22 November 2023
Reach Markets have compiled an updated Gold Industry Review that lays out the factors that have contributed to gold’s recent strong performance, and what to expect in 2023.
Critical considerations such as the US dollar, real yields on US treasuries, the banking crisis, de-dollarisation, gold mining and exploration climate, inflation, and interest rates are delved into with industry experts from Lion Selection Group, Banyantree Investment Group, Mine Discovery Fund Pty Ltd and Laiva Gold Inc.
In November last year, when gold traded as low as US$1,620/oz, Reach Markets mined the knowledge of industry leaders, including three resource-focused fund managers, a gold miner and a research company, to provide greater insight into the outlook for gold, what factors drive gold and how these experts are taking exposure. Click here to view the 2022 review.
Last year’s review covered the following key questions:
- What drives the price of gold and what explains its price movements over the past couple of years?
- Gold’s role in investor portfolios
- A longer-term perspective – what can we learn from past cycles?
- A permanent portfolio hedge or just temporary safe haven, or neither?
- Different ways to gain exposure
Since November, US dollar gold prices rallied ~20% (as at April 2023) and recently approached its previous all-time high of almost US$2,075/oz (7th August 2020). The market appears to now be at a major pivot point where it might either bounce off or break through these critical levels. Industry experts have predicted a bull run, with some forecasting levels as high as US$2,600/oz.
In our Gold Industry Review Refresh, we’ve laid out the crucial questions and answers from fund managers, investment managers, geologists and gold miners below:
- Key Question 1: What have been the main factors that have driven gold’s recent strong performance?
- Key Question 2: What will be the price drivers going forward?
- Key Question 3: What is your outlook for real yields on US treasuries?
- Key Question 4: What is your outlook on the US dollar?
- Key Question 5: What is characterising the current gold mining climate, specifically in regards to declining head grades, rising costs, and reduced major discoveries?
- Key Question 6: How are you taking exposure to gold in your portfolio?
Key Question 1: What have been the main factors that have driven gold’s recent strong performance?
Hedley Widdup, Fund Manager at Lion Selection Group Ltd (ASX: LSX) – a specialist mining investment company – shared his view on what is behind gold’s recent run all the way through US$2,000/oz.
“Gold is reacting to inflation, and not just in the context of currencies’ value being eroded and gold’s price increasing in turn – but importantly, in the context of real yields. Gold tends to trade strongly in the presence of low to negative real yields – which is exactly what financial markets have been presented with. The market’s consensus that central banks are at the upper limits of their ability to further hike rates without causing severe economic damage, while low to negative real yields persist, have acted as a strong tailwind for gold.”
Jeremy Gray, CEO of Laiva Gold Inc, which owns the largest gold mill in Europe, stated that “after a decade long bear market for gold, we have now entered a new bull market for the precious metal that could last for many years to come.” Highlighting what he views as the commodity’s safe haven nature, he specified “the fear investors are harbouring over the financial system, especially the banking crisis, is leading to increased exposure to the world’s oldest store of value.”
Zach Riaz, Director and Investment Manager at Banyantree Investment Group, touches on some of the macro factors that have acted as tailwinds to the gold price. “While declining US dollar has been one of the big drivers, combined with increasing talks of a potential pivot by the Fed, there is also elevated need for tail-risk insurance from geopolitical risks and broader macro issues such as the banking crisis”
Joseph Webb, Managing Director of Mine Discovery Fund Pty Ltd, which is at the forefront of discovering tier 1 metals deposits, touches on gold’s history and the supercycles it routinely goes through.
“Gold has been a great performer over time, and you don’t have to go back far to observe what can happen when a supercycle takes hold. Pre and post GFC from 2007-2011, gold surged from around US$700/oz all the way to US$1,800/oz – and that type of movement isn’t a once off in the market.”
Key Question 2: What will be the price drivers going forward?
Hedley Widdup always reflects on previous cycles to analyse what the future holds for gold, as history has repeated itself many times with the precious metal. He pointed out that gold performed incredibly well from the early 2000’s when it was around US$260/oz, all the way through to 2011 when it broke US$1,800/oz – which occurred in a climate with persistent negative real yields and inflation.
At the same time, the gold mining industry was coming out of a period with relatively high interest rates. He pinpointed an interesting point on the effect of interest rates on the forward selling of gold, and what this did to gold miners.
“The larger the interest rate, and the longer dated your forward contracts – the bigger the premium you are able to get over the spot price. This encouraged levels of hedging well in excess of annual production. As interest rates started to come down, and the gold price crept up – that created huge balance sheet liabilities that needed to be unwound. There are very similar economic conditions present today that are conducive to miners increasing their hedging positions, especially with the recent gold price strength. While the level of hedging is currently far lower than the previously described period, gold should be able to steadily appreciate under these conditions that are combined with solid demand drivers stemming from global uncertainty.”
Zach Riaz touched on central banks purchasing gold, as they collectively increased their net gold reserves by 1,136 tonnes in 2022 – the largest amount of any year in records going back to 1950. This trend continued into 2023 during the March quarter, as central banks bought a net 228 tonnes of the precious metal.
“Central banks buying gold as a way to hedge against or move away from the US dollar is going to be a recurring theme”.
Jeremy Gray noted that physical demand is now a factor that has to be seriously considered, as the rise of investors and institutions desiring to actually take possession of the gold they are buying could put serious upward pressure on the commodity.
“If the structurally positive conditions that are growing in the gold market can endure for a while longer, significant interest in the sector will grow – and will likely lead to prolonged gold allocations in investors’ portfolios.”
Joseph Webb highlights the uncertainty that is rife throughout the globe, and suggests that gold is an asset that could help to protect investors’ portfolios.
“The combination of having to manage inflation, an imminent debt ceiling, finding a way for the economy to move forward with a level of growth that is sustainable, and black swan moments such as banks collapsing and wars – are all factors that raise many questions which have uncertain answers – to which gold can provide adequate security from.”
Key Question 3: What is your outlook for real yields on US treasuries?
Hedley characterised the situation, highlighting the difficult situation that central banks are in.
“Central banks are in a bind. They know most of the world’s governments are heavily indebted, especially the US as seen with their pressing debt ceiling issue at the moment, and there is a lack of political willpower behind a level of monetary policy that would result in real yields.”
Zach Riaz sees long-term upside to real yields as relatively limited, given all the stressors in the market. “The macro data that we continue to see points towards at the very least moderating economic growth, even if you don’t accept a recession in the US – the probability of which is growing every day.”
Jeremy Gray holds the view that “a cycle of rising and falling inflation will force central banks to continue hiking and cutting interest rates, but overall the outlook for real yields on US treasuries is not overly optimistic – which is good for gold.”
Key Question 4: What is your outlook on the US dollar?
Specifically referring to the emerging countries and their high levels of economic growth that is heavily tied to globalisation, Hedley Widdup makes an interesting point that provides a balanced assessment of the situation.
“Where developed nations are moving towards deglobalisation – developing countries are far earlier in their economic growth journey and are heavily reliant on globalisation. The entrenchment of the US dollar peg in the global financial system, which has fueled the strength of their currency, doesn’t sit perfectly well with a lot of these governments. So some of them are selling their foreign currency reserves down to a level that still allows them to participate in the global economy, while buying gold at the same time. This puts downward pressure on the US dollar. However, with US treasuries still considered extremely safe, and now offering an attractive coupon – there are many emerging countries who are happy to have them on their balance sheets. So its interesting to watch, but I don’t think there is going to be any serious movement from these developments in the short term.”
Zach Riaz called the US dollar out as a crowded trade back in early November, right before it was drastically unwound. “What’s really interesting is that a lot of the financial crises occurring in the market are US specific right now – the regional banking stresses and approaching debt ceiling. The US dollar is a safe haven asset, so it will be very interesting to see how willing investors are to flock to the currency whilst accounting for these factors.”.
When referring to an important consideration that factors into his long-term bullish view on gold, Zach discussed a point that could lead to gold emerging as the preferred safe haven asset.
“Emerging countries are trying to wean themselves off the US dollar, while central banks are buying gold, and gold continues to be the most appropriate alternative for investors constructing a portfolio.”
Going against the general consensus, Jeremy Gray believes that “the two safe haven assets can rally in tandem – despite it being typically believed that for gold to rise, its rival safe haven asset the US dollar must fall.”
Key Question 5: What is characterising the current gold mining climate, specifically in regards to declining head grades, rising costs, and reduced major discoveries?
Joseph Webb describes the major consolidation of the gold mining industry in the past few decades, and how a temporarily necessary short term focus resulted in a lack of exploration culture that has resulted in the lack of major new discoveries.
“There were many major discoveries throughout the 70s, 80s and 90s that underpinned most of the dominant miners in the gold industry today. The consolidation that followed throughout a few cycles took out quite a few of the players in exploration – and the prolonged gold bear market forced producers to focus on what investors wanted them to – production, one quarter at a time.”
There were 341 major gold discoveries (>2Moz) between 1990-2021, totalling over 2Boz. However, only 28 of these were discovered during the past decade – accounting for 171.8Moz, or just 6% of the gold discovered during the past 30 years.
Joseph elaborated, stating “Junior explorers filled the gap for a while towards the end of the 20th century, but this petered off over the past decade as interest in gold pulled right back. Mine Discovery Fund Pty Ltd understands the strong long-term trend for gold, and so we’re working tirelessly to discover these tier-1 deposits that the industry desperately needs.”
Hedley Widdup perfectly described the declining head grade aspect of the current gold mining climate.
“Over the past decade, the mining industry as a whole has failed to invest in future sources of supply, and that’s got as much to do with development as it does with exploration expenditure. Gold has had a particularly difficult time accessing debt and equity markets over the past decade. There are many interesting opportunities in the way of small, high grade deposits that can be brought into production with a moderate amount of capex. However, most of the gold that is mined nowadays is from the majors who are moving bulk earth – whether it be underground or open pit. They have become increasingly efficient in moving a ton of dirt in order to be able to process lower grade ore, and head grades have reduced accordingly.”
Zach Riaz is hoping for a new dawn in gold mining where companies aren’t just making sure they have enough ore reserves to get through the next few years.
“I think the thing that is going to be most important across all commodities over the near-term, including gold, is M&A. Companies will look for quality assets that can add operating (or close to it) assets with cash flows, and that add scale to the overall business through cost efficiencies – instead of just focussing capital expenditure towards their own greenfield projects”.
Jeremy Gray again notes “the pressure that miners have been under over the past 10 years in the gold bear market is attributable to a lack of access to capital and falling prices – which has resulted in the bulk of activities having been on existing infrastructure and M&A”.
Key Question 6: How are you taking exposure to gold in your portfolio?
Hedley Widdup, who is also a geologist, outlines his current focus in the market. Lion Selection Group holds a net cash position of $76.8 million as at 30th April 2023, and is ready to deploy it into high quality projects when the time is right.
“When you’re well funded for investment and you know exactly what you’re looking for, you can invest in a period of time where you know you’re likely at the bottom of the cycle. The mining downturn has been brought about by disappearing liquidity, which is exactly what we’re seeing at the moment, and while we aren’t necessarily in a hurry – there are certainly attractive opportunities that are beginning to present themselves. Gold is one of the things we favour because the long term fundamentals are there, but it’s also something that is very well understood. We have a thorough understanding of how to make money in the gold industry, and are seeking to replicate that over and over again with time tested methods of investment. There are potentially opportunities to buy resources for cents on the dollar.”
Joseph Webb focuses exclusively on the pre-discovery phase of exploration, where the most geological expertise is required. Mine Discovery Fund Pty Ltd has an expert geological advisory board that’s responsible for some of the biggest discoveries in the world. The team uses AI-driven proprietary algorithms that incorporate machine learning for big data processing to identify high priority targets. They are especially focussed on finding tier-1 deposits near existing infrastructure that is hungry for ore.
“Gold is an important hedge for what we do, because we’re also going after critical minerals and base metals. We’re interested in both smaller high grade deposits, and larger, bulk tonnage low grade projects that can hold significant value. Most of the world’s gold is mined this way, and there are many mills operating under capacity that would welcome new discoveries in the area.”
Zach Riaz structures his gold exposure to focus on highly liquid investment opportunities. This includes major producers at the equity level and gold bullion through at the macro level.
He called it last year, right as he was finalising the Laiva Gold Mine acquisition, but Jeremy Gray is adamant that when you are bullish on a commodity – especially gold – you must buy unhedged high cost producers and be willing to take risk.
“They are the most levered to the gold price, and likely have hidden value waiting to be exposed in the face of a rising gold price, whereas low cost producers probably have a lot of their upside already priced in.”
We’d like to thank the following participants from the industry for their contribution to the review
Joseph Webb is a resource industry executive with more than 20 years’ international experience including the past 10+ years in CEO and Managing Director roles. He has held previous commercial roles in Rio Tinto and executive and operations roles across the full mining life cycle. He is experienced across multiple commodities including gold, copper, iron-ore, nickel and coal as well as M&A, capital raising and IPOs. Mr Webb leads Mine Discovery Fund Pty Ltd, a private investment vehicle that owns four ‘platforms’ focused on discovering base and precious metals, including Felix Gold Ltd (ASX: FXG) which has consolidated the largest land holding within Alaska’s world-class Tintina Gold Belt.
Hedley Widdup is a geologist and investment professional with extensive mine and resource geology experience spanning WMC Resources at the Mt Keith Nickel Mine, Olympic Dam, Mt Isa and St Ives Gold Mine. He graduated as a geologist with first class honours from the University of Melbourne in 2000 and completed a Graduate Diploma in Applied Finance in 2011. Lion Manager Pty Limited is a specialist mining investment team that provides investment management services to Lion Selection Group Ltd (ASX: LSX), an investment company with a market-beating 25-year total shareholder return of 8.2% (as at 30 April 2023) compared with the ASX Small Resources AC Index at 4.8%.The firm invests in the high growth early stage mining development space where research is poor and specialist knowledge is essential.
Zach Riaz is an investment manager and director at Banyantree Investment Group, with responsibilities across equity and multi-asset strategies. He has more than 12 years’ experience in the finance industry, including portfolio management and sell-side investment research.
Jeremy Gray is a mining investment professional and industry veteran with almost three decades’ experience as a Mining Equity Analyst, Mining Portfolio Manager and Investment Banker. He has headed the mining research divisions of industry leaders Standard Chartered Bank, Morgan Stanley and Credit Suisse.
Reach Corporate provides Corporate Advisory Services, including managing investor communications on behalf of Felix Gold Ltd and may receive fees for its services.
Reach Corporate provides Corporate Advisory Services on behalf of Laiva Gold Inc and may receive fees for its services.
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