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Gold’s value in a not so golden age

Policy and prices will be key for gold

Two key drivers of the gold price – central-bank policy and inflation – are on the move. As the chart below shows, these two influences have combined in various ways to shape the gold market since the early part of this century.

Now, following a coordinated and significant monetary and fiscal response to the pandemic globally, we have passed the point of maximum easing. Central-bank policy is beginning to tighten relative to its pace of easing last year.

At the same time, inflation is proving more persistent than many expected. It continues to surprise to the upside in many regions, with supply bottlenecks and temporary COVID impacts making price rises stickier than previously expected. This has led central banks to further ponder whether stimulus should be withdrawn.

Much of the debate in the market centres on how much of the inflation is transitory. Will base effects wash out or will the momentum continue? For investors, it’s worth thinking through the scenarios that might play out from here, and how they could impact gold.

Note: ‘Policy – ‘ = tightening policy, ‘inflation – ‘ = low inflation; and vice versa.

Source: Ninety One, Bloomberg, 30 September 2021

Assessing gold’s prospects under inflation scenarios

Scenario 1: inflation proves transitory

  • Inflation surpasses its peak in early 2022 as it becomes increasingly challenging for aggregate prices to maintain their rate of change – particularly as short-term pressures (such as from used-car and energy prices) fade towards the end of 2021, which should ultimately cause inflation to moderate.

  • Growth momentum continues to slow, although the absolute level remains above-trend.

  • In this scenario, stagflation (low growth + inflation) is avoided, and central banks are able to remain on their tightening paths.

  • Gold outlook: The combination of real rates rising from record lows and inflation no longer rising as base effects wash out proves to be a challenging backdrop for gold.

Scenario 2: a structurally higher level of inflation persists

  • Contrary to investor expectations, inflation maintains its momentum due to supply shocks, higher commodity prices and labour shortages.

  • Having been behind the curve, major central banks – most notably the US Federal Reserve – continue to tighten policy, resulting in stagflation.

  • Gold outlook: Even if real rates push higher, rising inflation and an environment of elevated risks act as tailwinds for gold, as investors seek to preserve capital.

It’s not all about policy and inflation

Of course, central-bank policy and inflation are not the only issues that may influence how gold performs in 2022.

There is also the fact that the path from here for the global economy is extremely uncertain – and gold’s reputation as a safe-haven asset means that, as economic uncertainty increases (typically associated with falling equities), investors tend to allocate to gold. With governments trying to normalise financial conditions and growth prospects diverging internationally, it remains challenging to forecast precisely what issues may arise in 2022. But it seems easier to forecast that there are likely to be issues. In such an environment, gold’s appeal should increase after a dull year for the precious metal, given its usefulness for investors looking to diversify their portfolios. 

For investors getting gold exposure through the equities of companies that mine and produce gold, there are other reasons to look forward with a degree of optimism. We think gold-mining stocks are attractive on both valuation and fundamental grounds. In fact, gold companies are in their best shape for nearly 40 years. A number of them are reporting record cashflows and, increasingly, these cashflows are less reliant on a high gold price. The following case studies illustrate some of the opportunities in the gold sector across the market-cap spectrum.

SSR Mining: a mid-cap growing from a solid foundation

We believe that a number of mid-cap gold companies are emerging with solid foundations and good growth prospects – among which SSR Mining is a great example, in our view.

SSR Mining combines a strong balance-sheet (it has net cash of US$411 million) with various brownfield growth opportunities and exciting exploration ground around all of its operating assets.