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Market Mood
The new year brings an opportunity to reflect on the year just gone, and what may come. One thing that I like to do is see which assets shot the lights out, on a view to perhaps avoid them, Figure 1.
Gold had a creditable year versus the S&P/ASX 200 and the Philadelphia index of gold and silver stocks that is widely followed in the USA. However, it was no contest versus US stocks. Our key interest is the fact that precious metals stocks lagged gold, and the US dollar was weak.
Gold tested the US$2000 mark to rally back above it in December, Figure 2. There are warning signs of a possible US slowdown. Conditions now look ripe for a rotation of market leadership.
Investment opportunity
There is an old saying, as popularised by the Wizard of Id comic strip ‘Golden Rule’:
Whoever has the gold, makes the rules!
In this world, there are two kinds of gold in play. One is control of the US dollar-denominated financial system. The other is control of global trade in goods and services.
Ever since the famous Bretton Woods Agreement of 1944, the US dollar has been king among all candidates for reserve currency status. Originally, it was pegged to gold, but then President Nixon let the US dollar float free of any anchor on Friday, August 13, 1971.
This created a 10-year gold bull market – once unconstrained fiat money creation ushered in the oil crises of 1973 and 1979 – along with stagflation and high unemployment in the global economy. The twin oil crises were, in part, an Arab world response to lost purchasing power in petrodollars.
It was only with the Federal Reserve regime of Paul Volcker that the monetary madness was finally brought under control. Inflation began to subside. The Plaza Agreement of 1985, to revalue the Japanese yen upwards, finally restored competitiveness to the U.S. Economy.
History never repeats, but it sure can rhyme.
The US economy of this time is extremely competitive in digital technology but is under increasing pressure from Chinese competitiveness in manufacturing. China has automated factories as part of a deliberate plan to offset the demographic crisis of an ageing population. China has also used state programs to subsidise and support the growth of new energy technology in electric vehicles, wind turbines, solar photovoltaic cells, energy storage, and fourth-generation nuclear power plants.
These conditions define for us a century-scale investment theme:
We are living through a major global power & energy transition
The energy bit is obvious. The world is moving from fossil fuel-powered combustion engines towards a future of ubiquitous electrification. This supports themes like battery minerals and copper.
The power bit is less obvious. The world is moving from a global political and financial system ruled by the West to a more diverse multi-polar world where emerging economies are growing stronger.
Needless to say, this latter dynamic, a global transition in geopolitical power, is supportive of stores of value that are geopolitically neutral. Some will contend cryptocurrency is key, but we think the utility of gold in backing trade among the rising power grouping, will prove a less risky bet.
Gold to under-pin multi-currency trade
The headlines concerning the geopolitical struggle between the US and China have tended to focus on the military dimension of conflict. While gold is a safe haven in times of war, we are bullish on the prospect of continued globalisation of trade outside of the dominant Western nation grouping.
In a nutshell, we believe that China, and their emerging frenemy India, will cohere a new global bloc of nations that trade with each other in commodities and manufactured goods. Gold will likely play a pivotal role in bridging currency mismatches for those nations who increasingly shun the US dollar for fear of G7 sanctions. The political act that changed everything was the Biden Administration’s move to cut Russia out of the SWIFT payments system. Ever since that fateful decision, the rising emerging market countries BRICS+ bloc have sought to move off of the US$ standard. This process will take 50 years or more.
Move for this Mood
Our thesis is that a major bull market in gold stocks is in sight. Gold did dip below the US$2000oz level, but has since carved out a consolidation move. We have yet to see a breakout that would bring hedge fund money into the shiny metal and the stocks, but conditions seem ripe.
This is not yet a market where one would bet heavily on explorers, but we do think it’s appropriate to add emerging producers and late-stage development companies. The key metrics are the likely scale of the project, the grade potential for a low All-In Sustaining Cost (AISC), and the quality of management to execute well on growth plans in a visibly improving market.
For us, three names stand out: Bellevue Gold (ASX:BGL), which achieved first pour from its new high-grade gold mine in the last quarter of 2023; De Grey Mining (ASX:DEG), which released a promising Definitive Feasibility Study (DFS) for the large Pilbara-based Hemi project and then raised $300M to advance to a final investment decision; and finally, we remain enthusiastic for proven company-building teams, like that of Rayleigh Finlayson who built Saracen Minerals. That script looks set to encore at the emerging Leonora district play Genesis Minerals (ASX:GMD).
In Australia, De Grey appears ready and competitive to become a top-five producer, see Figure 3 below. Since these estimates are based on the DFS, and with the mine yet to be built, one has to risk this view on the potential for project delays or cost increases in construction. The final investment decision has still to be made, but we view it as a speculative buy, with good potential to re-rate upwards.
Bellevue Gold is more of a known quantity since production began. The estimated AISC will remain uncertain until production is fully scaled up. While the reserve for this project looks low at 1.34 Moz, it is an underground mine that is open at depth. We think the company is now in the sweet spot to prove up its credentials as a producer.
Finally, Genesis Minerals will not likely release cost guidance until March. The stock is a little weak now, and we rate it as a speculative trading buy ahead of cost guidance.
Disclosure: the author does not hold any current position in the stocks mentioned.
Disclaimer
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