AGORACOM Small-cap Investor Relations Blog

Sponsor: Affinity Metals (TSX-V: AFF) a Canadian mineral exploration company building a strong portfolio of mineral projects in North America. The Corporation’s flagship property is the Drill ready Regal Property near Revelstoke, BC. Recent sampling encountered bonanza grade silver, zinc, and lead with many samples reaching assay over-limits. Further assaying of over-limits has been initiated, results will be reported once received. Click Here for More Info

Central bankers have been voracious buyers of gold during the last two years, and analysts look for that trend to continue in 2020.

Through the end of October, net official-sector purchases this year totaled 562 metric tons, reported Alistair Hewitt, director of market intelligence with the World Gold Council. That 56.2-tons-a-month average puts sales on pace to roughly match the 656 tons bought in 2018, which were the most central-bank purchases since 1967, according to WGC data.

“This year has been exceptionally strong. We think that next year, net buying will continue at a high level, even if it’s not as high as this year,” said Philip Newman, director of the London-based consultancy Metals Focus.

Goldman Sachs looks for global central banks to collectively acquire around 650 tons in 2020, while Standard Chartered is projecting central-bank purchases will total 525 tons.

“It’s still elevated,” said Suki Cooper, precious-metals analyst with Standard Chartered. “That is still firmly on the buy side.”

‘Safe, liquid and generates returns’

Hewitt commented that central banks are looking at three main criteria when deciding to expand the amount of gold they hold within their foreign-exchange reserves.

“For a central bank, gold is a fantastic asset because it’s safe, liquid and generates returns over the long term,” Hewitt said.

He also listed two more factors why the central-bank buying has suddenly jumped in recent years.

“One issue is we are seeing heightened geopolitical tensions,” Hewitt said, with these involving major gold-buying countries and economies. “Central banks are looking toward gold to balance some of that risk.

“We’ve also got negative rates and yields for a large number of sovereign bonds.”

Newman added that many central banks are “trying to get away” from the U.S. dollar. This is especially the case with Russia due to U.S. sanctions, he added.

As recently as 2017, most of the official-sector buying came from a handful of central banks, including Russia, Turkey and Kazakhstan. But in 2018 and 2019, there have been a slew, including some that had not been in the market for years.

“You’ve got a whole range of buyers,” Newman said.

The largest buyers during the first 10 months of the year were Turkey with 144.8 tons; Russia, 139; Poland, 100; and China, 95.8.

Others include Kazakhstan, 26.9 tons; India, 17.7; Qatar, 11; Ecuador, 10.6; Serbia and the U.K., 9.9; Argentina, 7; Colombia, 6.1; Kyrgyz Republic, 3.2; Mongolia, 2.3; Belarus, 1.9; Guinea, 0.9; Egypt and Mauritania, 0.7; Albania and Malta, 0.6; and Ukraine and Greece, 0.3.

Goldman Sachs projected that central-bank purchases could amount to as much as 22% of global supplies during 2019.

Central banks ‘buy for an extended period’

Hewitt looks for official-sector buying momentum to continue.

Central banks tend to put a lot of thought into decisions to buy – with a long, rigorous policy-making process — and purchase the metal for strategic reasons, rather than simply reacting to day-to-day moves in the price, Hewitt said.

“Once these people start buying, they continue to buy for an extended period of time,” Hewitt said. For instance, he pointed out that Kazakhstan has been a regular gold buyer since 2010.

“Both trade tensions and negative yields are still here,” Hewitt said. “They may rear their ugly heads again and become more pronounced, or they may fade away and become less pronounced. But those underlying forces will remain ever present in the market. Certainly in the next year or so, those two factors should continue to support and underpin central-bank demand for gold.”

Observers pointed out that not only have central-bank gold purchases been strong, but sales have been light. Back in 1999, when European central banks were selling the metal, they began following central-bank sales agreements to try to limit how much was sold in any one year and thereby keep this from being a destabilizing force in the gold market.

These agreements have been discontinued, Hewitt noted. Commerzbank analysts pointed out they were no longer necessary since hardly any European central banks are selling anyway. Germany’s central bank sells a modest amount each year only for its coin-minting program, Hewitt said.

“The market was not bothered by the central-bank gold agreement coming to an end, partly because the gold market is very different from what it was in 1999,” Hewitt said, adding that there “dramatic selling” back then.

“The gold market today is just more diverse, more resilient and more liquid. That’s why the market just shrugged its shoulder when the central-bank gold agreement came to an end.”

Further, analysts at Commerzbank, in their 2020 outlook, commented that one or more Western European central banks might even enter the market as a gold buyer.

“One possible candidate is the Dutch central bank (DNB), which in October published a remarkable statement about the role of gold on its website,” Commerzbank said. “In it, it described gold as an anchor of trust for the financial system. According to the DNB, gold reserves could serve as the basis for a new beginning in the event of a system collapse.

“If one or more Western central banks indeed started to actively buy gold, this would attract considerable attention and spark market reactions.”

SOURCE: https://www.kitco.com/news/2019-12-18/Central-banks-appetite-for-gold-expected-to-continue.html

Sponsor: Affinity Metals (TSX-V: AFF) a Canadian mineral exploration company building a strong portfolio of mineral projects in North America. The Corporation’s flagship property is the Drill ready Regal Property near Revelstoke, BC. Recent sampling encountered bonanza grade silver, zinc, and lead with many samples reaching assay over-limits. Further assaying of over-limits has been initiated, results will be reported once received. Click Here for More Info

Sponsor: Affinity Metals (TSX-V: AFF) a Canadian mineral exploration company building a strong portfolio of mineral projects in North America. The Corporation’s flagship property is the Drill ready Regal Property near Revelstoke, BC. Recent sampling encountered bonanza grade silver, zinc, and lead with many samples reaching assay over-limits.  Further assaying of over-limits has been initiated, results will be reported once received. Click Here for More Info

• Slovakia joins a host of countries seeking to repatriate
• Serbia, Poland and Hungary have boosted their bullion reserves

Gold is all that nationalist leaders in Europe’s east can talk about these days.

Just this week, Poland’s government touted its economic might after completing the repatriation of 100 tons of the metal. Over in Hungary, anti-immigrant Prime Minister Viktor Orban has been ramping up holdings of the safe-haven asset to boost the security of his reserves.

The gold rush mirrors steps by Russia and China to diversify reserves exceeding $3 trillion away from the dollar amid flaring geopolitical tensions with the U.S. Motivations in Europe’s ex-communist wing, however, can vary.

Take the latest example. Former Slovak Premier Robert Fico, who has a shot at returning to power, urges parliament to compel the central bank into bringing home gold stocks stored in the U.K.

The reason? Sometimes your international partners can betray you, Fico said, citing a 1938 pact by France, Britain, Italy and Germany allowing Adolf Hitler to annex a chunk what was then Czechoslovakia, and — more recently — the Bank of England’s refusal to return Venezuela’s gold stock over political differences.

“You can hardly trust even the closest allies after the Munich Agreement,” Fico told reporters. “I guarantee that if something happens, we won’t see a single gram of this gold. Let’s do it as quickly as possible.”

His comments came despite the U.K. being one of Slovakia’s closest allies after the Soviet empire crumbled, helping ease the path to European Union and NATO. Fico said Brexit and the risk of a global economic crisis put Slovak gold stored in Britain in a dangerous situation.

The gold Poland brought back also came from the U.K., though there was no questioning of Britain’s reliability by central bank Governor Adam Glapinski.

Instead, he said he wanted to demonstrate the strength of his nation’s $586 billion economy — the largest in the EU’s east. Poland has doubled its gold holdings in the past two years and now has the region’s biggest stockpile.

Hungary, though, has been an active buyer too. Gold reserves surged 10-fold last year, setting the clamor for the metal in the countries around it in motion.

Serbia’s strongman leader Aleksandar Vucic took note, ordering the central bank to boost reserves and prompting the purchase of nine tons in October. Vucic said last week that more should be bought because “we see in which direction the crisis in the world is moving.”

The biggest nation to emerge from the breakup of Yugoslavia still keeps some of its gold abroad, the central bank said by email. The region is buying more of the metal because of global uncertainty over trade and politics, Brexit and low interest rates, it said.

Romania had also sought to relocate some of its gold reserves from the U.K., but those plans were put on hold when the government behind them was ousted in October.

For the no-nonsense leaders that have come to dominate eastern Europe, the main benefit may be the message to voters that hefty holdings of the precious metal conveys.

“Gold is a symbol,” said Vuk Vukovic, a political economist in Zagreb. “When states purchase it, people everywhere see it as a sign of economic sovereignty.”

By Andrea Dudik and Radoslav Tomek

https://www.bloomberg.com/news/articles/2019-11-29/gold-is-the-new-obsession-for-east-europe-s-nationalist-leaders

Sponsor: Affinity Metals is a Canadian mineral exploration company building a strong portfolio of mineral projects in North America. The Corporation’s flagship property is the Drill ready Regal Property near Revelstoke, BC. Recent sampling encountered bonanza grade silver, zinc, and lead with many samples reaching assay over-limits.  Further assaying of over-limits has been initiated, results will be reported once received. (TSX-V: AFF) Click Here for More Info

Gold mining stocks have soared approximately 30% so far in 2019, based on the performance of the NYSE Arca Gold Miners Index (GDM) as of November 15.¹ Over the last 12 months, the sector is up nearly 50%. Some investors may assume that gold stocks have run their course. On the contrary, we think that the gold mining equities still have a great deal of upside to offer.

In brief, we think we’re in the early stages of a prolonged bull market for gold. While the relationship between the prices for gold bullion and gold stocks isn’t a linear one, rising demand for the yellow metal commodity has historically driven stock performance. Moreover, despite the recent rally, gold mining stocks have yet to recover from the beating they suffered starting in 2011. Still, recent outperformance — coupled with improving fundamentals — creates momentum, a key factor in many quantitative strategies.

Gold has been a store of value since the beginning of civilization, and yet the nuances of investing in gold â€” be it the metal or miners â€”  is still a source of confusion. As we see it, that also means opportunity.

Here are five reasons to consider investing in gold equities now.

REASON #1. Rising Gold Prices Drive Demand

Figure 1. Gold Bull Market is Just Getting Started

Source: Bloomberg as of 11/15/19. Gold was $1,514 on 11/1/19, and $1,468 as of 11/15/19. 

Gold recently broke past $1,500 an ounce for the first time since 2013 (Figure 1), as global political and macroeconomic trends are driving demand for the yellow metal. Along with other strategists, we think gold bullion could surpass its all-time high of $1,900 within the next couple of years. Key factors driving long-term demand for gold as a store of value and defensive asset, especially among central banks and institutions, include low-to-negative interest rates, rising debt levels, trade tensions and intensifying geopolitical risk.

Price movements for physical gold and gold-mining stocks aren’t perfectly in sync, but the relationship between them is strong and persistent, across economic cycles.

Historically, rising (and falling) gold prices have a three-times multiplier effect on gold stocks: If the value of gold bullion increases by 10%, mining stocks tend to increase by 30%, and vice versa. The reason: Miners have significant fixed operating costs and high operating leverage, meaning big swings in physical gold prices have a larger impact on miners’ profitability.

This relationship cuts both ways, as we saw after physical gold prices peaked in late 2011. As the value of gold subsequently declined (Figure 2), the value of gold stocks plummeted even more. Between 2011 and 2018, the sector posted negative returns in six out of eight calendar years. Even with recent gains, gold mining stocks have yet to recover relative to historical valuations. Since the sector peak in April 2011, gold mining equities are still off by more than 60%.

Figure 2. Gold Mining Equities are Very Undervalued

Source: Bloomberg as of 11/12/19.

Figure 3. Gold Demand Has Rebounded: Purchases by Central Banks

Central banks have been net buyers of gold over the past 10 years. Gold plays an important part in central banks’ reserves management, and they are significant holders of gold. According to the World Gold Council: “Today, central banks own almost 34,000 tonnes (t) of gold, making it the third-largest reserve asset in the world. The increase in central bank demand for gold reflects current geopolitical, political and economic conditions, as well as structural changes in the global economy. Gold is both a liquid, counter-cyclical asset and a long-term store of value. As such, it can help central banks meet their core objectives of safety, liquidity and return.” 

Source: Metals Focus, Refinitiv GFMS, World Gold Council. As of June 30, 2019.

REASON #2. Gold Stocks are Severely Undervalued

Given the amplified volatility of gold stocks relative to gold, investors need to go in with their eyes wide open. Nevertheless, multi-year declines may now set the stage for significant upside.

While miners as a group still trade below their net asset values, the discounts of smaller, “junior” miners are especially extreme, as much of the recent rally has been driven by the largest, “senior” gold miners. In fact, the valuation gap between North American junior and senior gold miners is the widest it’s ever been.

Figure 4. The Valuation Gap Between Senior and Juniors is at Historic Extremes

Source: BMO Capital Markets, FactSet. North American senior vs. junior gold miners. As of 7/19/19.

Reason #3. Supplies are Limited

Most investors grasp the importance of investing in companies whose business models are protected by “competitive moats.” Gold miners have this in spades, as it can take 15 years from discovery of a new gold mine to successful ore production. The barriers to entry are enormous for newcomers in this sector, given the need for expensive and specialized equipment, environmental regulations and political considerations.

Meanwhile, the supply of gold is finite and there have been increasingly fewer gold discoveries in recent years. This dynamic — combined with depressed valuations of junior gold miners â€” is driving consolidation in the industry. It is far cheaper for senior miners to buy new gold production than to “build” capacity themselves. In fact, based on an analysis of recent transactions, there is a 35% discount for buying ounces in the market via acquisitions versus discovering new ounces (according to Scotiabank).

Figure 5. Major Gold Discoveries have Declined Significantly

Source: © Copyright by SNL Metals & Mining 2016. All rights reserved.

REASON #4. Momentum May Turn Positive

Investors love momentum â€” following positive trends in prices, earnings and other factors â€” and the rise of quantitative strategies has made this market phenomenon even more pervasive. For the last eight years, momentum has largely worked against the gold mining sector, but now there are signs the wind is shifting, and that momentum could soon work in its favor.

Analysts covering the sector have understandably been conservative in their estimates and may soon be playing catch up, given higher gold prices and a leveling off of mining costs. Any improvements in earnings outlooks could potentially accelerate positive momentum for the sector. As my colleague Paul Wong wrote earlier this month in The Sweet Spot for Gold Equities: ”At this stage in the gold cycle, we are in the sweet spot for gold mining company earnings. A starting low gold price base will result in earnings changes with a high percentage increase when measured quarter-over-quarter or year-over-year.” 

In Figure 6, we highlight the progression of 2020E EPS (estimates of earnings-per-share) revisions for the top-10 gold mining companies in SGDM² versus the average 2020E EPS for the top-20 companies in the S&P 500 Index.³ Since January 2019, the average 2020E EPS for the top-10 gold mining companies had increased from $0.65 to $0.98 by the end of October, representing a 50% jump, compared to a decline of 9% for the S&P 500. After the Q3 reporting season, we would expect that 2020E EPS for gold miners will be revised even higher.

Figure 6. Sweet Spot for Gold Mining Company Earnings

Source: Bloomberg as of 10/31/19.

REASON #5. Gold Stocks Play a Different Role than Bullion

As with any investment, it’s important to think about the role of gold stocks in the context of a broader portfolio. One common misconception is that gold stocks and physical gold are two sides of the same coin. While their fates are certainly correlated, as asset classes they could not be more different.

Physical gold, whether it’s in the form of coin, bar or a trust (for example, Sprott Physical Gold Trust, NYSE Arca: PHYS), should be viewed as a stable store of value. It’s counter-cyclical and has proven over millennia to be an effective hedge against market turbulence and volatility.

As such, we recommend that investors allocate between 5% to 10% of their assets to physical gold and precious metals.

Gold stocks, conversely, should be viewed in the context of an investor’s overall equity portfolio; the size of the allocation will depend on many factors, including risk tolerance. Strategists advocate owning gold stocks continuously, in part because they have low correlations to the broader market. However, most investors view gold stocks as tactical investments. When valuations are severely depressed, as they are now, gold stocks may have the potential to outperform. 

At Sprott, we believe that it may be time to consider investing in gold stocks, in addition to physical gold.

BY Ed Coyne

SOURCE: https://sprott.com/insights/five-reasons-why-gold-stocks-make-sense/