After about three years of going nowhere, gold is once again the commodity du jour and some observers predict the rally is just getting going.
Since hitting a record high in late 2011 just shy of US$1,900 an ounce, gold has largely been out of favour among investors. As recently as August of last year, the precious metal was trading at US$1,170, almost 40 per cent below its peak.
But last week, gold futures hit a six-year high, driven on by expectations of interest-rate cuts and a weaker U.S. dollar. In the past month alone, gold has jumped 10 per cent, catapulting to more than US$1,400 an ounce.
Traditionally seen as a safe-haven investment that increases in value during periods of market turbulence, gold has lately benefited from an uptick in international political uncertainty. U.S. President Donald Trump recently threatened Iran with “obliteration,” not long after it shot down a U.S. military drone.
“We’ve ended a multiyear bear market and I think we are on the cusp of a multiyear bull market,” said Dennis Gartman, editor and publisher of daily market newsletter The Gartman Letter.
“A year from now, gold will be materially higher. Maybe $100, $200, $300 per ounce higher than it is now.”
Mr. Gartman’s bullishness stems from the extremely low global interest-rate environment and the continued weakening of the U.S. dollar compared with major world currencies.
In recent weeks, the U.S. Federal Reserve has turned increasingly dovish, with economists expecting at least a 25 basis-point cut in the overnight lending rate later this month. Lower rates generally put pressure on the U.S. dollar; since gold is priced in dollars, it tends to go up in value when the greenback falls.
History also suggests gold could have plenty of upside ahead.
“Gold tends to perform even better following the first cut of an easing cycle,” said Daniel Ghali, commodity strategist at TD Securities Inc.
“We anticipate that this is just the beginning of what will be stronger gold performance in the coming months.”
TD is expecting three Federal Reserve rate cuts totalling 75 basis points before the end of the year, and the bank expects gold to hit US$1,485 an ounce in the next six months.
An even higher gold price could stimulate further mergers and acquisitions in the gold industry. After being in a deep freeze for the past seven years, the world’s two largest gold miners struck multibillion dollar acquisitions over the past nine months, with Newmont Mining Inc. (now Newmont Goldcorp Corp.) buying Goldcorp Inc., and Barrick Gold Corp. buying Randgold Resources Ltd.
While veteran gold analyst John Ing with Maison Placements Canada Inc. doesn’t see any similar sized megadeals imminently, he says a number of smaller deals are possible, with buyers possibly stepping up to buy mines "where the higher gold price skates some of these projects [onside] and makes them a little more attractive from a cash flow point of view.”
Mr. Ing says he wouldn’t be surprised to see Vancouver-based Pan American Silver Corp. cut a deal to sell two Ontario gold properties. Last year, as part of its acquisition of Tahoe Resources Inc., Pan American inherited the Bell Creek and Timmins West mines. Pan American considers the assets non-core and said it is willing to sell both properties. Mr. Ing says the sale of the mines could fetch up to $300-million. In an e-mail to The Globe and Mail, Pan American spokesperson Siren Fisekci said the company is engaged in an “active sale process,” but declined to elaborate on specifics of discussions with any potential buyers.
In terms of miners that might pull the trigger on acquisitions to take advantage of the higher gold price, Mr. Ing singled out Toronto-based Kirkland Lake Gold Ltd. An acquisition by Kirkland Lake could address its relatively low reserve base, he said, and with its stock trading at a premium compared with its peers, the company is well positioned to be an “aggressive buyer.”
Kirkland Lake spokeswoman, Joanne Kearney, said in an e-mail to The Globe that the company’s main priority is to expand its existing operations, but it also plans to invest in “new, high-quality gold projects.”
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Niall McGee