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Gold still has lots of runway

06/19/2020
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Several notable people in the gold mining industry have told me over the years that anyone who claims they can predict the price of gold are either fools or liars. I generally agree, but with the utmost respect there are some nuances that need to be considered. You can predict direction, you can certainly predict indications, and there are times when you can be bold and say, ‘This is where I think gold is going to go.’

Which brings me to the subject of this blog. Gold is trading at $1,731 per ounce, up 29% in the past 12 months, including 14% this year. Can it hold at these levels and is there more room to run? I believe the answer is yes.

Even before the COVID-19 pandemic hit, many of the factors positively affecting the price of gold were in place: low interest rates globally, elevated debt levels, easing monetary policies, central bank buying, ongoing trade tensions between the U.S. and China, and mass economic protests in many countries around the world.

COVID-19 has punctuated and accelerated what was already happening, and one cannot ignore the potential impact on gold prices. Since the pandemic began, central banks have been expanding their balance sheets at astounding rates. In March, the U.S. Federal Reserve launched an unlimited quantitative easing program. Its balance sheet has expanded by about $7.2 trillion from $4.2 trillion at the start of the year and a modest $800 billion about 10 years ago. G20 economies have so far provided fiscal support totaling approximately $9 trillion. This is unprecedented. These initial fiscal stimulus measures are already higher than the entire spending that took place over multiple years during the global financial crisis that began in 2008. The fiscal stimulus measures introduced to the world will be funded by deficits and debt, which means that debt to GDP is going higher at a time when GDP is declining. That trend is going to continue for the foreseeable future, which creates a favourable environment for gold.

The fiscal stimulus measures introduced to the world will be funded by deficits and debt, which means that debt to GDP is going higher at a time when GDP is declining. That trend is going to continue for the foreseeable future, which creates a favourable environment for gold.

With the economy struggling to realize growth, an increasing number of countries are shifting to negative interest rates to encourage spending. Total global negative yield debt has seen a substantial increase. It’s fine for governments to borrow at low interest rates, but at some point that debt needs to be repaid or a default will occur or something else has to happen.

These fiscal stimulus measures and record government debt have pushed gold prices to all-time highs in a number of currencies and strengthened demand for gold-backed ETFs. Yet the price of gold is not fully reflecting what has transpired and the coming worldwide financial strains. Gold stocks are even more inappropriately priced.

There are three core reasons supporting higher gold prices in the short-to-immediate term. One, real interest rates are likely to remain low to negative for some time, supporting investment demand for gold. In addition, demand in emerging markets will likely increase as these markets return to some sense of normalcy. In my view, that demand, particularly from China, has not dissipated, it has simply been suppressed for a while.

Two, if we look past the likely immediate deflationary effects of COVID-19, there are factors that support higher inflation, which also supports gold prices. I believe there will be long-lasting supply disruptions that, even with weaker overall demand, will cause an imbalance in favour of demand that will be inflationary. We are also in a period of unprecedented government fiscal and monetary stimulus, which will devalue the purchasing power of currencies and likely cause inflation.

And, finally, we come to the debt issue. The political objective of encouraging higher inflation to support the sustainability of unprecedented debt levels cannot be overlooked. It is a far better alternative to default. Hence, there is political expediency to supporting higher asset valuations that underpin debt that cannot be repaid.

These factors make a strong case for investing in gold as a hard asset, a currency whose value cannot be debased. However, there is more to the story. Investing in gold as an asset class can represent an excellent value proposition. Investing in gold equities, particularly in a rising gold price environment, may be a better way to gain exposure to gold. Stay tuned for more on this.

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NON-GAAP INFORMATION

Yamana discloses certain non-GAAP measures including Cash costs per ounce of gold, Cash costs per ounce of silver, Co-product cash costs per ounce of gold, Co-product cash costs per ounce of silver, Co-product cash costs per pound of copper, All-in sustaining costs per ounce of gold, All-in sustaining costs per ounce of silver, All-in sustaining co-product costs per ounce of gold, and All-in sustaining co-product costs per ounce of silver to supplement its Consolidated Financial Statements, which are presented in accordance with IFRS. The term IFRS and generally accepted accounting principles (“GAAP”) are used interchangeably. The Company believes that these measures, together with measures determined in accordance with IFRS, provide investors with an improved ability to evaluate the underlying performance of the Company. Non-GAAP measures do not have any standardized meaning prescribed under IFRS, and therefore they may not be comparable to similar measures employed by other companies. The data is intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS.

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