Expert: Macro Market Drivers Supportive of US$2,000 Gold Price

Volatility hurting exploration budgets in 2022

While growth on the gold side comes as little surprise, S&P Global's research director and head of mining studies expects to see growth in battery metals capital allocation this year.

“There's been a lot of interest in battery metals in recent years, stemming from the energy transition and the rollout of electric vehicle plans,” Ferguson said. "Exploration budgets for lithium certainly gained traction in 2016 and 2019 before lithium prices fell, and as a result budgets also came down.”

Although spending was reduced in 2019, budgets remained elevated above 2015 levels. Rising values for lithium over the last 12 months will be supportive of more discovery.

“We anticipate strong growth from lithium launches this year,” he said.

This year, budgets have largely been reined in, as contracting markets have made investors more risk averse.

“As we move into 2022, there's been a lot more market volatility and a little bit less support,” Ferguson explained. “March wasn't too bad, (but) even the data in May was weaker than any month we saw in 2021, adding a little bit of downside risk to sustaining current exploration.”

Despite 2022’s decline in exploration spending, Ferguson said May of this year brought the most drill activity in a decade, and came after the mining industry's market cap hit an all-time high of US$2.5 billion in March.

“We're anticipating budgets to rise to 5 to 15 percent (this year),” he said.

“I’d say energy minerals — uranium, lithium, cobalt and nickel — should see more benefit just because their prices are low. But gold and copper will still be at the forefront.”

MKS PAMP sees average gold price of US$2,000 in 2022

Offering a macro overview of the precious metals space, Nicky Shiels, head of metals strategy at MKS PAMP, told conference goers that 2022 will be punctuated by a struggle between reflation and stagflation.

With US inflation ballooning to 8.6 percent during the month of May, Shiels explained that the US Federal Reserve’s interest rate hikes won’t be enough to control the growing cost of commodities and consumer goods.

“We think inflation will be sticky for a range of reasons, but one is supply driven,” she said. “The Fed hiking is not going to stop a war in Russia or China’s zero-COVID policy. There's persistent labor shortages … it's chaotic.”

Although energy commodities have so far been winners, Shiels anticipates growth in the precious metals segment.

“We're in a commodities bull market led by energy, (and) commodities are outperforming their past trends,” she said. “But (precious metals are) only up 5 percent since COVID, and theoretically it should be around 30 percent.”

The head of metals strategy believes there will be some rotation out of the “utility commodities,” such as base metals and energy, as higher inflation forecasts and growth downgrades begin to materialize later this year.

Despite the price constraints gold has experienced in the last year, its value as an asset class remains strong, especially in a higher interest rate environment.

“When we started having a higher interest rate regime, commodities outperform,” she added during her PDAC presentation. “And gold right now is still outperforming tech and crypto by 20 to 30 percent. So yes, it is somewhat rate sensitive, but there are more sensitive asset classes out there.”

Constrained gold and silver prices have helped facilitate massive growth in demand for physical gold and silver, a trend Shiels expects to continue. “There really is this growing ‘bunker mentality’ in the states that we will obviously see ramp up into US midterms as they're accumulating physical gold," she noted.

Regardless, the mounting uncertainty is expected to be supportive of precious metals pricing this year, and Shiels is forecasting an average gold price of US$2,000 per ounce and an average silver price of US$25 per ounce.