2019 was a dream come true for gold bugs — 2020 could be even better
What a difference a year can make — just ask a gold bug.
As 2018 drew to a close, the price of the yellow metal was struggling to break US$1,300 per ounce and precious metals mining companies were stuck in the doldrums: Barrick Gold Corp., for example, was trading at $17.88 while Detour Gold Corp was sitting at $10.88, having just emerged from a contentious battle with its shareholders.
As 2019 ends, it’s a totally different story: Gold broke through the US$1,500 per ounce barrier in August for the first time in six years before settling just below that threshold, sparking a run on gold mining equities that was bolstered by a string of transformational mergers. That included deals involving Barrick and Detour, which sat in the $24 and $25 range, respectively, in late December.
But even as gold’s hot run tempered slightly to end the year, its most enthusiastic investors say its prospects have seldom been so positive. They argue that the same factors that helped gold perform so well in 2019 — including trade tensions, potential interest rate cuts, a volatile stock and bond market and geopolitical uncertainties such as Brexit — remain in place to a certain degree and are setting the stage for a massive rally in 2020.
If we hit any growth bumps in the economy, or geopolitically, or pull back in major markets…. I believe gold will soar as an insurance asset
Peter Grosskopf, chief executive of Sprott Resources
Juan Carlos Artigas, director of investment research for the World Gold Council, is one of those who believes the problems have not been sorted out.
“Not only do we think that they’re not going to be resolved, they’ve been postponed, and things we haven’t been thinking of will start to come up,” Artigas said.
Artigas is skeptical about stock market gains, taking the view that low interest rates, including negative yields, have steered many investors to place their money into stocks.
“Stocks have been performing well,” he said. “Many are pretty high especially in relation to interest rates, but it’s driven by easy money, and not fundamentals … (so) you can expect pull back in the stock market.”
Meanwhile, for a second consecutive year, central banks around the world looked to be on pace to be net accumulators of gold. In 2018, central bank purchased roughly 650 tons of gold, the most since 1971 when the U.S. ended its gold standard that allowed its Federal Reserve to redeem dollars with gold, according to Artigas.
So far, through the third quarter of 2019, central banks had purchased 550 tons of gold.
Merger Mania to continue
Peter Grosskopf, chief executive of Sprott Resources Inc.
Peter Grosskopf, chief executive of Sprott Resources Inc., a fund that invests in physical bullion as well as gold miners and explorers, said he is predicting a wave of merger activity among smaller mining companies.
He explained his investment thesis: According to his analysis, the weighted average cost of capital for mid-tier and junior miners is around 15 per cent while major miners enjoy a rate around five per cent. That difference, combined with the rise in gold price this year, will usher in a wave of consolidation among companies with market caps between $800 million and $2 billion, Grosskopf said.
“There will be a lot more activity of majors buying junior miners to fill their development pipeline,” he said. “That trend is just getting started we think … You’ve got to sort through the pack to find the good ones but there’s no way in the world that a senior miner can trade with a five per cent cost of capital and a quality junior can trade at 15.”
In 2019, there has already been more than $30 billion in gold market mergers with the two largest gold producers in the world, Colorado-based Newmont Mining Corp. and Toronto-based Barrick Gold Corp. starting the year off with multibillion-dollar acquisitions. Other deals, most recently Kirkland Lake Gold Ltd.’s $4.4 billion acquisition of Detour Gold Corp., have followed.
Grosskopf says the dollar value of all deals in 2020 is not likely to match 2019, but there are likely to be a greater number of deals.
His thesis is also underpinned by the idea that gold prices are set to rise again in 2020, driven in his mind by the increasing debt loads of governments and corporations.
Of course, he and Artigas both believe there may be volatility in gold prices, which has been a hallmark of gold’s rise through 2019.
“If we hit any growth bumps in the economy, or geopolitically, or pull back in major markets…. I believe gold will soar as an insurance asset,” Grosskopf said. “We think that’s highly likely in the next year.”