Gold Digger: How inflation and geopolitical risks will sustain gold demand as a hedge
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Our Gold Digger column wraps all the news driving ASX stocks with exposure to precious metals.
The World Gold Council (WGC) has released its mid-year outlook for the metal and it’s no surprise it reckons inflation and geopolitical risks will likely sustain demand for gold as a hedge in H2.
Plus, the WGC says more rate hikes are already priced into the market and that the underperformance of stocks and bonds in a potential stagflationary environment may also be positive for gold.
“Gold’s both strategic and tactical role will likely remain relevant to investors, particularly while uncertainty stays elevated,” the report said.
Geopolitics, heightened inflation and monetary policy uncertainty are all top of mind for investors in the second half of 2022. We analyzed this in our mid-year outlook, released today, and recapped gold’s likely behavior during this volatile time: https://t.co/Uk0K3R8sR0 pic.twitter.com/orNFCfz2Ty
— Juan Carlos Artigas (@JCArtigas_WGC) July 7, 2022
Most central banks were expected to lift policy rates this year, but many have stepped up their actions in response to persistently high inflation which is being felt in financial markets.
The WGC says that investor expectations of future monetary policy decisions, expressed through bond yields, have historically been a key influence on gold price performance.
But, while gold has historically underperformed in the months leading up to a Fed tightening cycle, it actually outperforms in the months following the first rate hike.
While investors expect inflation to cool down eventually, the WGC believes it will remain high due to lingering commodity-related supply-chain disruptions from the pandemic and the Ukraine war, which have caused a surge in key energy and commodity prices.
Added to this, tight labour markets are causing concerns that wages/labour costs may rise further.
“Gold has historically performed well amid high inflation,” the report said.
“In years when inflation was higher than 3%, gold’s price increased 14% on average, and in periods where US CPI averaged over 5% on a y-o-y basis – currently at ~8% – gold has averaged nearly 25%.”
“Also, gold has outperformed other commodities in higher inflationary periods, which has yet to happen this time around.
“However, our analysis suggests that gold lags other commodities in commodity-led inflationary periods, and catches up and outperforms over the subsequent 12-18 months.”
In contrast, FxPro senior market analyst Alex Kuptsikevich says gold is drowning.
The metal fell more than 2.3% on Tuesday, the second steepest daily drop a year after falling 2.5% on June 13.
“The most obvious factor is the sharp rise in the dollar on forex, where the DXY index (a basket of the world’s six most popular currencies) has renewed its highs over the last 20 years,” he said.
“Gold often acts as an ‘anti-dollar with leverage’ for investors, so it was unsurprising to see such a market reaction.
“A second possible explanation is a bearish signal, the ‘death cross’.
“The 50-day Moving Average fell below the 200-day MA on Monday, but we saw a full-swing market reaction only after liquidity returned after the long weekend in the USA.
“The third factor was the continuing sell-off in industrial metals and the drop in silver due to the worsening global economic outlook.”
Silver dipped below $19 an ounce on Wednesday morning, the lowest since July 2020.
“The price of gold is now at its low since late last year,” Kuptsikevich said.
“This position simultaneously shows us buyer strength and tremendous potential for a decline.”
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Sihayo owns the Sihayo gold project in Indonesia, where it already has a feasibility study prepared despite its minnow status, and a strategic review process in train with CLSA looking for a potential funding partner for the proposed mine.
Earlier this week the $15m market cap company said its recent high pH (caustic) pre-leaching test work program has the potential to increase overall recoveries of the Sihayo Starter Project from 71.2% to greater than 80%.
Results indicate an uplift in recoveries of between 8% and 61% for transition mineralisation and between 21% and 74% for fresh mineralisation at the Sihayo Starter Project.
The company plans to incorporate these results into an update of the Ore Reserve and feasibility assessment of the project.
Notably, at US$1700/oz gold prices, Sihayo would deliver 551,000oz over its 6.5-year life, but with a capital cost of US$173 million and IRR of just 10.1%, some more exploration may be prudent.
This week the company picked up the 1,609km2 Mt Piper Gold Project from Coda Minerals (ASX: COD),which is adjacent to Agnico Eagle Mine’s (NYSE:AEM) large exploration land tenure and 30km from its the Fosterville gold mine in Central Victoria.
The project is also between Mandalay Resources’ (TSX: MND) high-grade Costerfield gold-antimony mine and the Sunday Creek Project owned by Southern Cross Gold (ASX:SXG) which recently announced significant drilling intersections including 119.2m at 3.2g/t gold.
The plan is to design an initial “low impact” exploration program for high priority target areas.
KZR is a ~$33.4m market cap company with ~$4.27m cash in the bank at the end of the March quarter.
The copper-gold explorer hit a highlight 611.4m-long intersection at 1.39% copper and 0.75g/t gold in drilling at the flagship MCB project in the Philippines this week.
This includes a 77.5m-long high-grade portion grading 2.47% copper and 2.12g/t gold (3.34% copper equivalent) from 232.10m.
This hole (MCB-038) was designed to improve confidence in the existing 1.5 million tonnes copper and 1.47 million ounces gold resource, in addition to defining further higher-grade areas to enhance the upcoming feasibility study.
A Scoping Study for the project announced December 2021 eyed the development of an underground copper-gold operation with a 25-year mine life.
Highlights from the scoping study includes a post-tax NPV (8%) of US$464m and IRR of 35%, assuming a copper price of US$4.00/lb and gold price of US$1,695/oz.
Initial capital expenditure was estimated to be US$253m with a payback period of ~2.7 years.
The $34m market cap stock had $3.5m in the bank at the end of March.