In 2020, Everything That Glitters Is Gold
WHY YOU SHOULD CARE
As interest rates sink, this precious metal is sailing.
By Brady Fletcher
- The price of gold has risen almost 33 percent since the start of the year, as low interest rates and worries about the stability of other financial assets makes investors bet on the precious metal.
- This trend appears set to continue — and could fuel a fresh mining boom.
In case you’ve been distracted by everything else going on in the world, gold has been on the rise: Its per-ounce price started the year at around $1,525, and has now surpassed $2,000. The trend looks set to continue. Why? Several factors have come together to make it a great year for the precious metal.
In 2019, major gold producers — known in the industry as senior mining companies — hit record production levels that enabled a series of mergers and acquisitions. And even though COVID-19 has disrupted operations and affected public markets, mining companies listed on Canadian markets have seen an 80 percent growth in year-to-date financing — from approximately $1 billion in March 2019 to $1.8 billion in 2020.
The Federal Reserve’s move to slash interest rates to levels we haven’t seen since the Great Recession has helped. Such low interest rates mean more pressure on the housing market and an economic environment where yield is hard to come by in many asset classes. The Federal Reserve’s buying activities have also been buoying the markets.
The stability of gold also makes it a lucrative investment in these unpredictable times. In April and May, North American gold exchange-traded funds saw record inflows as investors opted for real assets that could protect them from a potential currency devaluation as a result of massive government stimulus programs and increased printing of money. This was also reflected in the sell-off of bonds that has taken place in the past few months.
COVID-19 isn’t the only influencing force here. Over the past five to 10 years, converging trends — like reckless deficit spending by governments, mass amounts of currency printing leading to devaluation, growing pools of private equity that drive up company valuations and slowing economic growth in some parts of the world — have driven investors to hard assets such as mineral resources. Bullion prices have grown nearly 40 percent in the past year.
With growing automation forcing industry after industry to either retrain workers or let them go, the number of people relying on social support programs might well grow. Taxes are likely to increase and deficits will swell. Massive government programs aimed at supporting businesses and individuals during the pandemic are also likely to play a role.
The rise in demand for gold will also affect junior miners — exploration companies that search new regions for potential resources, then raise financing to prove the resource exists, before selling to a senior mining company that has the resources to take the project into production.
Over the past decade, a scarcity of risk capital has meant that funding for new explorations has been low. As the price of gold rises and senior gold companies have more capital available to them, they have more of an incentive to find ways to grow their resources — and that could mean looking at junior miners and their latest discoveries. Companies undertaking projects in regions with known gold discoveries — or where there’s a reinvigorated interest in exploration like British Columbia’s Golden Triangle — may present more attractive targets for larger enterprises.
We’re also in the midst of a massive shift in focus toward environmental, social and governance (ESG) investing. This trend has been exacerbated by COVID-19, during which consumers have shown their preference for companies that do the right thing. It’s true that, on the surface, mining companies might not seem compatible with the interests of ESG investors, especially those with concerns around land use and sustainable growth. But ESG and mining don’t need to be mutually exclusive.
Consulting firm Deloitte notes that attracting social investors is the mining industry’s top trend in 2020. Within the gold industry itself, companies are building policies around the World Gold Council’s Responsible Gold Mining Principles — a comprehensive framework that will align mining companies with the sentiments of ESG investors. In the current environment, junior gold miners are also likely to increasingly demonstrate their commitment to reporting ESG data, shifting the overall perception of the sector. All of which underscores why the recent glitter that the gold mining industry has witnessed isn’t about to wear off anytime soon.
Brady Fletcher is managing director of TSX Venture Exchange, a public venture market. The views provided in this article reflect those of the author. This article is not endorsed by the TMX Group or its affiliated companies.
- Brady Fletcher, OZY AuthorContact Brady Fletcher