Industry leaders debated the roles of economic uncertainty, inflation and monetary policy in driving gold to a record high this week even as many gold equities have underperformed.
The experts predict gold, which hit an all-time high of $2,554.78 per oz. on Thursday, to be on a long-term bull run. Some of the sector’s most respected voices, including Sprott’s John Hathaway, mining entrepreneur Frank Giustra, gold fund manager Ronald-Peter Stöferle and investor guru Rick Rule, said central bank gold buying, geopolitical tension and a divergence from traditional asset classes are boosting gold’s price.
Hathaway, managing partner of Sprott Asset Management, says less than 1% of most investment portfolios are allocated to gold, showing how the asset is misunderstood. Reallocating just 2-3% to gold could push up prices by $1,000 per oz., he said.
“Positioning in gold is still incredibly low among mainstream investors,” he said during a keynote discussion with Stöferle, managing partner at Liechtenstein-based Incrementum. “Yet, with today’s new record, we are already seeing signs of the market shifting.”
Stöferle, who publishes the annual In Gold We Trust report, said central banks have been soaking up as much as 30% of annual global gold production. In the first half of 2023 alone, central banks purchased 483 tonnes of gold — a record, according to Stöferle’s data — since sanctions against Russia began in 2022.
“It’s clear that we’re seeing a de-dollarization trend, with emerging markets increasingly looking to gold as a reserve asset,” Stöferle said.
The fund manager says that while inflation may not be a short-term concern, the longer-term outlook is inflationary.
“We’ve spent the last 30 years globalizing, and now we’re moving in the opposite direction. De-globalization is inherently inflationary,” he said.
Giustra, who helped start Wheaton Precious Metals (TSX: WPM, NYSE: WPM; LSE: WPM) and Endeavour Mining (TSX: EDV; LSE: EDV) among other businesses, agreed that fiscal stimulus, such as those in the United States, continue to drive inflation.
Even so, US inflation cooled to 2.5% in August and the Federal Reserve is widely expected to lower interest rates this month.
Giustra was particularly vocal about the US fiscal outlook, warning that the country’s ballooning debt and deficits will only worsen in a recession.
“The US is running a $1.9 trillion deficit at full employment. What happens when we enter a recession? The deficit could easily balloon to $4 trillion,” he said during a keynote fireside chat with Alex Deluce, editor of Gold Telegraph.
Giustra suggests mainstream media avoids discussing the genuine issues affecting the US economic outlook and the country’s dire fiscal state because no one wants to address the difficult choices ahead. His point is that the only options left—such as inflating away the debt—are highly favourable for gold.
“When the only escape from a fiscal crisis is devaluation, gold becomes the ultimate hedge.”
While the long-term outlook for gold remains bullish, both Giustra and Stöferle urged caution in the short term. Stöferle suggested that the gold prices could fall by $200 per oz. in the coming months as the market digests recent gains.
“I’m not overly bullish in the short term. A breather to $2,300 or $2,350 per oz. wouldn’t be a crash—it would be a healthy consolidation,” Stöferle explained.
Longer term, he said it could reach as high as $4,800 per oz., though not all panelists agreed.
Despite gold’s price surge, mining equities have dramatically underwhelmed.
Rule pointed out that the GDX, an index of gold mining stocks, is down 40% over the past decade. He attributed this underperformance to poor capital allocation, inflationary pressures, and ill-timed mergers and acquisitions.
“There have been some downright stupid capital decisions, especially around M&A and cost inflation,” Rule said. They have tarnished the industry’s image as “a place where money dies.”
Despite these setbacks, he says gold mining equities are poised for a rebound because energy prices have stabilized and input costs have fallen, boosting the earnings potential for gold miners. Rule forecasts the GDX index to double as investors return to the space in the medium term.
Giustra said institutional investors are, frustratingly, still sitting on the equity sidelines, waiting for a more sustained rally before moving back into the space. Like Hathaway, he underlined that once generalist investors re-enter the market, gold mining equities could see a significant upward move.
“The market is waiting for a catalyst. When that comes, we’ll see a flood of capital into mining stocks,” Giustra said.
Stöferle said the gold price action has shifted to BRICS (Brazil, Russia, India and China) nations, driven by global de-dollarization efforts.
“The marginal gold buyer is no longer in the West,” Stöferle said. “China, India, and other emerging markets now account for 50% of physical gold demand and 66% of global jewellery demand.”
Hathaway echoed these points, adding that gold is no longer viewed as just a hedge but as an integral part of emerging market strategies to rebalance global trade.
“De-dollarization is happening, albeit slowly,” he said. “We’re seeing more trade settled in local currencies, backed by gold reserves, as a means to avoid reliance on US dollar treasuries.”
