Gold continues to hold above US$1,800/oz

Gold bounced back to US$1,837/oz, this week, up 1.7%, off a recent trough of US$1,776/oz, as while the global-health-crisis-fear spike that drove gold to a US$2,052/oz peak in early August has abated, plenty of macroeconomic risks remain.

Global gold mining stocks rebound overall

Global gold mining stocks rebounded overall this week, with the GDX up 4.3%, indicating gains for producers, and the GDXJ, comprising junior gold stocks, doing even better, up 6.1%, ending nearly a month-long slide for gold miners.

Considering the gold price and risk levels; GTT.V in Focus

This week we look at the gold price since around 2018 in terms of three zones of risk to give some insight for where a trough may be for gold given its weakness over the past few months; GT Gold (GTT.V), which is heading for a PEA by Q1/21, is In Focus.

Looking at the gold price and different levels of perceived risk

While gold rebounded this week, the price has trended down now for four months off multi-year highs set in August 2020, leaving some investors legitimately concerned with how far the slide could continue. To offer some context for this, we have split the price action of gold over the past three years into a roughly three 'zones' based on the level of global macroeconomic risk. This uses the idea that the gold price, at least in recent years, has acted as a barometer of risk, and while we acknowledge that there will be other factors at play, it is nonetheless instructive to think of gold in this context to gain some insight into where it might be headed, and what we could be looking at in terms of a short-term trough.

Zone 1: Prior to mid-2019, with markets still very much in a 'risk-on' phase

In Zone 1, which actually runs from around 2013 (although our chart only shows the end of the Zone 1 period from late 2017) with the gold price having peaked at US$1,792/oz in October 2012 and then declined to average just US$1,270/oz from 2013 to mid-2019, marks a very strong 'risk-on' period in global markets. During this time there was an almost across-the-board shift away from safe haven assets like gold or government debt and into risky assets, with equities seeing a major run. Gold was particularly left behind by investors, and ranged from around just $1,175/oz to US$1,420/oz. At the lower end of this range, gold mines faced quite low margins, and they were certainly not at a level where there would be aggressive interest at the riskier junior mining end of the sector. Somewhat ironic given that risky small caps in many other sectors were seeing high levels of interest over this period.

Zone 1 persisted until around mid-2019, at which point there seems to have been a considerable shift in the risk tolerance in global markets. This was in part because the US Federal Reserve, which had begun hiking its interest rate gradually as early as 2016 from a trough of just 0.25% to 0.50%, began more rapidly boosting the interest rate in 2017 and 2018 before peaking at 2.5% in 2019 (Figure 5). While this level was still very low in absolute terms versus historic highs set in the 1980s at 20%, in relative terms, this marked a very substantial 10x increase off the lows of 0.25%. Many investors started to become very concerned that the era of almost free money, and the nearly decade-long bull market in equities, might be coming to an end. By mid- 2019, concerns of a macroeconomic cooldown urged the Fed to again start cutting rates, but by this point, the concept of risk had already moved to the forefront for more investors, and gold began to pick up.

Zone 2: From mid-2019 to March 2020 markets get increasingly nervous

While gold had reached levels heading for US$1,400/oz in early-2018, by mid-2018 it had declined again towards US$1,175/oz, especially as the Fed’s rate hikes made holding bonds more lucrative. However, the combination of growing concern over the length of the bull market in equities and the Fed's subsequent rate cuts dramatically increased the market's interest in a safe-haven assets, which saw gold push aggressively out of its 2013 to mid-2019 rut, and into a range between around US$1,420/oz and US$1,750/oz. At these levels, the producing sector suddenly was enjoyed reasonable margins for the first time in many years, and the gold price was even getting high enough that investors were seeing sufficient potential rewards to warrant the higher risk of investing the junior miners.

While the end period for this Zone incorporates the March 2020 crash and subsequent rebound, in we focus on levels up to February 2020, before markets were heavily affected by the global health crisis, but gold was still nearing US$1,700/oz, for this Zone. We view this level as key level, as it could show where gold might have remained had there been no major eruption in the global health crisis. Surely we still are still at least at risk levels that existed to prior to the global health crisis spike, and more likely we are at even higher levels of macroeconomic risk than in Zone 2. The global monetary expansion, a major driver for gold, was well underway already through 2019, and has only been increasing since, and the macroeconomic outlook has clearly deteriorated from the expectations of late-2019.

Zone 3: After March 2020 risks spike on global health crisis

Zone 3 is where what could be considered a relatively short-term spike in fear occurs regarding apocalyptic scenarios for the global health crisis and its possible macroeconomic aftermath, sending gold surging to a US$2,050/oz peak. However, the reality, while continuing to be grim, has been nowhere the worst possible downside scenarios that had been considered in the middle of 2020. So we could consider that somewhere in between US$1,750/oz and US$2,050/oz, gold had been incorporating a considerable frothy fear premium in the short-term.

At least a Zone 2 level of risk remains, and probably more

We have already addressed above that we believe that at least a Zone 2 level of risk certainly remains, and therefore we see a price dip well below US$1,700/oz, if we keep with our thesis of gold as risk barometer, as unlikely. But the question remains about the upside potential for gold. It seems unlikely that another spike in global health crisis related fear will get us there short-term. However, over the medium-term, we believe that there are more than enough drivers to gradually move gold up toward US$2,000/oz and above in 2021. These include; i) the massive continuing monetary expansion in the US and globally, that will boost the relative value of gold to global currencies, and ii) significant government fiscal and other stimulus and other measures will be necessary to support global populations hit by the macroeconomic fallout of the global health crisis including shutdowns, which in turn will require more debt to finance, further expanding the money supply and boosting the relative value of gold.

These are not short-term fear issues that can be curbed by some headlines of progress on vaccines, but rather very fundamental underlyingly medium to long-term drivers of the gold price. In short, getting back to US$2,000/oz by next year wouldn't require another major health crisis scare, but rather only that the macroeconomic effects of the first scare to run their natural course. Consensus estimates by major investment banks for the gold in 2021 also support this, with the average above US$2,000/oz.

Producers mainly rise on gold rebound

The producing miners mostly rose this week by low single digits on the rebound in gold (Figure 6). There was news flow from only one of the major gold producers, with Barrick reporting its inclusion in the Dow Jones Sustainability Index's World Index for the 13th consecutive year (Figure 8). News flow from mid-cap gold producers included El Dorado's updated reserve and resource statement, two firms reporting developments on National Instrument 43-101 reports, with Equinox filing for the Santa Luz gold mine, and SSR Mining reporting upgraded reserves and resources from an independent study of the Copler District to be released in a 43-101, and Iamgold reported the remaining assay results from its 2020 drilling program.

Canadian gold juniors mixed

The Canadian juniors were mixed this week, with some companies driven by a combination of the company news and the gold price rebound. (Figure 7). For the domestically operating Canadian juniors, GT Gold reported an operational update and Q2/30 results and the adoption of an advance policy for director elections (see the In Focus section below for more detail). Probe Metals reported the continued intersection of high-grade gold at Monique, initiated its PEA on Val d'Or East and completed its $10mn private placement. O3 Mining reported the results of its summer channeling program at Alpha, and Bonterra reported drilling results from its current drilling program at its Gladiator project (Figure 8). For the internationally operating juniors, K92 reported drilling results from Kora, Novo reported updated details on its sale of Blue Spec in Australia to Calidus, and Mako Mining reported the restatement of financial statements for the eight months to December 2019 (Figure 9).

In Focus: GT Gold (GTT.V)

GT Gold operating in British Columbia's Golden Triangle

GT Gold is a gold explorer operating in British Columbia's Golden Triangle, which is historically lucrative gold district with a history dating back to early gold rushes in the late 1800s and known for high grades of gold. The region had seen active gold production into the 1990s, but between gold price declines, a lack of infrastructure and relatively tough northern climate, interest in the region had waned especially over the past decade. However, over the past two years, there has been a resurgence of interest, as there have been major improvements in infrastructure over the past decade, including an electricity grid and port and road development, while the gold price has surged. The company has two main projects; 1) the Saddle project, with two areas, Saddle North, which is its most advanced, with a maiden resource having been released, and Saddle South, which is at an earlier stage of development, and was the focus of a drilling campaign in 2019, and 2) Tatogga, a project seven kilometers southwest of the Saddle project, with October 2020 seeing the completion of a drilling program on the Quash Pass area of this project.

Saddle North Maiden resource released, PEA targeted by Q1/21

The company released its initial maiden resource for Saddle North in July 2020, and followed up with a National Instrument 43-101 technical report in August 2020. The project is a copper-gold-silver resource, with a total 8.1mn lbs in CuEq, with 2.4mn lbs of copper, 4.0mn oz of gold and 8.9mn oz of silver (Figure 12). The total Resources comprise 3.1mn lbs in Indicated and 5.0mn in Inferred Resources, of which 3.9mn lbs, or 48%, are estimated to be open pit, and 4.2mn underground. The company is now moving towards a PEA for Saddle North targeted for Q1/21, and has received the final metallurgical results for the nine samples to be used, with metal recovery between 85% to 92% for copper and 57% to 69% for gold, which marks an improvement over earlier results.

For its other projects, the company is initiating a comprehensive re-log of the Saddle South drill core and advance to geological modelling by early 2021, with a maiden resource estimate targeted by end-2021. The company is awaiting assay results from its most recent drilling activity, the 4,481m completed at Quash Pass in October 2020.

Recent private placement and strong shareholder backing

The company continues to be well funded with strong shareholder backing, having announced a fully subscribed C$5.7mn private placement, and closing the first tranche of this of C$1.39mn, in November 2020, and Newmont, one of the largest global gold producers, holds a 15% stake, and the Chairman and founder of Equinox gold, Ross Beatty holds 8.9%. While like many of the major Canadian junior gold miners, GT Gold's share price did decline off highs set around the mid-year peak in the gold price, interestingly, GT Gold has started to pick up over the past two months on its recent progress, even while many of these other juniors have continued to fall.