Last week I had the pleasure of doing a webcast about gold and gold mining stocks. I hosted portfolio manager Ralph Aldis.
Unfortunately, I can’t share our entire discussion, but there are a few key points I’d like to highlight.
THE gold it recently surged to an all-time high of $2,432 an ounce, confirming one of the biggest rallies in decades. The appeal of the yellow metal as a hedge against the uncertain investment climate and combined with the amounts of gold that central banks buy steadily each month has not only raised a level of support, but is expected to further push gold to new highs in the coming weeks and months.
Purchasing power that crosses borders
The recent rise in gold is not just a “dollar case“. The precious metal is making a historic breakout against currencies ranging from the Japanese yen to the Chinese yuan and the Indian rupee. This global phenomenon overstates the attractiveness of gold as a store of value and a means of maintaining purchasing power.
The Chinese small investors are driving a significant inflow of capital into the country’s gold-backed ETFs. In March alone, Chinese gold ETFs saw an impressive inflow of $164 million, the fourth consecutive month of positive flows, according to the World Gold Council (WGC). The investment spree pushed total holdings in gold ETFs to $5 billion by the end of March.
Historic central bank demand is reshaping the gold market
The market remains bullish on gold. This can be attributed to factors such as negative real interest rates, rising government debt and ongoing efforts to de-dollarize trade between BRICS, see mainly China and Russia. As central banks continue to print money and governments run huge deficits, investors are increasingly turning to gold as a way to protect their wealth from the “erosion of paper money”.
One of the most impressive developments in recent years has been the historic demand for gold from the central banks. These institutions are hoarding gold at an unprecedented rate as they seek to reduce their reliance on the US dollar and create an alternative global reserve currency. China, for example, may need to buy the equivalent of 8 years of total world gold production to compete with the dollar.
The gold mining industry is being restructured
In the gold mining industry there is incredible mobility through mergers and acquisitions. Gold traders are trying to increase the inventories them in bars, in the absence of new, large deposits and due to the reduction of reserves in the existing mines. As such, many companies are turning to mergers and acquisitions as a way to expand their production and take advantage of gold’s bull run. Below are the 10 biggest mining deals for 2023, starting with Newmont’s acquisition of Newcrest for about $15 billion.
This restructuring creates great investment opportunities. By holding positions in gold mining companies, investors can take advantage of leverage in the price of the metal or the potential rise in share price following takeover deals or mergers.
Diversifying portfolios with gold and investments linked to the yellow metal
Gold’s rally has not brought greater investment in the US. I think investors are leaving an opportunity on the table. Although the price of gold has strengthened significantly over the past four years, the number of shares outstanding in the SPDR Gold Shares ETF (GLD) has declined, suggesting that demand still has room to run.
For investors seeking exposure to gold without the risks associated with individual mining stocks, companies that manage rights to mine and trade the metal are an attractive option. These companies provide upfront capital to gold miners in exchange for a percentage of future gold mining or revenue. This business model enables royalty and streaming companies to have high profit margins and strong cash flows with minimal operational risk.
Gold’s role as a safe-haven investment is becoming increasingly important. With central banks buying gold at record highs, M&A activity heating up in the mining sector and the price of the metal hitting new records against various currencies, holding gold or investments related to the precious metal may not was ever in a more favorable position.
Performance – editing: Michalis Papantonopoulos
