Gold SWOT: Central Banks Continue Adding Gold to Their Portfolios

Strengths

• The best-performing precious metal for the past week was silver, up 10.35%. Gold, and in particular, silver, had a buoyant week, climbing higher last Friday despite the surge in nonfarm payrolls. One would expect the release to temper gold back, as it will be longer before any rate cuts materialize now. Instead, gold continued to push higher, likely on more geopolitical risk as Iran tells the U.S. to step aside as it readies a response to Israel’s attack on its consulate in Syria. 
• IAMGOLD reported first gold was poured at Côté, on schedule. BMO thinks this milestone is an accomplishment worth celebrating at the project. In other news, Gold Fields announced the delivery of first gold from its Salares Norte project in Chile, in line with its revised project schedule, according to BMO.
• RBC expects a modest positive reaction from K92 Mining shares following the release of fourth-quarter financial results, which came in ahead of estimates and consensus on lower costs. On Friday, the National Bank raised its price target on K92 Mining to C$9.00 from $8.50. Stifel took its price target C$11.00 from C$10.00 on Wednesday.

Weaknesses

• The worst-performing precious metal for the week was palladium, down 1.22% as hedge funds boosted their net-bearish position to a four-week high. For the first quarter of 2024, the gold price was strong, primarily driven by dovish signaling from central banks, escalating geopolitical tensions, and falling real rates. Despite bullion's strength, the gold equities lagged, primarily driven by guidance misses, cost inflation, jurisdictional impacts, and dividend cuts, among other factors, according to Bank of America.  
• Gold Fields’ production for the first quarter of 2024 is expected to be lower than planned because of operational challenges at the South Deep mine and weather-related events in Australia and Peru, according to Bloomberg.
• Westgold Resources has reported March quarter-end production of 52.1koz, a miss versus Canaccord’s forecast of 64koz and down 12% quarter-over-quarter, following heavy rainfall that interrupted operations at both Murchison and Bryah last month.

Opportunities

• The S&P/TSX Gold Index (in U.S. dollar terms) was up 19% in March, its best monthly performance in almost four years; the GDX ETF was up 20%. While strong, Canaccord continues to view the sector as undervalued. Based on the ratio of gold to the S&P/TSX Gold Index (in USD), Canaccord sees 25% upside to the average. The chart below shows the performance of the S&P Venture Precious Metals & Minerals Index of junior gold exploration stocks, which surged 27% in March, outperforming its senior peers. This is a move we have not seen happen in several years, meaning money is moving back into junior mining again.

• According to Barron’s, stocks, bonds and cryptocurrencies all slumped while stalwart old gold continued its remarkable rally, with a sixth day of gains and another record high. Over the past six months, the correlation between Bitcoin and gold is very low at 7.2% -- a 100% link would denote the two assets trade in sync.
• Central banks themselves keep adding gold to their portfolios. This has perhaps been most visible in China, where the PBOC has been increasing its exposure. That buying has also attracted purchases from China's retail market participants. Indeed, jewelry sales and non-monetary gold imports hit record highs earlier this year, according to Bank of America.

Threats

• In aggregate, gold miners slashed exploration budgets in 2024 with guidance implying a 9% decline from 2023. In Bank of America’s view, this trend can be attributed to rising costs that have eroded margins. Exploration is typically the easiest item to cut, owing to its non-operational nature. This may set the stage for more acquisitions in 2024 with less spending.
• Gold has gone past not only its nominal record but also its previous inflation-adjusted highs. While fundamentals are supportive, it may be getting slightly ahead of itself over the short term, according to Bloomberg.
• Several gold miners have already flagged production impacts from rainfall disruptions. Tracking rainfall around select Australian gold assets highlights that other assets are likely impacted to varying degrees, where Goldman has adjusted its quarterly production for rain at Jundee and Carosue Dam/Kal (Northern Star), along with Mt. Rawdon and Mungari (Evolution Mining).