Could gold break out as the stimulus backed economy reveals its true nature?

The economic conditions that drove major gold booms across history are bubbling under the surface, according to a well-known mining analyst.

Gavin Wendt of Minelife spoke to Stockhead this week as markets lost the plot on the back of sliding iron ore prices and concerns about the potential collapse of one of China’s biggest companies, Evergrande.

That has brought gold, which saw big losses last week, back to the minds of investors.

After Monday’s carnage across multiple share markets, they may be beginning to feel a little shaky on whether economic growth and stock market mania driven by stimulus spending is really a simulacrum.

“Will economic growth start to ease off now where the governments have thrown a whole lot of money at the problem and artificially created economic growth that probably wouldn’t have been there?” Wendt said.

“Now, once that government stimulus is taken away, what’s going to sustain things?

“Might we see inflation but at the same time, economic growth receding, the dreaded stagflation I think that was around in the 70s and the early 80s.”

That period drew a major recovery in gold as prices of the recently deregulated commodity charged, resulting in the discovery and development of some of Australia’s most iconic and long-lasting gold mines like St Ives, Kanowna Belle and the consolidation of the Super Pit.

“That contributed to fantastic conditions for the gold price,” Wendt said. “I think that’s a real … possibility. I think gold is probably the commodity out next, that people should be looking at.”

Gold prices boomed after the Global Financial Crisis

Should Evergrande fall some commentators believe it could create conditions similar to the collapse of investment bank Lehman Brothers in 2008 that precipitated the Global Financial Crisis.

While others say the risk of ‘contagion’ outside China’s highly leveraged property market is far lower, that period also saw gold break the US$1000/oz barrier for the first time.

Today it sits at US$1775/oz, handy for most producers but down on record levels of US$2060/oz seen in mid to late 2020.

The punishment for gold equities has been far stiffer. In general they have slid around 40% from last year’s highs even though most are still making healthy profits on a gold price that according to Wendt has mostly traded sideways in 2021.

While money has flowed into riskier assets and commodities, Wendt said the gold price, a hedge against inflation and weak economic conditions, stood to benefit if the global economy’s house of cards collapses.

He says gold is the commodity over the next 12 months that “could really surprise”.

“We should be cautious about the world economy,” Wendt said.

“China is going through issues at the moment. You know, China did all the heavy lifting last year and now it’s pulling back.

“And we’re starting to see some of those key industrial commodities starting to pull back a little bit from their highs.

“China’s debt levels are significant. And when they have had issues in their property sector before, it’s been able to keep a lid on those or distract perhaps from attention specifically by always punching out fabulous growth numbers.”

Eyes on Fed, China

These issues and concerns are now coming to the fore.

“We have said this before, it’s something you got to watch, the world has moved on. Because there’s more money that just seems to get thrown as stimulus into the world economy, and everybody just marches on, keeps enjoying the ride,” Wendt said.

“No one wants to think too much about the negatives for too long.”

All eyes overnight were on the outcome of the two-day US Federal Reserve meeting, where it will offer interest rate projections out to 2024 for the first time.

A rise in rates is seen as a negative for gold, which bears an opportunity cost because it does not accrue interest.

Finlayson back in the game

If you want to know whether investors will still buy a good gold story, check Genesis Minerals (ASX:GMD) yesterday.

It did not take long for Raleigh Finlayson to return to the gold game, sending shares in the junior explorer soaring on news he had taken a cornerstone stake in the miner and would become its MD next year.

Former Saracen boss Finlayson was the managing director at Northern Star Resources (ASX:NST) for less than a year after its merger before handing the reins over as planned to ex-CEO Stuart Tonkin.

Genesis owns the 1.6Moz Ulysses gold project around 30km south of Leonora, a region familiar to Finlayson who grew up on a nearby Goldfields pastoral station and ran a string of mines in its vicinity as the head honcho at Saracen.

Genesis has long been mooted as an obvious takeover target for St Barbara (ASX:SBM), which needs more ore sources for its 250,000ozpa Gwalia mine.

That is in the rear view mirror for now, with the well-capitalised miner almost certain to go it alone with Finlayson and other heavy hitters on board.

As part of the deal that propelled Genesis to a 150% gain to 18c yesterday, Finlayson will put his money where his mouth is with a $7m cornerstone stake in the 6c a share, $20.8m capital raising.

He will also be issued 245m unlisted options for consulting work up to the point he begins as MD, which at 10.5c are already well in the money after Genesis’ meteoric jump yesterday.

Northern Star will take a $3m allocation in the $16m placement (which will be supported by a $4.8m 1-for-30 entitlement offer to existing shareholders).

Meanwhile former Fortescue Metals Group (ASX:FMG) chief Nev Power will join the board as a non-exec director along with corporate lawyer Michael Bowen.