A tantalizing value gap appears to be opening between gold in its physical form and shares in major goldmining companies.
The issue, which analysts believe is related to inflation-linked “compressed” profit margins by the miners, might be an investment opportunity as rate-cut time nears.
Among the examples of the gold gap is the price of the metal which is up 5% since the start of the year to $2152 an ounce whereas the share prices of the world’s top two goldminers are down, Newmont has fallen by 15% and Barrick is down 12%.
The metal v equities gap has closed over the past month as some investors buy into the thesis that equities will start to play catch up and a second price driver for the big gold companies moves into view; they are also exposed to copper as a by-product.
The gold/copper combination makes for an interesting thematic as falling interest rates drive gold and the electrification of everything drives copper, arguably the most exposed of the base metals to energy transition.
Investment banks have mixed views on gold. Earlier this month Citi hinted at gold hitting $3000/oz over the next 12-to-16 months, though that record price was assigned a low probability of occurring.
A more likely price was $2150/oz, Citi’s base case since September last year and close to the latest price of $2152/oz.
Real Yields Tailwind
Morgan Stanley has a more optimistic view, telling clients late last week that its bull case was $2300/oz driven by declining real investment yields which are a tailwind for gold.
The latest price tip from Morgan Stanley follows a more interesting note from three days earlier when the bank picked up the theme of a bullion v equities value gap, a trend which had been developing since 2021.
But that downward trend could reverse as interest rate cuts edge closer.
The bank’s latest gold sector research note was headlined with a question: Gold bull case in play?
“Gold is hitting record highs, but if yields continue to move lower, we see room for further upside ahead,” Morgan Stanley said.
A key factor in the $2300/oz price forecast is continued central bank gold buying which is overpowering exchange-traded fund (ETF) selling by investors.
The power of the central banks in the gold market is demonstrated by their collective holdings of 36,000 tons compared with 2321 tons in ETFs.
“ETF outflows since January last year have released 337 tons of gold, versus central bank purchases of more than 1000 tons over the same time,” Morgan Stanley said.
Jewelry demand is also starting to pick up after a flat ‘23. China’s gold and jewelry sales were up 23% year on year during the Chinese New Year celebrations.
The future trend in the gold is likely to be choppy, Morgan Stanley said.
“However, if real 10-year yields come down further there is scope for gold to move higher from here.
“Gold also tends to rise after the first Fed rate cut (expected in June) while elevated geopolitical and political rick in 224 should also provide support.”