October 16, 2023
Gold rose 2.1% this week to US$1,885/oz, rebounding from a two-week decline, as an extreme spike in global geopolitical tensions centered around conflict in the Middle East offset the rising real bond yields and US$ that had been driving the earlier drop.
Gold rebounded 2.1% to US$1,885/oz, after a considerable two-week slide, as the eruption of geopolitical tensions offset the high bond yields and US$ which had driven the earlier decline. We expect that the resurgence of issues in the Middle East to a level of severity not seen for many years could support the gold price further on a flight to safety. Similar extreme crises have been the major factors in the gold futures price breaching US$2,000/oz, including the global health crisis in early 2020, Russia’s invasion of Ukraine in early 2022 and the banking crisis in 2023. These new issues may also have the effect of compounding a geopolitical situation which was already stressed, and could see gold elevated for a longer period than in the past three crises, when it was not maintained above US$2,000/oz for long.
The previous three crises were followed by periods where the economy actually
rebounded, as in 2021, or the market was expecting improvement via a return to more
dovish central policy, as through mid-2022 and early 2023, driving back down gold.
However, even as real bond yields and the US$ surged through mid-2023, which tend
to pressure gold to the downside, the metal held up well, as the market seemed to
be holding out hope for actual rates cuts, or indications that they were on the way.
Instead, they got a consistently hawkish Fed, which eventually drove a US$100/oz plunge in gold in early October 2023 with the market finally capitulating on hopes that the Fed or other central banks were coming to the rescue anytime soon. The most recent major economic data, US inflation, with a headline number rebounding for a third month, seems unlikely to dissuade the Fed from maintaining tight monetary policy into 2024. While this may have been negative for gold in absence of other major factors, it was completely overshadowed this week by surging geopolitical tensions.
US headline CPI inflation hit 3.7% in September 2023, up from a recent low of 3.1%
in June 2023, especially on rising energy prices, as the oil price trades near a threemonth high (Figure 4). However, core inflation, which excludes the more volatile food
and energy components, has continued to decline, to 4.1%, down from a peak of 6.6%
in October 2022. While core inflation does tend to be more of a focus for the Fed than
headline inflation, the September number is still considerably above its target of 2.0%.
Also, while perhaps weighted less heavily, the Fed will still certainly consider the
headline number in its decisions, especially since a Middle East centered conflict can
spike the oil price, which has been the source of most of the recent rise in prices.
Recent EU inflation data has shown a continued decline in headline inflation, to 5.3% in August 2023 from a 10.6% high in June 2022, and core inflation, to 5.2% from a peak of 5.6% in March 2023 (Figure 5). This core inflation also remains significantly above the European Central Bank’s target, similarly at 2.0%. For both the US and Europe, the inflation numbers have still not come down enough that either central bank would be likely to view inflation as having been brought entirely under control.
This week we look at changes in the TSXV Top 10 Mining Stocks and TSXV Top 10 Gold Stocks by market cap over the past several years to show the major sector shifts in the industry. Starting in 2018, gold stocks dominate the TSXV Top 10 Miners, comprising 67% of the total, with one stock each for the royalty, silver and base metals sectors (Figures 6, 7). The TSXV Top 10 Miners market cap starts to pick up in 2019, reaching CAD$7.3bn, with gold still the largest segment, at 63%, but offset somewhat by a rise in silver to 26%, while royalty companies were at 15%. However, as the gold price jumped in 2020, the sector reached a peak 76% of the total TSXV Top 10 Miners, with silver dropping out of the Top 10.
After three gold-dominated years, there is a sudden shift in the composition of the
Top 10 towards lithium in 2021, driven by a soaring metal price on a spike in electric
vehicle demand, with the sector reaching 44% of the total, nearing gold’s 48%. The
post-global-health-crisis economic rebound that started in 2021 continued into 2022,
but supply of lithium and base metals had become limited because of earlier
shutdowns, driving up the prices of these metals.
This led to lithium becoming the largest component of the Top 10 Miners in 2022, at 56%, with copper and other base metals at 27% and gold at just 17%, as its price was comparably stagnant in 2022. Gold has made a comeback as of August 2023, to 32% of the Top 10, with lithium at 50%, and base metals at 18%, as the prices of these latter metals have eased on rising recession fears.
The shift into large cap lithium especially has seen the TSXV Mining market cap
become more concentrated in the TSXV Top 10, which reached 32% of the total as
of August 2023, over twice the lows over the past decade at 15% in 2017 (Figure 8).
However, this has been driven by the uncommonly large $4.6bn market cap Sigma
Lithium, with most TSXV stocks rarely reaching over $1.0bn. Excluding this, the ratio
would have remained closer to its 20% average from 2013 to 2021, and the
proportion of gold in the Top 10 Miners would move back up to almost 50% for 2023.
The TSXV Mining to TSX Mining market cap ratio shows an extended relative move into the TSXV, averaging 9.0% from 2020 to 2023, up from just 5.6% from 2013 to 2019 (Figure 9). This demonstrates a significant shift in market interest towards riskier junior miners in the past four years. The lower ratio from 2013 to 2020 was driven by an extended junior miner bear market with investors much more focused on safer bets in the sector. Whether this ratio continues at a high level will depend on whether the trend towards risk off accelerates into next year, and sees the market avoid small caps in general, including the junior miners.
Looking at the TSXV Top 10 gold stocks, the largest trend has been a shift in the proportion of the market cap towards earlier stage exploration stocks. At the tail end of the gold bear market in 2018, the market was still concentrated in advanced stage stocks as they remained very risk averse. The proportion of producers in the TSXV Top 10 Gold in 2018, at 38%, hasn’t been higher since, and was around the same level as developers, at 38%, with explorers at just 12% (Figures 10, 11). This started to change gradually in 2019, with a moderately higher concentration in explorers, at 19%, with developers rising to 50% and producers down to just 17%. In both 2018 and 2019 ‘other’ stocks in the Top 10 had long-term arbitration and lawsuits ongoing over previous projects and no major active mining activities.
The major shift in the composition of the TSXV Top 10 Gold occurred in 2020, as the
gold price really took off, and there was a huge push into the explorers, many at very
early stages, without initial resource estimates. The explorers jumped to 69% of the
TSXV Top 10 Gold in 2020, with developers at 31%, and nothing from the producers
or ‘other’ sector. This continued in 2021, with the Top 10 adding CAD$1.6bn in market
cap, and the split between explorers and developers roughly maintained.
This heavy risk on period for TSXV gold subsided in 2022, with the TSXV Top 10 Gold market cap nearly cut in half and the percentage of explorers dropping to 49%, while developers rose to 37%, and the producers and ‘other’ segment edged back into the Top 10. The TSXV Top 10 Gold market cap has rebounded in 2023, adding about CAD$1.7bn, with explorers still near half of the index, developers at 36%, and producers at 4%. The ‘other’ segment has risen to 14% in 2023 as these companies have made significant progress towards resolving their arbitrations and lawsuits, which could see them receive sizeable payouts.
The TSXV Top Ten Gold has ranged from 10.6% to 18.8% of the Total TSXV Mining
Market Cap, moving through two cycles over the past decade, with a peak in 2015,
trough in 2017, peak again in 2019 and a trough in 2022 (Figure 12). The ratio has
risen in 2023 and we expect this could continue, as 2021 and the first half 2022 were
strong periods for lithium and base metals prices and stocks, while interest in the
gold sector waned. However, surging inflation and heavily inverted yield curves do
not bode well for the global economy heading into 2024, and lithium prices have
already plunged from their highs, and copper and other base metals are struggling.
While gold has been volatile in recent weeks, it is likely to be heavily supported by rising geopolitical tensions, and it could significantly outperform the base metals into near year if a recession develops. While all small cap stocks, including junior miners, could get hit by continued high interest rates and risk aversion, we see a reasonable chance for TSXV gold juniors to outperform other junior miners, which could continue to drive up the TSXV Top 10 Gold to TSXV Mining Market Cap ratio in 2024.
The major gold producers all gained and most large TSXV gold stocks were up on the rise in gold and equities (Figures 13, 14). For the TSXV gold companies operating domestically, New Found Gold announced drill results from the new Monte Carlo Zone of the Queensway project, Osisko Development received an Environmental Assessment Certificate for Cariboo and Laurion Mineral Exploration expanded Ishkoday through the acquisition of 53 mineral claims over 10.46 sq. km. (Figure 15). For the TSXV gold companies operating internationally, Lion One poured first gold at its Tuvatu project (Figure 16).
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.