Join our community of smart investors

Gold bull market nears second birthday: what have we learnt?

Gold has settled around $1,750/oz, around $500 up from where it was two years ago. But investors need to be aware the bull market might not last for another two years
April 20, 2021

If you told an investor two years ago that gold would soon be considered weak below $1,700 (£1,215) an ounce (oz), you’d have knocked the socks off all but the biggest gold bugs. Now we’re almost at the two-year birthday of this gold bull market, it’s worth looking at its prospects of hitting $2,000/oz again and what London’s gold miners are doing to keep the profits coming in.

Gold’s rise was borne out of a weakening US dollar and the Federal Reserve signalling rate cuts were on the way, before being revved up by investors diving into the safe-haven asset as the world pulled the shutters down due to Covid-19. 

This has made gold companies hard to ignore in the past two years. 

The strange combination of record gold prices and high-performing equities may be temporary, but it has meant gold equities have been some of the best bets for investors, given they saw little impact from Covid-19 as long as mines were allowed to remain open. 

Investment demand, which saw people buying gold-backed exchange traded funds (ETFs) at record levels last year, has cooled off comparatively, but the depressed jewellery trade is rebounding. Canadian bank BMO reported this week that gold withdrawals for March from the Shanghai Gold Exchange were double that of a year ago at 168 tonnes (t). Year-on-year comparisons aren’t ideal given Covid-19, but withdrawals also doubled month-on-month, showing a rapid uptick. 

We have been almost totally supportive of the London gold miners at Investors’ Chronicle, bar one that has put retail shareholders through the ringer again and again – Petropavlovsk (POG). It is a small field of contenders once you cross off those with little trading volume, or not yet at the revenue stage, such as Greatland Gold (GGP) and SolGold (SOLG), despite the former's huge valuation gains. 

Since gold started moving north, we have recommended investors buy Caledonia Mining (CMCL), Hummingbird Mining (HUM), Highland Gold Mining (HGM), Pan African Resources (PAF), Resolute Mining (RSG), Trans-Siberian Gold (TSG), on top of existing buy ratings for Polymetal (POLY), Centamin (CEY) and Hochschild Mining (HOC).

Shanta Gold (SHG) moved from a ‘soft buy’ to a buy idea in February after a brilliant 2020. London’s gold miners have largely outperformed the industry over two years, with two-year gains of 100 per cent not uncommon. The VanEck Vectors Gold Miners ETF is up 58 per cent in the same period.

 

The picture gets murkier on a 12-month basis, as Centamin, Hummingbird and Resolute – once billed as the next Randgold Resources – have all had setbacks. Polymetal is also about level on a year ago, although it has a hefty dividend to keep investors onside. 

Resolute is the only real stinker of the bunch, falling by half since the January 2020 buy call. We had flagged issues at its then-new mine Syama, but we did not see the rough year ahead coming. Most recently, the Ghana government blocked its $105m sale of a mine to a Chinese company, on the grounds it had not signed off on the deal before it was announced.

The company, Chifeng Jilong Gold Mining, has now pulled out of the purchase. 

 

Gone for a run

Gold hit a new record of $2,061/oz in August last year off the back of huge investment demand. It retreated slowly back below $1,700/oz by March as the investment demand dropped. The weaker US dollar and Treasury yields have seen traders go back to gold in recent weeks, however. 

Saxo Bank head of commodity strategy Ole Hanson said a further dip was unlikely. 

“While we are waiting for a breakout of the current range – up or down – the outflow from ETFs has been grinding to a halt, an indication that most of the selling at current levels has now been done,” he said. 

Gold bugs have long talked about $2,000/oz as just the start. Given there was scepticism gold would climb over that level again before this current run, it’s worth considering what some are saying now. 

Wealth manager Incrementum, which publishes an annual report called ‘In Gold We Trust’, has a “conservative” forecast of $4,800/oz by 2030. This is more optimistic than the banks, although they rarely look that far ahead. 

Bernstein has a long-term forecast of $1,500/oz, although puts the 2022 and 2023 average at $1,950/oz. Macquarie Bank has a long-term forecast of $1,400/oz, and sees the metal falling below $1,700/oz fairly quickly. 

The Australian bank said in March “gold prices already appear to have peaked” and has gold on its least preferred list for the next 12 months because of US real rates recovering. Catalysts for a big recovery include Covid-19 hitting the world hard again or a surge in inflation, Macquarie said. 

The bulls are looking closely at longer-term factors, like what happens to gold if the record equities run finally stops?

Incrementum uses a gold/S&P 500 ratio over 120 years to show the relationship between the two. This reached about 1.6 times in 2011/2012 and is currently at about 0.6 times. This is largely an indication of the strength of the tech stocks at the top of the S&P 500, but either a massive correction, or gold shooting up again, could see a return to the 120-year mean of 1.69 times. 

 

Fish leaving the barrel?

Looking at individual companies, the bull market basics – as we’ve covered many times on these pages – mean most of them are doing very well. Shanta is a good example, given it has been able get to net cash, buy new assets and start paying a dividend.

Among the more established miners, Polymetal has continued on its debt-and-dividend path to little surprise, while Centamin has yet again proved it needs another source of income on top of Sukari. The question is whether it will build or buy one with its bull market earnings.

This is the question across the board, really, whether costs will be inflated upward along with the price. Given most mines can run on an all-in sustaining cost (AISC) of $1,000/oz or less, this will determine whether they're ready for the end of the bull cycle.

Predicting when this might happen is a fool's errand, but another two years at this level seems unlikely.