Gold loses refuge status due to inflation and market chaos

Even the biggest gold producers want to diversify

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Golden bugs should have a moment.

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Inflation seems to be spiraling out of control for the first time in decades. The stock markets have collapsed. The shadow of a recession looms amid rapidly rising interest rates. Russia’s ongoing attack on Ukraine has unleashed chaos on the global food supply, trade and political order.

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All of these factors have traditionally led investors to buy gold, which has been a safe depository of value for centuries. Yet the gold price, along with the stocks of prospectors, are in free fall.

Example: Gold fell three percent last week to $1,665 an ounce after data was released showing US inflation reached 8.3 percent in August, the opposite of what you’d expect given new evidence of intense upward price pressure. Gold has now sunk about 20 percent since hitting US$2,087 an ounce in March.

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Meanwhile, since April, the VanEck Gold Miners ETF and the Van Eck Junior Gold Miners ETF, two publicly traded funds indexed to the largest gold producers and explorers, respectively, have fallen 42 percent and 40 percent.

Against that backdrop, Canadian gold mining executives are gathering in Denver this week for Gold Forum Americas, a conference where the largest companies will pitch to investors. Analysts said they expect one of the key themes to be how gold producers plan to keep costs in check, rather than trying to follow the inflation story. Indeed, many analysts attribute gold’s underperformance to the central bankers’ response to inflation – pushing interest rates higher to cool the economy.

“If we take a step back, higher nominal rates combined with potentially moderating inflation in the coming months (even if they are still well above the Fed’s 2 percent target) are likely to lead to lower gold prices (raising higher interest rates). the opportunity cost of holding gold),” Fahad Tariq, an equity analyst at Credit Suisse, wrote in a Sept. 13 note to investors, referring to the US Federal Reserve.

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Fahad wrote that markets currently estimate a 20 percent chance of the Fed raising interest rates by a full percentage point, something the Bank of Canada did in July.

Bearish mood seems to have infected the sector, with even the biggest gold producers looking to diversify

One of the stories that gold has supported in the past is that central bankers cannot be trusted to keep prices in check. As late as November 2021, Fahad had written about gold as an “inflation hedge” and “defensive asset” that outperforms when growth-oriented assets struggle. Gold prices rose during the first few months of the year as investors sought refuge amid the geopolitical chaos unleashed by the war in Ukraine.

But Fahad acknowledged that the case for gold as a haven will only hold up if the global economy plunges into a protracted recession, or if central bankers fail to keep pace with inflation. Credit Suisse analysts said they see central bankers taming inflation through higher interest rates and a shallow recession as a more likely scenario than a deeper downturn. As a result, they lowered their gold price estimates this year to US$1,725 ​​per ounce from US$1,850 per ounce, and they forecast US$1,650 per ounce in 2023.

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Meanwhile, a bearish mood appears to have infected the sector, with even the largest gold producers looking to diversify.

Last week, Agnico Eagle Mines Ltd., Canada’s largest gold producer and the world’s third-largest prospector, announced it would diversify its portfolio by investing $580 million to acquire a 50 percent stake in copper. and zinc project in Mexico.

For Agnico, which focuses solely on precious metals, making such a large investment in an unbuilt copper-zinc project that is still years away from production – $580 million represents 36 percent of its operating margin in the first six months of the year. this year – represents a new direction.

Chief executive Amman Al-Joundi described it as “a unique opportunity” as his company already operates a mine in Mexico.

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Similarly, Natalie Frackleton, a spokesperson for Agnico, took it as a one-off: “Agnico’s primary strategy is to be a world-class gold producer. However, we believe that San Nicolás offers a small, natural amount of diversification to our gold trade,” she said.

But as demand for both copper and zinc is expected to grow based on their use in energy transition technologies, the deal could foreshadow how prospectors will seek growth in the future.

Bank of Montreal analyst Jackie Przybylowski recently wrote that more gold companies could diversify their commodities as “electrification and green energy themes” draw investment attention.

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Toronto-based Barrick Gold Corp. chief executive Mark Bristow has acknowledged that at one point several years ago he entered unsuccessful merger talks with US-based Freeport-McMoran Inc., one of the largest copper producers in the world.

“Copper is probably the most strategic metal, and it’s geologically related to gold,” Bristow said. “So if you want to become a world-leading gold company over time, eventually you’re going to produce [copper].”

If the gold price continues to fall, other prospectors may also seek to include copper, zinc and other metals in their portfolios.

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