Gold and gold stocks continue to be in the news with the increasing importance of gold as a part of a broader diversified portfolio. An increasing number of investors continue to invest in the asset, with the global monetary uncertainty weighing on broader asset classes. Gold provides both safety and a vehicle for investment, and can be considered as a part of a diversified portfolio. This research note takes a look at key factors driving the gold market, and some stocks that may offer value.
By: Yourstockresearch.com 1 st September 2023
Introduction to Gold Prices and their Future:
Gold prices continue to remain range bound as U.S. inflation data came in weaker than expected. News of a weaker than expected topline CPI report led to the dollar declining, and gold prices increasing slightly on the day.
Gold prices have come down recently after rising above $2000 an ounce due to significant demand from central banks, and demand from the bullion market sent gold prices higher in the 2022-23 period. Since rising gold has retreated, coming back down to $1940 an ounce as weaker than expected inflation data particularly out of the U.S. improved investor sentiment towards macroeconomic stability.
As inflation abates The Federal Reserve has been slowing down the pace of its rate increases, and is currently expected to raise only a few more times in 2023, with real rates already close to ~1% above core CPI, but should inflation remain sticky those rate hike projections might increase.
Overall, if inflation doesn’t come down, and the dollar continues to weaken, gold prices may be heading back above $2000. In addition, a further pause from the Fed may increase inflationary expectations leading to a further increase in demand for gold.
Continue reading to understand Gold’s stock’s future.
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Looking forward in 2023
For the current month, the Fed is expected to increase hikes once again, meanwhile, the ECB and Bank of England are also, likely to continue their rate hikes, with inflation continuing to be an issue. This will put pressure on gold, as higher rates continue to be bullish for the dollar, and also are likely to lead to a reduction in the overall U.S. money supply. Money supply will also be under pressure in Europe, while the rest of the world should continue to see growth in the supply of money, which will be bullish for gold.
Adding to bullish sentiment will be the demand for gold globally, and sentiment will continue to remain strong for the foreseeable future, with multiple global central banks including, Central Banks in China, Russia, Turkey, and Latin America, continuing to buy gold to shore up their reserves. This theme is likely to continue to play out for the foreseeable future with an increasing number of Central Banks hedging their dollar reserves due to recent geopolitical events and improving cross-border trade in local currency.
High debt-to-GDP is another factor that has been playing a key role in monetary uncertainty that has led to investors relying increasingly on gold. With debt likely to continue to increase especially in the United States, but globally as well, investors will continue to look to investments such as gold to hedge their savings against inflation, and the potential for loss of purchasing power from a weaker currency.
Demand and supply of gold
Gold demand has been relatively steady over the past few years averaging close to four thousand tonnes. Demand continues to outstrip supply for now, and inflationary conditions and demand for physical forms of gold may eventually push demand even higher, or significantly above supply. It is unlikely that supply increases at a substantial rate in the near future, with mining remaining relatively capital intensive, and increases in supply requiring investment that may not be financially viable for gold miners.
Gold Demand & Supply
Gold demand remains below gold supply, but gold demand has been relatively tepid mainly due to inflation being globally quite low for years, and total demand has been around 4000-4200 tonnes per year for a few years. But steady demand has meant gold prices have continued to rise. Expect that the gold supply will remain ahead of demand at least in the short term (mainly due to bullion trading), but could come into shortfall in the coming years, as more gold is demanded due to increasing economic turmoil.
Gold supply has also been relatively steady with total gold supply averaging around 4200 tonnes per quarter, which is above the rate of gold demanded.
Since inflation remains high in many developing countries and developed countries, gold continues to remain in favour, and both developing and developed countries have their rationale to invest in gold. Developing countries, especially those with unstable currencies, such as the Turkish Lira, or unstable monetary and economic systems such as Argentina may see investments in gold as a way to hedge against economic uncertainty. Meanwhile, investors in developed countries are likely to see gold as a method to diversify their portfolios. In general, economic uncertainty has been on the rise especially as rates go up, and underlying economic faults come to the surface, thereby pushing gold to become an increasingly important asset.
It should be noted some of the supply comes from the gold already in the market, which ensures even if demand outstrips supply the exchange of gold, and buybacks from bullion sellers, etc. means that supply remains adequate for now.
Dollar and Gold
Dollar strength largely depends on two factors, interest rates, and the supply of dollars in the medium-term. While demand for the dollar has remained steady, supply of dollars continues to slowly reduce as interest rates remain high, leading to a decline in M2 supply, and thereby decreasing the total number of dollars in circulation. As a result, decreasing supply will put upward pressure on the dollar.
Over a longer period, the US economy and trade will continue to play a key role in dollar demand. As a result, demand for dollars could reduce as the U.S. economy slows down, and global trade follows. There is already a strong expectation that recession is likely to be a reality in the latter half of 2023, albeit there is no expectation of major depression in the economy. Therefore, demand for the dollar should remain steady.
There has been some talk of moving away from dollar-based trade, but this is likely to be overstated, as the total dollar percentage of trade remains largely steady in the first half of 2023.
BRICS, Reserve Currencies and Gold
BRICS continue to play a key role in global trade and are planning to back a BRIC-led currency with gold. The total export of BRIC countries currently stands at $3.5 trillion making up close to 12% of total global trade value. This poses a significant percentage of global trade, and the ability to increasingly trade with a gold-backed currency, could see demand taken away from the dollar, thereby weakening the dollar further, sending gold higher on a weakened dollar, and increasing demand for gold.
ETF demand for gold
ETF demand also remains strong and should continue to remain strong in the coming month, with inflation remaining higher than usual in many countries. During the last few months, gold-backed ETFs have continued to witness inflows, bringing the total holding to around 3500 metric tonnes under management. (Source: Gold.org)
While assets under management continue to be under pressure, with an expectation of slowing inflation, sticky inflation could bring investors back, which will translate into higher ETF flow. In general, inflows from Asia and North America tend to be higher, driven by cultural factors and savings culture as well.
North American demand continues to see positive inflows, with inflation continuing to remain relatively robust and the first five months witnessed $3.2 billion in total inflows. For the year total inflows could be around $8 billion in total.
Europe has been far more moderate in ETF inflow with inflows currently around $200-300 million a month despite inflation in certain countries hitting high levels of inflation. The UK has been the biggest source of inflows, but usual sources such as Switzerland (partly due to currency hedges), have continued to be moderate in their demand.
Meanwhile, Japanese and Indian demand continues to drive Asian demand, while Chinese demand for gold ETFs has been a lot more moderate. Chinese ETF demand should pick up during the year and in 2024, despite inflation being relatively tame, as other asset classes remain volatile, and gold offers a steadier outlook, and investors will look to add gold, as part of investment diversification from these regions
Bullion and physical gold outlook
Investment continues to see strong demand as well; physical gold demand hit the highest level since 2022 in 2011. This demand was driven by two major factors, one was, demand from millennials, and the second was the increasingly uncertain monetary environment, partially led by inflation. Bullion demand is so high, many gold producers are buying back gold to satisfy demand.
Physical gold demand, from retail investors, remains strong, with an increasing number of people turning to gold to diversify their wealth. The likes of the Royal Mint had initially seen a 200% increase in demand, meanwhile, March saw the United States Mint continues to see demand in the 250,000 ounces range per month. The record-breaking levels as well with continued to see the Perth mint’s demand coming in at 70-80.000 ounces demand per month through the first 6 months, with demand from the United States being especially high.
The next 6 months should see similar levels of demand per month, and this trend is likely to continue as investors have looked to increasingly diversify their portfolio amidst high debt, and an increasing monetary uncertainty.
Many investors are looking to get 5-10% of their portfolio in gold as a safety hedge against the future of currency declines, and physical bullion will play a key role.
Jewelry
Overall, gold prices are likely to be range bound in the short-term, but continued tailwinds from demand, slower rate hikes in the U.S., and demand for physical gold are likely to slowly push prices back up towards $2000 an ounce over a longer timeframe.
Jewelry demand primarily comes from India, and other Asian nations, where the commodity is seen as a way of both fashions and as a way to store wealth. The Middle East is also a source of demand for jewelry as is Africa.
Demand is expected to continue to rise from these regions, and that should continue to put pressure upwards on demand for the commodity. Prices may rise as yearly demand starts to push up toward the range of supply.
Jewelry tends to be price sensitive and growth of demand is expected to increase by 5% in FY24, India meanwhile has seen a slowdown as increasing prices, and local inflation continue to weigh on demand.
Meanwhile, countries like South Africa continue to see strong demand for jewelry, and the Middle East and Africa are likely to see an 8% growth in demand for gold jewelry, annually through 2030, which means that significant demand for
Investment Takeaway
Investment in gold can provide a long-term hedge, at a time, when many nations are facing high-levels of debt and monetary policy continues to in the long-term to be dovish, due to a disinflationary global environment, therefore, leading to policy makers are likely to keep rates low, thereby fermenting inflation.
Gold prices are likely to head back up above $2000, and the current disinflationary policy action is likely to turn inflationary, therefore the long-term status for gold remains bullish. Gold can be added to your portfolio as a partial percentage of around 5-15%, and would provide an adequate return with safety taken into account.
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Consider These Gold Stocks For Your Portfolio
Barrick Gold (NYSE: GOLD)
Barrick Gold’s strong management and continued investment in business operations, along with a portfolio that will last decades, means that the stock has strong prospects going forward.
Valuation for the company remains within range of where the stock should trade, and growth, is expected to remain consistent as well.
The stock currently trades at a forward P/E of 15x. Barrick Gold is one of the most foremost gold producers with a resource of gold and other commodities that will last for years. Investors can consider the stock if they’re looking for long-term steady returns.
Kinross Gold (NYSE: KGC)
Kinross Gold like Barrick Gold has a plenty of gold resource, and a relatively low cost of production. The company’s gross margin will likely head towards 30%, and will continue to increase output for the year as it looks to take advantage of gold prices. Expect sales to grow by anywhere from 20-25% for the year.
Valuation for the company also remains reasonable with a forward P/E of around 16x. Considering that growth is in mid-double –digits, the stock trades relatively cheap. Investors can consider Kinross if they are looking for steady gold operations , and a reasonable management.