Gold’s moment?

No holding back the go-to crisis and inflation hedge

The Russo-Ukraine war has had an immediate impact on world commodity markets, most visibly energy, but also grains and fertilizers. Metals have also seen price spikes, including gold, which recently crossed the US$2,000 per ounce threshold after marking time in a trading range for over a year and a half. So with gold now on the radar reasserting its use as the ultimate crisis and inflation hedge, is it time to dip into the gold mining sector?

First, a little background on what’s been driving these price moves.

The biggest moves have been in certain metals, such as nickel, which hit an all-time high in early March on the London Metals Exchange, where trading was suspended due to the difficulty of settling trades. Aluminium, copper, palladium, and even iron ore and coal all shot up on the possibility of Russian exports being hit by sanctions by the U.S. and Europe in protest against the Russian invasion of its neighbour.

The sanctions and embargoes imposed by Western nations on Russia, which also cut Russian banks off from the global SWIFT settlement system, initially did not include Russian oil and gas products, as Russia accounts for over 40% of Western Europe’s gas imports. Limited liquefied natural gas (LNG) imports from the U.S., Qatar, and Algeria are not enough to immediately replace Russian supply, leading to the possibility of power interruptions in the short term.

However, the U.S., Canada, and the U.K. have now all sanctioned Russian oil exports, with very little domestic impact, because Russian exports comprise only 3% of U.S. oil imports and 8% of all oil-related products, 5% of British imports, and less than 2% of Canada’s oil imports.

When announcing the sanctions on March 8, President Joe Biden noted that the European countries were not in a position to follow his lead, but oil prices still rose to near their all-time highs of the 2008 financial crisis. In fact, the first week of March saw the largest-ever increase in overall commodity prices since records began over 60 years ago.

Gold in waiting

The one commodity that had been a laggard in this upward move of commodity prices was gold, which until February stubbornly resisted any move to the US$2,000 threshold. With inflation running at levels not seen in 40 years (an annual 7.9% in the U.S. in February and over 5% in Canada, the U.K., and the European Union), and with the Russo-Ukraine war imminent in early February, gold’s failure to move was frustrating traders, who wondered why an asset that had proven to be a good hedge against inflation and risk in the past was still not attracting as much investor interest.

However, with the actual invasion of Ukraine, and with the rapid imposition of effective sanctions, which had the effect of driving up the prices of all sorts of hard and soft commodities, gold finally broke out from the US$1,800-US$1,900 range it had been trading in for much of the last year. Over the past week, gold has risen back over $2,000 per oz., before closing the week at US$1,992.

Looking at the last time gold began a long term bull market, in 1999-2000, gold rose from $250 an ounce, marked by an Economist magazine cover entitled “The Death of Gold?”, to $850 an oz. ahead of the financial crisis of 2008, or by 340% in less than a decade. In 1973-74, when the Yom Kippur War saw the price of oil more than treble from less than $4 per barrel to $11, gold more than trebled to over $150 per ounce from US$35 per ounce during the inflation that followed.

While not suggesting gold will necessarily exactly match that kind of performance this time, it’s reasonable to assume that having taken out its previous all time high, gold could run to $2,500 per ounce, a 25% move.

This would be reflecting in gold mining stocks, which are operationally leveraged to the price of gold, as every additional dollar increase in the price of gold drops straight through to their bottom line.

Thus, the gold mining sector went up more than twice as much as the actual price of gold during the 2000-08 bull market. One of the frustrations over the last 18 months since gold last touched $2,000 per oz. has been the disappointing performance of the gold stocks. The iShares Global Gold ETF has finally started to outperform physical gold, up 31% compared with a 21.5% advance in gold over the last year. Almost all of that performance has come in the last month, when the ETF rose 23.5% compared with 12.2% for gold bullion.

I’ve been recommending exposure to gold and materials stocks over the last few years, as they have paid down debt, become more efficient at mining their resources, and in some cases have effected non-dilutive zero-premium mergers which have created operational savings and improved their geographical diversification.

Attractive gold mining plays currently include miners Barrick Gold Corp., Agnico Eagle Mines Ltd., Equinox Gold Corp., royalty play Franco-Nevada Corp., and junior miner First Mining Gold Corp. In other metals, Pan American Silver Corp., base metal plays First Quantum Minerals Ltd. and Anglo Pacific Group, and uranium producer Cameco Corp. are worth keeping an eye on. As always, discuss investment strategy with your advisor before trading in these stocks, as they tend to be volatile and at the higher-risk end of the equity spectrum.

Gavin Graham is Chief Strategy Officer of Calgary-based SmartBe Investments. He is a veteran financial analyst, money manager, and a specialist in international investing, with over 35 years’ experience in global investment management.

Notes and Disclaimer

The commentaries contained herein are provided as a general source of information, and should not be considered as investment advice or an offer or solicitations to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication, however, accuracy cannot be guaranteed. Investors are expected to obtain professional investment advice.

The views expressed in this post are those of the author. Equity investments are subject to risk, including risk of loss. No guarantee of performance is made or implied. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.