Year in Review 2023 and Outlook for 2024

Gold Shines as Risk and Rates Escalate

Gold, iron ore and uranium the stand-out gainers in 2024

The past year was a difficult one overall for the metals, with the main standouts to the upside being a geopolitical risk-driven gain in gold, a China-driven rise in iron ore and a surge in uranium on broadening global support for nuclear power (Figure 1). A jump in global interest rates to near two-decade highs saw recession fears persist all year, and while one still did not actually erupt, cooling economic activity saw the prices of the rest of the metals range from near flat to heavily down. This year was also the first where the distortions to supply chains from the global health crisis finally subsided, and the 2022 price spikes for many metals continued to reverse, which was the case for the weakest performers, including cobalt, nickel, and lithium.

Mining sector underperforms global markets

The mining sector substantially underperformed global markets, with the MSCI Global Metals and Mining ETF of the largest global producers up just 5.6% and the S&P/TSXV Metals and Mining Index of junior miners down -8.2% (Figure 2). This contrasts with a 38.2% surge in the Nasdaq, driven mainly by a few tech stocks and AI-related hype, which were also behind most of the 24.7% gain in the S&P 500. While other major markets were more subdued, generally trending down through most of the year, they saw an abrupt recovery in the last two months of the year, on rising expectations for rate cuts in 2024. This left the US small cap Russell 2000 Index up 15.8% as there was some year-end rotation away from tech, although this did not carry over to the average junior miner listed on the TSXV. European stocks trailed the US market, up 10.3%, and the emerging markets’ 5.2% gain was similar to the performance of the MSCI Global Metals and Mining ETF.

Widening spread between high tech and low mining valuations

This stock underperformance saw the valuations of mining stocks drop to low levels, with the global mining, gold, silver and copper producer ETFs price to book valuations (P/B) ranging from just 1.38x-1.64x at the end of the year (Figure 3). This was a quarter of the 6.63x P/B of the Nasdaq, and substantially below US small caps, European stocks, and emerging markets. The TSXV sector P/B valuations for gold and silver miners contracted back to the pre-boom levels of 2018, copper P/Bs eased from 2020 highs and only the lithium sector continued to carry a high multiple (Figure 4). It appears that much of the downside from any potential recession has been priced into the mining sector, but not yet big US tech, which increases the probability, in our view, for some potential rebalancing in valuations between the sectors this year.

Macro: Rates & Political Risk Spike, Inflation Slides

Interest rates spike to two-decade highs

While the big macro story last year was the spike in inflation to multi-decade highs, the story this year has been a jump in global interest rates to near twenty-year peaks to combat the high prices. The US Fed Funds rate averaged 4.92% for 2023, its highest since 5.02% in 2007 and 6.24% in 2000, and while the Fed was early with its hikes, other global central banks had followed suit by mid-2023 (Figure 5). These global rate hikes have had the desired effect of reducing inflation, with US and European headline CPI growth at 3.12% and 2.88% in November 2023, respectively, down from peaks of 8.93% and 10.05% in June 2022 (Figures 6, 7).

However, core inflation remains a concern, and at 3.99% in the US and 4.19% in Europe as of November 2023, is considerably above 2.00% targets for both central banks. Unemployment is also low in both regions, the inflationary potential of which limits how quickly the central banks can reduce rates. Nonetheless, the Fed indicated in its most recent meeting that it was done with hikes, and could shift to cuts in 2023, and there are similar expectations for the ECB. While the market expects severe rate cuts next year, central banks remain cautious of an inflation resurgence, and have disappointed with their lack of dovishness over the past two years, so a return to the zero inflation, zero rate world of the mid-2010s seems unlikely. This leaves the risk that even with cuts, rates could remain relatively high, and even another year at 3.0%- 4.0% base rates could be enough to cool global economic activity considerably.

US real interest rates above zero for most of year

The rising nominal interest rates and falling inflation sent US real rates, which is the balance between these two figures, above zero for most of 2023. The US 10-year real yield turned positive first in June 2023 at 0.7% and reached a high of 1.6% in October 2023 (Figure 8). The real yield was 1.4% as of the most recently reported November 2023 data, with the nominal yield at 4.5% and CPI inflation at 3.1%. This is a far cry from the heavily negative interest rates of early-2022, which got as low as -6.4% in March 2022, when the nominal yield was 2.1% and inflation 8.5%.

Rising real rates are generally a negative driver for gold, as the opportunity cost of the holding the metal versus bonds rises. However, any downward pressure from this driver for gold this year was more than offset by spiking geopolitical risk and other macro drivers. Expectations that real rates could decline on Fed cuts into 2024 were also likely baked into expectations for the gold price. For the base metals, the rising real rates can also be a negative driver as they make the costs of financing businesses higher, and in turn dampen demand for materials all along the supply chain.

US$ Index slides and US money supply collapse eases

Another two major macro drivers for the gold price are the US$ Index and US money supply growth. As gold tends to move inversely to the US$ Index, the fall from the 2023 peak of 107 in September 2023 to 101 in December 2023, near lows of 100 in July 2023, lent support to the gold price (Figure 9). The spike in the US$ index to a 2022 high of 114 in September 2022 had been driven by the country being far ahead of the rest of the world on rate hikes, drawing fund flows into the dollar to capitalize on the higher yields. However, as rates in the rest of the world caught up with the US, funds flowed back towards other currencies. With the US expected to again lead the world, but this time with rate cuts, the pressure on the dollar has intensified in recent months.

Gold also tends to increase as the money supply rises, and therefore the surge in US M3 growth to a peak of 26.9% year on year in February 2021 was a major driver (Figure 10). However, M3 growth collapsed through the rest of 2021 into early 2023, reaching a low of -4.5% year on year in April 2023, which would have been attenuating gold’s rise. Both of these numbers are severe, with US M3 growth usually ranging from about 3.0% to 10.0% since 1960 and it almost never turning negative. However, the contraction in the money supply may have bottomed in recent months, with growth becoming slightly less negative, and up to -3.3% as of October 2023. If the Fed shifts to easier monetary policy in 2023, M3 growth could start to expand again by next year, which could support the gold price.

Precious Metals: Gold Shines

Will gold finally break out of a four-year range?

Of the precious metals, only gold gained this year, rising a respectable 10% (Figure 11). While some of above outlined drivers like real interest rates and a falling money supply were moving against it for much of the year, they were offset by a huge spike in geopolitical risk. Already rising global tensions from the conflict in Ukraine were exacerbated by the start of war in the Middle East, which has continued to escalate. At the same time China’s issues with Taiwan and other countries in the South China Sea are simmering and the UK has recently sent warships to Guyana over their conflict with Venezuela. The probability that a widening premium will be priced into gold for its role as a hedge against global conflict this year seems high, in our view. Economic drivers may move more in the metal’s favor also, as real rates could decline, money supply growth pickup and the US$ continue to drop.

This combination of drivers could finally see gold shake off a strong tendency since 2020 to revert to around an average just above US$1,800/oz (Figure 12). The metal repeated the following pattern over the past four years; it would shoot up to around the US$2,000/oz level briefly on a given economic or political crisis, drop back towards US$1,700/oz as the crisis was not as severe as expected, and then head back up towards the US$1,800/oz average. While the gold price rarely lasted more than a day above US$2,000/oz in previous crises, the end of 2023 has been very different, with almost a whole month of trading days above this key level. We see the probability being weighted towards more gains for gold in 2023, with strong potential to finally definitively breakout above that persistent US$1,800/oz average.

Silver flat as risk hedge and economic drivers balance out

The silver price was near flat this year, down -1.0%, as the lift from geopolitical escalation was balanced by downward pressure from industrial drivers. Similar to gold, silver is a risk hedge, and rising political tensions this year likely supported the price. However, much more of its demand comes from industrial use than for gold, so a cooldown in economic activity this year has been a downward driver. This year the price could be boosted by a fourth year of deficit expected for silver market, assuming demand is not slashed by a major recession. While the gold to silver ratio was volatile in early 2023, in the second half it has been close to the 2021-2023 average of 79.5x and ended the year at 86.7x (Figure 13). While this does not suggest a major relative mispricing of the two metals, the long-term gold to silver ratio is much lower, at 52.6x from 1915 to 2020, indicating potential for a relative gain in silver.

Platinum and palladium weaken on auto demand decline

While platinum and palladium were both down, the former held up much better, declining just -9%, while latter plunged -39%. This was because of slowing global auto production growth, with a large proportion of the demand for both metals coming for their use in catalytic convertors. The weaker palladium performance has come as the industry has been substituting away from it and increasingly towards platinum. Also, palladium is much more exposed to the auto industry overall, at over 80% of its total demand, compared to just over 30% for platinum. However, both the platinum and palladium markets are in deficit, as falling prices have made production uneconomic for some companies, and they have started to reduce output. While a supply shortfall could help rebalance the market and support the prices of these metals, as for silver, the risk of a recession further hitting demand remains.

Larger TSXV gold stocks see strong year overall

After a reasonably weak 2022, the TSXV top ten gold stocks had quite a good 2023, with the market caps of seven out of ten rising and none of the declines even reaching -30% (Figure 14). Among the big gainers in market caps were three developers in the advanced stages of construction with production targeted by H2/24, Artemis Gold, with its Blackwater project B.C, Canada, G Mining Ventures, with Tocantinzinho in Brazil and Amaroq, with Nalunaq in Greenland, up 76%, 176% and 72%, respectively. Two larger cap, pre-Resource Estimate explorers saw mixed gains, with New Found Gold nearly flat, down -4%, even a strong results continued from the Queensway project, and Snowline Gold jumping 112% on outstanding assays from its Rogue project in the Yukon.

Reunion Gold released its Initial Resource Estimate for its Oko West project in Guyana and saw solid 19% gains. There were two stocks with large gains from an atypical driver, Gabriel Resources and Gold Reserve, up 48% and 115%, with progress on arbitration cases that could see them eventually receive large financial rewards. While Osisko Development continued to engage in small scale production from its Trixie Mine, it was down -26% as the market awaits the start of construction on its main Cariboo project in 2024. The market cap of the only large TSXV gold company in full commercial production, Robex Resources, saw a -23% decline over the past year.

Larger TSXV silver and PGM stocks see mixed performance

The larger TSXV silver stocks were mixed, with Vizsla Silver seeing decent 26% gains driven in part by a major upgrade of the Resource Estimate for its large, high grade Panuco project in Mexico (Figure 15). However, both Dolly Varden and Abrasilver were near flat, up just 3% each, even as both continued to generate strong drill results from major drilling campaigns at their respective projects, Kitsault Valley in B.C. Canada and Diablillos in Argentina, and the latter announced a Resource Estimate upgrade near year-end. The newcomer to the group was Hercules, which surged 819%, moving from the small to large cap space, on strong drill results from its eponymous project in Idaho, U.S..

The market cap changes for the two platinum group metals (PGM) stocks diverged considerably. Canada North, which operates the Resource Estimate-stage Ferguson Lake PGM and base metals project in Nunavut declined -22% even as it released decent drilling results over the year. Bravo Mining gained 51% as its PGM, gold and nickel project Luanga in Brazil released robust drilling results throughout the year and then its Initial Resource Estimate near the end of 2023.

Base Metals: A Return to ‘Normal’

Most base metals down as 2022 market distortions ease

While most base metals declined in 2023, it was not from a particularly negative macroeconomic situation, as a global recession loomed, but did not actually develop. Instead, it was more because the post-global-health-crisis and political issues that sent many metals prices soaring in early 2022 faded in 2023, marking a return to ‘normal’. The largest metal market, iron ore, was the main exception, ending the year up 16%, but this reflects China construction which was finally recovering (Figures 16, 17). Metals considered to be broader world indicators, aluminum and copper, were near flat, showing a global economy at an inflection point, with no strong direction.

Of the mid-tier metals markets, lead was also near flat for a second year, down -4%, but zinc and manganese were down -15% and -16% respectively, continuing to slide off peaks reached during a spike in early 2022 (Figure 18). The nickel market saw the worst performance of the mid-tier, continuing a reversion from a jump in 2022 after the Russian invasion, with the country a major global supplier, exacerbated by trading exchange problems. For the smaller metals markets, tin was almost flat, up 1.6%, and while it also had spiked in 2022, it had given up these temporary gains by the middle of last year (Figure 19). In contrast to several other base metals which peaked in early 2022, molybdenum’s post-global health crisis surge did not start until late 2022 and peaked in February this year, before reversing, and it fell -20.1% in 2023. Cobalt was down -40.8%, continuing a slide off an early 2022 peak.

Large TSXV base metals stocks mixed

Most of the TSXV base metals stocks that were already large caps entering 2023 saw weak performances. The market cap of Alphamin, the only major tin producer on TSXV, operating the Mpama North mine in the Democratic Republic of Congo, was down -4%, as the tin price flattened (Figure 20). Two companies declined even after releasing Feasibility Studies for their projects, with Los Andes, operating the Vizcachitas copper project in Chile, down -3%, and nickel developer Canada Nickel, developing the Crawford project in Ontario, Canada, down -31%. Of this larger group only NGEX gained, up 153% on a new copper discovery at its Potro Cliffs project, and an upgraded Resource Estimate for its Los Helados project, both in Chile.

The other big gainers were all new to the large cap space, including Premium Nickel, which saw the biggest jump, up 269%, on strong drill results from the past-producing Selebi and Selkirk nickel projects in Bostwana. Fireweed, the only major zincfocussed company on the TSXV, rose 26% on strong drill results from its PEA-stage Macpass project in the Yukon, rose 26%. Copper developer Minsud Resources was up 116% on high grade drill results from its exploration stage Chita Valley project in Argentina.

Lithium price boom comes to an end

Lithium had the biggest decline of the major metals, down -81%, and is -84% off its November 2022 peak (Figure 21). After plunging through to April 2023 there was a strong, but brief, 81% recovery through to June 2023. However, the price dropped to new lows, putting it back at 2020-2021 levels. The main cause of the lithium boom had been an unexpected surge in electric vehicle demand which led to shortages of lithium for their batteries, exacerbated by supply constraints caused by the global health crisis. This was especially a problem in China, which accounts for nearly 80% of lithium chemical production, and was shutdown longer than other countries. However, Chinese producers finally began to catch up with demand this year, with significant new production capacity coming online. Demand pressures also eased as the growth rate for global electric vehicles sales slowed from an average 106% year on year in 2021 to 56% in 2022 and 38% over the first ten months of 2023.

Half of TSXV large lithium stocks gain even as metal crashes

Even the major plunge in the lithium price did not keep all the large TSXV lithium stocks down. The market cap of Sigma Lithium, the largest TSXV mining stock, gained 17% as its Grota de Cirilo project in Brazil began commercial production (Figure 22). Patriot Battery Metals more than doubled, up 127% on strong drill results from its Corvette project in Quebec, Canada. Two mid-tier market cap lithium stocks, Li-FT and Lithium Ionic also gained on strong drill results from their respective exploration stage projects, Yellowknife in NWT, Canada, and Bandeira in Brazil.

However, the other half of the large lithium stocks did decline substantially on the fall in lithium. Standard Lithium, developing lithium brine projects in Arkansas and Texas, was down -31%, while American Lithium fell -47%, even after a major Resource upgrade for its Falchani project in Peru. Critical Elements Lithium, which released a new Feasibility Study for the Rose project in Quebec, Canada in second half 2023, dropped -54%, and Frontier Lithium, which released a Pre-Feasibility Study for its Pak project in Ontario, Canada, saw the weakest performance, down -62%.

Most large TSXV uranium stocks see big gains on price jump

Uranium has had by far the strongest performance of any of the major metals this year, with the spot price up 70%, as global policy support for nuclear power as a part of green energy plans continues to grow (Figure 23). This is part of a long-term secular uptrend that started around 2017, which has seen even nations and political groups previously very cautious regarding nuclear expansion, including the Japanese government and European Green Parties, show more support for the industry.

This has propelled the share prices of most of the larger TSXV uranium stocks, with enCore Energy seeing the biggest gain, up 145% as it started production at its Rosita Plant in Texas, U.S., in November 2023 (Figure 24). Isoenergy was up 98% with most of the gains coming after the announcement of its acquisition of Consolidated Uranium in September 2023. F3 Uranium gained 67% on strong drill results from its Patterson Lake North project in Saskatchewan, Canada. Goviex declined by a marginal -6% as it continued to develop its Feasibility Study-stage Madaouela project in Niger and Resource Estimate-stage Mutanga project in Zambia.

Are major rate cuts really coming soon?

The big questions this year are whether interest rate cuts will be both early and extensive, and whether a major recession would need to occur before a return to a dovish policy. Given central banks still cautious of a resurgence of inflation, without a global slowdown, any cuts seem likely to be gradual, leaving interest rates still near twenty-year highs, which could dampen economic activity. In our view, this makes the probability weighted to downside for base metals prices this year, with either continued relatively high rates, or an outright recession, curbing demand.

Drivers still look supportive of gold

Gold could continue to outperform in the difficult scenario of an economic slowdown in part from a flight to safety. A recession could also prompt expectations of a return to easier money which might be priced in more quickly to the more monetary-factordriven gold than more industrial-factor-driven base metals. Add to this a further rise in geopolitical risk, and gold could have many core drivers working in its favour. The bear case for gold would be a high growth, low inflation scenario similar to the mid-2010s, which we view as a particularly unlikely historical anomaly.

Currently low valuations provide mining stocks a cushion

For equity markets, the question is whether rate cuts can offset the potential downward pressure on earnings from an economic slowdown. Sectors with extremely elevated valuations, especially US large cap tech, seem more risky as centrals banks attempt to pull off this balancing act. In contrast, global mining sector valuations have dropped to very low levels and appear to be pricing in some quite recessionary outcomes, giving them a comparably strong cushion in the event of a weak economy or stock markets next year.

Gold stocks could prove resilient among TSXV mining sectors

For the TSXV mining sectors, even if there is broader pressure on global markets, gold stocks could prove resilient if the gold price continues to rise as we expect, with the downside likely truncated by valuations that have dropped to lows not seen since the end of the last bear market in 2017-2018. Other major TSXV sectors including silver and copper could see pressure if their metal prices are hit by a recession. The high P/B lithium sector could suffer if the metal’s slide continues on rising supply, and for the uranium sector, risk may be increasing as it becomes less clear how much of the boom is part of a legitimate secular uptrend and how much is cyclical froth.