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Gold SWOT: Gold has a shaky start to the new year on hawkish Fed Minutes

Commentaries & Views

Strengths

  • The best performing precious metal for the week was palladium, up 1.59%, perhaps on the threat of labor negotiations breaking down in South Africa. Gold stabilized largely by Friday after disappointing hiring figures came in at half of what was expected. However, this marks the worst weekly loss in the past six on the 10-TIPS yield, climbing from -1.032% to -0.747%, becoming less negative.

  • Exchange-traded funds (ETFs) added 71,225 troy ounces of gold to their holdings in the week. The purchases were equivalent to $128.3 million at yesterday's spot price. The Perth Mint's sales of gold coins and minted bars hit a decade high in 2021, thus showing retail interest in the physical metal. More significantly, Ireland has added about 3 tonnes over the past three months to its gold reserves, a 60% increase from the amount held a decade ago, according to Bloomberg.

  • Centerra Gold Inc. confirmed that it is engaged in negotiations with representatives of the Kyrgyz Republic to resolve disputes related to Centerra's Kumtor Mine and the seizure of control of the mine by the Kyrgyz government in May 2021. Centerra expects that the framework for any resolution would involve Centerra receiving the approximately 26.1% in Centerra common shares held by Kyrgyzaltyn JSC (an instrumentality of the Kyrgyz Republic) and upon receipt, Centerra would cancel the shares. The Kyrgyz Republic would assume all responsibility for Centerra's two Kyrgyz subsidiaries and the Kumtor Mine.

Weaknesses

  • The worst performing precious metal for the week was silver, down 4.03%, which was expected alongside the hit that gold took. Gold and base metals slid for a second day after minutes from the Federal Reserve highlighted prospects of faster monetary tightening. A strengthening U.S. economy and higher inflation could lead to earlier and faster interest-rate increases, with some policymakers also favoring starting to shrink the balance sheet soon after, according to minutes of the Fed's December 14-15 meeting. Gold slid as Treasury yields climbed to the highest since April, pressuring non-interest-bearing assets.

  • Pure Gold announced fourth-quarter production figures, first-quarter guidance, a change in some executive management, and numerous operational updates. Although fourth-quarter production and first-quarter guidance were both below expectations, the change in management with a strong focus on operational execution is a very welcome change.

  • Last week, MAG Silver and partner Fresnillo announced that full load commissioning of the 4,000 tons per day Juanicipio plant will be delayed by at least six months due to additional blackout-prevention requirements and delays in inspections from the Mexican electrical authority. Early ore will be processed at 1,300 tons per day at nearby Fresnillo mills until grid power can be connected, decreasing MAG's attributable 2022 free cash flow by 50%. While MAG recently secured an additional $80 million in liquidity, this delay does increase the risk to the company's balance sheet.

Opportunities

  • Bank of America forecasts gold and silver to average $1,925 and $30.13/ounce in 2022, +7.0% and +15.1% year-to-year. Gold historically has been a useful portfolio diversifier and hedge against risk uncertainty. A headwind for gold now is the Fed delivering a hawkish shift in late 2022. Aggregate gold equivalent ounce (GEO) output for the North American gold producers is forecast to increase 4% year-to-year to 23.9 million GEO in 2022. During 2021, production was impacted by COVID issues at a number of mines and several companies experiencing operating issues at key mines.

  • The Board of RTG Mining reported that the Department of Environment and Natural Resources (DENR) of the Philippines has lifted the four-year-old ban on the open pit method of mining gold and other ores. The lifting of the ban was meant to revitalize the mining industry as there are significant economic and social benefits to be realized, according to the DENR.

  • Investors should expect more acquisitions during 2022. According to Bank of America, the race to replace reserves mined has led to accelerated M&A in the global gold sector in the fourth quarter of 2021. There were 11 deals announced (versus a quarterly average of nine deals) at a total value of $5.36 billion (the seventh highest quarterly total since the fourth quarter of 2012). During the fourth quarter of 2021, 8.9 million ounces of gold reserves were acquired, bringing the 2021 total to 18 million ounces. Despite exploration success, they still had to acquire 30% of their reserve ounces through acquisitions, just to stay flat for the year on reserves.

Threats

  • According to Bank of America, sector average all-in-sustaining-cost (AISC) could increase 3.8% year-to-year to $1,078 per ounce in 2022. On a third-quarter 2021 results calls, gold company CEOs were expecting cost escalation of around 3% to 7% for materials (steel, copper, and lumber), energy, and labor into 2022. In addition, royalty and production taxes are seen adding up to $30 per ounce to cost structures. Sustaining capital spending is forecast to be over 10% year-to-year.

  • Goldman sees oil and copper as better hedges against inflation than gold. Jeff Currie is "extremely bullish" on commodities in general, saying the market is at the beginning of a super cycle that could go on for a decade amid underinvestment in production and spending on green technologies.

  • Naysayers who say gold was perhaps the greatest disappointment of 2021 may be missing the boat. For 2021, an inflation hedge that pays no yield, the uber-low real-rate environment offered an almost ideal environment for bullion to rally. Yet the spot metal fell 3.6%. Of course, these pontificators won't offer up the facts that the gold price was up 18% in 2019 and another 25% in 2020, long before inflation showed up. Oh! But they got one more ace in the hole; the Fed is going to raise interest rates later this year, perhaps as early as March. Trouble is, everybody that is buying gold already knows that.
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