When is it a Good Time to Invest in Gold?

Introduction

Gold is such a fundamental element for Humanity. It's been used as a monetary source for Millennia. It's used in jewellery, and still retains that monetary value.

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"Money is a matter of functions four; a measure, a means, a standard and a store" 

That old adage is still relevant today, because when you look at what Fiat currencies do over time, they all go to zero, and if you look at what gold does over time, it retains its value. The same amount of gold is required in trade today as it was thousands of years ago… whether it be a Roman toga or a handmade suit in London. So, you can argue that gold has held its value over time. 

This Barbarous Relic

Of course, in today's economy, which is incredibly complex and sophisticated, gold famously viewed by John Maynard Keynes as that ‘Barbarous Relic’, is often overlooked. But if you speak to long-term asset managers, they will often highlight the need to have gold in a portfolio as a diversifier. 5% of assets in gold to give you that counter-cyclical stability in your portfolio. It's still really relevant and it's still a significant foreign currency reserve for banks, such as in the US, which ostensibly has a large amount of its currency reserves in gold. It's so easy to think that it's irrelevant on a financial asset basis and then you have a period like we have at the moment where there was quantitative easing in 2008 after the banking crisis and then again with the covid funding. Look at the expansion of the money supply, there has to be some recognition of debt and inflation and all of those financial metrics which are instability in the financial sector. But guess what, gold performs well. 

More than half of global junior mining and exploration companies explore for gold. It's where the dollars get spent. If you track the exploration dollars going into gold in Australia and Canada, it's a proxy for the full industry. There are occasional booms that eat gold's lunch in the form of Rare Earths, ETFs and Bitcoin, and more recently lithium that takes money out of the gold sector. But still, the majority of the spend in the ground in exploration goes into gold. And why is that? The answer is that the CapEx required to build these projects is low relative to anything else. It's easier to value a gold company. It's easier to bring it into production. The execution risk and the CapEx is less. And if you are an exploration or a development junior that is where you want to be, because that's where it's so much easier in an incredibly difficult environment to make your fortune.

So gold as an exploration class is staying with us, and gold as an asset class is staying with us.

Let's talk about the supply side

China is now the largest gold producer and there's lots of informal non-listed gold production from parastatal or artisanal workers. There's a huge amount of gold coming out of Africa and a large amount of that is from illegal miners. Garimpieros, artisanals, pecaneros, all around the world there's a name for the small-scale miners, and they produce a lot of gold.

We haven't actually seen gold supply rise in the last 5 years even though the gold prices performed very well in US dollar terms. And that tells you a few things:

1. It tells you that it's harder to find new deposits, so the rate of discovery of new economic deposits has gone down. You can find lots of low-grade gold, but the stuff that actually makes money is really hard to find, which means that it's a very mature industry. 
2. It also means that you've got supply inelasticity, so when the gold price goes up you won't necessarily see a quick response to the mine supply. 
3. Even in terms of recycling gold that comes out in the secondary market. With the above-ground stocks of gold, a lot of the old jewellery that was lying around got sold in the global financial crisis in 2008. There was a time when the gold price actually went up in 2009-2011. There was a tidal wave of recycled gold that gradually got re-absorbed and melted down. But if there's a gold price spike this time round, it's not expected to have that same level of secondhand recyclable gold coming out of the woodwork. 

So in a sense, you've got a financial system which is prepped for a very strong gold market. We've got huge levels of debt in the developed world. In Europe, the UK, and particularly in the US, interest rates are now at multi-year highs and the US is not at the moment even able to pay off the interest rates. It's defaulting on the interest payments, let alone on the principal. So we're coming to this point where the financial markets are under increasing strain and the supply side is constrained by lack of investment over the last 10 years. The difficulty of finding new economic ounces, because remember it's not just the price of gold that determines how economic something is, but also the cost of extracting. And if the margin stays small you're not going to incentivise a lot of new production. So we are in a position of inelastic supply, a very troubling debt situation coupled with inflation….

It's a wonderful Paradox

The value of real money is actually decreasing and we're in a gold market which is as bad as it’s been for 10 years. No one loves gold despite the whole gold sector being primed for a sizeable move on the upside.

As an aside, there is something called the Daily Sentiment Index (DSI) in the US. Whenever the DSI goes below 10%, it has been followed by a gold kick.

Also, the World Gold Council has been charting seasonality in the gold price since 1971. There's normally a good period of price performance in Q1 and then a pullback in May/June followed by a strong performance in August/September.

If you look at the DSI index and if you look at where the seasonality of gold is, plus you've got the macro picture of supply constraints, mature supply, mature industry and supply inelasticity. The perfect storm for investing in gold?

A recent survey of the central banks points out that 7 out of 10 of the banks interviewed indicated that they're expecting to see gold increase as a percentage of foreign currency reserves in the next five years, and that the majority expected that the US dollar proportion of foreign currency reserves was going to fall to between 40%-60%. That is why the central banks are buying gold now. It is the highest level that they'd been buying in 10 years, and Q1 was double the previous year. 

Central banks are buying gold

You can see that it's principally developing emerging nations that are realising, ‘oh perhaps we don't want to be so closely aligned to the US’ and they're the ones that are growing their gold reserves. 

There are many ingredients in the gold price which point to a potential gold price rise in the short term. 

The gold sector is notoriously difficult to pick timing on. You have to look at the difference between strategy and tactics. The strategy for the gold sector is to build a position on the basis that you're comfortable with, with the fundamentals that we've been talking about: that paper currencies tend to go to zero, they devalue over time, and that gold holds its value and is both a means a measure a standard and a store (or value).

Whereas Fiat currency is not, and you have to buy into the understanding and the philosophy that it's a mature supply-side industry, there has been reduced exploration, a lower number of discoveries and static production: 

1. The increase in production has not really been there in the last 5 years, so with that as the context and your belief that you should have 5% of your assets in gold, that's the strategy.
2. The tactic is ‘when do you buy?’ Is this a good time or a bad time? When the markets are on their knees, when people have almost given up, when the Daily Sentiment Index is below 10% and when people are capitulating (plus we know that there's a seasonality in gold), you're likely to be right more often than not. 

Conclusion

When non-specialists want to capitulate, that's typically when the sector is at its weakest, and the value is at its greatest, and that is quite close to where we are at the moment. Time to buy gold equities!

Gold Companies to Watch

‍Karora Resources‍

Karora Resources is a growing gold and nickel producer in Western Australia with its main assets being the Beta Hunt mine, Higginsville operations, and Lakewood Mill located near Kalgoorlie. With over 1,900 km of highly prospective land, Karora produced a record 133,836 ounces of gold in 2022 and over 80,000 ounces in the first half of 2023, aiming to reach 170,000-195,000 ounces by 2024. A leader in ESG, Karora achieved carbon neutrality in the past two years. The company believes growing to 200,000 ounces of annual production will re-rate its valuation to the next tier of gold producers, and Karora is debt-free and well-positioned to self-fund growth from operational cash flow.

‍First Mining Gold‍

First Mining Gold is a Canadian gold development company focused on advancing its flagship Springpole Gold Project in Ontario, one of the largest undeveloped gold projects in Canada, and the recently acquired Duparquet Gold Project in Quebec, a top 20 Canadian gold asset. The company also has interests in several partnership assets including the Pickle Crow project in Ontario with Auteco Minerals, the Hope Brook project in Newfoundland with Big Ridge Gold, and is the largest shareholder of Treasury Metals which is advancing the Goliath Gold Complex in Ontario. First Mining was founded in 2015 by Keith Neumeyer, the founding President and CEO of First Majestic Silver Corp.

‍Treasury Metals‍

Treasury Metals is a Canadian gold exploration and development company focused on advancing its Goliath Gold Complex in Northwestern Ontario, which contains 2.1 million ounces of measured and indicated resources and 1.3 million ounces of proven and probable reserves. The project benefits from proximity to infrastructure like roads, power, rail, and communities. Treasury also has early-stage exploration projects in Ontario, including Gold Rock and a joint venture at Weebigee-Sandy Lake. The company aims to foster open dialogue with regional communities and Indigenous Nations to create sustainable economic opportunities, safe workplaces, social value, and community well-being.

‍Elemental Altus Royalties‍

Elemental Altus Royalties is a gold-focused royalty company with a portfolio of royalties across 14 countries, providing exposure to producing, development and exploration stage assets operated by established mining companies. Key assets include the Caserones copper royalty in Chile, the Karlawinda gold royalty in Australia, and the uncapped Pickle Crow royalty. Following recent accretive acquisitions to expand its royalty coverage and presence in the Americas and Australia, Elemental Altus aims to continue executing transactions to emerge as a leading precious metals royalty company, leveraging its scalable royalty model, growing portfolio, strong institutional shareholder base and balance sheet.

‍Signal Gold‍

Signal Gold is a TSX and OTCQX-listed gold mining company operating in Nova Scotia and Newfoundland. The company is advancing the high-grade Goldboro Gold Project and operates the Point Rousse mine, mill, tailings facility, and port. Signal Gold also owns 15,000 hectares near the past-producing Nugget Pond Mine. The company's main goal is to produce 150,000 ounces of gold per year within the next 5 years.