IAUM - Can Gold Regain Investor Enthusiasm After Recent Slip?

2023-05-25 18:00:00 ET

Summary

• What fueled gold's rally and why it ran out of steam.
• Can gold get back above $2,000?
• Copper was betting on a China boost that never came.

The price of gold has eased recently, after reaching new highs earlier this month. Greg Barnes, Head of Mining Equity Research at TD Securities, tells Greg Bonnell why he thinks the trend for the precious metal is still pointing higher.

Transcript

Greg Bonnell: The price of gold has come off the multi-decade high it saw earlier this month. But it still had a strong start to the year compared to copper. We've seen a pretty steep drop in prices there recently. Joining us now to discuss what's driving these trends and whether these trends will continue is Greg Barnes, head of mining equity research at TD Securities. Greg, always great to have you on the program.

Greg Barnes: Thanks, Greg. Good to see you.

Greg Bonnell: So we've got two divergent paths here. We're going to dig into why. But let's start with gold. Of course, we saw a big run-up recently. And now it just feels like it's in a bit of a hold pattern, waiting for a catalyst. What got us here? And what can we expect?

Greg Barnes: Several things got it to this point. I think it's inflation-- obviously, people worried about inflation using gold as a hedge against inflation-- weakness in the US dollar-- we've seen some of that year-to-date-- obviously, concerns around the debt ceiling ongoing. And I think we've seen massive central bank buying, which has been a big support for the gold price. And that's come mostly from developing countries. And with the US sanctioning Russia and sanctioning some of their cash holdings outside Russia, gold has become something of a safe haven for central banks globally as well. So I think there's multiple factors that have been driving gold.

Too, as well, is the Fed-- what they're going to do with interest rates. And we know if we look back historically, when the Fed starts to cut rates, that generally is very good for gold. And the opportunity cost of holding gold goes down. So gold prices go up. And I think there's some anticipation built into the gold price about when the Fed will actually start to cut rates-- so multiple things driving gold.

I think the trend-- obviously, nothing goes up in a straight line. But the trend, I think, in our view at TD Securities, is we will see gold go higher again from these levels.

Greg Bonnell: Could it go substantially higher for these levels? It was quite something to see it break $2,000 and get up to multi-year highs at that level. And people always-- after you see a run like that, people get cautious. Think, well, OK, can it have more in it. How much more could it have in it?

Greg Barnes: The mid-$2,000 range is not out of reach. $2,500 certainly is a price that-- it's a nice, round number. And I think it's something the market will look for in that kind of environment. And the Fed is cutting rates. So I don't see any reason why it couldn't get there.

Greg Bonnell: So at $2,500, what about the mining sector itself and those names levered to gold? Would that mean good things for them, or could we see some divergence? Because I know there's other pressures. Like, the price of what they're taking out of the ground is one thing and then, I guess, the cost of taking it out of the ground.

Greg Barnes: Exactly. And the cost pressures have been the big issue for the gold miners over the past 18 months or so. Particularly in 2022, costs were up anywhere between 15% and 20%. So a lot of the increase in the gold price was offset by higher costs.

We've seen some of those inflationary pressures ease off. And if the Fed is doing things correctly, and it's working, we should see inflationary pressures come down. I'm not sure if we'll get to 2%. But that would help. Clearly, margin expansion is what we're looking for. So at higher gold prices, if we see the cost pressures come down, that would work very well for the gold miners themselves.

Greg Bonnell: You said $2,500 isn't out of reach for gold, given certain factors. What could stand in its way? What would keep it stalling?

Greg Barnes: If the US dollar strengthens for whatever reason, which it shouldn't do if the Fed is cutting rates, inflation does come down, some of the safe-haven attributes for gold as an inflation hedge will fade.

Central bank buying-- if that dials back from the very strong levels we've seen recently, that, obviously, wouldn't help gold at all. And we've seen record levels of central bank buying. So I'm not sure if that can continue.

So there are things that could hold the gold price back. But again, I think if the-- if we're in an environment where the Fed is cutting rates, that should be good for gold. And we should see higher gold prices from there.

Greg Bonnell: Right. Off the top of our conversation, we talked about a divergent path here. So we've done a nice rundown on what's driving gold and where it could go. What about copper?

Greg Barnes: A couple of things there-- I think number one is the world is looking towards a recession sometime later this year, perhaps early 2024, whether it's a deep recession, a shallow recession, whatever. We are definitely heading into an economic slowdown. And the leading indicators are showing is that. Copper inventories on the LME, London Metal Exchange, have started to creep higher off a very low level. And they're still not high by any stretch of the imagination. So people are watching that trend higher. That tends to weigh on the copper price.

We should see better supply of copper in the second half of the year. A couple of mines have ramped up. Some of the social and political issues in South America have died down, so that should help the copper price go up as well.

And quite frankly, the reopening trade, China reopening trade, at the beginning of the year that really pushed copper prices up a lot has disappointed. The reopening--

Greg Bonnell: Well, why is that disappointing? It seemed like such a simple thesis at the beginning of the year. China pretty abruptly drops its COVID policies, and everyone thinks it's game on across a number of things, including the materials sector. It hasn't played out.

Greg Barnes: Well, I think the rest of the world is slowing down, so that doesn't help China in its exports. I think in the reopening trade on the consumer side, it's been pretty good, but on the industrial manufacturing side is not quite so good. And that's what's important for copper. So there has been a disappointment on that front from a copper consumption, industrial production point of view.

I think the industrial production numbers last week from China were disappointing. So that gives you an indication it hasn't been as strong as people had hoped. So I think all of those things are feeding into the weakness we've seen recently on the copper price.

Greg Bonnell: Now, longer term, we keep hearing about the electrification of everything. And of course, it's pretty hard. Unless they find some other way to generate electricity, to generate it without copper, what do we still think longer term for copper?

Greg Barnes: We're still seeing an issue with copper supply and stronger demand. So those two things should lead us to counterbalancing each other and should lead us to higher copper prices from here, definitely.

I think if we look at-- currently, copper supply is experiencing a bit of a bounce, with several copper mines, big ones, coming into production right now. But if we look beyond those two or three mines, big ones, that are coming on-line, there isn't much behind it in terms of big, new greenfield copper projects in the pipeline. They just aren't there. So supply is going to struggle over the second half of this decade. And if we have a stronger demand environment, we will see continuing deficits in the copper supply market.

Greg Bonnell: Want to, before we finish our conversation, ask you about the earnings season that we've just been through among the miners. How would you characterize it?

Greg Barnes: Disappointing, as expected.

Greg Bonnell: Disappointing, as expected?

Greg Barnes: Q1 is always a weak quarter, whether it's seasonality, whether-- just a reset after what is typically a strong Q4. Companies try and push hard in Q4 to meet their guidance for the year. And there's always a bit of a setback in Q1 as a result of that. And I think we saw that to a bit of an extreme level in Q1, both on the gold side and the base metal side.

But we are seeing improving production through the balance of the year as a number of projects come on-line, grades improve, less maintenance work done. So I think we will see improving production, both on the copper side and the gold side, in the second half of 2023.

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