It’s time for a polished performance from gold

IF gold were a schoolboy his report card would read something like “a bright kid who shows promise, but lacks direction and rests on his laurels”.

In these times of geopolitical ructions and ratcheting inflation, the yellow metal should be in its element. Bullion particularly has outshined in periods of stagflation (high inflation and low economic growth) and when real interest rates (taking inflation into account) are negative.

But having peaked at $US2050 an ounce in August 2020, gold has retreated 17 per cent to around $US1700 an ounce. In Australian dollar terms the metal has fared slightly better, falling 11 per cent to $2480 an ounce.

The paradox of gold’s behaviour is that while inflation is a friend, rising interest rates are not. That’s because gold isn’t incomegenerating and higher rates exacerbate the opportunity cost of holding the metal relative to risk-free returns from investments such as bank deposits.

Mind you, gold tends to do well when “real” interest rates (taking inflation into account) are negative, such as … now. For the listed Aussie miners, costs are becoming problematic, with the likes of Northern Star Resources (NST), Ramelius Resources (RMS) and Evolution Mining (EVN) recently issuing de facto earnings warnings.

In this week’s quarterly disclosure, Northern Star warned of per-ounce all in sustaining costs (AISC) rising 11 per cent in the current year, with output declining 7 per cent. AISC takes into account not just direct operating costs but items such as general admin expenses, royalties and depreciation.

This month’s slew of June quarter updates will further reflect the persistent labour shortages, cost inflation and higher diesel costs.

Bell Potter reckons the average AISC could be as high as $1900 an ounce. But with any commodity there can only be so much gloom – as buyers who bought into oil at sub $US10 a barrel in the early days of Covid would attest. The benefit of exposure through a miner is that when they do perform well, the benefits to investors are amplified well beyond the returns on a lump of bullion. Naturally, when production costs rise faster than the gold price the lowcost producers are best placed. But when gold rises faster than input costs – a likely scenario if or when the economy slows – the highcost producers actually have better financial leverage.

Macquarie lists 17 miners that have underperformed the gold price over the last three months. The worst are

Dacian Gold (DCN) and Evolution, down 65 per cent and 47 per cent relative to gold, respectively.

Even worse, Wiluna Mining (WMC) this week called in the administrators after its eponymous WA mine turned out to be more of a money pit than a gold mine (as it had been for a string of previous owners).

Investors seeking a pureplay exposure might consider buying physical bullion, or a proxy such as a gold ETF that merely tracks the bullion price (with or without a currency adjustment).

Exemplars include the BetaShares currency-hedged

Gold Bullion ETF (QAU). On a fancier note, the ETF Securities Metal Securities Australia (GOLD) bestows investors with silver, platinum and palladium exposures as well as gold.

Arguably, the ASX gold majors are decent value after their recent selldown, although surfing the fortunes of the late-stage developers might deliver better value in the longer term. Macquarie’s gold watchers like Bellevue Gold (BGL) and De Grey Mining (DEG). To the gold bugs the lure of lustrous stuff remains as strong as ever.

This story does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.