Eastern vs. western perspectives on gold
Martin kicked the panel off by reviewing the last several years in the gold market. Looking back at 2019 and 2020, he noted that an influx of western investors helped pushed the metal's price to phenomenal levels.
However, as the fallout from the COVID-19 pandemic drove inflation and interest rates, these investors became sellers, and gold started to sink. Capitalizing on these lower price points, central banks moved into the market and not only stabilized the price, but caused it to surge to all-time highs. By mid-2024, gold was 70 percent above its 2022 low.
Frank Giustra, CEO of the Fiore Group, largely agreed with Martin's summary of gold's activity, but added that while he thinks central bank buying will continue, there is more going on than meets the eye.
“What most people don’t understand about gold is that it’s not that the gold price is going up — it's the fact that the fiat currencies that are measured against it are going down in value for a whole host of reasons," he said.
Giustra sees the US fiscal situation as a factor pushing the gold price up, and suggested that the situation is not only beyond repair, but also on the precipice of a crisis. “At some point there will be a US dollar crisis. It’s going to happen in our lifetimes, probably sooner rather than later, and when that happens, gold will go through the roof," he noted.
Grant Williams, author at Things That Make You Go Hmmm, expanded on Giustra’s point, outlining a critical difference between the east and west. “In the east, people don’t buy gold to sell it because the price has gone up. They buy gold to own it, and when they do sell it, it’s because they need to raise money for something important,” he said.
Williams also suggested that the west is at the end of a cycle. In his view, investors are attempting to maximize their returns in any way possible, and the system is corrupt and lacks consequences.
“This is going to come to a head. We’re in the middle of that process now, and at the end of that process, when these cycles fall over, the one thing you want to own is gold," he explained at the conference.
"We are moving into the part of this where it's not just a good idea to own gold anymore — it's essential to own gold. And I think the price is going to reflect that in the coming 12 to 18 months."
Tech stocks, Bitcoin distracting investors from gold
The panelists agreed that today’s investors are distracted as tech and Bitcoin dominate headlines.
While technology stocks still follow the typical market ebbs and flows, cryptocurrencies are a different story.
Giustra even compared the crypto space to a Ponzi scheme, pointing to one influential commenter who has suggested that Bitcoin will reach a value of US$13 million and gold will reach zero.
“These are ridiculous statements, but he needs to make those kinds of statements to keep the greed factor going. In any pyramid scheme, you need to have new buyers all the time to keep the game going,” he said.
Giustra also outlined how the cryptocurrency space has influenced the recent US election, spending US$245 million to influence Congress and the incoming president to ease regulations. This comes from a shifting narrative that implies crypto is a store of value. Giustra believes it's an asset class in search of a purpose.
GoldMining (TSX:GOLD,NYSEAMERICAN:GLDG) CEO Alastair Still backed Giustra, saying that unlike gold, Bitcoins can be created every day, while gold’s limited supply is inherently connected to its store of value.
Still described how resource scarcity has been tested, outlining how geopolitically stable jurisdictions are diminishing. At the same time, mining companies have underinvested in exploration and been slow to find new assets.
“So while I think many investors are a little behind the curve," he explained at VRIC.
"What we have seen is the major operating companies, they're running deficits in their reserves, so they’re not replacing what they’re mining, and that’s because they’ve been underfunding exploration for years."
Gold majors dealing with low grades, declining reserves
The systemic underfunding of exploration could be an opportunity for explorers and developers to start acquiring projects that will be sought by majors in the future. As it stands, miners are having to maximize extraction efforts.
“The operators are mining lower grades. That doesn’t necessarily mean they’re making more gold. They might make more profit, but they are actually potentially mining less gold,” Still commented.
David Garofalo, CEO, president, chairman and director at Gold Royalty (NYSEAMERICAN:GROY), agreed that operators are facing a challenge. “They’re facing a squeeze from tiny reserves, and reserves are down 40 percent. That’s demonstrated because the juniors haven’t had access to capital for over a dozen years,” he said.
He went on to explain that the entire industry is facing cost pressures.
All-in-sustaining costs have risen along with the price of gold, leading to a squeeze among producers. Much of this is due to inflation, which has resonated throughout the general economy.
“That’s why when you look at the leaders in our industry, their share prices are lower today than they were 30 years ago, when the gold price was a 10th of what it is today,” Garofalo said.
Rising costs and chronic underfunding are causing a dual squeeze. No new projects are in the pipeline, and he doesn’t expect the situation to reverse any time soon. Instead, he sees sees major companies like Barrick Gold (TSX:ABX,NYSE:GOLD) and Newmont (TSX:NGT,NYSE:NEM) with stagnating reserves and stalled output.
They can grow their share count, but not the gold they have access to, they’re not creating share value.
Which gold stocks to focus on now?
Garofalo suggested that the right space to be in now is the development stage. He thinks the majors are approaching a point where they need to add assets to their portfolios to continue to grow.
“The industry has basically been giving money back to investors for the last dozen years in dividends and share buybacks and whatnot, and not meaningfully back into the grassroots exploration to replace depleting reserves,” he said.
Likewise, Giustra backed the idea that the gold sector needs more consolidation.
“There are far too many companies burning a lot of overhead. The industry needs to consolidate. We need to deliver performance. And so it’s partially the industry’s fault; for a long time, it hasn’t performed. You need to perform economically with your deposits to qualify as an investment sector,” he said.
Williams added that it’s important for investors to understand what they are looking for. He said that gold can be “a get rich quick scheme, a get rich slow scheme and a stay rich scheme,” depending on where you are in the cycle.
“That shouldn’t be your only focus. You shouldn’t only be thinking about, 'Where can I find the 10 baggers?' If that’s really your mindset, crypto is the perfect vehicle for that, because there’s a 10 bagger produced every minute if you're lucky enough to get in and get out. This industry is tangible," Williams said.
"It’s things you pull out of the ground that are valuable."
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Securities Disclosure: I, Dean Belder, hold no direct investment interest in any company mentioned in this article.
