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Gold will gain from dedollarization, and the critical shortages are not in the metals themselves - Randy Smallwood

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(Kitco News) - The politicization of the U.S. dollar is forcing banks into gold, while the Fed is making capital more expensive at a time when mines need to invest in growth, according to Randy Smallwood, President and CEO of Wheaton Precious Metals and Chair of the World Gold Council.

“The need for gold, the original critical mineral, as a store of value, as a measure of value, but a constant store of value in times like this has never been more apparent,” Smallwood said. “As we continue to struggle through this challenge of high inflation rates, I just get the sense that it's a bit of a house of cards that wouldn't take much to fall over.”

Smallwod spoke with Kitco News journalist Ernest Hoffman at the recent PDAC 2023 mining convention in Toronto, where he discussed the state of the precious metals market. He also explained what’s driving the recent M&A activity in the mining sector.

“I think it's a problem with growth opportunities out there,” he said. “When people start looking at their production profile going out, they realize they've got some holes four, five, six years out, and shareholders don't want to see those production holes come to fruition, so everyone has to look at different ways to grow.”

Smallwood said that things like permitting and licenses are making it harder and harder to build new mines. “There's no doubt consolidation is going to play a more important role as time moves on on that front, and I think we're starting to see it's one of the paths towards filling some of those production holes.”

He also acknowledges that M&A is a way for mining majors to support their stock prices and keep investors happy while new projects get underway. “Definitely, assuming that it's good value that they're buying,” he said. “Sometimes you can pay too much for these things.”

Smallwood believes that the mining sector has been in a growth phase since 2018, following a focus on balance sheet repair during the five years prior. When we look at where demand is going for metals in this world, I think we still have a lot of growth in this industry in terms of new mines coming on stream,” he said. “There's a lot of very, very tired old mines that are getting near the end of their life over the next few years, and so they're going to have to be replaced with something. Not only that, there's an increasing demand as the world tries to electrify, especially for a lot of the critical minerals. We don't see any slowdown on that, there's going to be continued investment in the space.”

He also sees the Fed’s rate hikes having a significant impact on the mining sector, but this actually benefits streaming companies.

“It's making debt more expensive, and debt is one of the sources of capital that companies use to grow. We are a different source of capital, as in the streaming business model, so this is a net positive for us,” he said. “It does make streaming even more attractive compared to other sources of capital. It's also having an impact obviously on growth profiles and demand for metals, but I do think there's enough other factors playing into demand for metals that'll still keep the mining industry strong.”

Smallwood also spoke in his capacity as Chair of the World Gold Council when looking at the potential moves for gold prices, where he sees strength for the foreseeable future.

“In most currencies around the world gold is already near all-time highs, and it's actually not that far off in US dollars,” he said. “Even in the face of a very strong US dollar on a relative basis, and I would say 2022 was the year of the US dollar, the strongest US dollar we've ever seen.”

He also reflected on the changing role of the U.S. dollar as a reserve currency on the international stage, saying that USD has been politicized and this will drive not only investors but also central banks to hold the yellow metal.

“The US dollar is widely accepted around the world as a pretty apolitical device, it's not subject to too much political influence,” he said. “What we saw last year is, it actually does have some political influence. The central bankers, the people that are responsible for the store of value within each currency, within each country's central bank itself, are starting to realize that they may have a little bit too much U.S. dollar exposure. Where are they going? To gold.”

Smallwood also sees the recent trend of investment moving into base metals and lithium to support electrification, but he doesn’t believe gold will suffer as a result.

“The market itself will define how that growth occurs, the right pricing in terms of what's happening,” he said. “We've seen cobalt at highs and then down lows, it's down low again. The commodity pricing itself is ultimately what's going to drive how much gets invested into each one of these sectors on a go-forward basis. Gold's holding up pretty well.”

Smallwood sees critical shortages not in the metals themselves, but on the investment side, and with the single asset project developers in particular.

“There is a critical shortage,” he said. “Where it really stands out is the single asset project developer company, the company that's trying to build a mine but they don't have any operating cash flow. Anyone that's in the mining business and that's actually operating mines right now is actually generating pretty good cash flows, they've got strong balance sheets. We're a service provider, we supply capital, and we don't see a lot of opportunities in that space because those companies are all pretty profitable. But we've lost a lot of those investors that used to support those single asset developers, so there's a huge void in that space. Most of the stuff we're looking at is working with single asset project developers on a go-forward basis, but we can't do it all. We need those investors back, we have to have some success stories.”

“There's some great rewards in there if you can find the right assets.”

To find out which projects Smallwood believes are heading in the right direction, watch the above video.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.