Is gold due for the mother of all bull runs?

Admittedly, it is not the first time we have asked the question and each time we have been confounded by the quixotic behaviour of the prettiest of commodities.

Still, gold is gaining momentum slowly: the spot price hit a record $US2048 an ounce in mid April and after a pull-back is lurking around $US1970/oz.

In Aussie dollar terms the metal peaked at $3005/oz in mid June and is parked at the $2900/oz level.

There are complex factors in the mix, including the contrary interplay between rising rates (an enemy of gold) and the friendly force of inflation (which higher rates are meant to subdue).

But the long-standing ‘inverse correlation’ between gold and real (inflation-adjusted) rates may be breaking down.

Market Pulse analyst Kelvin Wong notes that US Treasury Inflation Protected Securities (TIPS) last Friday hit 1.79 per cent, breaching their October 2022, 14-year high of 1.69 per cent.

But in that week the gold price slightly firmed, breaking the tight 10-year trend that has seen gold move inversely to the TIPS.

Because it does not produce income, gold traditionally has suffered when bond yields (interest rates) rise.

Wong attributes the likely reason for gold’s strength to an uptick in geopolitical tensions, as measured by the Global Geopolitical Risk Index.

Based on keywords across 10 newspapers, the index stands at 103.10, the highest level in eight months (albeit well below the 170 at the time of Russia’s Ukraine invasion in February last year).

Given intractable conflicts such as the Ukraine mess, US-China tensions and the Australia-England war of the bat and ball, we are ‘stumped’ to think why gold should not go higher.

Some punters believe bullion is benefiting from expectations that we may have seen the last of the savage rate hikes (the view of both Reserve Bank punching-bag-in-chief Philip Lowe and Mark Delaney, the investment head of the biggest super fund in the land, Australian Super).

For local gold bugs, the issue is whether to play the theme with an exposure to the commodity itself, or via a listed gold play.

The easiest direct exposure is via a gold exchange traded fund that simply tracks the gold price – currency hedged or not – with holders unaffected by the vagaries of mine performance.

However broker Wilsons contends that investing in the miners provides the value X factor of production growth, improving economies of scale and mergers and takeover activity (the country’s biggest gold miner Newcrest (ASX:NCM) is being taken over by Newmont Corporation of the US).

Wilsons notes the gold miners easily have outperformed the broader market over the last 10- 20 years, “albeit with some volatility”.

In pure value terms, the firm prefers Evolution Mining (ASX:EVN) over the new sector leader Northern Star Resources (ASX:NST).

Evolution’s key assets are Ernest Henry and Mt Rawdon in Queensland, Cowal in NSW and Red Lake in Canada. About 20 per cent of Evolution’s current-year revenue is expected to derive from copper, which is almost as sexy as gold.

Of course another tactic is to weigh in on the up-and-coming explorers and developers with a decent chance of producing within years, as opposed to decades.

Investors are ‘feline’ good about the $100 million market cap Black Cat Syndicate (ASX:BC8), which is confident of restarting the Paulsens underground operation in the East Pilbara in early 2024.

Acquired from Northern Star a year ago, Paulsens is envisaged as a tidy 42,000-ounce a year operation over three years, generating revenue of $356 million at today’s prices.
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