Image credits: Wikimedia Commons

ESG Decisive for Capitalizing on 2021’s Gold Rush

By Alejandro Ehrenberg | Mon, 12/07/2020 - 17:06

Gold reached unprecedented heights during 2020. Opening the year at US$1,520/oz, the metal spiked above the US$2,000/oz mark in August and is currently hovering at US$1,830/oz. Among the factors accelerating gold’s rise in 2020 were trade tensions between China and the US, the COVID-19 outbreak and uncertainty around the US presidential elections.

However, there is hope that a vaccine against COVID-19 will be available at some point next year and that the incoming Biden administration will offer more stability than its predecessor. Given this optimistic panorama, what can investors expect of gold in 2021 and what will that mean for miners?

The fundamental factors fueling the gold market since it started its upward trajectory in late 2015 did not alter significantly during 2020. If anything, recent events have simply intensified this bullish trend. Early this year, before the pandemic broke out globally, Rick Rule, President & CEO of Sprott US Holdings, spoke with MBN about the reasons behind his bullish case for gold. Rule highlighted unsustainably high debt levels as one of the main variables influencing the price of gold. He cited the US debt, which exceeds US$27 trillion, and pointed out that the resources for facing it are chronically insufficient, resulting in debt levels increasing every year.

During an interview with MBN, Gijsbert Groenewegen, Founder of Silver Arrow Partners, also underscored debt as a key variable. “Hardly any country in the world has a surplus, and, because taxpayers are already heavily burdened, governments only have the option to square their budgets by debt issuance,” he said. When governments keep issuing debt in a context that is already marked by massive budget deficits, investors start doubting whether purchasing power can be guaranteed. “If money is issued with nothing to back it up, currency in circulation gets devalued,” Groenewegen added.

There is an inverse correlation between the value of gold and that of the US dollar: as investors perceive weakness in the latter, the price of the former increases. “The devaluation of the US dollar and the increase in national debt are the major factors that will likely push gold prices up in the near future,” financial consultant Daniel Penzing commented to MBN, adding that he expects the gold to silver ratio to return to a level close to its historical average soon.

Government response to the COVID-19 crisis has accentuated favorable conditions for gold. In an effort to defibrillate their economies, countries around the world have rolled out stimulus packages of unprecedented scale. “The US government has chosen to try to print its way out of the problem, issuing trillions of dollars and bailing out certain businesses. Gold will take off in response. Silver will follow that pattern eventually, although it is more volatile than gold,” Jason Reid, CEO, President & Director of Gold Resource Corporation, which owns mines in Mexico and the US, said to MBN. In the same line, Ryan Scribner, Co-Founder of personal finance website Investing Simple, said to MBN that he expects gold prices to keep climbing in 2021 and maybe even outpace the stock market in terms of returns. “With the record amount of money printing tied to the stimulus packages passed in the US, investors are fleeing the US dollar in search of a better alternative,” he added.  

When growing debt dovetails with persistently low interest rates, gold becomes even more appealing in comparison to other assets. Rule noted that, in a free market, a growing debt would result in a 10-year US Treasury bond yield of around 10 percent. However, the yield currently is 0.87 percent points, which indicates that interest rates have been manipulated down. “The value proposition of the US’ 10-year Treasury is not very appealing: they will give you back less than what you gave them. That has been called return-free risk. Gold is remarkably appealing, given that circumstance,” Rule said.  

Vic Patel, professional trader and Founder of Forex Training Group, explained to MBN that the devaluation of major currencies in real purchasing power should continue into 2021, as governments remain under pressure to provide stimulus to stabilize the economy. “I am very bullish on gold and gold mining stocks for 2021. I expect the price of gold to increase to US$2,500/oz by the end of 2021,” he said. Similarly, Bryan Slusarchuk, CEO of gold company Fosterville South Exploration, told MBN that bi-partisan support for quantitative easing in the US, unprecedented monetary and fiscal stimuli and a low to negative interest rate policy are the perfect recipe for a gold bull market. “Gold is the only currency in the world not being printed with reckless abandon in an effort to stave off a huge depression,” he remarked.

This auspicious scenario will impact the way gold mining companies are valued in the market. Simon Popple, Managing Director of Brookville Capital, explained to MBN that the anticipated rise in the gold price during 2021 will make gold shares increasingly attractive. All-In-Sustaining-Cost for gold mining companies averages roughly US$1,000/oz, yielding a profit of about US$800/oz as prices currently stand. “Let us say the gold price moves up 20 percent to $2,300/oz. Costs are likely to rise, too, but probably not by the same amount. If costs move up 10 percent to US$1,100/oz, that would provide a notional profit of US$1,200/oz: an increase of 50 percent compared to today,” Popple elaborated. Gold miners’ profits are keenly sensitive to the price of gold. When that is compounded with the fact that some gold producers have dividend policies that prioritize their shareholders, and is placed in a context where many companies are finding it hard to provide strong income streams, investors will naturally pay more attention to gold miners. “Mining shares are already heading north but I am convinced this is just the start of the journey,” Popple concluded.

Joseph Yaffe, Co-Owner of precious metal dealer Gainsville Coins, voiced concurring opinions during an email exchange with MBN. “Stock prices for miners tend to lag the movement in the gold price, so the sector may take a few months to catch up to the gold rally. Investors can take advantage by buying the dips in the gold price while also allocating a modest proportion of their investment portfolio to major mining companies. Despite the aforementioned lag, gold miners typically outperform the spot gold market during bull markets,” he said.

In contrast with previous commodity market upswings, in 2020 equity markets seem to be moving in sync with commodity prices. During an interview with MBN, Dean McPherson, Head of Business Development Global Mining at the TMX Group, said that the mining industry is gaining notoriety not only among specialized investors but also among the generalist kind. “Our two exchanges have just over 1,200 mining companies listed. Our overall market index is up over 24 percent this year. The TSX Venture Exchange’s metals and mining portion is up by almost 60 percent. These are very encouraging figures,” McPherson commented.

A large part of the current confidence in the mining sector is related to its consolidation around Environmental, Social and Corporate Governance (ESG) topics. If gold producers want to leverage the high price environment and increase their access to financing, they would be wise to focus their efforts not only on operative efficiency but also on achieving a strong ESG profile and communicating it effectively. “Mining companies should be aggressive in increasing their level of ESG disclosure and communication with the investment community. They should not only share operating results but also show how they are raising stakeholder value beyond just shareholder value,” McPherson said. He went on to explain that the new generation of investors care about the value added and the way the environment and people are treated. “For the past ten years, we have seen growth in these concerns, going beyond balance sheets. Investors are now more likely to invest in companies that are trying to meet ESG standards. This process will go a long way in attracting the interest of young and generalist investors,” he noted.

Terry Heymann, CFO of the World Gold Council, recently shared with MBN his reasons for considering gold a good fit in an ESG-savvy portfolio. From an economic lens, he explained that some ESG factors — in particular climate change — will heavily impact investment portfolios over the next decades. “We will see repricing among asset classes and risk evaluation will be dramatically affected by climate change. Many businesses are doubting whether they will attract investment in the future, like the coal industry. In all this uncertainty, gold will play an increasingly important role as a climate change mitigating asset,” Heymann said.

Moreover, as investors increasingly look to incorporate an ESG component into their investment-making process, gold and gold mining should be considered part of that outlook. The gold industry’s ESG performance is strong, even when there are risks that have to be properly handled. “That is true with respect to physical gold, ETF instruments or gold mining equities. Each method of gaining exposure to gold has merits, depending on the investor’s circumstances. But all of them have solid ESG characteristics,” Heymann concluded. Gold mining companies looking for guidance on ESG performance can turn to the World Gold Council’s recently-published Responsible Gold Mining Principles, a framework through which producers can provide confidence that their gold has been produced responsibly.

Peter Dougherty, President & CEO of Argonaut Gold, which owns two gold projects in production and one under development in Mexico, told MBN that the industry should be happy with anything above US$1,200/oz and should make business plans accordingly.

Indeed, a rigorous attitude with respect to operative performance coupled with robust and well-communicated ESG profiles will put gold mining companies in an outstanding position to capitalize on the gold market’s foreseeable strength. 

Photo by:   Wikimedia Commons
Alejandro Ehrenberg Alejandro Ehrenberg Journalist and Industry Analyst