Gold Benefitting from 'Chaos and Confusion'
Fundamentals were already good but Trump’s return has added ‘kerosene to the bonfire’
A panel discussion at the WA Mining Club last week heard that the outlook for gold has never been better.
Canaccord Genuity gold analyst Tim McCormack said putting politics aside, gold had been experiencing strong tailwinds for the past 12-18 months as the US entered a rate cut cycle.
He said tracking the data over the past 75 years, gold rose around 40% on average during a rate cut cycle.
“Now, it's debatable whether we're in one of those right now, but certainly, the couple of rate cuts we had were positive for momentum and sentiment last year,” McCormack said.
“Other factors that I kind of think about that are interesting and positive for gold are certainly around the demand stack, and we've seen a real pivot from central banks and ETFs now as well, coming in on top of the more static kind of demand things like jewellery, so that's definitely helpful.
“There's a run on the vaults, which is getting a lot of media at the moment. There are people pulling in gold bars from all over the world, and you can actually get yield on gold in some of these banks as well, at the moment, if you're happy to let it sit there.”
Argonaut deputy chairman Liam Twigger said central banks were currently holding around 35,000 tonnes of gold in reserves, which, if counted as a currency, would be the second largest reserve holding behind the US dollar.
“The other dynamic, which I think sets the market up for a 10-year bull run, is that the buyers of the last resort, historically, were the Chinese retail dealers or the Indians, but the demand is central banks. When the price comes off, the central banks come in and I think that's a very strong sign for gold,” he said.
The Trump factor
Twigger noted markets had been volatile since US President Donald Trump returned to office, which had proved to be good for the gold price.
“I think the outlook for gold, which reflects the sum of all fears, couldn’t be better,” he said.
McCormack said layering Trump over an already positive backdrop added kerosene to what’s “already a pretty good bonfire”.
“It's not anything fundamental that Trump's saying or proposing. I think he just has this way, with Elon Musk, of sort of information saturation that just causes chaos and confusion,” he said.
“And at its core, gold is a safe haven that you go to in times of uncertainty, and I think that's unfolding right in front of our eyes and really compounding what is a very strong structural tailwind.”
The panel discussion took place in Perth on Thursday, prior to Trump’s contentious Oval Office meeting with Ukrainian President Vlodymyr Zelenskyy, which has only heightened global uncertainty.
Sky News political contributor Chris Uhlmann said geopolitical uncertainty, as well as the massive debt burden of the Western World, were positive for gold.
“It's no surprise that everyone's looking at the gold at the moment, because the world is nervous,” he said.
Uhlmann said we were witnessing a shift of the world order.
“We grew up under a security blanket that was thrown down by the United States in an environment that was created after the Second World War – it’s the only one we've ever known,” he said.
“All these institutions, the World Bank, the United Nations, International Monetary Fund, were laid down so the world didn't go to war again, a world war, and the security blanket was provided by the United States.
“That's being ripped up, so the future will be very different and it's likely to be a much more unstable world.”
Equities still undervalued
McCormack said many gold equities were trading at record highs, leading to a belief that they were expensive.
“The reality is they're not. The Australian gold producers are trading – some are more expensive than others – but around about a 20% discount on average, to my valuations, the street valuations,” he said.
“If you go and look at some of the majors, Barrick, Newmont, these kinds of names, they're trading, right down at sort of 40% discounts to where the street sees fair value.
“So we are emphasizing, imploring people that the sector is a very good place to position money at the moment.
“And it's a sector that hasn't seen, I don't think, a real shift of generalist money into it either. There's a lot of specialist resource positioning money in it, but that real wave of generalist money is what will be the next leg and push all these things 50-100% higher.”