Good morning MINING AIM, and welcome to my thought of the day.
After the shenanigans of yesterday, it's worth considering why gold is so high (at $2,405/oz, close to record highs), and where the precious metal may go into the next few years.
This matters to AIM because the very best gold stocks like Amaroq or Greatland Gold are currently enjoying vastly improved project economics in this pricing environment. Amaroq has one of the top gold grades globally and GGP has an estimated AISC of less than $800/oz. Even if the gold price falls from here, they will still be wildly profitable, and if it rises...
Fortunes are there to be made.
But it's not just the big guns - from Oriole to Panther to Guardian, anyone with a prospective gold resource is finding acquiring exploration capital that much easier.
For what it's worth, this is all simply my speculation. With copper, or lithium, or helium, there are massive supply gaps coming down the tracks over the next couple of decades, and in the much longer term, you will see similar problems with the hydrocarbons as easily accessible sources of oil and gas start to run dry.
Gold is different, because while yes, there are many industrial applications, its value is derived from its status as a store of value. For thousands of years, gold has ever been the real asset inflation hedge of choice, and most investors hold at least some of the precious metal in their portfolios.
Why is this? Well, to an extent, it's an insurance policy against widespread financial hellfire. In an apocalyptic scenario where the US empire collapses like every empire before it, an electronic record that you owned shares in a company that used to exist in the former empire will be worthless. Physical gold won't be though.
There's also the fraternity argument. I hold gold. You hold gold. Everyone holds gold. It underperforms equities over time, but if everyone has some, then you should too. To an extent, many hold Bitcoin for the same reason - very few holders could explain how a blockchain works, but nobody wants to be the odd one out.
And gold does tend to hold its value against inflation; the US has been printing dollars like no tomorrow, so in a sense, gold has not risen in dollar terms but simply continues to command a similar proportion of dollars in circulation.
But other than gold, you have a few choices.
Real estate? At record highs and due a crash.
US Dollars? Money printer go brrrrrrr. The deficit is completely unsustainable, and inflation is destroying the value of the dollar.
Cryptocurrency? Did you see yesterday? Bitcoin et al are proxies for the S&P 500, whether you like it or not.
Bonds? Yes fairly decent but requires a sovereign currency to retain value, also can underperform inflation.
Collectibles (think wine, whisky, cars, coins, art etc)? Yes, actually you can get great returns and are decent stores of value. However generally a lot less accessible than gold investing.
Indeed, investing in physical gold coins from a reputable seller like the Royal Mint is attractive not only because there is no capital gains tax to pay, but because it's easy. Managing a rental property, staying on top of the bond market, or building a cellar for your wines is all effort - gold is truly passive and requires nothing more than a safe place to store it.
Gold vs Bitcoin
But why gold in the first place? Plenty of people think that Bitcoin is the future and more and more investors are picking BTC over GOLD. On the other hand, detractors believe crypto is little more than a Ponzi Scheme, destined for eventual collapse
In one sense, crypto sceptics have a point. Anybody can create a cryptocurrency, and there are already more than 12,000 in circulation. But only a handful of these are serious contenders to become currencies or challenge gold, and of these, even fewer are secure or consistently upgraded.
But this is perhaps a misdirection. Taking a step back, what gives any currency value? The US Dollar, backed by the US government, is currently the world’s reserve currency. But it isn’t tied to any gold standard, any other currency, or backed by any physical asset. Instead, it holds value because consumers globally accept that it does, as they value the credibility of the US government.
For now.
Cowrie shells, cacao beans, and cattle have all been used as forms of money through history. Multiple agricultural products are still important traded commodities to this day. Yet they all have problems as currencies.
This is because all money (in general) utilises six tangible, physical assets. It must be durable, portable, divisible, fungible, scarce, and accepted by the masses. And — absolutely critical — money becomes more widely adopted the better it fulfils these criteria.
Gold is relatively portable in smaller amounts. It’s fungible, in that one kilogram of gold is chemically very similar if not identical to another. It’s certainly scarce enough, and expensive to get out of the ground. And it has been accepted for millennia as a form of payment, despite issues with fakes.
It is on the other hand tricky to divide. This made the old gold standard a necessary evil, where issued currency is backed by physically deposited gold at central bank locations. Eventually the gold standard was abandoned altogether, to be replaced with ‘fiat’ or currency based on faith in the issuer.
And the key argument is that cryptocurrency will one day eclipse the current fiat systems of pound, dollar, and euro, because it offers advantages across the six money-defining categories.
Let’s take Bitcoin, by far the most valuable and well-known cryptocurrency, as an example.
It’s more durable than fiat currency. It cannot be destroyed as long as its blockchain is maintained on even one computer. And it has gone ten years now without an outage. For context, the Federal Reserve money transfer system cut out for several hours in February 2021. And unlike a fiat currency, Bitcoin will not end, for example, if there’s a war or economic collapse.
It’s as portable as fiat. It can be sent anywhere with an internet connection in seconds, and unlike a bank account, a user needs only memorise their private key to access it anywhere in the world. Further, it’s usually cheaper to send internationally.
It’s divisible, as one Bitcoin consists of 100 million Satoshis, far more than is found in most fiat.
It’s fungible. One Bitcoin is identical to another. And unlike gold or fiat, it cannot be counterfeited as it runs on blockchain technology.
It’s scarce. There can only ever be 21 million Bitcoins, meaning it will ultimately be deflationary. And anyone can check the Bitcoin protocol code to confirm this limit. To change it would require the vast majority of nodes to act against their own economic self-interest.
The only true problem Bitcoin has is acceptability. While 200 million people use the 'currency,' most use it as an investment rather than as a payments system. But through regulatory change and institutional investment, this is changing rapidly.
Most importantly, it has credibility as its open source, decentralised nature has stood the test of time since its inception.
Of course, various crypto programs, from Ethereum to Cardano, are trying to solve differing financial problems with varying levels of success.
The likelihood is that of the thousands currently online, a handful with develop into full blown currencies. This could help solve the acceptability problem, as more credibility becomes assigned to fewer cryptos. Of course, there are no guarantees in crypto investing. Bitcoin and Ethereum could become the Yahoos of tomorrow. Detractors could also be right, and crypto itself may collapse in the coming global recession.
The vast majority of Bitcoin is held within a small number of wallets - and a mass offloading could be a future problem.
But for people looking for a hedge, consider that the recent market chaos saw Bitcoin, Ethereum and the top tech stocks tank well into the double digits. By contrast, gold fell by 1%.
And whether you like it or not, this makes gold a better HEDGE than Bitcoin at present. This does not mean Bitcoin will collapse, or that it is a scam...but that claiming it is a hedge is not fair. Every time the equities run scared, Bitcoin falls with them.
Gold demand
There are tons of tailwinds that should see the metal remain elevated:
Huge geopolitical instability — Russia/Ukraine, Israel/Hamas, China/US/Taiwan etc etc.
Inflation — which is not defeated by any means. It's just taking a breather.
Monetary activity — states are starting to cut rates, making gold relatively more attractive. They also like to print money like no tomorrow.
Central Bank activity — central banks are buying gold at a record pace. For context, they added a whopping 1,136 tonnes of gold worth some $70 billion to their stockpiles in 2022, by far the most of any year in records going back to 1950, according to the World Gold Council. They then added 1,037 tonnes in 2023.
Debt — Public and private sector debt is unmanageable. This will haunt the west, but gold will keep its value in any event.
Supply issues — there are fewer gold operations coming online and the ones that are, are coming online at a lower grade than historically. This is partially due to political issues in South America, but also due to generic permitting and financing problems.
But the big question is on how gold responds into the future. The received wisdom has always been that when the Federal Reserve increases rates, this makes the return on US dollars more attractive and therefore gold should fall. This hasn't happened. Gold has hit record highs instead.
With rates now starting to fall, theory dictates that gold should rise - but in this topsy turvy world...who knows?
The answer, I suspect, is that trust in other stores of value (and particularly the US dollar) is collapsing. Gold is decoupling from its relationship with the dollar.
Just on an individual level, there is much lower trust in state governments, and by extension, non-gold assets. Consider the average Chinese worker, who has grown up believing that property is the key to wealth.
That worker is watching their worldview crumble with China's buckling real estate sector. But gold doesn't lie.
And as uncertainty grows, so does gold's allure.
- Charles Archer, 6/8/24