Summary: MRP believes gold is in the early stages of a new bull market. The dollar/gold ratio, which measures the relative strength of the dollar versus gold, is starting to tilt in gold’s favor; supply constraints are emerging; and demand is picking up again in some important growth markets.
After dropping to its lowest level of the year last month, gold is starting to recover its luster. Moreover, several macro and structural shifts are unfolding, which could send the metal on a multi-year rally. Here are three reasons we’re bullish on gold.
US Dollar Effect
MRP has been bearish on the US dollar since December 2015. While the greenback has enjoyed a period of strength during the past two months, we believe this is a temporary bounce and that the dollar is in a multi-year bear market that began 2.5 years ago. US nominal rates have risen while the ECB has remained on hold, however, there’s chatter that the ECB’s bond-buying era might be coming to a close, which should drive European bond yields higher. Meanwhile, there’s been a resurgence of US inflation which we expect to accelerate in the coming months. As a result, the inflation-adjusted central bank rate differentials should begin to weigh on the dollar. Services inflation is at cycle highs, while prices in other areas have been creeping up including, energy, housing, and even food.
Because the U.S. dollar is the benchmark pricing mechanism for gold, there’s a special relationship between them. As a rule, when the value of the dollar increases relative to other currencies around the world, the price of gold tends to fall in U.S. dollar terms. Part of the reason is that gold becomes more expensive in those other currencies, causing demand to recede. Conversely, as the dollar falls, gold tends to appreciate. If the value of the dollar declines, as we expect it to, the price of gold should move higher.
Mining gold has become more difficult and global output is expected to decrease steadily, with many experts now predicting an era of “peak gold.” Some industry insiders believe 2017 was the peak point for gold, and anticipate supply to fall up to 20% by 2022. That’s because all the gold that could be easily accessed has already been mined, and new discoveries since 2006 have plunged by 85%. In fact, the $54 billion spent on exploration over the past two decades resulted in a mere 41 discoveries, yielding only an aggregate of 215 million ounces of gold.
Gold deposits in China, Australia and South Africa, some of the top producing nations, are showing signs of becoming depleted in some mines. In the meantime, lower gold prices in the past have made it too expensive to explore new mines, especially given that the lead time between discovery and production of a new gold deposit is now 20 years. With costs rising and profits decreasing, fewer and fewer new projects are being started, and some mines have folded. Last year, total supply dipped 4% to 4,398.4t against demand of 4,071.7t. Unless something changes, the supply constraints will eventually lead to a deficit which could cause prices to skyrocket.
Global gold demand declined by 7% in 2017, largely due to a fall in investment demand for gold bars, gold-backed ETFs, and central bank gold reserve purchases. Nevertheless, a couple of bright spots are emerging.
Although Asia gold demand has been tepid for a couple of years, the World Gold Council (WGC) just published a report this month noting that China’s market for gold jewelry has been quietly improving. This is a big deal, as China consumes the most gold in the world, and accounts for about 30% of global demand in the gold jewelry market.
Another interesting data point is that technology demand for gold grew last year for the first time since 2010. In fact, the WGC believes that the major slump in the electronic sector’s demand for gold may be behind us, due to the rising electrification of the world, the advent of the Internet of Things (IoT), the electric vehicle revolution, and increased use of gold in devices like smartphones. A mobile phone contains on average of 50 milligrams of gold. With an estimated 7 billion mobile phones worldwide, that adds up to 350 tons of gold contained in these devices. It would take a country like New Zealand 30 years to produce that much gold.
The unique properties of gold are driving new uses in medicine, engineering, and renewable energy technologies, as well as electronics every day. These industrial uses account for about 11% of global gold demand, or approximately 450 tons a year, and that could easily grow.
To say that this new century has been dramatic for gold would be an understatement. After an astonishing six-fold rise from 2000 to mid-2011, when gold hit an all-time high of $1,920, the precious metal then dropped over 45% through the end of 2015.
MRP added Long Gold as a theme on October 21, 2015. At the time, we wrote that “the extraordinary period of strength in the U.S currency may now finally be ending, marking a bottom for gold and reversal of its performance going forward”. Since the theme launch date, gold is up 12.5% and the dollar has declined 2.4%, with a few ups and downs in between. Given the factors discussed above, MRP continues to like the theme and maintains the view that gold is in the early stages of a new bull market.
We’ve also summarized the following articles related to this topic in the Commodities section of today’s report.
We’ve also summarized the following articles related to this topic…
Gold: Gold may hit $1 400 in ’19 on ‘powerful fuel’ of weak dollar
Gold may have posted two straight months of declines, but is set to shrug off the blues and rise in 2019 as the dollar weakens. The precious metal will start to rebound in the final quarter of this year to average $1 375 an ounce in the last three months of next year and could touch a high of $1 400. That’s a level last seen in 2013. Weighed down by the surging greenback, bullion has dropped about 5% since April 11 to trade around $1 293, shrugging off political turmoil in Italy and uncertainties surrounding global trade issues.
The overall interest rate environment is expected to remain low as the Federal Reserve hikes another two or three times next year before ending its tightening cycle. This, coupled with fully valued equities, geopolitical risks, and a downward trend in mine supply, will see increasing pressure to buy gold.
In the near term, there’s not a lot of reasons to think that gold will climb as the greenback continues to firm up, with the Fed expected to raise interest rates two more times this year. Prices are seen averaging $1 290 in the third quarter and $1 300 in the final three months of 2018. MiningWeekly
Gold: Gold Production On The Cusp Of Peaking
Mining gold has become more difficult and output is expected to decrease steadily as the metal becomes harder to find. Vitaly Nesis, CEO of Polymetal, believes the fourth quarter of 2017 was the peak point for gold, and anticipates supply to fall up to 20% by 2022.
Most of the world’s gold was mined before the 1848 Gold Rush era. Since 1950, 125,000 tons of gold has been processed, which is about two-thirds of all the gold ever mined. During the past 18 years, mining companies have invested $54.3 billion on exploration. Yet, there have been just 41 discoveries producing only 215.5 million ounces of gold.
Gold mining companies are gearing up for a new era of exploration deeper below the surface than ever before. These companies will be incurring new costs at the same time their profits are decreasing, which is why so few new mines are being excavated or new projects being started. To add to the problem, the lead time between discovery and production of a new gold deposit is 20 years.
In 2015, Goldcorp produced 3.4 million ounces of gold. That amount fell to 2.8 million in 2016 and to 2.5 million ounces last year. Other mining companies (and countries) are experiencing similar declines in production. If this trend continues, the finite nature of gold will ensure its price skyrockets. Zero
Gold: China’s Jewelry Market on the Mend
For a dozen years through 2013, China’s market for gold jewelry soared by around 450%. In the three years through 2016, the market dropped by a third, before picking up last year. For gold miners and traders this is a big deal. China accounts for about 30% of global demand in the gold jewelry market.
Gold prices tumbled in 2013, with the result that China’s jewelry market demand rose from 600 metric tonnes to over 900 tonnes in 2014. Since then, demand had fallen to around 610 tonnes in 2016, before rising to around 640 tonnes last year.
In a recent survey, the WGC asked Chinese women how they would spend 5,000 yuan (about $780) on jewelry. In the largest (tier 1) cities, 18% would buy gold jewelry, while 14% would buy diamond jewelry and 15% would purchase platinum. In the smaller (tiers 3 and 4) cities, 24% of women would buy gold, with just 8% choosing platinum and 12% choosing diamond jewelry.
Among 18- to 25-year-olds, only 9% would spend their 5,000 yuan on gold jewelry, compared to 31% who said they would purchase smartphones or wearable technology products. Among women older than 26, nearly a quarter (24%) would buy gold compared with 23% who would spend the money on designer fashions and 20% who would buy technology products. 247WS