The Real Reason Behind THIS Gold Rally

Gold has been all over the financial media lately.

The price of the yellow metal soared past $2,100 per ounce and kept growing for several trading sessions. As of writing, it’s trading within spitting distance from $2,200 per ounce.

It has gained about 6% year-to-date.

It’s official. We’re in the middle of a prolonged gold rally.

But the reasons for this particular one aren’t quite clear.

Well, to most investors, at least.

Read on to understand what’s driving gold, how you can benefit from it, and how this latest bull run could impact Canadian mining companies.

Why Is Gold Soaring?

The usual explanation for any spike in the price of gold is lower future interest rates.

In fact, most central banks now agree that they should start lowering interest rates soon.

The Fed’s Jerome Powell said recently:

We’re waiting to become more confident that inflation is moving sustainably to 2 per cent, and when we do get that confidence, and we’re not far from it, it will be appropriate to dial back the level of restriction so that we don’t drive the economy into recession.

In other words, the Fed believes that it managed to achieve a “soft landing” for the U.S. economy, and it will soon no longer need to maintain its restrictive policy.

That means lower interest rates and potentially higher gold prices.

But there’s another explanation uncovered by Bloomberg…

China Set the Stage for This Gold Rally

Most investors are focused on what the Fed says.

They don’t pay too much attention to what happens in the rest of the world. But China, which is one of the world’s largest economies and a society that traditionally valued gold, has been driving gold demand higher.

Its central bank has been making massive purchases of gold. Global central banks bought about 1,037 tons of gold in 2023, according to the World Gold Council.

It was the second year when purchases topped 1,000 tons.

And China was the biggest buyer of gold in 2023. It purchased 225 tonnes alone.

In 2024, the trend has continued. Turkey and China continued to make massive purchases of gold.

But It’s Not Just About Central Banks

Gold tends to do well when people lose trust in the financial system.

As an alternative asset that doesn’t represent anyone’s liability, gold is a perfect alternative “off the grid” investment.

And in China, the financial system has been sputtering.

The country is facing a property crisis and shaky stock markets.

Investors are worried.

So, they have been buying bullion and jewelry in droves.

Sales of jewelry rose by 8% in 2023 in China, to 707 metric tons.

Sales of gold coins and bars jumped by 15.7%, to 299.6 metric tons.

These numbers tell us that despite the high gold prices in 2023, China’s demand from both retail consumers and investors has been soaring.

And this year, it could continue…

What Does It Mean for Canadian Mining Companies?

According to S&P Capital IQ, gold is poised to dominate mining companies’ exploration budgets.

In 2023, it was estimated to top $6 billion, or around 46% of the total capital spent on commodity exploration.

Major mining companies spent about $3 billion on gold exploration. Juniors added over $2.3 billion to the total.

Canada was the leader in gold exploration budgets.

The country was responsible for about 23% of the global investment in exploration.

About $1.5 billion was spent on gold exploration in Canada in 2023, according to the company.

This confirms one of our key theses… Canadian mining companies could potentially become some of the biggest winners of the rising gold environment.

Canada remains an undisputed leader in the amount of money invested in gold exploration.

These large amounts of capital will turn into more discoveries… and, eventually, shareholder returns.

As far as gold exploration is concerned, Canada is the place to be.

High gold prices could only accelerate this trend, in our view. With gold trading at over $2,000 per ounce, more companies will have the incentive to explore for gold. High gold prices mean that every successful exploration effort will create more value than it would otherwise.

Mining companies could see their margins improve… which could also drive their share prices higher.

With inflation in decline, they could be more profitable. Their shareholders could potentially be rewarded with higher equity returns and dividends.

As the gold rally continues, Canada remains the best place for investors to deploy their capital, in our view.