Despite almost non-stop selling by Western investors throughout 2023 and 2024, thegold it has surpassed previous all-time highs and today trades above $2,300 an ounce. Western liquidations were overtaken by purchases by central banks, investors and eastern families. China drove these dynamics, but it was not just a Chinese phenomenon: demand also grew significantly in the Middle East and elsewhere.
In this scenario, below is the view on gold and gold stocks James Lukefund manager of Schroders.
Geopolitical and fiscal fragilities – trends linked to demographics and deglobalization, which are shaping the future of markets – are combining to drive a growing global attraction to gold. This could trigger one of the strongest bull markets since President Nixon canceled the gold standard in 1971.ending the convertibility of the dollar into gold.
Gold stocks are still trading at rock bottom valuations
While gold prices have risen, gold stocks have lagged. Despite solid fundamentals, driven by the Eastern-led gold bull market, valuations are close to 40-year lows, due to weak Western sentiment towards gold and poor operating results of some gold leaders. sector. What could induce a change?
The phrase “markets determine opinions” could be changed to “margins determine opinions” for mining companies. With gold prices averaging around $2,200 per ounce year-to-date and our view that cost inflation is set to slow considerably, we expect to see strong margin expansion and cash flow generation cash during the year. We believe that strong cash flow and financial discipline will become difficult to ignore and over time will begin to shift sentiment.
After all, It’s no exaggeration to say that gold mining could rally 50% and still be inexpensive. With a total market capitalization of approximately $300 billion, the gold stock sector has been largely ignored, but we believe that will change. If there was ever a time to include gold stocks in a multi-year precious metals allocation, we think this is it.
Gold’s strength reflects the shift to a more multipolar world
The hardening of geopolitical fault lines around the US-China rivalry and the sanctions imposed on Russia after invading Ukraine in 2022 prompted record purchases of gold by central banks as a monetary reserve asset. The $300 billion in frozen Russian reserves clearly says what dollar “militarization” or dollar hegemony can mean. The large issuances of US Treasuries to finance the deficit also raise doubts about the sustainability of the long-term debt. Central banks – notably, China, Singapore and Poland in 2023 – have caught them, though record purchases have so far taken gold reserves as a share of total reserves from 12.9% at the end of 2021 to 15.3% at the end of 2023.
Over the long term, central bank purchases reflect well the evolution of global geopolitical and monetary/fiscal dynamics. Between 1989 and 2007 Western central banks sold all the gold they could, limiting sales after 1999 with the gold deals to keep sales orderly. In that post-Soviet world, with the rise of liberal democracies led by the United States, accelerating globalization, and U.S. debt parameters unique to those of today, the “de-monetization” of gold as a reserve asset seemed entirely logic.
The 2008 financial crisis, the introduction of quantitative easing and rising geopolitical tensions were enough to put an end to Western selling and lead emerging market central banks to quietly enter the gold market averaging 400 tonnes per day. year between 2009 and 2021. Big numbers (over 10% of annual demand) but not seismic.
The purchase of more than 1,000 tonnes of gold (20% of global demand) by central banks in 2022 and 2023, a pace that continued into the first quarter of 2024, is potentially seismic. It seems entirely plausible that the current dynamics of tension between incumbent and rising power, combined with the fiscal fragility that looms not only over the United States, the country that issues the reserve currency, but over the entire advanced economic bloc, may trigger a sustained movement towards ‘gold.
In simple termsthe gold market is not big enough to absorb such a large move without prices rising muchespecially if other global players also try to enter this market at more or less the same time.
Demand from Chinese investors is growing, while the luster of real estate fades
Chinese households, which added trillions of dollars to already record savings rates in 2022 and 2023, are one such player. The end of the 30-year real estate bull market was key to triggering a huge change in attitude toward gold. We doubt that this is a temporary phenomenon.
Western investors, whose sales have not been enough to stop record gold prices, are another key player, who could switch from sellers to buyers in the coming quarters. Western investors’ purchases and sales reliably followed developments in monetary policy. Cyclical easing still looks likely this year and a fiscally dominated future suggests that Federal Reserve intervention will be needed to keep the Treasury market solvent/liquid. Gold will continue to be an important hedge against the fiscal credibility of central banks and states more generally, which Western investors will use.
