High Gold Prices Bid Well for Mexican Producers

The gold price chart for March 2020 looks like a rollercoaster. Starting at US$1,590 per ounce, the price hit US$1,674 on March 9. One week later, it dropped 11.3 percent. At the time of writing, it had climbed back up, perched uneasily at US$1,622. Not since the aftermath of the late 2000s Great Recession, had gold reached such heights.

Gold’s price contractions this month are explained by investors looking for liquidity in order to palliate the losses their other assets are experiencing. In times of panic, everyone rushes to cash. On this point, the World Gold Council (WGC) elaborates: “Like most asset classes, gold is being affected by the unprecedented economic and financial market conditions in play around the globe. Recent volatility in the gold price has been driven by massive liquidations across all assets and likely magnified by leveraged positions and rule-based trading.” However, it is important to keep in mind that the very fact that gold is effectively used to acquire cash speaks to its strength and appeal.

Indeed, focusing only on the yellow metal’s short-term volatility misses the larger point. The measures governments are taking to lighten COVID-19’s blow to the global economy anticipate high gold prices in the long term. Krishan Gopaul, from the WGC’s Market Intelligence Group, says “central banks have taken even more action in order to prop up the global economy. The Fed has made two unscheduled rate cuts this year, bringing rates to near zero. The action was coordinated with the eurozone, the UK, Japan, Canada and Switzerland.” Low-interest rates increase gold’s comparative appeal.

Additionally, countries around the world are injecting trillions of dollars into the economy in an effort to keep businesses afloat. Most impressive among these efforts, on Monday, March 23, the US Senate announced a US$2 trillion stimulus bill. Deficit-bloating initiatives such as these, as necessary as they may be, further strengthen gold’s allure. As Bart Melek, TD Securities Head of Global Strategy, said to Kitco News, “since (gold) is nobody's liability, which is quite opposite to government paper that will be issued to support all the spending needed by the trillions to fund the various stability programs throughout the G7, it has a clear path towards US$2,000 per ounce.”

Mexico is a Top 10 global gold producer, boasting some of the world’s most important mines. If there is a bright side to the current health contingency, Mexican gold miners may find it in sustained high prices in the long term. That would guarantee the viability of a number of exciting projects in the pipeline, like Endeavour’s El Compas, Telson’s Tahuehueto, Alio Gold’s Ana Paula, Fresnillo plc’s Orisyvo, Orla's Camino Rojo and SilverCrest Metal’s Las Chispas.