Mixed Signals on Inflation

Gold flat as rates and inflation outlook opaque

The gold price was near flat, down -0.2% to US$2,022/oz, as the outlook for global rates and inflation remained opaque with some news flow appearing to indicate a potential resurgence of prices but other data pointing to a continued cooldown.

Mayfair and Osino outperform among TSXV Mid-Tier Gold

This week we look at the price and operating performance and valuations of the TSXV Mid-Tier Gold stocks over the past year, with Mayfair Gold and Osino Resources seeing the largest price gains, with the rest of the group facing moderate declines.

Gold stocks up on flat metal and equity gains

Gold stocks rose with the GDX gaining 2.0% and GDXJ up 1.5%, as a rise in equity markets offset the flat gold price, with the S&P lifted 0.77%, the Nasdaq adding 0.40% and the Russell 2000 gaining 0.89%, while larger TSXV gold was mostly up.

Mixed Signals on Inflation

The gold price was near flat this week, down -0.2% to US$2,024/oz as it closes in on its strongest ever January average, as economic data this week gave mixed indications on the outlook for inflation and rates. Third quarter US GDP came in well above expectations at 3.3% annualized, with the strength hinting at inflationary pressure. Contrasting this was the US Personal Consumption Expenditure Price Index for December 2023, which continued to cool to 2.9% yoy. However, this measure is a month behind, and more recent jumps in the oil price and global container rates also indicate that inflation could be gaining again in early 2024.

Another anti-inflationary move came from the European Central Bank (ECB) which held rates steady in its meeting this week and did not give strong indications of any upcoming rates cuts, although this has been followed up by more dovish comments by ECB officials. On balance, the market has taken the data as inflationary enough to drive up global bond yields over the past several weeks. The US equity markets took the news, combined with upbeat fourth quarter 2023 earnings from major companies, as bullish, with the S&P up 0.77%, the Nasdaq gaining 0.40% and the Russell 2000 rising 0.89%.

Yields back up on fears inflation could reemerge

The pick-up in yields has been global, with the 10-year rate rising for four of the largest bond markets, the U.S., Japan, France and the UK, with only China continuing to decline (Figures 4, 5). The yields for these markets peaked in October 2022 and then declined to a trough in December 2023 on expectations for rates cuts by early 2024. However, strong economic data in these regions and recent indicators of a global inflation resurgence have led to a jump in yields with the US, Japan, UK and France up 0.53%, 0.14%, 0.34% and 0.32%, respectively, from their recent troughs.

Only a return to a mid-2010s scenario likely to hold back gold

With gold generally considered an inflation hedge, the metal could still benefit from a surprise rise in inflation, which could drive central banks to hold off on rate cuts, which would likely put pressure on the global economy and stocks markets. However, even such negative economic outcomes could still be good for gold, prompting first a flight to safety, and then a monetary loosening in response, further driving up the price.

Adding to this a premium for continued geopolitical risk, we see a high probability that gold puts in its highest yearly average ever in 2024, and should easily break US$2,000/oz, as it has already done for a month. The only big problem scenario we see for gold would be a return to the low political risk, zero inflation, high growth global economy of the mid-2010s, where gold was virtually ignored in a risk-on mania. This seems particularly unlikely for not just this year, but the next several.

Central banks continue to pile into gold

Global central banks have certainly been espousing the upbeat outlook we see for gold this year, with recent net additions remaining high (Figure 6). Central banks added 45 tonnes and 42 tonnes in November and October 2023, and 385 tonnes over the first eleven months of the year. Even if December turns out to be a relatively light month for central bank gold additions, the full year figure looks set to surpass both the 409 tonnes and 406 tonnes added in 2022 and 2021 (Figure 7). This would make 2023 the fifth strongest year of central bank gold additions in last twenty. A net reduction in holdings had not been seen since 2008, when the onset of the global financial crisis sent central banks on a clear long-term trend of backing up their financial systems with more gold holdings.

Container index points to potential inflation pickup

Crescat Capital recently highlighted the potential for a resurgence in inflation, with one factor being a near doubling of the Drewry World Container Index from 1,661 at the end of December 2023 to 3,964 over the past week (Figure 8). This has been driven by global shipping lines diverting away from the Red Sea after attacks there. Crescat expects this could exacerbate a second wave of inflation that could already be in progress, potentially driving central banks to maintain rates higher for longer.

Investment advisors’ gold allocation still low

While above we showed central banks’ strong interest in gold, Crescat Capital has shown in a recent report that the retail investment community has been much less aggressive in building up gold holdings. They highlight Bank of America data indicating that a majority of investment advisors, at 71%, have a 1.0% or less allocation to gold, while another 27% have a 5% or less allocation (Figure 9). Only 2.0% allocate up to 10% to gold, and none have a holding of 10% or more.

While this is understandable as legacy positioning following the mid-2010s gold bear market and then huge focus on risk assets in the recovery from the global health crisis, it may not be as appropriate in the current risk-heavy environment. While gold has gained since the global health crisis, the opportunity for a much wider retail move into the metal is not even close to maxed out, especially if the price surprises to the upside.

The market has also not been bullish on gold stocks, with their price to book valuations at some of the lowest levels of any sector, in distinct contrast to excessive tech stocks valuations. These low valuations have likely truncated the risk of downside for these gold stocks somewhat, and if the gold price jumps, we could finally see a convergence of the valuations of these two sectors.

Mid-Tier TSXV Gold companies mostly dip over past year

This week we look at the performance of the TSXV Mid-Tier Gold companies over the past year, including Mayfair Gold, Osino Resources, Tudor Gold, Lion One Metals, Amex Exploration, Montage Gold, Laurion Mineral Exploration and G2 Goldfields, with market caps ranging from CAD$249mn to CAD$120mn (Figure 10). While in our Review of 2023 we showed that the performance of the larger TSXV gold companies overall had been reasonably strong last year year, the mid-tier has lagged, with only two, Mayfair and Osino, seeing substantial gains, and the rest declining (Figure 11).

These declines have been moderate however, as the companies have had decent operational progress and the gold price has held up, including a substantial rise over the past two months to an average above US$2,000/oz. The main downward pressure on these stocks has likely come from the market becoming more risk averse with respect to small caps, and also eschewing the metals space in general, especially in contrast to their aggressive allocations into large cap US tech.

Mayfair and Osino the outperformers of mid-tier TSXV gold

Mayfair Gold has had a reasonably steady rise in its share price over the past year, as it develops the 3.5mn oz Au Fenn-Gib project in Ontario (Figure 12). News flow over the past year have included continued drill results, an upgraded Resource Estimate in June 2023 and a new discovery in September 2023 at the project. FennGib’s average grade of 0.93 g/t Au puts it at the lower end of Mid-Tier TSXV Gold (Figure 13), along with its Market Cap/Resource valuation of CAD$7.0/oz Au (Figure 14). The company’s price to book (P/B) has jumped substantially year on year to 12.9x, near the highest of the group (Figure 15). The big move this year has seen it rise near its consensus target price, with the market expecting only 21% upside (Figure 16) after a moderate upgrade to the target over the past year (Figure 17).

Osino Resources is developing the Twin Hills project in Namibia, with a slightly lower resource than Mayfair, at 3.5 oz Au, but slightly higher grade, at 1.08 g/t Au. The project is at a far more advanced stage than Fenn-Gib, with construction to begin this year, partly explaining a higher Market Cap/Resource at CAD$11.2/oz Au. While the company was trading at a P/B of 12.9x at the end of 2022, similar to Mayfair’s current level, its equity turned slightly negative in the most recent quarter, sending the multiple heavily negative. Osino’s upside to its target is 47% after moderate target downgrades over the year.

Lion One, G2 Goldfields have smaller, but very high-grade, projects

Lion One and G2 Goldfields have smaller Resource Estimate-stage projects, the 0.7mn oz Au Tuvatu in Fiji, and the 1.2mn oz Au OMZ in Guyana, respectively. However, the projects have extremely high grades, with 8.8 g/t Au for Tuvatu and 9.1 g/t Au for OMZ, driving a high Market Cap/Resource for Lion One, at CAD$17.6/oz Au, with G2 Goldfields near the middle of the group at CAD$10.2/oz Au. The P/B valuations for both eased over the past year, to 3.0x for GS Goldfields and just 0.9x for Lion One, even as both have continued to report decent drill results. The market expects 96% upside to G2 Goldfields’ target and 236% for Lion One.

Tudor and Montage have largest Mid-Tier TSXV Gold projects

Tudor has by far the largest project of the group, Resource Estimate-stage Treaty Creek in British Columbia, at 30.7 mn oz Au. Montage Gold’s Kone project in Cote D’Ivoire has the second largest, at 5.3 mn oz Au, with construction targeted by the end of 2024. Tudor has a grade of 1.09 g/t Au and Montage at 1.10x, and both have a low Market Cap/Resource versus the group of CAD$0.7/oz Au and CAD$2.4/oz Au, respectively. The market sees upside to 168% Montage’s target, which has remained flat over the past year, and 266% upside for Tudor after moderate upgrades.

Amex and Laurion still at pre-Resource Estimate stage

Amex Exploration, developing the Perron project in Quebec and Laurion Mineral Exploration, advancing the Ishokoday project in Ontario, are still at the pre-Resource Estimate stage, so data is limited for comparisons to the other TSXV Mid-Tier Gold companies. Both have continued to release consistently decent drill results from their projects over the past year. Amex’s P/B has declined moderately over the past year to 1.6x from 1.9x, and the market sees 128% upside to its target price. Laurion’s P/B is the highest of the group, at 15.5x, but this is mainly because its equity is low from accumulated deficits, and it has no consensus target price.

Gold producers and most large TSXV gold up

The gold producers and large TSXV gold stocks were mostly up (Figures 18, 19). For the TSXV gold companies operating domestically, Snowline reported drill results from the Valley Target of Rogue (Figure 20). For the TSXV gold companies operating internationally, Rusoro Mining continued to move forward in its Arbitration Award process and Amaroq reported drill results from Sava, the start of an EIA and SIA for Nalunaq and new samples beyond the Target Block of Nalunaq. Robex reported Q4/23 production from Nampala and Lumina appointed Ausenco and a team of consultants to lead its Feasibility Study for the Cangrejos project (Figure 21).