Gold Nearing an All-Time High; Are the Miners Benefiting ? (...No)
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Driven by the ongoing US banking stress coupled with the Fed's signaling of an end to the hiking cycle, risks surrounding the US debt ceiling negotiations and continued central bank demand, gold at $2,058 per ounce (March 4) is nearing its all-time high of $2,075, achieved in June 2020. In addition to the aforementioned drivers, note that according to the World Gold Council, net inflows into ETFs were registered in March ($1.90B or +32t), representing the first inflows in 10 months. Lower yields and a weakening dollar have pushed gold to outperform all other liquid commodity futures with +12.6% YTD performance, surpassing the +9.6% from silver, +1.3% from copper, -14.4% from WTI and -53.1% from natural gas. Extending the performance period from 2010, gold's outperformance relative to the other commodities is even more apparent:
For most of this past April, gold spent time above the $2,000 per ounce level. Prior to this recent period, the last time gold surpassed $2,000 was March 8, 2022 when the precious metal briefly touched $2,040 per ounce but failed to remain above the $2,000 level in the subsequent days. In light of the current Q1/2023 reporting window, we thought it interesting to compare cash margins in the two quarters (Q1/2022 and Q1/2023) where gold was above (or near) the psychologically significant $2,000 level. Though last month (April) is technically Q2/2023, gold was relatively high in Q1 and ended the month of March a shade below the $2,000 level. Moreover, for the current comparison purposes, we only have the data points from Q1/2023 to work with (our sample group of large cap gold miners consists solely of those companies which have already reported to date). The peer group below consists of Barrick Gold (GOLD), Newmont Mining (NEM), Agnico Eagle (AEM), Eldorado Gold (EGO), SSR Mining (SSRM), Alamos Gold (AGI) and finally Endeavour Mining (EDV.CN).
Interestingly enough, from Q1/2022 to Q1/2023, though the average realized gold price from the comp group increased from an average of $1,883 per ounce to an average of $1,902, the net cash margins dropped, going from $1,046 to $973 per ounce in the very same timeframe. This clearly illustrates the margin erosion bought upon by 10 consecutive rate hikes since the start of 2022, coupled with strained supply chains and inventory delivery backlog. Though the more recent indicators point towards inflation abating, labor costs remain stubbornly high and characteristically inelastic. All that said, though the gold miners listed above have increased by an average of +21.5% YTD, since the previous gold high on March 8, 2022, the peer group has in fact declined in value, decreasing by an average of -9.0% to date (excluding the performance of Alamos which was an outlier at +65.5%).
The first leg for the gold miners outperformance is a sustained and elevated gold price environment. This is where we are at present. and arguably, prices will remain at these elevated levels over the near term. The second leg needed to be seen is a concerted decrease in inflationary pressure so that the miners can fully benefit from an elevated gold price and demonstrate a certain degree of margin expansion. Q2/2023 may be the critical quarter to test that hypothesis should inflation continue to soften. Until then, B2Gold (BTG) and Kinross Gold (KGC) report on May 9, Torex Gold (TXG) reports on May 10 followed by IAMGold (IAG) and K92 Mining (KNT.CN) both reporting on May 11. Perspective if everything.