Gold SWOT: Can gold prices surpass the record set during the height of the Covid pandemic?

Strengths

• The best performing precious metal for the week was silver, up 3.53%. Over the past two weeks, total known ETF holdings of silver dropped by more than 16 million ounces, or more than 2%, but the silver price gained over 14%. The price of gold rose as the dollar weakened for a sixth straight day, writes Bloomberg, with traders betting that the Federal Reserve’s aggressive monetary-tightening cycle is nearing an end. Data on Thursday showed U.S. initial jobless claims unexpectedly declined last week, underscoring the ongoing tightness of the labor market and complicating growing bets of Fed rate cuts.

• Evolution Mining has announced the start of underground production at its fully owned Cowal gold mine in New South Wales, Australia. The Australia-based gold mining company said that the milestone has been achieved three months earlier than the previously announced target of the June 2023 quarter.
• Gold prices could surpass the record set at the height of the Covid-19 pandemic if ongoing turmoil in the banking sector persists and global central banks downshift their interest-rate hiking cycle, according to Sprott Inc. The haven asset briefly rose above $2,000 an ounce this week for the first time in a year as a deal to buy Credit Suisse Group AG failed to calm fears over the global banking industry.

Weaknesses

• The worst performing precious metal for the week was gold, but still up 0.33%. South African power challenges point to a tighter platinum group metals (PGM) market. Several miners are subject to load curtailments, often at short notice, at the request of state-owned energy operator Eskom. The industry needs power for smelting, refining and hoisting, meaning less power availability and lower refined volumes, all else equal.
• First Majestic Silver announced it is “temporarily” suspending mining activities and reducing the workforce at its Jerritt Canyon mine, effective immediately, due to a combination of ongoing challenges at the mine which include contractor inefficiencies, inflationary cost pressures, lower-than-expected head grades, and multiple extreme weather events affecting northern Nevada.
• Fortuna Silver reported updated mineral reserves and resources as of December 31, 2022; gold and silver reserves declined year-over-year by 14% and 22%, respectively. Combined proven and probable reserves were reported at 2.8 million ounces gold and 20.1 million ounces silver versus reserves at December 31, 2021, of 3.1 million ounces gold and 25.9 million ounces silver.

Opportunities

• Franco Nevada is seeing a lot of opportunities to add assets to its portfolio as the cost of funds for developers continues to increase. The team is looking at mostly mid-sized deals (under $400 million) in the precious metals space (both primary gold producers and by-product precious metals from other producers), with project financing type transactions currently trending in the market. Franco’s preference is for precious metals deals, but it will consider a non-precious metals deal if the deal makes sense. 
• According to Bank of America, sensitivity to the gold price for producers is largely driven by: 1) the cost base, i.e. higher cost producers offer more torque as they benefit from the most margin expansion in an upswing in gold prices, and 2) financial leverage; producers with higher levels of debt (i.e. enterprise value with a higher component of debt) also offer more torque to the gold price.
• Joseph Sitch is co-CIO of the Global Multi-Strategy Fund alongside Victor Smorgon’s chief executive Peter Edwards. Joseph has led the $200 million fund to a net return of over 40% a year, including an outsized 102.3% in financial 2021, and 47.5% in the year ended last June 30. Joseph’s reason for targeting Australian-domiciled miners is they are not as exposed to a stronger U.S. dollar, meaning domestic miners should remain profitable during periods when the greenback is weighing on U.S. dollar gold prices, but the Australian currency is holding up. The fund’s near-10% exposure to Australian gold has paid off as the commodity price hit a 12-month high of US$2,009 an ounce this week, and more importantly, the Australian dollar gold price topped $3,000 for the first time. Mr Sitch believes those prices are still not being factored into the valuations of locally listed gold companies.

Threats

• Since Sibanye's investor day, where management outlined its medium- to longer-term expectations, it has largely missed its production and unit cost guidance in all three key operating divisions (SA gold, SA PGMs and U.S. PGMs). The poor operating performance has been attributed to issues such as load shedding, industrial action, skills shortages, flooding, safety stoppages and operational challenges. Bloomberg reported blackouts have reduced the size of the South African economy by almost a fifth since Eskom started rationing electricity around 2008. The IMF reduced its forecast for growth in South Africa to 0.1% from 1.2% this week, largely due to the power outages.
• According to Bank of America, royalty and streaming (R&S) stocks offer the least sensitivity to rising gold prices owing to the limited operating costs associated with the business model (no cost on royalties, typically low fixed costs on streams).
• RBC reduced its PGM basket price forecasts by 20% between 2023-2030 to reflect a faster than previously expected decline in ICE vehicle sales. RBC, however, expects PGM markets to shift back to modest deficits in the second half of the year, as vehicle sales recover from current levels and as supply risks persist. The group sees palladium and rhodium moving to perpetual surpluses from 2025.