Insights

Second-Quarter 2021 Recap: Gold and Other Precious Metals Continue to Offer a Possible Hedge Against Inflation

Strengths

  • Billionaire investor Sam Zell is now buying gold, despite decades of criticizing those who purchase it, reports ETF Trends. Zell says it is because these monetary policies may create inflation like the 1970s and he believes gold could be a hedge.
  • Gold began to finally lift in price this quarter after Treasury Secretary Janet Yellen said President Joe Biden’s economic plans would not increase inflationary pressures because the boost to demand would be spread out over a decade. This could enable central banks to continue dovish monetary policies, which would potentially allow gold to appreciate.
  • While the senior miners have outdistanced some of the mid-tiered miners, exploration companies with new discoveries seem to be catching a bid. Arizona Metals reported the discovery of a new high-grade gold and zinc zone at its 100% owned Kay Mine property in Arizona. The share price climbed more than 450% this quarter on the drilling results. 

Weaknesses

  • Early in the quarter, Bloomberg Intelligence senior commodity strategist Mike McGlone wrote that the gold bull market has stalled. “Unless the higher price discovery process in Bitcoin reverses, the crypto represents a top gold headwind,” McGlone says.
  • According to RBC, new projects have faced upward pressure on capital costs due to ongoing cost inflation including steel (up 50% or more year-to-date) and labor. Since 2019, RBC estimates that project capital intensity has increased by 25%, with average cost to build a 100,000 ounce per year operation of $205 million. Operating costs are also under pressure. Diesel is one of the largest components of input costs, with higher prices to date (up 25%) placing upward pressure on operating costs.
  • Gold and copper miners in the Western U.S. are struggling for their power needs. The Western Electricity Coordinating Council (WECC) estimates that without imports, Nevada, Utah and Colorado could be short power during hundreds of hours this year, or equivalent to 34 days. New Mexico and Arizona fare a little better with being short only 17 days, under worst-case scenarios this year. The WECC’s Jordon White said: “It’s no longer necessarily a California problem or a Phoenix problem. Everyone is chasing the same number off megawatts.”

Opportunities

  • CIBC analyst Cosmos Chiu wrote, on the week ended April 16, that he expects silver to benefit from its use in solar panels, especially given the growing importance of environmental, social and governance (ESG) investing. “Of all the metals, silver has the highest electrical conductivity, making it difficult for potential substitutes (such as copper and aluminum) to compete,” Chiu says. 
  • Auto demand is picking up with lockdowns being relaxed across the U.S, but palladium is facing its 10th successive year of supply falling short of demand, thus the positive market dynamics that could keep palladium in the spotlight longer than anticipated. In addition, there are only a limited number of miners with exposure to platinum and palladium deposits.
  • Investment Bank Liberum wrote recently that the diamond market looks to be in better condition after some rocky years. Diamond inventories have dropped to cycle low levels, which creates a positive environment for pricing towards the end of this year. Easing COVID restrictions in the U.S. and Europe may release pent-up demand from weddings, which may drive strong jewelry demand for the second half of the year.

Threats

  • The senior miners continue to talk down merger and acquisition activity. Newcrest Mining CEO Sandeep Biswas said that although there is likely to be further consolidation in the gold industry, current valuations make it a tough market to find compelling targets. 
  • Miners must navigate tricky jurisdictions and geologies as well as gain the trust of politicians and populations at a time of rising environmental standards. Host nations are also demanding a bigger slice of any mining windfalls. Those management teams that best understand how to obtain their social license will likely prosper more. 
  • Crypto assets such as Bitcoin continue to present a challenge to gold, according to some. Paul Tudor Jones, the head of Tudor Investments, believes that 5% of a portfolio should be in crypto assets. It has the potential to serve as a diversifier, Tudor says, much like gold or commodities. The Grayscale Bitcoin Trust could soon surpass SPDR Gold Shares as the growing popularity of cryptocurrencies pushes the bitcoin ETF over $50 billion, close to the $60 billion held in the world’s second-largest commodity ETF which holds gold bullion.

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