January 11, 2024
In the first part of our 2024 outlook, we talked about political chaos and the decline of the U.S. dollar as some of the most important trends that will shape up the global economy next year.
But there is something still more important going on. And it has the power to deliver a catalyst for both gold and gold mining companies.
A lot of them are based in Canada, which means that whatever happens in the global economy will send shockwaves through the markets and support select sectors.
But first, why are we so confident that a global crisis would be good for gold and Canadian miners?
Gold and other commodities rise in fall in value in response to several forces acting on them.
As we said in our previous article, lower interest rates will be good for gold. Investors expect them to start falling somewhere in mid-2024.
But lower interest rates will also make it easier for Canadian mining juniors to raise capital. In general, when interest rates are lower, capital is more accessible, and investors are more likely to take risks.
They aren’t satisfied with the return they generate from safe assets, so they add more high-risk and high-potential investments to their portfolio.
This is why we expect a flood of new capital in the Canadian mining space.
Canada has traditionally been one of the most respected and liquid markets for junior mining companies. Now that capital is poised to become more available, we could see more deals in the mining space, from equity raises to mergers and acquisitions.
But there is something else you need to know about.
Interest rates could go down even further than investors expect. And it will triggered by an economic chaos.
Here is how we reached this conclusion.
The global economy has been defying gravity, as the Economist points out.
Despite a series of aggressive interest rate hikes, the U.S. is growing at a rate of over 5% per year. That’s an incredible achievement for the world’s largest economy.
But next year, this trend could reverse.
And it has to do with debt.
The United States has borrowed massive amounts of money to support its growth. Its deficit is close to 7% of the country’s annual GDP. Its national debt stands at about $33 trillion.
And it wouldn’t be a problem if interest rates were close to zero. But they are not.
As of writing, key benchmark rate in the United States stands at over 5%.
At this level, the country’s debt becomes harder to service. Some rating agencies started cutting the country’s investment rating in response to this.
So we have two options here…
Option one is a recession in the United States. If the country can’t continue finance its growth through debt because it’s too expensive to service, its growth will slow down.
Option two is lowering interest rates.
If it sounds like cheating to you, you’re not alone. But the United States is in a position where it can decide at which interest rate it wants to borrow money.
And next year the U.S. will have presidential elections. Which means that the government will do everything it can to support economic growth. Before the elections, growth numbers will need to look as good as possible.
And that means that interest rates will likely fall faster than investors think, and to lower levels.
Which brings us to gold and Canadian mining companies.
Low interest rates are great for gold.
In fact, we will not be surprised gold to soar past $3,000 per ounce on the back of investors’ optimism.
And as the U.S. and other governments continue to borrow and spend to support economic growth, the commodity space will prosper.
Right now, the U.S. government is focused on clean transition and green energy.
This is a crowning achievement of the current administration, and it will do everything it can to keep the momentum going.
This “clean transition” needs critical minerals… which are in high demand and low supply.
From lithium to copper, nickel, and others… this time, government spending means building green infrastructure. Which needs minerals that the U.S. doesn’t have enough of.
So that’s our thesis for next year. Lower interest rates will spur deal activity in the mining sector. And as the United States continues its push into clean energy, mining companies, including the ones based in Canada, will be some of the biggest beneficiaries of this trend.
We believe that the setup for Canadian mining companies hasn’t been this good for years.
We look forward to next year. This is the right place and the right time.
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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.
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