Gold outperforms as investors seek safe haven

It’s not a fair comparison, strictly speaking, because they are very different metals but over the past four weeks signs have emerged of what might be a significant change in the mining world’s pecking order with gold starting to outperform the speculator’s favourite, lithium.

That trend could continue into next year as governments take their feet off the interest rate pedal and the appeal of the “barbarous relic”, as Lord Keynes once famously described gold, becomes even greater.

Multiple pointers support the case for gold as the big boys of the game start to outperform, and with smaller stocks following as investors look for opportunities to leverage the underlying increase in the gold price.

Emerging performers in the gold sector

Small-cap gold stocks which have recently caught the eye of seasoned observers because of their encouraging exploration news include Sunstone Metals (ASX: STM), Lefroy Exploration (ASX: LEX) and Gascoyne Resources (ASX: GCY):

• Sunstone, which reported thick and rich gold grades from the latest drilling at its Bramaderos project in Ecuador, including 101 metres at 4.9 grams of gold a tonne from a depth of 106m, has risen by 0.6c (30%) to 2.6c.
• Lefroy, which has struck a deal to expand its footprint in the area south of Kalgoorlie in WA as it builds a case for developing the nearby Burns gold discovery, is up 2c (9%) to 20c, and
• Gascoyne, a once deeply unloved stock after repeated problems at its Dalgaranga gold project in WA, has risen by 3c (18%) to 20c after making what could be a game changing nearby discovery called Never Never with encouraging assays such as 15m at 11.96g/t from a depth of 291m.

Lithium performance and future prospects

Some lithium stocks have also performed strongly over the past month.

Azure Minerals (ASX: AZS) has rocketed up by 50% to $1.73 and Leo Lithium (ASX: LLL) is up 6% to $1.14, but one-time favourite Liontown Resources (ASX: LTR) is down 4% to $2.84 and Patriot Battery Metals (ASX: PMT) has buckled under a short seller attack to be down 21% at $1.54.

Lithium stocks will undoubtedly continue to ride the wave of interest in energy transition and demand for the batteries used in electric vehicles (EVs) but it’s also the case that the price of lithium (in its many forms) has eased as supply rises and demand growth relaxes with EV sales hitting buyer resistance.

Concerns over US government debt

First clue to a gold revival lies in the value of the US dollar, the only meaningful currency in which gold is traded as well as being gold’s arch enemy as a long-term store of value.

At its simplest, when the dollar rises gold falls and the reverse when the dollar falls, which is what’s happening as clear signs emerge of an end to the US central bank’s interest rate increases.

Last week, the dollar index (DXY), which measures the US dollar against a basket of other currencies, had its worst week since November last year, falling by 2.2%. Gold responded with a US$43 an ounce rise to US$1978/oz.

What particularly worries institutional and rich private investors is the growing debt load of the US Government which has proved to be incapable of reining in spending or controlling its addiction to debt, a combination which is creating perfect conditions for gold, arguably the world’s ultimate reserve currency.

US dollar faces uncertain future

Other countries, through their central banks, are concerned about the outlook for the US dollar and the way in which the US Government has “weaponised” the dollar in disputes with Russia and China, two of 16 countries which have been buying gold over the past two years.

Citi, a US investment bank, told clients earlier this week in its latest Commodities Market Outlook, that central bank managers would continue to “try to reduce sovereign credit risk, which gold does not have in its physical form, and look towards de-dollarisation”.

That comment sits comfortably alongside the case made repeatedly by the world’s biggest gold bull, Egon von Greyerz from Swiss-based Matterhorn Asset Management, that total US debt had risen by US$21 trillion over the past four years to US$95 trillion, laying the foundations of a continued fall in the value of the US dollar.

Citi’s outlook on gold

Citi does not subscribe to the doomsday views of gold bugs such as von Greyerz but it does see encouraging conditions for the gold price to continue rising, averaging a record US$1950/oz this year and possibly rising to US$2200/oz in the first half of next year.

Gold could do even better as speculators are noticeably absent from the gold market today with Citi noting that “speculative positioning for gold is already weak, so financial inflows could boost prices”.

Citi is not alone in developing a taste for gold with Wilsons, an Australian investment bank, earlier this month mapping out the case for gold stocks in a report headlined Golden Opportunity.

That analysis made the surprise point that over the past 10 years gold mining companies have outperformed the overall Australian stock market as measured by the S&P ASX 200.

Wilsons said while gold in its bullion form has an appeal, investing in gold miners provided distinct advantages that included exposure to production and exploration growth, “tail risk protection” in case of a significant market downturn, operating leverage to the gold price because the miners have a fixed cost base, and the prospect of takeover activity.

Of the many reasons to feel optimistic about the outlook for gold the two most compelling are the near certainty that the interest rate tightening cycle is coming to an end, and the heavy buying of gold by central banks keen to diversify their assets away from the US dollar.

“Gold rush redux” is Citi’s catchy description for what it sees as a gold revival with the price expected to rebound into 2024 with all traffic lights flashing green.