Gold hits a new all-time high

“Record highs in the US, Japanese and German stock markets continue to make headlines, as does Bitcoin’s gallop toward its November 2021 zenith, but another, much more unsung commodity is also breaking new ground and that is gold, which is breaking above $2,100 an ounce for the first time,” says AJ Bell investment director Russ Mould.

“The metal’s rate of progress might be less spectacular, but its steady gains may reflect the ongoing increase in government debt around the globe, but particularly in the USA.

“It is unfashionable to focus on gold, especially when the Magnificent Seven are doing so much to propel US equities to new highs (or at least five of them are, anyway), and it is easy to dismiss the case for including the precious metal in even the most balanced of portfolios. As Warren Buffett succinctly put it in a speech he gave at Harvard in 1998, ‘Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.’

“Yet, unusually, the market is shrugging off the Sage of Omaha’s words of wisdom and embracing gold instead. Its rise to new highs even means that in capital terms it has matched strides with the much more widely lauded S&P 500 index since the start of 1971, the year when President Richard M. Nixon withdrew America from the gold standard and pulled down the curtain on the Bretton Woods monetary system that had prevailed since the end of the Second World War. This nugget of data may give a warm glow to gold bugs.

Source: LSEG Datastream data

“Nixon broke the gold standard so he could fund welfare programmes and pay for the Vietnam War and one thing that his move undeniably did was permit America to borrow. America’s aggregate deficit has mushroomed over the past fifty years and will grow again in the fiscal year to September 2024 as the Biden administration keeps spending to boost the economy and improve technological and energy self-sufficiency through the CHIPS and Inflation Reduction Acts. The Congressional Budget Office’s latest forecast is for a $1.6 trillion deficit in fiscal 2024, the fourth-highest number in history, and for that figure to surge to $2.6 trillion by 2034. Heaven knows what would happen were a recession to hit, forcing an increase in welfare spend and leading to a decline in tax income at the same time.

Source: LSEG Datastream data, FRED - US Federal Reserve database, Congressional Budget Office

“It is tempting to argue that this does not matter, and no-one cares, as evidenced by how Congress keeps on raising the debt ceiling. Nor will America ever default, so holders of US Treasuries will always get their coupons and their principal investment returned upon maturity.

“However, further increases in the debt ceiling are inevitable and this raises the issue of how America funds the coupon payments and the maturity of its debts. The annualised interest bill now stands at $1 trillion and counting. America cannot afford to keep interest rates where they are for long and there is a risk that the Fed has to cut rates to keep the burden manageable and take risks with inflation (or even let inflation help salt down the debt/GDP ratio, if interest rates are kept below nominal GDP growth for long enough). Worse, it may even have to resort to Quantitative Easing (QE), or money printing, if creditors prove less tractable in their support of America’s spendthrift habits.

“None of this may come to pass, but gold bugs think it just might, looking at how the precious metal is performing.

Source: FRED - St. Louis Federal Reserve database, Congressional Budget Office, LSEG Datastream

“Equity investors are clearly less convinced, given how badly gold miners are performing. The New York Stock Exchange ARCA Gold Bugs index is no higher now than it was in autumn 2003, when the gold price was $380 an ounce, while Endeavour Mining is facing relegation from the FTSE 100 in a further sign of investor disinterest in gold diggers.

Source: LSEG Datastream data

“A wave of mergers and acquisitions has not fired their interest, either. Barrick Gold swallowed up Randgold Resources and Newmont snapped up GoldCorp in 2019; Agnico-Eagle and Kirkland Lake Gold merged in 2021; and in 2023 Agnico-Eagle and Pan American Silver bought and split up Yamana Gold before Newmont pounced on Australia’s Newcrest. Even AIM-quoted tiddler Shanta Gold has drawn a bid on the London market.

“Sceptics will dismiss this as an attempt to manufacture growth and momentum where little or none exists, since gold output grows only slowly and the all-in sustained cost (AISC) of producing gold is rising, in no small part due to surging energy and staff costs (trends which rather dent gold miners’ perceived status as a hedge against inflation). But the gold miners themselves may see an opportunity, especially as valuations for gold miners remain depressed and their profit margins and cash flows should benefit if the gold price maintains its current trajectory.

“Newmont’s bid for Newcrest in 2023 valued its target at 1.7 times historic book value and the majority of US-listed and UK-traded gold miners trade at a discount to that.

Source: Company accounts, Marketscreener, consensus analysts’ forecasts

Source: Company accounts, Marketscreener, consensus analysts’ forecasts

“In many cases, the US-listed miners and producers do look to offer greater scale (and lower all-in sustained production costs) than their UK-listed equivalents, but the relative valuations look to reflect at least partly that, and also the differing jurisdictions in which the miners operate. It is also possible to argue that junior miners can offer greater leverage into any upside in gold prices.”

These articles are for information purposes only and are not a personal recommendation or advice.