave Reeves says he is “more than happy” to build a mine at current prices, even with the $A trending upwards.

The company hopes to pour its first gold in late 2021 or early 2022.

Reeves is heartened by nearby successes such as De Grey Mining’s Hemi: “it just goes to show that the Pilbara is certainly a place where if you put more effort into, the rewards will come.”

Of course the ASX gold players are not restricted to their home shores, with mining-friendly jurisdictions such as Canada also presenting opportunities to revive long-forgotten projects.

Auteco is a leading example as it raises $30.4 million to further Pickle Crow, its lead project in Ontario.

In what increasingly looks like a bargain, in January Auteco bought Pickle Crow from First Mining for $C100,000 ($94,000), plus 25 million Auteco shares and a commitment to spend $C10 million over the next five years for a 70 per cent stake.

Pickle Crow Gold Project in Canada

(The company then has the right to buy a further 10 per cent for $C3m).

Once Canada’s biggest gold mine, Pickle Crow produced between the early 1930s and 1966, before falling victim to low gold prices and corporate machinations. “It was not due to a lack of mineralisation, but gold price at $US35 an ounce,” Shorrocks says.

Auteco this month announced an inferred resource of 830,000 ounces at a staggering 11.6 g/t – a significant milestone on its journey to growing Pickle Crow to a targeted two million ounce resource.

 The resource excludes other intersections including 10 metres at 5 grams a tonne and one metre at a monster 900 g/t.

The company had embarked on a 5000 metre diamond drilling campaign, but is now expanded to 10,000m with a second rig enlisted (and probably a third one to follow).

“We will attack this low hanging fruit,” Shorrocks says. “I’m hopeful we can convert a lot of these great intercepts into a resource in the not too distant future.”

 

Despite the cheery omens for gold on so many fronts, investors also should be alert to the potential dampeners.

Westgold’s Cook cautions that while it’s a great time to be an Australian producer, investors often overlook that higher gold prices mean higher production costs as miners chase lower cut-off grades.

Broker Ord Minnett cautions that while the local gold miners’ prospects “remain worlds away from other segments of the ASX,” value is harder to find given the recent strong share performances.

Globally, COVID-19 is likely to continue to heavily influence the gold price, in terms of both the demand dynamics and the extent to which social distancing requirements have affected operations.

“Jobs data, the dollar, general uncertainty, equity market performance, monetary policy all certainly matter,” says RBC Capital Markets. “But the biggest risk and biggest swing factor undoubtedly is the COVID-19 resurgence.”

But once again, Australia has been a safe harbour in a global sea of troubles.

According to the aforementioned Resources and Energy Quarterly, COVID-19 lockdowns in 19 countries including Canada and South Africa meant that world gold supply fell 3.8 per cent during the quarter to 1066 tonnes, with mine output falling 2.6 per cent.

However Australian production has been unaffected, with March quarter production rising 2 per cent to 80 tonnes.

“Despite some concerns about the impacts of the COVID-19 pandemic on gold operations, Australian gold production is estimated to have grown by 4.3 per cent in 2019-20 to 335 tonnes, encouraged by higher $A gold prices,” the agency says.

 

In Gold We Trust,  indeed.

Reach has commissioned the article and has permission from the author to publish it. The views and opinions expressed in this article are those of the author and do not necessarily reflect the views and opinions of Reach Markets.