Strengths
- The best performing precious metal for the year was platinum, up 11.33% with most of the gains coming over the past quarter. The World Platinum Council expects a platinum deficit in 2023 with demand growing 19% and supply only rising 2%. According to UBS, there are three structural reasons in favor of gold: 1) Long-term investors and the official sector are gradually building gold allocations. Central banks have been net buyers of gold for more than a decade now, amid a broader trend of diversifying dollar-denominated reserves. 2) The proportion of gold holdings relative to overall assets held by institutional investors remains light, in their view, and they think it is likely held more for diversification and portfolio protection rather than expectations of outright material price appreciation. 3) Strong physical demand has also been a key factor affecting the relationship between gold and real rates, in their view. Key physical gold markets India and China have continued to buy large volumes of gold this year, helped by cheaper prices as gold came under pressure from macro forces.
- Deal flow for the royalty sector remains strong, with increased complexity in deal investment structures, partly due to intense competition between royalty companies for quality assets, and $1.2 billion of transactions announced since June 2022. Year-to-date, $2.9 billion has been deployed (one of the highest years on record), driven by sector consolidation. The current deal pipeline remains focused on precious metals streams and development projects.
- Russia's Finance Ministry announced the doubling of the amount of Chinese yuan and gold it can hold in its national wealth fund. The upper limit for yuan share would be 60% and the upper limit for gold would be 40%. The fund held $186.5 billion in November. To further internationalize renminbi, China announced it will extend the trading hours for the onshore yuan to 3 a.m. local time the next day rather than 11:30 p.m. effective Jan. 3, according to the People's Bank of China (PBOC).
Weaknesses
- The worst performing precious metal for the year was palladium, down 7.12% despite MMC Norilsk Nickel PJSC, which controls 40% of the global palladium market, noting global markets will face a sharp deficit in 2023. Perhaps the market expects some of the metal to reach the market through commodity rehypothecation, but electric vehicles (EVs) will start to gain more market penetration, limiting the need for palladium loaded with catalytic converters for gasoline engines. While gold is a traditional haven in times of economic distress, the precious metal has slumped over the past month in the face of the greenback's relentless gains and hawkish moves by central banks.
- Cost inflation continues to be a key theme for the precious metal producers, and against that backdrop, the royalties as a group outperformed in 2021, down 4% on average versus the producers down 13% and gold 4%. So far in 2022, the royalty sector is down 2%, on average, against a flat gold price (+1%), and while slightly lagging the senior producers (+2%), they are outperforming the intermediate and junior gold producers, down 12% and 19%, respectively.
- The World Platinum Investment Council (WPIC) lowered its supply forecast to 7.78 million ounces as it expects lower output from South Africa and Russia. Additionally, the organization estimated supply at 8.18 million ounces earlier this year and Major South African producers are all lowering guidance. The WPIC sees sanctions impacting Russian output and has reduced its platinum surplus outlook to 627,000 ounces from 652,000 ounces.
Opportunities
- Mergers and acquisitions (M&A) will continue into 2023, with numerous senior companies having publicly commented on looking at M&A as part of their growth strategy. Transactions that provide diversification and less risk concentration would garner shareholder support. There may be further consolidations in the streaming space (between the smaller players) as these transactions are done to increase market cap in a business that allows for growth with synergies. According to RBC, valuations for these junior miners have approached lows not seen since 2015 when gold was $500 per ounce lower at $1,200, setting the stage for potential deals.
- Zoltan Pozsar of Credit Suiss penned an interesting report titled "War and Commodity Encumbrance" this week. At the heart of the work is how China has changed the structure of oil trade with Saudia Arabia in that the Shanghai Petroleom and Natural Gas Exchange will be fully utilized renminbi settlement in oil and gas trade, creating the dawn of the "petroyuan." What will the Saudis do with the renminbi they accumulate from selling their oil? One obvious option is converting your it directly into gold on either the Shanghai Gold Exchange or the Hong Kong Gold Exchange, which have offered that convertibility option since 2016 and 2017, respectively. The new invoicing for all oil and gas in renminbi is expected to be completed over the next three to five years. Gold is likely to remain well bid as the dollar loses market share in world energy trade.
- And if you needed any more confidence to stay long gold, Mark Cuban, billionaire owner of the Dallas Mavericks said, "I want Bitcoin to go down a lot further so I can buy more." Cuban had less flattering words for gold investors, but most people want the price of something they own to go up a lot, so they can sell it.
Threats
- According to Morgan Stanley, gold looks overvalued versus recent moves in real yields, although some support is coming through from still strong inflation and rising risks of recession, and sentiment could turn if rate expectations start to reverse.
- Late in the week, it was reported two B2Gold Corp employees were killed after armed robbers attacked a local bus transporting the employees from the Fekola Mine to Bamako, Mali. There were security forces on the transport bus, but the incident resulted in the death of two employees. All reports indicate this was not a terrorist incident, yet it underscores the risks involved in working in certain countries.
- Google searches for "diamonds" in the U.S. appear to have decoupled from their historical trend of sharply rising into the holiday season. This could be indicative of weakening consumer appetite for these stones, as evidenced by the softening for polished prices across the size spectrum as well as the weaker than expected DeBeers site sales.
