June 30, 2024
Commentary
The Stealth Bull Market in Precious Metals Won’t Remain a Secret For Long
Gold and silver continued their torrid advance through the second quarter of this year. At the end of Q2, gold and silver bullion had gained 12.8% and 22.5%, respectively. The rise in precious metals has come at a rather opportune time. Worries about cost inflation have abated, and the focus is shifting back to fundamentals for precious metal equities. Earnings and cash flow are about as fundamental as it gets for valuation purposes. Through the first two quarters of 2024, we have seen earnings estimates for the NYSE Arca Gold Miners Index (GDM) rise by nearly 60%, and these estimates continue to rise in the first few weeks of the third quarter. We expect this number to increase further as analysts begin using spot prices rather than their forecast prices.
Precious Metal Equities are Seeing Rapid Increase in Earnings Estimates Through 2024
Curiously, the forecast prices for gold and silver have diverged significantly versus spot gold and silver prices.
Analyst Gold and Silver Price Forecasts Remain Conservative Relative to Spot Prices
As the table above illustrates, the spot price of gold and its forward curve diverge from the median analyst forecast by larger and larger amounts as we look into the future. For example, at the time of writing, gold is forecast to average $2,200/oz in 2025, dropping to $1,900/oz in 2027. Similarly, the long-term forecast price for silver is $26/oz, significantly lower than the spot and implied forward prices. The current conservative nature of commodity price forecasts has a twofold impact on precious metal equities. Firstly, using lower commodity prices in estimating earnings produces estimates that are likely to prove conservative. Secondly, lower metal price assumptions also reduce the Net Asset Value (NAV) used to help calculate price targets for the companies in question.
We saw a similar theme play out in the early 2000s when conservative commodity price forecasts led to conservative price targets for precious metal miners. As realized prices for gold and silver continued to improve through the early 2000s, analysts frequently chased their target prices and earnings estimates higher.
In March 2000, Cisco, a provider of hardware that powers connectivity, became the largest company on the S&P 500 by market capitalization. Fast forward over 24 years, and we can’t help but note a similar theme with Nvidia taking over the mantle of the most valuable company on the S&P 500. Typically, the company that enables a new technology—Cisco with the internet and Nvidia with AI—rarely remains the most valuable. Indeed, innovative businesses that can harness the value of the technological advance produce the most value. For example, consider Microsoft, Google, and Amazon in the internet age.
Nvidia’s valuation suggests that we might be approaching a phase where hype is more important than fundamentals, and optimistic projections are being used by analysts to estimate target prices. This is diametrically opposed to the current setup in precious metal equities, where fundamentals are driving price movements. Furthermore, we believe the fundamentals for gold and silver are set to improve further for reasons we will lay out below.
The Fed and the USD is Trapped and Global Central Banks Know It
The Federal Reserve, the backbone of American monetary policy, finds itself in a predicament. Rate cuts were once the magic wand that could invigorate a sluggish economy, but now, they threaten to spiral into a doom loop. The more the Fed prints digital money, the less effective it becomes, leading to a vicious cycle of diminishing returns. The once omnipotent Fed is now navigating a labyrinth with no clear exit, where every turn promises only deeper entanglement.
Similarly, the Treasury is stuck between a rock and a hard place. The US Treasury, the fiscal counterpart to the Fed's monetary might, is equally ensnared. The bond market, long considered a haven of stability, is teetering on the brink of a breakdown. Yields are no longer the reliable compass they once were, and the bond market's structural integrity is under siege. This unravelling signals not just a market correction but a tectonic shift in the bedrock of global finance, with the Treasury at the epicentre of this impending quake.
It is worth pointing out that foreign ownership of both US debt and the US Dollar has been in decline for well over a decade, with gold becoming the de-facto reserve asset of choice. The pie charts below compare and contrast the change in ownership of US debt over the last decade:
US debt ownership breakdown 2014 vs 2024
The two most obvious things that stand out below are:
China and Japan used to own nearly 40% of the US debt in 2014, and their ownership has halved to approximately 20% today.
In the absence of new buyers, the Fed has been forced to step in and increase its ownership from around 36% to nearly 50% today, as most foreign entities have been reticent to supplant China and Japan, especially given the paltry yields that US Treasuries have offered over the timeframe.
The emergence of BRICS+ is worth paying close attention to. Alongside the EU, it is one of the few economic blocs that can challenge the global dominance of the USD. As nations band together to create an alternative to the US-led order, the balance of power is shifting. This isn't just about economic clout but a reconfiguration of geopolitical alliances. The age of unipolarity is giving way to a multipolar world where the US must navigate a new, more complex global dynamic.
Political Turmoil Rising Against Stagflationary Backdrop
Political turmoil is becoming the new norm across developed societies, a sign of fraying in the societal fabric. The election of Trump in 2016 has inspired increasing polarity in global politics. The recent elections of Milei in Argentina and Meloni in Italy are a continuation of this trend.
The recent spate of economic releases, including the recent ISM data, points towards forthcoming economic volatility. The US economy, which has been a standout against a choppy global economic backdrop, is showing signs of sputtering. Growth is stagnating, and inflation is acting like a weed that is increasingly difficult to kill. The dual threats of stagnation and stagflation are converging, creating a precarious situation for policymakers and businesses alike.
Gold has Become the Hot New Reserve Asset For the Central Banks
In this climate of uncertainty, central banks have rediscovered the safe-haven appeal of gold. While investors fearful of rising rates were busy fleeing the bullion ETFs, central banks around the world took advantage of the situation by becoming large purchasers of gold.
Annual Gold Demand From Central Banks Has Exploded
It bears noting that gold has been one of the best mainstream assets for the entirety of the 21st century, outperforming equities and bonds alike. With investors once again turning their attention to bullion, we expect the yellow metal's allure to only grow, while also serving as a tailwind for retail demand for silver. Gold remains under-owned, and we view it as the ultimate buy-the-dip asset for modern portfolios.
Gold trades around $2,400/oz today, and silver is near $30/oz. The spectacular gains we have seen in 2024 for both metals have not come as a result of increased investor flows. In fact, the gains have come despite negative investor flows from Western investors. Similarly, gold and silver equities have posted strong gains through 2024, not because of high investor interest, but because their earnings have been supercharged by rising metal prices.
The factors driving gold and silver are numerous. It is a narrative woven with threads of systemic risk, geopolitical shifts, and global economic transformation. Each driver is telling a part of the story, and together they paint a picture of a world in flux, where old certainties are crumbling, and new paradigms are emerging. The prior bull market in precious metals emerged like a phoenix out of the tech wreck of the early 2000s. We are seeing signs that history will rhyme yet again.
Maria Smirnova and Shree Kargutkar
Sprott Asset Management
Sub-advisor to the Ninepoint Gold & Precious Minerals Fund,
Ninepoint Gold Bullion Fund and the Ninepoint Silver Fund
NINEPOINT GOLD & PRECIOUS MINERALS FUND - COMPOUNDED RETURNS¹ AS OF JUNE 30, 2024 (SERIES F NPP300) | INCEPTION DATE: OCTOBER 12, 2004
MTD |
YTD |
3M |
6M |
1YR |
3YR |
5YR |
10YR |
15YR |
Inception |
|
|---|---|---|---|---|---|---|---|---|---|---|
Fund |
-6.0 |
13.3 |
7.2 |
13.3 |
20.1 |
-1.7 |
9.0 |
5.1 |
3.4 |
3.1 |
S&P/TSX Global Gold TR CAD |
-2.2 |
12.7 |
9.6 |
12.7 |
16.2 |
4.8 |
9.6 |
6.4 |
1.4 |
3.2 |
NINEPOINT GOLD BULLION FUND - COMPOUNDED RETURNS¹ AS OF JUNE 30, 2024 (SERIES F NPP226) | INCEPTION DATE: MARCH 17, 2009
MTD |
YTD |
3M |
6M |
1YR |
3YR |
5YR |
10YR |
15YR |
Inception |
|
|---|---|---|---|---|---|---|---|---|---|---|
Fund |
0.3 |
16.0 |
5.2 |
16.0 |
24.2 |
12.2 |
10.5 |
7.5 |
6.5 |
6.0 |
Gold Spot (CAD) |
0.4 |
16.5 |
5.4 |
16.5 |
25.2 |
13.2 |
11.5 |
8.4 |
7.5 |
6.8 |
NINEPOINT SILVER BULLION FUND - COMPOUNDED RETURNS¹ AS OF JUNE 30, 2024 (SERIES F NPP326) | INCEPTION DATE: MAY 9, 2011
MTD |
YTD |
3M |
6M |
1YR |
3YR |
5YR |
10YR |
Inception |
|
|---|---|---|---|---|---|---|---|---|---|
Fund |
-3.9 |
25.5 |
17.5 |
25.5 |
30.3 |
5.7 |
12.8 |
4.0 |
-1.3 |
Silver Spot (CAD) |
-3.8 |
26.4 |
17.9 |
26.4 |
32.1 |
7.2 |
14.7 |
5.9 |
0.6 |
NINEPOINT SILVER EQUITIES FUND - COMPOUNDED RETURNS¹ AS OF JUNE 30, 2024 (SERIES F NPP866) | INCEPTION DATE: FEBRUARY 28, 2012
MTD |
YTD |
3M |
6M |
1YR |
3YR |
5YR |
10YR |
Inception |
|
|---|---|---|---|---|---|---|---|---|---|
Fund |
-12.0 |
15.1 |
13.2 |
15.1 |
17.5 |
-12.6 |
7.3 |
2.2 |
-2.2 |
MSCI ACWI Select Silver Miner IMI NR USD (CAD) |
-10.5 |
16.7 |
15.2 |
16.7 |
23.7 |
-5.4 |
6.9 |
2.9 |
-2.6 |