US Fed chair Jerome Powell finally admitted that inflationary pressures weren’t going to be as short-lived as perhaps expected.
Earlier this week Powell surprised markets by suggesting it would be appropriate to drop the phrase “inflation is transitory” from the Fed’s lexicon.
For gold bugs, the prospect of higher inflation is often viewed as a good thing. Gold is an ‘inflation hedge’; an investment that ostensibly protects the buyer from decreased purchasing power of a currency due to rising prices.
Which is happening right now, everywhere.
Goehring & Rozencwajg Associates managing partner Leigh Goehring told Kitco that we are “getting closer to the explosion of gold prices to the upside”.
“There are too many similarities between now and the late 1960s and early 1970s, and they cannot be ignored,” he says.
“Back then, inflation was going up about 5%-6% per year — the same as now. And then, in 1973, there was the black swan event — the oil embargo.”
Oil went from $US4 a barrel up to $US15 a barrel literally overnight.
This time there’s a difference, Goehring says.
“This time around the Fed will have to give up on raising rates because it will be too painful for everyone,” he says.
“Once the precious metal bottoms from the Fed’s tightening action, it will begin its massive bull market.”
‘Rapidly approaching an inflection point’
In November, Goehring & Rozencwajg wrote that multiple trends supported the view that we are rapidly approaching inflation’s inflection point.
“In 2019, M2 [money supply] was only growing at 4% per year; today it is growing at 27% per year — the fastest rate in history,” they say.
All this free cash means shortages are starting to develop, Goehring & Rozencwajg say, in everything from timber, semiconductors, restaurant workers and ketchup packets.
“Despite these trends, investors continue to pile into technology stocks, SPACs, cryptocurrencies and long-term bonds; each of which will perform terribly in an inflationary environment,” Goehring & Rozencwajg say.
“In stark contrast, inflation hedges like gold remain priced at record low levels relative to financial assets and are ignored by almost all investors.
“The countdown to inflation is ticking and we are getting closer and closer to an explosion in inflationary pressures,” Goehring & Rozencwajg says.
“All economic signs point in that direction, yet few investors are prepared to protect themselves, yet alone profit from an investment landscape that is about to suddenly and radically change.”
Winners & Losers
Here’s how ASX-listed gold & silver stocks are performing:
Scroll or swipe to reveal table. Click headings to sort. Best viewed on a laptop
Dacian Gold (ASX:DCN) has returned to the market chasing cash for its Mt Morgans gold mine near Laverton in WA’s Goldfields.
The $200 million capped gold miner entered a trading halt seeking $20 million in a fully underwritten raising to complete pre-stripping at its “thicker, higher grading” ‘Doublejay’ orebody by March 2022.
Dacian will have cash and gold on hand before costs of $36.8m.
The gold miner produced 15,819oz at an AISC of $2,362/oz in the September quarter, with FY2022 guidance of 100,000-110,000oz at an AISC of $1550-$1700/oz.
‘Windfall’ is a high-grade exploration and development asset in Canada’s Quebec Province.
It contains an indicated mineral resource of 1.857Moz at an ultra-high grade of 9.6g/t, with a further 4.24Moz at 8g/t in inferred resources.
That would underpin a mine with a 300,000ozpa capacity over its first 7 years, operating at all-in sustaining costs of just US$610/oz.
First production is pencilled in for 2024.
And West African Resources (ASX:WAF) has finalised the acquisition of the 6.8Moz Kiaka gold mine in the hopes of becoming a 400,000ozpa producer by the middle of the decade.
Having kicked off production at the Sanbrado mine in Burkina Faso in March 2020 at the start of the Covid-19 pandemic, WAF is now one of the lowest cost mid-tier gold producers on the ASX.
It is on track to beat the 280,000oz upper end of its production guidance in its first full year of operations in 2021.
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