September 30, 2024
Commentary
The Stealth Bull Market in Precious Metals Continues to Unfold
Gold and silver continued their torrid advance through the third quarter of this year, propelled by the super-sized rate cut from the Fed and the spectre of more easing to come. Through Q3, gold and silver bullion had gained 13.23% and 6.92%, respectively, adding to their already sizeable gains through the first half of the year. Precious metal equities also responded to strong gold and silver prices with the GDX and GDXJ rising by 15.92% and 14.46% respectively.1 As worries about cost inflation have abated for the miners, investors are beginning to shift their fundamentals for precious metal equities. Earnings and cash flow are about as fundamental as it gets for valuation purposes. Through the first three quarters of 2024, we have seen earnings estimates for the NYSE Arca Gold Miners Index (GDM) rise by nearly 70%, and these estimates are likely to continue rising into year-end. We expect this number to increase further as analysts begin using spot prices rather than their forecast prices. It is important to note that the precious metal miners are seeing their profits rise at a much faster clip than the widely followed S&P500, which has seen its earnings expectations increase by under 10% over the same period.
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 $2,290/oz in 2026, dropping to $2,200/oz in 2027. Similarly, the long-term forecast price for silver is $28/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.
As the bull market in the precious metals continues to unfold, we remain baffled with investor behavior towards the space. We don’t think that investors are asleep at the wheel. To the contrary, we think that investors have yet to turn on their engines and focus on the massive opportunity unfolding in the market. The chart below illustrates this disconnect. Since the beginning of 2019, we have seen the price of gold rise nearly 80% - an astounding return by nearly any metric. Over this period the shares outstanding in the widely followed GDX ETF have declined by nearly 23%. This continues to be one of the biggest headscratchers for us for a simple reason. Rising metal prices result in rising revenues for miners. We do accept that there was a period of rising costs as a result of the inflationary period following COVID. However, over the past year, most miners have a firm grasp on costs and are seeing their profitability and margins rise. And yet, investors have continued to ignore this development and have chosen to continue redeeming their precious metal holdings.
Traditionally, gold has taken its cues from the US Dollar and real yields. Over the past two years, this relationship has been on hiatus. We have seen the US Dollar remain rangebound while real yields have strengthened. If we had been observing this behaviour before COVID-19, this recipe would have been disastrous for gold. Today, the paradigm and indeed the type of players transacting in gold have changed. Gold has continued to go from strength to strength over the past two years as newer larger entities have continued to emerge with substantial appetite for the precious metal. Since 2022, we have seen massive levels of gold buying by Central Banks around the world. Through 2024, nearly 480 tons of gold have been added to the central bank coffers according to the IMF.
Earlier, we noted the emergence of multiple buyers for gold, and we would like to elaborate on what we are noticing to that end. Through 2023 and the first half of 2024, China was the elephant in the gold-buying room. So strong was the demand in China that the Shanghai gold prices traded at a strong premium to the COMEX spot price. We noticed a shift in the Chinese demand in May with the Chinese central bank announcing a “pause” in gold purchases. It triggered a small sell-off as nervous gold holders who were raising the Chinese demand tailwind liquidated their holdings.
The sell-off didn’t last long as other central banks continued their purchases including the likes of Turkey, India and Poland – a rather diverse group it is. The other elephant in the room as it pertains to gold has been India, which lowered its import duty on gold imports in July. This ignited a massive surge in gold demand out of India. While we do not have the full data yet, gold demand has increased by over 30% according to some sources and raised the overall demand to record levels.
We have also witnessed a reemergence of investor interest in the West as seen through the ETF flows. Since May 2024, gold ETFs which had been witnessing outflows have recorded ~3 million ounces of positive flows into their coffers. The existing bullion ETF holdings stand around 83.5 million ounces which are still well below the record ~110 million ounces.
We would be remiss in missing an important development in silver – or rather the lack thereof as far as China goes. While we saw the demand for gold cool in China in recent months, the demand for silver has continued. The recent stimulus measures introduced by China are aimed at improving local demand but also towards encouraging industrial activity. China is a large source of demand for silver particularly due to its dominance in the field of solar manufacturing. On the Shanghai exchange, silver continues to trade at a hefty premium despite the large run-up we have witnessed in the white metal.
The action in precious metal equities has remained unchanged since the second quarter. As we saw in the first half of the year, the moves we have seen in precious metal equities have come on the back of rising earnings and profitability and the upside has come in spite of negative investor sentiment and negative asset flows. We expect further upside to earnings should current prices hold or strengthen.
The factors driving gold and silver are numerous but more importantly, whale buyers have emerged who are actively buying the dip and supporting ever stronger gold and silver prices. The other factors, namely, systemic risk, geopolitical shifts, and global economic transformation (hat tip to BRICS countries). Each driver is telling a part of the story, and together they paint a picture of a re-alignment of the economic world order. 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, Ninepoint Silver Bullion Fund and the Ninepoint Silver Equities Fund
1. Bloomberg
NINEPOINT GOLD & PRECIOUS MINERALS FUND - COMPOUNDED RETURNS¹ AS OF SEPTEMBER 30, 2024 (SERIES F NPP300) | INCEPTION DATE: OCTOBER 12, 2004
MTD |
YTD |
3M |
6M |
1YR |
3YR |
5YR |
10YR |
15YR |
Inception |
|
|---|---|---|---|---|---|---|---|---|---|---|
Fund |
4.9 |
32.0 |
16.6 |
25.0 |
48.3 |
7.9 |
10.8 |
8.7 |
3.1 |
3.9 |
S&P/TSX Global Gold TR CAD |
1.7 |
31.7 |
16.9 |
28.1 |
49.0 |
14.3 |
11.5 |
9.8 |
2.0 |
4.0 |
NINEPOINT GOLD BULLION FUND - COMPOUNDED RETURNS¹ AS OF SEPTEMBER 30, 2024 (SERIES F NPP226) | INCEPTION DATE: MARCH 17, 2009
MTD |
YTD |
3M |
6M |
1YR |
3YR |
5YR |
10YR |
15YR |
Inception |
|
|---|---|---|---|---|---|---|---|---|---|---|
Fund |
5.5 |
29.5 |
11.6 |
17.4 |
40.7 |
16.0 |
11.8 |
9.2 |
7.3 |
6.6 |
Gold Spot (CAD) |
5.6 |
30.3 |
11.9 |
18.0 |
41.9 |
17.0 |
12.8 |
10.2 |
8.3 |
7.5 |
NINEPOINT SILVER BULLION FUND - COMPOUNDED RETURNS¹ AS OF SEPTEMBER 30, 2024 (SERIES F NPP326) | INCEPTION DATE: MAY 9, 2011
MTD |
YTD |
3M |
6M |
1YR |
3YR |
5YR |
10YR |
Inception |
|
|---|---|---|---|---|---|---|---|---|---|
Fund |
8.1 |
32.2 |
5.3 |
23.7 |
37.9 |
12.9 |
11.6 |
6.4 |
-0.9 |
Silver Spot (CAD) |
8.3 |
33.7 |
5.7 |
24.6 |
39.9 |
14.5 |
13.4 |
8.3 |
1.0 |
NINEPOINT SILVER EQUITIES FUND - COMPOUNDED RETURNS¹ AS OF SEPTEMBER 30, 2024 (SERIES F NPP866) | INCEPTION DATE: FEBRUARY 28, 2012
MTD |
YTD |
3M |
6M |
1YR |
3YR |
5YR |
10YR |
Inception |
|
|---|---|---|---|---|---|---|---|---|---|
Fund |
7.8 |
28.2 |
11.4 |
26.1 |
45.9 |
-1.5 |
6.8 |
5.2 |
-1.3 |
MSCI ACWI Select Silver Miner IMI NR USD (CAD) |
7.3 |
32.8 |
13.8 |
31.1 |
54.8 |
5.5 |
8.7 |
6.3 |
-1.6 |