19th November 2021
Gold has been on a bit of a rollercoaster over the last year, with prices in November 2020 climbing above $1,950/oz then dropping to just over $1,680 by March 2021, and the swings since then have been almost as large. The price has ascended rapidly since the start of November, sitting at around $1,856 at the time of writing on Friday morning, and it received an extra boost on Wednesday after US inflation hit a headline rate of 6.2%, the highest in three decades. UK inflation also hit a 10-year high, and Canada’s rate matched a peak last achieved in February 2003. Gold is traditionally seen as a hedge against inflation, so with numbers like this, investors have been flocking to the yellow metal.
The drivers of the gold price are more complex than that, though, and today I’d like to look at an interesting new piece from the US Federal Reserve that digs into this question a bit. To start with, gold competes with the US dollar as a safe-haven in turbulent times, and the dollar has risen recently on better-than-expected US retail data, making gold more expensive for holders of other currencies to buy. And then there’s the question of interest rates: gold doesn’t pay interest, so if rates go up the opportunity cost of holding it increases. Interest rates are at almost at rock bottom at the moment, but there is plenty of speculation about how soon the Fed might increase them (perhaps Q4 next year), and it’s already phasing out bond-buying as a prop for the US economy. Plus, there’s the less-tangible but very real “fear factor” – when economic times are seen as generally bad, people put their faith in gold.
So how to tease out all these competing factors? The Chicago Fed put out a letter this month that helps. They looked at gold price data from the collapse of the Bretton Woods system in 1971 up to Q1 2021, and found that, up to around 2000, the real gold price and inflation expectations tended to be closely linked.
However, something interesting happened after that. It seems that expected interest rates took over from inflation as the most significant driver of the gold price. These two are expected to have a negative correlation (when inflation goes down, gold goes up and vice versa), and while this pattern did not really show up in the data before about 2000, after that it’s very clear:
Superimposed on all this is data measuring the general pessimism or optimism of consumers about the economy, which also shows a pretty good correlation with the gold price:
The authors of the letter concluded that overall, gold is certainly used by investors as an inflation hedge because its supply is relatively fixed, although the reason gold holds this privileged position over any other fixed-supply commodity may be nothing more than a relic of the gold standard era. Moreover, the effect of inflation was assessed as quantitively the largest factor overall. But from about 2001 onwards, interest rates and the level of consumer confidence in the economy started to dominate the gold price, and disinflation in that period was masked by low interest rates over an unprecedented duration, propping the price up since the turn of the century.
So what does this mean for the gold price now? It’s once again time to remind you that nobody at Spotlight is an investment advisor of any kind, and you should not rely on us to tell you where to put your money. Only your own research or a qualified professional can help you with that. But to idly speculate, it looks like decent times ahead for gold. Interest rates are likely to remain low for at least a year or so, and it seems it will take a while for central banks to get inflation under control. Both of these factors mean the gold price could stay relatively high over the medium term. This is excellent news for the mining industry, as high costs for gold will drive investment into any project that can dig it up, and returns for current producers will be extra nice. Lovely.
Around the Traps
Good news from one of our favourite companies, who luckily enough are exploring for gold: Mammoth Resources (TSXv:MTH) has reported the first results from this year’s drilling campaign at the Tenoriba property in Mexico, and there are anomalous gold grades over intercepts covering many tens of metres. Thomas Atkins, President and CEO, compared the grades favourably to those at producing mines like Agnico Eagle’s La India, which is in a similar high-sulphidation system to Tenoriba.
The lovely folks at Warrior Gold (TSXv:WAR) also have some very nice drilling results from their Goodfish-Kirana project in the Kirkland Lake gold camp. Assays are forthcoming, but one of their drill holes has hit visible gold, which we love to see! Check it out below.
Guanajuato Silver (“GSilver”, TSXv:GSVR, OTCQX:GSVRF) has announced a private placement of CAD$8,250,000, with a lot of its units going to major shareholder Endeavour Silver, as well as Ocean Partners, GSilver’s buyer for silver and gold concentrate from their freshly re-opened El Cubo mine and mill facility. The company plans to use the funds to further explore and develop their El Cubo and El Pinguico silver-gold projects.
Solgold’s (LSE&TSX:SOLG) Board of Directors has appointed Darryl Cuzzubbo as the Managing Director and CEO of the company, effective 1st of December. Good luck to Mr. Cuzzubbo and all at Solgold as they advance their incredible Cascabel copper-gold project in Ecuador!
More appointments: Moneta Gold (TSX:ME) has announced a new VP Corporate Development, Ardem Keshishian, and Director of Sustainability, Vince Deschamps. These two will have plenty of work to do as Moneta advances its Tower gold project towards an expanded resource estimate and PEA, so best of luck to both!
In the Spotlight
Lots of news from us here at Spotlight this week! Find out what we’ll be up to soon:
- We’re official media partners of Minex Eurasia 2021, which is being held in-person in London as well as online on the 30th of November. This year’s conference has a special focus on ESG issues in Russia, Central Asia and Mongolia, and the best part is that online viewing is free! Sign up here.
- Mines and Money London is back! From the 1st-2nd of December, Europe’s largest mining investment and capital raising event is on in-person, and Spotlight will be there conducting interviews with select mining companies and keeping you up to date @SpotlightMining. You can register here.
- The biggest party of M&M London will be Spotlight Night! After a long break from international social events, we are pleased to present an evening of friendly networking among mining professionals from 17:30 on Wednesday 1st December at a well-known venue close to the conference site. Due to corona regulations, prior registration is necessary.
And what have we been doing recently? Check it out:
- Our new expert contributor Aaron has written up our regular Project of the Week on Chakana Copper’s (TSXv:PERU) exciting Soledad project in central Peru, which you can read here.
- Luke Holland has written a great piece giving us an overview of Mexico’s geopolitical landscape and its major mining projects, which I know many of you will be interested in.
- This week in our monthly North American newsletter, I wrote about the US adding nickel and zinc to its list of critical metals for the first time, as well as some minerals that dropped off the list due to updates in the USGS’s methodology.
That’s all for this week folks, have a lovely weekend!
- Jane Lockwood