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The price of gold keeps hitting new highs, regardless of the fact it remains an unloved and neglected asset class for investors in developed markets.
The Comex commodities exchange reported at the end of August that the price of gold has risen for six consecutive months. The gain was nearly $450 an oz., to $2,561. That’s the biggest six-month percentage advance (+21.9%) since the last peak in August 2020.
Moves of this magnitude have seen pullbacks in the past, including a seven-month $400 (18%) correction in the second half of 2020. A report on Bloomberg at the same time noted that "gold bullion has dropped every September since 2017, with an average decline of 3.2%, easily the worst month of the year."
Nonetheless, even if gold (and silver) are entering a seasonally weak period, gold is up 21.4% year-to-date, silver has gained 21.2%, and the VanEck Gold Miners ETF (NYSE: GDX) has climbed by 24.5%. Only the Global X Silver Miners ETF (NYSE: SIL) is lagging somewhat, up 15.4%.
This performance compares favourably with the S&P 500 and Nasdaq Composite, which are both up 18% year to date. Even more impressive, there has been no surge in gold buying as evidenced by the fall in the gold tonnage held by the largest single gold ETF, SPDR Gold Shares ETF (NYSE: GLD). Amazingly, it has lost 16 tons this year, and the tonnage it holds is down 863 tons (32%) from the August 2020 high.
Central banks around the world are cutting short-term interest rates. The list now includes the Bank of England, the European Central Bank, the Bank of Switzerland, and, of course, our own Bank of Canada, which cut rates three times over the summer, the latest being on Sept. 4. The headwind of high interest rates that faced gold is now turning into a tailwind.
Further rate cuts by the U.S. Federal Reserve are expected by year-end, with the expectation that rates will fall by one percentage point in total.
Other actions by central banks are reinforcing the bull case for gold. The Reserve Bank of India is buying 44.3 tons this year, more than the total purchases of the last two years combined, while the People’s Bank of China has continued to buy gold without officially reporting it. The National Bank of Poland added 14 tons of gold in July, the largest increase of the year, and its president has stated the goal was to have 20% of its reserves in gold, up from about 15% at present. In the first half of this year, net central bank buying came to 483 tons, 5% more than in the corresponding period last year, according to World Gold Council (WGC).
Furthermore, the sharp lowering of import duty holding periods and taxes on gold by India recently are expected to add 50 tons or more to gold demand in the second half of this year. Indian gold mutual funds experienced the highest inflows in July since February 2020.
While Western investors continue to focus on the Magnificent Seven mega-cap technology stocks and obsess about small changes to revenue growth for Nvidia or the introduction of the Apple 16 iPhone, gold companies are reporting record profits and cashflows.
While some major investment banks have target prices for gold of $2,700 by year-end, this is barely 6% above today’s price. Should interest rates continue to fall over the next 18 months and geopolitical tensions remain high, it’s reasonable to expect gold to trade substantially higher. For example, $3,000 an oz. is less than 20% higher than gold’s present price.
Even if prices do not rise by that amount, well-run gold and silver mines in politically stable jurisdictions with growth in output remain an excellent way to benefit from growing interest in an asset that is no one’s liability and has retained its value in real terms over several centuries.
One such mining company is Alamos Gold Inc. (TSX: AGI), which I track in more detail in the Internet Wealth Builder newsletter. The company recently made what seems to be a terrific acquisition of a financially distressed competitor with an excellent property (Argonaut Gold) and is experiencing solid growth from its existing mines, of which almost 90% are located in Canada. Regardless of whether one of the major players makes a takeover offer, Alamos should enjoy strong growth in revenues and cashflow over the next few years.
Alamos Gold has two major producing gold mines in northern Ontario, a third in Sonora Mexico, and on in the development stage in Manitoba.
Alamos will have production of 500,000 oz. in 2024, with the potential to grow production by 80% to 900,000 oz. It also has a declining cost profile, with all-in sustaining costs forecast to fall to $1,025 per ounce in 2026 from $1,150 per oz in 2024. About 88% of its net asset value is in Canada and the average mine life of its Canadian operations is 18 years, Alamos is probably the premier growing diversified intermediate gold producer in Canada.
Alamos would be a suitable addition to growth portfolios. However, as a mining company, it is high on the risk scale and subject to bouts of volatility as market conditions fluctuate. Before investing, consult with your financial advisor to ensure the stock aligns with your risk tolerance and financial objective.
Gavin Graham is a veteran financial analyst, money manager, formerly Chief Investment Officer of BMO Financial, and a specialist in international investing, with over 35 years’ experience in global investment management.
Notes and Disclaimer
Content © 2024 by Gavin Graham. This article first appeared in The Internet Wealth Builder newsletter. Used with permission.
The commentaries contained herein are provided as a general source of information, and should not be considered as investment advice or an offer or solicitations to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication, however, accuracy cannot be guaranteed. Investors are expected to obtain professional investment advice.
The views expressed in this post are those of the author. Equity investments are subject to risk, including risk of loss. No guarantee of performance is made or implied. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.
Image: iStock.com/Bet_Noire
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