Traditionally, a strong dollar and rising bond yields are not good for gold (which is interest-free). It’s no surprise that investor demand for gold has continued to decline: gold exchange-traded funds (ETCs) globally have seen net outflows of $11.7 billion over the past year, according to Morningstar data. .
Yet, on April 12, the spot price of gold hit its highest level ever at around $2,431 an ounce. Since then, the value of the bullion has fallen slightly to around 2,300 dollars, still a historically high range, recording a return of around 25% in the last seven months (data as of 2 May, in dollars).
Although the expected policy changes dovesh by the Federal Reserve are a key element, the dynamics behind the surge appear to be more subtle.
“Gold has already digested the Federal Reserve’s downgrading of its 2024 monetary policy easing outlook, yet it is continuing its upward trajectory,” says Ned Naylor-Leyland, manager of Jupiter’s Gold & Silver fund AM. “This suggests that other factors are at play, such as the return of significant demand for physical gold, particularly from China and the Middle East. This wave of physical buying could be driven by a confluence of reasons, including inflationary concerns and rising geopolitical tensions in the Middle East.”
Beijing is hungry for gold
China has in fact become one of the most important buyers of gold in the world. The China Gold Association (CGA) reported that the country’s gold consumption in 2023 amounted to nearly 1,090 tons, an increase of 8.73% from the previous year. Another indicator of overall gold demand in China, the Shanghai Gold Exchange (SGE), reported a 95% year-on-year increase in demand in January.
“Behind the record demand from China, there is an interesting demographic shift taking place,” continues Ned Naylor-Leyland. “Younger buyers, aged 25 to 34, increased their share of overall gold purchases from 16 to 59 percent in 2023. The decline in the stock market and local real estate values contributed to the increase in younger generation, but it is the form of investment that indicates the true nature of demographic change. Younger buyers in China are choosing to purchase one-gram gold beans to preserve long-term wealth.”
However, according to Bert Flossbach, co-founder of Flossbach von Storch, “gold would mostly benefit from negative real interest rates, which Japan still has and probably needs in the long run. In the United States, however, the real interest rate on inflation-linked bonds is +2% and would need to fall significantly to make gold attractive again to US investors as an inflation hedge.”
But above all, Flossbach thinks that “it is not possible to make serious predictions about the price of gold. Over the last 10 years, investors have enjoyed an annual increase in the price of gold of more than 8% in euro terms. Looking ahead, we should not expect another similar growth. For us, gold investments are not about returns, but about their insurance character as part of a diversified investment strategy.”
Time to look at gold stocks?
If on the one hand the value of fiscal gold has risen a lot in the last six-seven months, on the other hand the prices of gold companies (i.e. those companies that extract and market it) have not been able to follow in the wake.
The simple comparison between two ETFs from the same management house exposed to these two asset classes, the iShares Physical Gold ETC and the iShares Gold Producers ETF, makes this gap evident: in the last year the former has gained 17.7% , while the second only 2.5%.
On the other hand, something seems to have changed in the last three months, with the ETC on iShares physical gold recording a +14.4% and that on the shares of gold mining companies +20.4% (in euros, at 2 May 2024).
“After years of being undervalued relative to the metal, the NYSE Arca Gold Miners Index and the MVIS Global Juniors Gold Miners Index have significantly outperformed gold since March. This could mark the start of a long-overdue turnaround for gold mining stocks,” says Imaru Casanova, gold and precious metals portfolio manager at VanEck.
Generally speaking, although the returns of physical gold and gold mining stocks are correlated in the long term, they may not be correlated in the short term. Simply put, the higher the price of gold, the more convenient it becomes to dig for gold sources. Mining stocks can rise significantly when gold rises, but this is not always the case. Traditionally, therefore, the titles of the sector mining they are more volatile and amplify the movements of the yellow metal, as can also be seen from the previous graph.
“The outperformers The industry must also demonstrate that it has a fundamental positioning and a solid strategy that translates rising gold prices into improved cash flow and higher yields that will enable growth,” continues Casanova. “Organic growth is not easy in the gold industry. The search for new gold deposits or the definition/expansion of existing ones is a difficult, time-consuming process that requires a high capital investment. To significantly expand their depleting reserve and resource base, companies generally must acquire other companies or assets. All things being equal, the more advanced a project is, the higher its valuation and the faster the company grows.”
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