Gold loses status as a haven from inflation and market chaos

Even the largest gold producers seek diversification

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Gold bugs should have a moment.

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Inflation appears to be spiraling out of control for the first time in decades. The stock markets have been thrashed. Against the background of rapidly rising interest rates, the shadow of a recession is emerging. Russia’s ongoing attack on Ukraine has created chaos in the world’s food supply, trade and political order.

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All of these factors have traditionally driven investors to buy gold, which has been a safe haven for centuries. But the price of gold is in free fall along with stocks of gold miners.

Case in point: Last week, gold fell 3 percent to $1,665 an ounce after data was released showing US inflation hit 8.3 percent in August, the opposite of what you might think given new evidence expected for strong upward pressure. Gold is now down about 20 percent since hitting $2,087 an ounce in March.

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Meanwhile, since April, the VanEck Gold Miners ETF and the Van Eck Junior Gold Miners ETF, two exchange-traded funds indexed to the largest gold producers and explorers, respectively, are down 42 percent and 40 percent, respectively.

With that in mind, Canadian gold mining executives are gathering in Denver this week for the Gold Forum Americas, a conference bringing together the largest companies to present to investors. Analysts said they expect one of the key issues to be how gold producers plan to keep costs under control, rather than trying to leech on the inflation story. In fact, many analysts attribute gold’s underperformance to central banks’ response to inflation – raising interest rates to cool the economy.

“If we take a step back, higher nominal interest rates combined with potentially moderating inflation in the coming months (although still well above the Fed’s 2% target) will likely result in lower gold prices (higher interest rates increase opportunity costs). for holding gold). ” wrote Fahad Tariq, an equities analyst at Credit Suisse, in a Sept. 13 note to investors, citing the US Federal Reserve.

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Fahad wrote that markets are currently pricing in a 20 percent chance that the Fed will hike rates a full percentage point, which the Bank of Canada did in July.

Bearish sentiment appears to have infected the sector, with even the largest gold producers looking to diversify

One of the narratives that has supported gold in the past is that central bankers cannot be trusted to keep prices under control. As recently as November 2021, Fahad had written about gold as an “inflation hedge” and “defensive asset,” outperforming when growth-oriented assets struggle. Gold prices rose in the early months of the year as investors sought sanctuary amid the geopolitical chaos unleashed by the war in Ukraine.

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But Fahad conceded that the case for gold as a safe haven only stands if the global economy enters a protracted recession or if central bankers cannot keep up with inflation. Credit Suisse analysts said they are persuading central banks to tame inflation with higher interest rates and that a shallow recession is a more likely scenario than a deeper downturn. As a result, they lowered their gold price estimates this year from $1,850 an ounce to $1,725 ​​an ounce and forecast $1,650 an ounce in 2023.

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Meanwhile, bearish sentiment appears to have infected the sector, with even the largest gold producers looking to diversify.

Last week Agnico Eagle Mines Ltd., the largest gold producer in Canada and the third largest gold miner in the world, announced it would diversify its portfolio by investing $580 million to acquire a 50% interest in the San Nicolás copper mine. Zinc project in Mexico.

For Agnico, which focuses exclusively on precious metals, such a large investment in an under-construction copper-zinc project that is years away from production — $580 million represents 36 percent of its first six-month operating margin this year – represents a new direction.

CEO Amman Al-Joundi described it as a “unique opportunity” as his company already operates a mine in Mexico.

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Similarly, Natalie Frackleton, a spokeswoman for Agnico, called it unique: “Agnico’s primary strategy is to be a world-class gold producer. However, we believe that San Nicolás offers a small, natural degree of diversification to our gold business,” she said.

With demand for copper and zinc expected to increase due to their use in energy transition technologies, the deal could herald how gold miners look to grow in the future.

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Bank of Montreal analyst Jackie Przybylowski recently wrote that more gold companies may seek to diversify their commodities as “electrification and green energy issues” grab investor attention.

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Toronto-based CEO of Barrick Gold Corp., Mark Bristow, has admitted that several years ago he was involved in unsuccessful merger talks with US-based Freeport-McMoran Inc., one of the world’s largest copper producers.

“Copper is probably the most strategic metal, and it’s geologically related to gold,” Bristow said. “So in the plenitude of time, if you want to become a world-leading gold company, you will end up producing [copper].”

If the price of gold continues to decline, other gold miners may also look to add copper, zinc, and other metals to their portfolios.

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