27 June, 2022
Gold dipped -0.4% to US$1,828/oz this week as stocks bounced on weak economic data leading to expectations for a pullback in Fed rate hikes, although its Chairman's testimony to the government indicated that the attack on inflation would continue.
This week we compare the short and medium-term performances and of gold and crypto and their respective attributes and conclude that both will be important financial assets over the long haul and are complements as much as substitutes.
Gold edged down -0.4% for the week to US$1,828/oz, as weak economic data lead
to expectations that the Fed might pull back on its aggressive rate hikes which are
targeted at curbing a four-decade high in inflation. While the Fed does have a twopronged mandate to both maintain price stability but also promote growth to
maximize sustainable employment, currently clearly the balance has swung towards
controlling prices. It looks to set stay that way through the rest of 2022, barring an
unlikely plunge in US CPI inflation, as there was really nothing in Fed Chairman
Powell's testimony to Congress this week that suggested that there would be a
pullback from the rate-hike driven attack on inflation.
The Chairman even directly stated that the Fed was not trying to provoke, and that they don't expect to need to provoke, a recession. However, he also said that it was absolutely essential that the Fed restored price stability, not just only for the first part of its mandate, but also the second, as a wage price spiral could also drastically affect the goal of maximizing sustainable employment. This was not the testimony of a Fed that seem at all on the verge of pulling back on rate hikes, and while another quarter or so or market and economic fallout may cause such a softening of their stance, it is clearly maintaining its hardline for now, and very likely through most of 2022.
For gold, we might have expected this aggressive Fed, with the implication that; 1) the money supply could start to contract, which is a negative long-term driver for gold, and that 2) negative real bond yields could move head back up toward zero, a short to medium-term negative driver for gold, would have put more pressure on gold so far. However, it has held up reasonably well in 2022, as; 1) the market could be pricing in an expected pullback by the Fed in 2023 already, and 2) pricing in high geopolitical risk, which could eventually become a contagion in other countries, and 3) pricing in overall risk, with gold often considered a general hedge against adverse outcomes, whether they be political or economic.
For gold stocks, however, their performance has been weak this year, especially the junior miners, given the especially aggressive sell off of small caps this year, and if the Fed continues its aggressive hikes, we expect this to continue over H2/22. To the upside, this could send the valuations of gold stocks, which were already inexpensive before the decline, in contrast to the majority of sectors, which had become quite overvalued by 2021, down to extreme bargain levels. This could make very late in 2022 and into 2023 quite a good buying opportunity for gold producers and juniors. However, with Fed still on the inflation warpath, we don't see any rush to pile into junior mining stocks right now for an extended holding period, although the significant drop has now created trading opportunities within bear market rallies, similar to what we have seen over the past week, although we again recommend caution and note than these can reverse abruptly.
While the gains in crypto over the past few years lead to it often being compared to
gold as a store of value and even touted as a potential electronic replacement for it,
the crypto crash of the past year has brought these ideas into question. This we week
we compare gold versus crypto to assess the role that each could play as financial
assets long-term. The rise in the value of crypto in past two years in comparison to
gold has taken a dramatic shift in just the last two years, as shown in Figure 4, which
compares the total above ground gold stock multiplied by the average gold price in
each year to the average combined market cap of the two largest cryptocurrencies,
BTC and ETH.
While even as late as 2016, the combined BTC-ETH market cap was a rounding error of the total gold stock, at just 0.1%, it had risen to a small, but still material, 2.0% in 2018, and took a huge leap to 9.3% in 2021.While it has pulled back to 7.8% on average so far in 2022, even if the BTC and ETH prices remain low through the rest of 2022, and it drops to around 5.0-6.0% for 2022, this is still quite large, given that crypto market only started in 2009, and is now heading for size equivalent to a reasonable chunk of a gold market that has been around for 3,000 years.
It may be tempting for gold bulls to focus on the crypto crash since late 2021 and tout the abject superiority of the metal, which is up 1.8% since November 2021, while Bitcoin has collapsed -65.1%, Ethereum -71.5% and is significantly outperforming the S&P 500, which is down -15.2% (Figure 5). However, we need to back up to 2019 to really put this recent decline in perspective, with Bitcoin having risen a massive 42x from the start of 2019 to its peak in November 2021, and Ethereum up 18x at its peak in October 2021, while gold gained 42.9%, certainly impressive in absolute terms, but in relative terms barely moving. Also, Bitcoin has seen huge percentage drops like this several times before and went on to set new highs.
We need to consider that there has likely been very strong leverage in this surge cryptocurrency and for the equity markets, and this appears to be going into reverse, a trend which could continue and lead to a further contraction in cryptocurrencies and the stock markets. For gold, interestingly the broader market crash has not really driven a dip at all, which could suggest that the average gold holding is not really leveraged much, and that there a lot of investors that were cash buyers some time ago and remain very long-term holders. This could be a positive for the gold market, showing that we are actually still very far from any over-leveraged late-stage bull market for the metal. We would also expect that these long-term holders would be anticipating an eventual pullback by the Fed on its aggressive policy heading into 2023, and therefore remain reluctant to sell their gold holdings.
While some might view gold as a relic which cryptocurrencies will drive out of usage, and others see crypto as valueless and on its way to eventually to zero, we view these two financial assets as more complements than competitors and believe that both will continue to be important over the long haul. The downsides of gold are well known, in that it must be stored and cannot be easily used for direct transactions. While cryptocurrency can in many cases be used very rapidly and easily for some transactions and is far more efficient that converting gold into cash for these purposes, it is still not completely widely adopted as a payment method, although becoming increasingly more so.
One major downside of crypto is that an owner must actually hold their 'keys' for the coins, with the crash revealing major risks in using custodians instead to hold crypto. There is also the issue of coins completely collapsing with their value being entirely wiped out. While this may be much less of a risk for well-established coins like Bitcoin or Ethereum it remains a wider risk for much of the crypto space overall, with many of the coins new and untested by market turmoil. There is basically no risk of a gold holding suddenly evaporating to zero, even if it is held by a third party in storage, with some recourse available to go to authorities to recover it. There is really no regulatory control of the major coins like Bitcoin, which for many highly adds to their attractiveness, but this also poses a major risk, and if a cryptocurrency transaction goes wrong for whatever reason, it is gone for good and virtually untraceable. In contrast, a transfer or shipment of gold would be very unlikely to just 'vanish', and the recent crypto disasters show the advantage of the heavy regulations on banks which see depositors protected at least to some degree by government guarantees.
There are also some clear advantages that both crypto and gold hold in contrast to
fiat currencies. Importantly, neither the value of Bitcoin or gold can be hyperinflated
away. The units of Bitcoin are fixed and cannot be expanded at all, and while the total
gold stock is still expanding, is grows at a maximum of about one to two per cent per
year, nowhere near the rate of most major currencies. Over the very long-term, we
would therefore expect crypto and gold to maintain their value versus the money
supply over time. While gold does demonstrate such a relationship, crypto has not
done this yet, it is still very early years for crypto, whereas gold as had 3,000 years to
settle down into a relationship close to the global money supply.
Overall, we believe that gold and crypto have complementary attributes that will lead to many investors wanting to hold both in their portfolio, as well as a fiat currency, certainly for many more years, although it will be interesting to see how the preferred balance between the holding of these three financial assets shifts over the coming few decades.
The producing gold miners were all down as gold edged down (Figure 7). B2Gold reported drilling results from Fekola North in Mali, and from Ananconda, 20 km north of Fekola, announced a drill program at Bakolobi and acquired Oklo and its Dandokok project. Alamos reported initial gold production at its La Yaqui Grande Mine, part of the Mulatos Complex with first gold pour in June 2022 with 3k oz in production expected this month (Figure 9).
The Canadian juniors were mostly down as gold dipped, even as equity markets rebounded (Figure 8). For the Canadian juniors operating mainly domestically, Osisko Development reported final drill results from the exploration and category conversion drill campaign at Cariboo and Amex reported drill results from the copper rich volcanogenic massive sulphide QF Zone at its Perron gold project (Figure 10). For the Canadian juniors operating mainly internationally, Minera Alamos completed a surface rights agreement for the Cerro De Oro Gold Project, provided a regional exploration update for the Melchor Ocampo Area at Zacatecas and announced a nonbrokered private placement of US$4.7mn. Mako Mining reported drill results from an area 50 m southwest of San Albino West, and Novo Resources reported a drill result showing a new style of mineralization at Malmsbury with the level of gold high compared to the rest of the project (Figure 11).
The company operates the Tocantinzinho project in Brazil, with a Feasibility Study released in February 2022. The project has Proven and Probable Reserves of 2.04mn oz Au and Measured, Indicated and Inferred Resources of 2.15mn oz (Figure 13). The Feasibility Study outlines total production of 1.83mn oz over a 10.5-year mine life, initial development capital of $US458mn, sustaining capital of US$83mn, an AISC of US$681/oz and an after-tax NPV of US$622mn at a gold price of US$1,600/oz (Figure 14). This puts it around the middle of the largest TSXV gold developers, with a total production level about 100k oz below Osisko Development's Cariboo at 1.966mn oz Au, a project with a similar mine life, at 11 years, and level of annual production, at 185k oz/year compared to Tocantinzinho's 175k oz/year (Figures 15, 16). While Tocantinzinho's initial capital is considerably higher than Cariboo, at just US$306mn, its AISC, at US$681/oz, is considerably lower, with just US$796/oz for Cariboo. The two projects overall have similar post-tax NPVs, with Cariboo at US$671mn.
G Mining most recently released an operational update on Tocantinzinho on May 26,
2022, with early works activities having started in preparation for full construction and
procurement and commitments for items with long lead times, which is expected to
total $47mn by June. Brazil's national grid operator, Operador Nacional so Sistema
Eletrico has confirmed that it could provide the 22.9 MW requested by G Mining, and
the company has reached a labor agreement in principle with the local union and is
preparing for a construction decision by H2/22. The company has also extended the
land package where Tocantinzinho is located in Tapajos in Northern Brazil by 45% to
a total 996 sq. km. for additional exploration.
The company plans a 10,000-meter exploration and drilling program in Q3/22, and expects to complete detailed engineering through 2022 and start construction by Q3/22, with first gold production targeted by Q3/24 and the first full year of production at Tocantinzinho by 2025. The company also released an update on its financing, on May 17, 2022, reporting progress as it evaluates potential sources including commercial bank and private debt, precious metals streaming and strategic equity. G Mining reported that it had received a range of proposals from major financiers in global mining, and it expects financing to be secured by mid-2022.
Disclaimer: This report is for informational use only and should not be used an alternative to the financial and legal advice of a qualified professional in business planning and investment. We do not represent that forecasts in this report will lead to a specific outcome or result, and are not liable in the event of any business action taken in whole or in part as a result of the contents of this report.