By: Timothy Lee, Mining Analyst, Red Cloud Securities.
2023 Was a Strong Year for Gold
The gold price had a strong 2023. Since sliding to just above US$1,600/oz in fall 2022, gold surged in fall 2022-spring 2023 with a second surge in late 2023, and it is now hovering above US$2,000/oz.
Over the past two years, gold has defied expectations, remaining strong despite a rate hiking cycle by central banks. In part, gold has been boosted by geopolitical events, with conflicts in Ukraine and the Middle East. The gold price spiked in early 2022 with Russia’s invasion of Ukraine and again in October 2023 with the Hamas-led attacks in Israel.
Record buying by central banks also supported the price in 2022-2023. According to the World Gold Council, central banks bought a record 1,082t of gold in 2022, followed by an only slightly lower 1,037t in 2023.
Meanwhile, annual mine production increased a modest 1% YoY to 3,644t in 2023, falling short of the 2018 record. Gold recycling responded to the high gold price and increased 9% YoY.
Overall, these factors led to a record year for gold in 2023. The LBMA (PM) gold price ended 2023 at US$2,078.4/oz, a record high year-end close and a 15% annual return. Meanwhile the average 2023 gold price of US$1,940.54/oz was also a record high.
Looking for a Catalyst in 2024
We believe gold is poised to perform well in 2024. The World Gold Council’s “Gold Outlook 2024” market consensus calls for a “soft landing” in the U.S., which would likely also benefit the global economy. Historically, gold has not had a particularly strong performance during soft landings, with flat to slightly positive returns. On the other hand, there is a risk of a hard landing and a risk of a global recession, as China faces challenges with its real estate market and various economies globally face the risk of harder slowdowns than that seen in the U.S. soft landings are relatively rare – seven of the past nine rate hiking cycles resulted in recessions. Recessions have traditionally been positive for the gold price, particularly if governments turn to economic stimulus programs involving the issuance of large amounts of currency.
In our discussions with investors as well as executives of gold exploration and mining companies, many investors are looking at gold equities to kick off 2024. However, gold equities have yet to lift off, as it appears that investors are looking for a catalyst before diving into the space. It is likely that first rate cuts by central banks, particularly the U.S. Fed, will serve as a key positive catalyst for gold and gold equities. The question is: “When will this occur?”
Deep Values in Gold Equities
While gold has outperformed most other commodities, gold equities have underperformed. As of the time of writing, the NYSE Arca Gold Miners Index was down ~9.5% over the past year, while the COMEX Gold Continuous Contract was up ~8.6% over the same period. We note that, despite the high gold price, some gold producers have faced challenges with rising costs in the inflationary environment over the past few years. Nonetheless, we believe this significant disconnect between the gold price and gold equities presents a buying opportunity in gold equities.
Traditionally, during bull markets for gold equities, the large cap producers have been first to respond, followed by intermediate and junior producers, developers, and explorers as investors shift their focus down-market. As gold producers continue to mine out their reserves and look for growth, they must turn to acquisitions. We believe quality gold explorers and developers with significant sized projects are particularly appealing in this environment.
