Gold - Where to next for the yellow metal?

What a stand-out year for gold 2020 proved to be.

As is so often the case, a bad year for the world is a good year for the yellow metal. However it’s not just the price that’s been pushing the boundaries of expectation. It has also been a standout year for gold discoveries, particularly in Australia.

So what’s next for gold after such a stellar year?

Whether you are backing listed companies in the hunt for the next million ounces, or you’re hoarding bullion under your bed in preparation for the next apocalypse, or maybe you just love to adorn yourself with the glittering metal, there aren’t too many people walking this round earth that are not interested in what happens to gold in 2021.

It seems it has always been that way too. When Hernan Cortez met the great Aztec King, Moctezuma, in Tenochtitlan in 1519, he was asked why the Spanish desired gold so much. The Aztecs, after all, valued the blue-green feathers of the quetzal bird more highly than gold. Cortez’s reply is now the stuff of legend – that his people had a disease which could only be cured by gold.

Despite prophecies foretelling the arrival of pale bearded gods from the east, if the Aztec’s had fully appreciated the apocalypse about to befall them perhaps they would have put more store in the intrinsic value of gold.

Perhaps if we had known what a horror show 2020 would turn out to be, we would have all got into gold earlier. But that’s the nature of prophecy – events are only truly understood after they have occurred and it seems that everyone is a genius with the benefit of hindsight. After all, there were no shortage of warning signs – SARS, swine flu, Ebola, HIV. The frequency and impact of pandemics have increased in recent decades as the wet market trade in wild animals and land clearing push humans and nature deeper into conflict.

What we can say about the future is that the next crisis is never far away.

More on predictions later. First let’s look at the year that was and some of the standout performers amongst our listed gold explorers.

Gold started its current cyclical upturn way back in August 2018, when the US dollar price bottomed at $1,180 per ounce. Since then its upward trend has been seemingly unrelenting, at least it was until March 2020 when the gravity of the COVID-19 pandemic finally hit home and global markets plunged.

Like everything else, gold was dumped. From March 6 to 16 the gold price dropped 11 per cent, from US$1,671 to US$1,486. By comparison, the Dow Jones Industrial Average stock index in the United States and the All Ordinaries index in Australian each fell 37 per cent in the rout. The NASDAQ index of technology companies in the US fell 30 per cent.

Then global markets staged a dramatic recovery, fuelled by buckets of cash thrown into private hands by Governments fearing economic and social collapse and the emergency approval of a number of COVID-19 vaccines across the world. The NASDAQ has risen an incredible 88 per cent from its March lows as lockdowns triggered an online spending boom and working from home gave the digital revolution a shot of adrenaline.

Over the same period gold rose by an impressive 40 per cent to its all-time high of US$2,067 per ounce on August 7, before settling back to be 23 per cent higher for the year at US$1,881 by the end of December.

Whilst some post-crash predictions of US$3,000 per ounce by year-end seemed almost credible at the time, gold has traded comfortably in a band between US$1,800 and US$1,900 since August.

With the US and Australian government cash interest rates sitting at almost zero – or even negative after accounting for inflation – and no prospect of an overseas holiday, there was nowhere for all the cash to go except into discretionary purchases and stocks. Online trading platforms saw a surge in new customers. According to an Australian Securities and Investment Commission report released at the beginning of May, more than 4,600 new online trading accounts were opened each day between 24 February and 3 April.

It wasn’t just the number of retail investors on the rise but also the dollar volumes. Average daily stock market turnover by retail brokers increased from $1.6 billion to $3.3 billion in the same period. Locked down investors trading on cheaper speculative stocks helped push the small-cap index up 69 per cent from the bottom of the market in March compared to a 47 per cent rise for large caps.

The rising gold price was replicated in the stock performance of many gold explorers and producers. Whilst gold company share prices have retreated from their August highs a little, in line with the correction in the gold price, strong performances for the year have been widespread among small-cap explorers.

Investment in mineral exploration across Australia is up and gold leads the pack, according to the Australian Bureau of Statistics. The extra investment is delivering results. Major discoveries in greenfield areas and established mining zones came thick and fast throughout 2020. Savvy Geologists looking at ground in and around abandoned mines with fresh eyes and technology delivered a swag of outstanding results for smaller explorers.

De Grey Mining was a standout among the top performers in 2020, rising almost 1,900 per cent on the back of its Hemi discovery in the Pilbara region of Western Australia. The company has an aspirational target of 5 million ounces of extractable gold at Hemi, with a further 2.2 million ounce mineral resource already defined within the broader 1,200 square kilometre tenement area. At its peak, De Grey’s stock price was up a staggering 3,000 per cent.

Musgrave Minerals was another strong performer, announcing in June the presence of high-grade, near-surface intersections at its Cue gold project. Cue hosts a defined mineral resource of 6.4 million tonnes at 3.2 grams per tonne of gold for 659,000 ounces. The company also raised $16 million to fund 30,000 metres of drilling in 2021 to further test high grade, high priority targets. The company’s shares were up 304 per cent at year-end.

Traditionally a gold explorer, Chalice Mining launched into the stratosphere on the back of a series of high-grade results identifying widespread platinum group metals, copper and nickel at the Julimar project just 70km north of Perth. Chalice has risen more than 2200 per cent from its March lows to become a 1-billion-dollar company, at least on paper.

Other impressive results came from Auteco Minerals, up 990 per cent, at its Pickle Crow project in Canada, Predictive Discovery, up 650 per cent, in West Africa, White Cliff Minerals, up 316 per cent, on a maiden mineral resource of 779,000 tonnes at 1.7 grams per tonne for 42,400 ounces of gold at the Reedy South project near Cue in Western Australia, and Tesoro Resources up 935 per cent this calendar year, which included an intra-year rally of more than 3100 per cent from its low point in March through to its October highs on thick, high-grade results at its El Zorro project in Chile.  

As Peter Allen sang: “Everything old is new again.” One interesting feature of 2020 was the number of explorers revisiting historic mining areas across Australia.

Metalicity, up 450 per cent and Nex Metals, up 418 per cent, are exploring old open pit and underground areas north of Kalgoorlie with good results at the Kookynie and Cosmopolitan projects. The historic Cosmopolitan mine was one of the largest and most profitable mines in Western Australia in its day producing some 360,000 ounces of gold from discovery in 1895 to 1922.

Navarre Minerals, up 90 per cent, is drilling a prospect on the western side of the Stawell gold corridor in western Victoria. Stawell has been producing gold since the 1850s gold rush first drew thousands of prospectors to the region. Stretching south from the recently re-opened Stawell gold mine, Navarre said its 70km-long tenement has targets analogous to the nearby 4 million-ounce Magdala underground gold mine that is privately-owned by one of Navarre’s major shareholders. The company plans to deliver a maiden resource in early 2021.

GBM Resources, up 275 per cent, is targeting a 1 million-ounce resource from its combined Mt Coolan projects in Queensland, which include the purchase of the Yandan mine which produced 350,000 ounces from 1985 to 1990.

With so many explorers having significant success, consolidation and acquisition is likely to be a key feature of the gold industry in 2021. Cashed-up producers need to replenish depleted resources and will want to make a lot more hay while the sun shines so brightly. In the year ahead expect plenty of news from Australia’s biggest gold miners including Westgold Resources, up 14 per cent, Northern Star Resources, up 10 per cent, Evolution Mining, up 32 per cent, and Saracen Mineral Holdings up 43 per cent.

While gold has been a symbol of wealth and prestige for 5000 years, its position as the pre-eminent hedge against inflation and crisis has been challenged in recent decades. Gold was so much on the nose in the final years of the last millennium that in 1997, then Australian Treasurer, Peter Costello sold 167 tonnes of Australia’s hard-won reserves at just over $400 an ounce to net $2.4 billion.

When the gold price bottomed in mid-1999 at US$250 per ounce, Costello must have been feeling pretty smug. As Mark Twain famously said: “Reports of my death have been greatly exaggerated.” And gold rose from the ashes again.

Despite cyclical lows, the gold price has risen inexorably since then – up about 650 per cent in 20 years.

The gold that Australia abandoned in its 1997 fire sale would be worth around $10.7 billion today. The RBA’s current gold holdings, in the Bank of England’s vaults, now totals just under 80 tonnes, unchanged since 1997. That’s less gold than is held by the central banks of Iraq, Libya and Romania, according to figures compiled by the International Monetary Fund. It is also less than the amounts held by the similarly sized economy of Spain with 282 tonnes and Russia with 2300 tonnes. As of December 2020, the US had the largest reserves with more than 8,134 tonnes.

In the digital universe some are predicting the crypto-currency Bitcoin will replace gold as the dominant hedge against inflation and protection in a crisis. With Bitcoin up more than 260 per cent this year and heading toward US$30,000 each, the digital tide is high.

Despite Bitcoin’s increasing financial mainstream acceptance, the gloss has not come off gold. Globally the demand for gold has never been stronger and central banks are among the world’s biggest investors, with total holdings of more than 35,000 tonnes. Most of that supply has been amassed since 2010 when central banks went on a gold-buying spree following the global financial crisis. Buying peaked in 2018 when banks purchased 656 tonnes. Russia, under Vladimir Putin, has increased its reserves significantly since 2006 when it had just 40 tonnes.

Do they know something we don’t? Probably not – they are simply looking to maintain value in a volatile global market and protect against the next economic crisis. If the US Government were to liquidate its gold reserves at US$1,800 per ounce it would generate approximately $516 billion, a fraction of its $21 trillion of debt. With large debt to gross domestic product ratios in most countries and the prospect of longer-term negative interest rates when accounting for inflation, it is little wonder that central banks are trying to amass as much gold as they can.

According to the World Gold Council’s 2020 Central Bank Gold Reserves survey, 20 per cent of central banks intend to increase their gold reserves over the next 12 months, compared to just 8 per cent of respondents in the 2019 survey.

As Frank Sinatra sang: “Who knows where the road will lead us? Only a fool would say.” Nevertheless, there are signs of where gold is heading in the year ahead, summarised in brief by the following three scenarios.

Scenario 1 – On trend since 2018, gold trades in a band between US$1,750 and US$1,950 per ounce, occasionally touching US$2,000 on negative news. It is unlikely to drift lower due to over-riding macro-economic fundamentals – real negative interest rates, rising inflation and an unresolved pandemic despite optimism around vaccines. On the positive side, infrastructure spending and the unstoppable advance of the digital revolution boost demand for most commodities.

Scenario 2 – Return to record highs breaching US$2,200 an ounce, reflecting the trendline’s upwardly adjusted 2020 trajectory. Global Government debt has reached unsustainable levels with the US accounting for almost a third of the total. As it is, countries cannot repay their debts however falling back into a deeper recession risks widespread social and political chaos. Increasing the supply of cash through more stimulus appears to be the only palatable option. Higher stock prices will increase market volatility and bubbles are already emerging. Gold and other precious metals might be safe havens when the inevitable correction comes.

Scenario 3 – The global economy takes a turn for the worse, launching gold into uncharted territory towards US$3,000 per ounce. One small additional crisis is likely to tip the market over the edge. Trade tensions with China and its expansionist tactics across multiple borders lead to sabre rattling and armed conflict. A war between Israel and its hostile neighbours escalates, pulling the US back into the Middle East. Belligerent Republicans control the US Senate and a lame duck Biden Presidency drifts with no power to legislate. COVID-19 mutates beyond the control of the current vaccines leading to a new wave of lockdowns.

So be careful what you wish for gold fans. Surely we don’t want to live in a world where gold is US$3,000 an ounce – or do we? After the dramas of 2020, perhaps we should all simply hope for gradual gains from gold rather than meteoric rises in 2021 and a less heart-pounding year.

Matt Birney is the Managing Editor of Bulls N’ Bears