This week, industry executives discussed how monetary policy, inflation, and economic uncertainty contributed to gold’s record high, despite the fact that many gold-equities have underperformed.
Experts forecast that gold, which on Thursday reached a record high of $2,554.78 per ounce, is on a long-term bull run. Prominent figures in the industry, such as John Hathaway of Sprott, Frank Giustra, a mining entrepreneur, Ronald-Peter Stöferle, the manager of a gold fund, and investor guru Rick Rule, have stated that central banks’ purchases of gold, coupled with geopolitical unrest and a shift away from conventional asset classes, are driving up the price of the metal.
According to Hathaway, managing partner of Sprott Asset Management, the majority of investment portfolios have less than 1% dedicated to gold, demonstrating how misunderstood the commodity is. According to him, reallocating merely 2-3% to gold could raise prices by $1,000 per ounce.
“Mainstream investors’ positioning in gold is still incredibly low,” he stated in a keynote address alongside Stöferle, the managing partner of Incrementum, a company located in Liechtenstein. “However, we are already observing indications of a shift in the market with today’s new record.”
According to Stöferle, the author of the yearly In Gold We Trust report, central banks have been consuming up to 30% of the world’s annual gold supply. According to Stöferle’s data, central banks bought 483 tons of gold in the first half of 2023 alone, setting a record since sanctions against Russia started in 2022.
“Emerging markets are increasingly turning to gold as a reserve asset, indicating that we’re witnessing a de-dollarization trend,” Stöferle stated. Although the short-term outlook for inflation may not be alarming, the fund manager believes that the long-term outlook is inflationary.
“After thirty years of globalization, we are now heading in the other way. He stated that de-globalization is intrinsically inflationary.
Giustra, who among other things helped found Wheaton Precious Metals (TSX: WPM, NYSE: WPM, LSE: WPM) and Endeavour Mining (TSX: EDV, LSE: EDV), concurred that fiscal stimulus, like the ones in the US, is still what propels inflation.
Nevertheless, US inflation dropped to 2.5% in August, and this month’s interest rate cut by the Federal Reserve is almost universally anticipated.
US budgetary crisis
Regarding the US fiscal picture, Giustra was especially outspoken, cautioning that the nation’s spiraling debt and deficits will only get worse during a downturn.
“At full employment, the US is running a $1.9 trillion deficit. When a recession hits, what happens? “The deficit has the potential to rise to $4 trillion,” he stated in a fireside conversation with Gold Telegraph publisher Alex Deluce.
Because no one wants to face the tough decisions that lie ahead, Giustra argues the mainstream media avoids addressing the real problems hurting the US economy and the nation’s poor budgetary position. His argument is that the few options left are very favorable for gold, such as inflating away the debt.
“Gold becomes the ultimate hedge when devaluation is the only way out of a fiscal crisis.” In the short term, Giustra and Stöferle both advised prudence, even though the long-term outlook for gold is still positive. As the market processes the recent gains, Stöferle predicted that the price of gold might drop by $200 per ounce in the upcoming months.
“I’m not unduly optimistic about the near future. A pause at $2,300 or $2,350 per ounce would not be a crash, but rather a constructive consolidation, according to Stöferle. In the long run, he predicted that it might go as high as $4,800 per ounce, although not every panelist shared this view.
Cost in relation to stocks
The price of gold has surged, but mining equities have performed terribly. The GDX, an index of stocks in the gold mining industry, has dropped 40% in the last ten years, as Rule noted. He blamed misplaced mergers and acquisitions, inflationary pressures, and inadequate capital allocation for this underperformance. Rule stated, “There have been some incredibly dumb capital decisions, particularly in the areas of M&A and cost inflation.” They have damaged the reputation of the sector as “a place where money dies.”
He claims that despite these losses, the market for gold mining stocks is about to recover since energy prices have stabilized and input costs have decreased, which increases the prospective earnings for gold miners. Rule predicts that when investors come back into the market in the medium run, the GDX index will double. Regretfully, according to Giustra, institutional investors are still keeping their hands off the equities market, biding their time for a longer-lasting upswing before making another move. Like Hathaway, he highlighted the possibility of a large increase in gold mining stocks once generalist investors return to the market. “A catalyst is what the market is waiting for. We’ll witness a rush of money into mining companies when that happens, Giustra said.
Due to worldwide de-dollarization initiatives, according to Stöferle, the action in gold prices has shifted to the BRICS (Brazil, Russia, India, and China) countries. Stöferle declared, “The marginal gold buyer is no longer in the West.” “Now, 66% of the demand for jewelry worldwide and 50% of the demand for physical gold are accounted for by China, India, and other emerging markets.” Echoing these remarks, Hathaway added that developing market initiatives to rebalance global trade now see gold as more than just a hedge. He declared, “De-dollarization is happening, albeit slowly.” “Trade settlement in local currencies backed by gold reserves is increasing, reducing reliance on US dollar treasuries.”
