The run on gold has happened. The precious metal started climbing in mid-2019 and is now sitting comfortably at the highest point since 2011. But this does not mean it will stop there.
Governor of the Bank of England Andrew Bailey raised the spectre of negative rates last month, leaving UK investors looking for somewhere to put their cash with a conundrum: will gold’s strength continue? The precious metal is at record highs in sterling terms. In US dollars, gold has not reached its all-time high of almost $1,900 (£1,549 at the current rate) an ounce (oz) but plenty of gold bugs see it passing $2,000 an oz because of Covid-19 keeping cash cheap and interest rates low or below zero.
The authors of Incrementum's annual In Gold We Trust report, Ronald-Peter Stöferle and Mark Valek, have been predicting skyrocketing prices for years. The title of their benchmark research product gives some insight into their bullishness. In this year’s report, they say gold has plenty of room to run.
“If we compare different macro and market indicators at the last all-time highs of gold in 1980 and 2011 with today, it is evident that the current valuation of gold is still very appealing,” the report says.
Adjusted for inflation, the peak in 1980 was $2,215/oz.
Looking at past recessions as a guide, Stöferle and Valek say the precious metal’s growth peaks in phase three of a recession, when it is officially declared after two quarters of gross domestic product (GDP) decline. “We are about to enter phase three, the official declaration of recession, and massive monetary and fiscal rescue packages have already been thrown together to combat the downturn,” the report said. This has seen a 14 per cent increase in the gold price on average in the last eight recessions.
The bullishness is not limited to bugs like the team at Incrementum. BMO Capital Markets lifted its long-term gold price this week for the first time in five years to $1,400 an oz and set its 2020 average price forecast at $1,732 an oz.
Covid-19 has seen investors already run to gold. This year, overall gold exchange-traded-fund (ETF) investment has grown 17 per cent, according to World Gold Council data, with North American and Asian buyers leading the way. Europeans have been less enthusiastic, pushing up assets under management in the region by 13.5 per cent compared to 19.5 per cent in North America and 17 per cent in Asia.
Paper gold is a good option, if bullish about further increases. But miners can provide income on top of possible further valuations increases. Most gold mines are built with a $1,300/oz price as the base case, and are heavily exposed to diesel prices for machinery and sometimes power for the whole operation if there is no grid power available, so while revenue will climb from gold sales, costs are also falling at the moment, increasing margins.
For investors, options in the UK are more limited than Canada, the US and Australia, but several Africa- and Russia-focused operators are providing dividends on top of the current strong valuations. Their cohort could get bigger early next year.
AngloGold Ashanti (SA:ANG), a 3m oz per year producer, is pondering a return to the London Stock Exchange. Its re-entry (after leaving in 2014) would be a welcome addition to the local gold cohort, according to RBC analyst James Bell, who this week looked at how a new top dog in London would fit in.
Its South African market capitalisation of R78bn (£8bn) would see it overtake Polymetal (POLY) as the largest gold miner in London by valuation.
Mr Bell said AngloGold could attract a premium in London because generalist investors were happier backing large-cap miners (than smaller operators) and many had happy memories of the last sizeable, Africa-focused gold miner to be on the LSE, Randgold. Considering country risk is important before backing a gold miner. The majors are largely valued on where their mines are: AngloGold is currently valued at 1.7 times net asset value, whereas Polymetal is at 1.3 times.
Among the other major gold players, Barrick Gold (Can:ABX), which has mines across North America and Africa is over two times while Agnico Eagle’s (Can:AEM) P/NAV is 2.8 times. Agnico’s operations are mostly in Canada and Finland.
There are also Aim-listed explorers to consider, but these are far more of a bet on their projects delivering strong drill results than a strong gold price and none will have the parachute a dividend can provide if valuations stop heading north.