Gold Will Reach $3,000/oz Within 18 Months, It Is Not A Dream

Published on: May 16, 2024
Author: Caroline Kong

During the past two years, the price of gold stagnated for a long time when geopolitical conflicts, inflation and trade protectionism dominated the market. However, in the last two months, the price of gold has risen by almost $500 per ounce since March, setting new all-time highs on several occasions, amidst a 5 per cent rise in the US dollar index.

One of the main reasons behind $2,400 gold price is the rise in US debt, which has led to money flowing into gold for defensive purposes. This year is the year of the U.S. election, the U.S. political and economic stability is a priority, but in the face of the U.S. structural contradictions, dilemmas, and the debt pressure is getting bigger and bigger, the price surge of gold highlights the investors’ self-protection of the risk aversion.

Meanwhile, gold production continues to decline after peaking at 3,300 tonnes in 2019, with all-in sustaining costs for miners rising from $1,000/oz to over $1,400/oz.

Coupled with continued buying interest in gold from China’s central bank and the private sector, in 2023, China purchased a record amount of gold, buying a total of 735 tonnes of gold, an increase of 23% year-on-year. China is now the world’s fifth-largest gold holder, having purchased gold for 18 consecutive months. Meanwhile, China’s holdings of U.S. Treasuries fell to $775 billion from $1.1 trillion in 2021, a decrease of $400 billion and a nearly 14-year low. In the first two months of the year, China imported 367 metric tonnes of gold, up 51% year-on-year.

Fiscal, monetary and geopolitical uncertainty has prompted investors to turn to gold as an alternative currency or classic store of value. Compared to the unlimited supply of fiat dollars or cryptocurrencies that can be created or disappear with a click, the supply of gold is limited. And gold is universally fungible and finite. Gold can be bought and sold in U.S. dollars, making it a substitute for fiat currencies for central banks and investors.

It should be noted that more countries have joined the de-dollarisation camp as the game between the two biggest economies China and US continues. For instance, Saudi Arabia is selling its oil in exchange for the yuan(RMB), and China has become the largest consumer of Saudi oil. As gold and silver become a larger and larger part of global central bank reserves, the dollar will predictably be used less and less. For China, gold has become more of a critical mineral. Thus, investors have reasons to believe that gold will reach $3,000 an ounce within 18 months.

Looking at gold miners’ first-quarter earnings, the sector is becoming a cash-flow machine as gold prices have risen by 15 per cent and gold miners’ profit margins have expanded significantly. However, the increasing cost of mining gold coupled with the difficulty for gold miners to replenish reserves to meet central bank-led demand growth. Gold miners remain undervalued on multiple fundamentals (market capitalisation/reserves, earnings, cash flow and balance sheet), especially when compared to the overvalued S&P 500.

Due to the long time in building mines, which often takes up to 10 years between the first discovery and the production of the first barrel of gold. Combined with today’s huge capital requirements, project construction requires time-consuming approvals and can easily involve billions of dollars in capital investment. This has led to imminent mergers and acquisitions in the gold mining industry. This includes Newmont‘s $19 billion acquisition of Newcrest and G Mining Ventures‘ $825 million acquisition of Reunion Gold’s Okowest deposit in Guyana, although the latter has yet to release a feasibility study.

In the coming weeks, veteran producers like Barrick and Agnico-Eagle should be proactively looking for M&A opportunities, as well as mid-sized developers like B2Gold, Endeavour Mining, McEwenMining and Eldorado. Many explorers are also very cheap on the TSX, and investors may want to keep an eye on companies with advanced preliminary exploration analyses or feasibility studies that are likely to be financed in the current bull market. Potential M&A targets like Centamin and Lundin Gold, both of which are currently priced attractively, are also worth considering.

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