Despite recent record-high levels, the gold price has remained relatively flat for the past few years.
Although high interest rates have weighed on the yellow metal, its price has been backstopped by record levels of central bank buying, as well as geopolitical issues in Eastern Europe and the Middle East.
With central banks poised to begin lowering rates, what’s in store for gold in 2024?
The gold outlook panel at this year’s Vancouver Resource Investment Conference (VRIC), which took place from January 21 to 22, provided insight on the issues that might affect the precious metal in the next year and beyond.
Host Jay Martin, president and CEO of Cambridge House International, was joined on stage by EB Tucker, editor of the Tucker Letter; Alastair Still, CEO of GoldMining (TSX:GOLD,NYSEAMERICAN:GLDG); Ronnie Stoeferle, managing partner at Incrementum; and David Garofalo, chairman and CEO of Gold Royalty (NYSEAMERICAN:GROY).
“Fundamental disconnect” between gold and gold stocks
While the gold price hit a new record in late 2022 and has stayed comfortably above US$2,000 per ounce in 2023, Still said this movement hasn’t translated into funding for gold project development.
“Even though we’re at US$2,000, there’s a scarcity of assets out there and a scarcity of projects coming into the pipeline for the developers and major operators,” he said. “That’s really occurred because over the last 10 years or so major mining companies have focused on profits, earnings, dividends and they’ve done that at the expense of cutting exploration.”
He noted that this strategy may provide short-term gains, but is damaging in the long term. “There’s a fundamental disconnect between the price of gold, the scarcity of resources and where the equities are,” Still said.
Garofalo agreed, saying that for a long time limited capital has flowed down to the juniors, which he called “the pointy end of the spear for discoveries.” Juniors are essential to grassroots exploration in the mining industry, and without capital investment, new assets won’t make their way into the development pipeline.
“It’s no wonder that the industry has seen a 40 percent shrinkage in reserves for the last dozen years — juniors just haven’t been in the market in any sort of consistent fashion,” Garofalo said.
He questioned why generalist investors would want to get involved in an industry that’s getting smaller, pointing to the high number of mergers and acquisitions over the past several years. On the flip side, he said this environment has created a bullish scenario with a high gold price and undervalued equities.
Central bank buying providing gold price support
Tucker blamed gold equities’ lackuster performance on a limited number of investors.
“The reason stocks go up is one reason: more buyers than sellers. We know the fundamentals — all of us up here, we’ve been in this thing a long time,” he said. “We know that on paper, this looks like the cheapest market you could possibly imagine. You know, I think it’s smaller than it was 25 years ago, it’s like the world has gotten huge in a money sense and the gold sector has gotten so small that we all know each other, we’ve been on one WhatsApp text.”
Tucker acknowledged that the market is likely to turn at some point, but questioned what will happen when the people who have been on the sidelines decide to get back in, and what they are going to buy. He thinks those decisions are going to be more important to watch and will have a bigger impact on stocks than fundamentals.
Stoeferle also sees fundamentals being a bit of a false indicator, and said if someone told him two years ago that interest rates were above 5 percent and inflation was coming down, he would have guessed the price of gold would be closer to US$1,500 or US$1,600. Instead, gold has been bailed out by all-time high central bank buying, specifically the movement of gold into central bank reserves in China, India, Singapore, Turkey and some Eastern European countries.
He believes that this gold buying marks a shift toward gold coming back as a neutral monetary reserve. Stoeferle has also seen a greater retail demand from Asia and the Middle East that hasn’t been mirrored in the west.
“In the United Arab Emirates, Turkey, Saudi Arabia, it’s staggering — the infrastructure for gold trading, the long-term view that they have when it comes to gold, the openness when it comes to discussing a new monetary system. It’s really staggering,” he told the audience at VRIC. “So going forward, I would say the central banks will continue to buy, but at some point, we will need investors really coming in.”
He pointed to lowered ETF demand causing the shedding of 255 metric tons (MT) last year, while physical gold trading was down 70 percent. For him, this is a huge divergence and it’s pointing to gold going to all-time highs, likely when the Federal Reserve begins its rate cuts.
When will retail investors return to gold?
Even though Stoeferle sees investors eventually returning to gold, he also believes the yellow metal has a marketing problem: many people see it as something useless or dirty.
“I think we have to change the perception,” he said on stage at VRIC. “We have to deliver a positive case for gold. We have to make sure that most of the companies, especially the listed companies, are doing a tremendous job when it comes to ESG. But I think the reason why Newmont (TSX:NGT,NYSE:NEM) took over Newcrest is primarily because they’ve got all that growth in the copper space. So I think that large institutional players, they’re so driven by ESG, it’s really tough for them to really buy into gold because it’s something that is definitely not the zeitgeist.”
Tucker said he’s unsure about whether the retail market will get interested in gold again. He said many of those who participated in the 1970s gold bull market are too old, and those he’s introduced to physical gold don’t understand its purpose. “The new generation, they’re not into it. It’s not happening,” he said.
Additionally, most people in the US who invest in gold use the paper market instead of physical metal. Tucker isn’t sure the narrative will change, although he asked, “Why not have the real thing that’s right in front of us?”
“And what is the utility?” Martin asked the panelists rhetorically. “I tend to believe the narrative will change when the macro changes, and people will buy the asset that makes the most sense.”
He said he was encouraged by the number of kids under the age of 18 at this year’s VRIC. “They’re here because they know that things aren’t making sense and they’re curious about hard assets for that reason,” he said.
Garofalo pushed back on this, saying gold is still relevant and that since it’s been used as a currency since antiquity, there isn’t a place on Earth where its inherent value isn’t known today. However, younger investors who lack trust in traditional currencies have instead embraced crypto markets, which are also more convenient to invest.
Garofalo thinks gold is capable of bringing similar trust to younger investors. “It provides a rational way to trade for goods and services, more than any other currency in the world and for longer than any other currency in the world,” he said.
While there was discussion around the lack of gold knowledge among retail investors Still said he’s still seeing desire in the market for the yellow metal. “I recently read an article (saying) of all places Costco (NASDAQ:COST) is selling gold, and the reality is they can’t keep it in stock. So there is a demand for it,” he said.
Still also raised the issue of convenience and simplicity. He doesn’t see enough channels in place for people to add gold to their portfolios, and also said the narrative has also become complicated and off-putting.
“People are hearing about countries they’ve never heard of before, (and) sustainability is top of mind, what’s happening in these other places,” he said, suggesting the narrative has to get back to basics. “Simple projects in the Americas. Good stable jurisdictions. A simple narrative so people can actually understand what they’re investing in.”
Investor takeaway
So where does gold go from here?
Stoeferle said the conditions are right for a breakout, and sees it going to US$2,500 in the next six to eight months.
“Gold has made new all-time highs in basically every currency now, also in US dollar terms,” he said. “This is probably not the end of this market. Obviously gold works in a recession, gold works as a dollar hedge, gold works in times of negative real interest rates and gold works pretty well in times of turmoil.”
In his view, 10, 15 or 20 percent is a reasonable amount of gold for each person to hold.
It’s a point that speaks to gold’s importance in a portfolio, but gold exposure can come in many forms. Investors should consider the amount of risk they’re willing to take when deciding how to invest in the yellow metal. Junior gold companies are riskier but have the chance of much higher returns, while majors are less risky but also have less room for growth. Additionally, there are the more stable physical products or gold-backed ETFs that carry different costs and risks.
Investors should understand their strategy, their timelines, and if buying gold can add value and benefit their portfolios.
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Securities Disclosure: I, Dean Belder, hold no direct investment interest in any company mentioned in this article.
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