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Gold Hunting

Momentum Gets the Baton – U.S. stocks (S&P 500) continued momentum that began at the end of 2023, with double digit growth through the first quarter of 2024. Sentiment improved as ten of eleven sectors in the S&P 500 posted gains, with cyclical sectors outperforming their defensive counterparts. Canadian and global equities in general lagged the U.S. market, mostly due to a lack of artificial intelligence exposure relative to U.S. markets. Meanwhile, the bond market’s performance was dented by the prospect of the U.S. Federal Reserve delaying rate cuts due to higher-than-expected inflation and a resilient economy.  Commodity and particularly gold prices have been the biggest story in 2024 thus far. Bullion prices were up approximately 12% in the first quarter, despite a strong U.S. dollar and elevated U.S. real interest rates. Other commodities including oil and other precious metals have also been on the rise.

What The Rise In Gold Is Likely Telling Us – Gold, and commodity prices in general, have been on an upswing to begin 2024. However, gold’s rally really began at the end of 2015, when its price dipped to nearly US$1,069 per ounce following an all-time high in 2012 of US$1,771. Over the last 9 years, the price of bullion has appreciated 118% to US$2,330 today, a 9.6% annualized return. For most of that timeframe, gold’s historical correlation to real interest rates and the U.S. dollar, along with loose monetary conditions help to explain higher prices for the precious metal. More recently however, gold is surging along with higher real rates and the U.S. dollar, which leads us to explore its recent attraction.

Gold’s allure spans many cultures and centuries, making it one of the most sought-after metals. In addition to its longevity, the precious metal exists in finite form making it one of the best stores of value. Unlike fiat currencies, there is no single governing body of the currency, it must rely on production costs (supply) and demand to determine price.

Valuing the floor price for gold is often viewed from the supply side, with the cost of production being the reference point. Today this cost, as measured by the All-in Sustaining Cost (AISC), is approximately $1,315/ounce but rising at a rate of approximately 6-8% year-over-year. This is due to the rise in labour as well as commodity prices in general such as oil and other metals which are major inputs in production. It therefore makes sense, when viewed from the supply side, why gold prices have increased over the last few years. If inflation is increasing, gold production costs should rise, leading to higher prices in the precious metal. This correlation often holds true, although not exactly since market prices tend to front-run reality. Also, it is true that a production cost approach is useful to determine the lower band for the gold price, however it says nothing about the upper band.

Driving prices above their marginal cost of production often comes from the demand side. The recent rally has been driven by buyers who have not traditionally made material purchases, while the usual exchange trade funds (ETF) buyers have remained net sellers. Available data for the first quarter shows that global central bank gold reserves continue to rise as countries seem set on moving away from a reliance on the U.S. dollar. There has been a push, particularly by emerging markets, to move away from the Petrodollar system (oil and other commodities are priced in U.S. dollars) following sanctioning of U.S. dollar-based assets. There have also been numerous greenback spikes against currencies and central banks may be diversifying away to achieve more stability. With balance sheets and global liquidity expanding, diversification helps to safe-guard balance sheets.

The reasons for owning gold; to hedge against inflation, diversify balance sheets and gain liquidity from an asset without credit risk is unlikely to change given today’s increasing economic and geopolitical risk. Our diversified portfolios accumulate assets that help to protect investors against financial risks that will attempt to erode their capital. We view markets similar to Gavekal, “Today, the markets are where they were in 1970: massively short of energy, short of gold and very long energy “consumers”.


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