Gold: record prices and what happens next

At the recent Mining Indaba in Cape Town, South Africa, we spoke to industry experts and analysts about the big issues, including gold, which has just hit a record high. 

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Darren Bowden, CEO, Metals Exploration (LSE:MTL): It's really interesting because you've got so many different types of commodities and we could all invest in all of them. But the one thing that's different about gold is gold is not just a precious metal. It's a financial instrument. It's basically US dollars in the ground, OK. And so when you get instability in the world or instability in the markets, you get an opportunity where gold is going to vary in price. Because people buy into gold and put gold in the bank as a hedge against a changing inflation, increasing inflation, US dollar, or, let's say, instability in a regional geopolitical situations, such as the war in Ukraine, Israel as well.

So those types of things will drive the gold price up. The rising CPI will drive gold price down because what you're doing is you've now got your normal financial instruments, which are bank notes, are actually worth more. The minute that starts dropping off and we see that the interest rates across the world are starting to come off, then gold will start rising against those financial instruments. So, there's a number of variables. I'm trying to call gold long or gold short. How long is a piece of string?

Julien Bosche, vice-president EMEA, Trident Royalties (LSE:TRR): Gold is effectively a store of value. It's the store of value that's been around for thousands of years. And everyone obviously continues to expect it to do that. And in fact, if you look at it, gold tends to spike on major geopolitical events. It also spikes with inflation, for example. In our corporate presentation, we actually have a chart that plots gold with US debt. And you can see they just tend to follow each other in lockstep. In fact, I also heard just this morning, there's a huge amount of gold buying happening right now in China with some of the issues with the property developers.

There's people shifting away from what was seen as something relatively safe in property, but as it turns out, has been a bit of a nightmare, there's a lot of retail gold buying in China as they shift to something that's seen as a very strong store of value. And so that's a lot of what drives it. Obviously, central banks are big buyers of gold, again as a store of value. And you have a few different elements there that would indicate that it could continue. Notably, things like the weaponisation of the dollar potentially. Some of these elements would all be supportive of gold, as everyone looks to go into an asset class that should be relatively insulated from geopolitical events.

Segun Lawson, CEO, Thor Explorations (LSE:THX): Historically, as far back as people can remember, gold has always been a form of monetary value. Obviously, it's used in jewellery as well. And in more recent history, it's always been the flight to safety in uncertain economic times with the global wars. So that's been the traditional driver. As technology has improved, gold has actually used a lot more technology as well. But given the high inflationary environment we're in and the global economic situation we're in, gold has resorted to being that flight to safety again. Looking at interest rates, which is not my expertise, which will continue to escalate, we don't think that's going to be sustainable on a perpetual basis.

And we do think as soon as that starts curtailing, we're going to see a much stronger gold price than the current highs we're experiencing now. So I'm very bullish about the gold price. As a CEO of a gold producing company, I'd naturally be bullish. But I think given the fundamentals of what drives the gold price, I'm even more bullish than normal.

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John Meyer, head of research, SP Angel: Gold prices have risen to over $2,000 an ounce and they are holding above that level. So that's good news. The market's waiting for the Federal Reserve to cut interest rates. When they do that, we would expect the US dollar to pull back a little bit and then the gold price to move forwards again. And I think that's a key signal that everybody's looking for. So when there's an indication the Fed will cut rates, the price rises. And when somebody from the Federal Reserve says, “Oh, we're going to delay the rate cut,” the price pulls back a bit.

So it's quite a solid market. There is some inflation, of course, for the miners. Remember that. But at the end of the day, when gold prices rise, the whole mining sector tends to go with it.

Kieron Hodgson, mining analyst, Panmure Gordon: There's a multitude of factors. At Panmure Gordon, we have actually devised a proprietary five factor model which actually looks at the underlying drivers of what is statistically relevant for a particular driver or a force to move the gold price. Those particular factors are economic uncertainty, global inflation, central banks trading on the technical side. And lastly, and probably the one that's probably the most important at this moment in time is the US dollar.

The factors are clearly variable in their importance. At the moment, economic uncertainty is slightly waning, but it was definitely one of the key factors for the momentum in gold. Certainly what we've seen with the unrest in Europe and then exemplified by the unrest in the Middle East. That protectionist aspect of gold, it really came to the fore. However, our analysis has shown that the US dollar is likely to become the driving force once again.

2024 has got quite a significant number of political risks associated with it. We’re looking at the number of countries that are going to the elections this year, not least the US. In fact, the economic picture in the US remains pretty strong. It means that from what we see is that the dollar will continue to appreciate or at least remain robust. That's negative for gold. However, as we move to the second half of the year, the risks associated with the US election are starting to certainly come to the fore.

And if it's as contentious an election as we expect, you're likely to see some weakness in the US dollar. That will be supportive for the gold price and also other metals in general. So for us, we look as if the $2,000 an ounce mark is a fair price as we stand. But it wouldn't surprise us to see an element of weakness in the first half of the year, but then strengthening significantly in the second half of the year because of the election concerns and potential dollar weakness.

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Darren Bowden, CEO, Metals Exploration:If we look at the current environment, geopolitical, financial, the current position of rising CPIs is stopping, it's starting to go in the other direction. I back all the institutional advice I've seen, I agree with them. I think gold is going long. And what that means is I see gold either staying or going beyond its current number. And currently sitting at about $2,050, somewhere around that number. You can see gold at $2,500. I think that's likely. Is it likely to see gold at $1,800? No, I don't believe that's the case.

So I see gold as an instrument which has a long which you should be buying into because I think it has a very long position right now.

Segun Lawson: A gold price of $2,000 to $2,250 is where I have it as on the back of the envelope given the global economic environments, the geopolitical situations all over the world, the various wars going off. And I don't see any reasons why it wouldn't go higher, between $2,250 and $2,500. But on a conservative basis, we do believe that $2,000 to $2,250 is a realistic range for the gold price over the next 24 months.

Kieron Hodgson: Investing in gold is very much reliant upon the risk profile of the investor that he's considering a position. If you like the attraction of gold because of its diversification properties, its hedge properties and the capital preservation characteristics that gold provides, then you are arguably better minded to invest in exchange-traded funds (ETFs) or in physical, despite the risks that come with insurance and warehousing physical gold bars in your property. A lot of investors like exposure to the underlying equities.

And the reason for that is the belief that there is a leverage to the gold price because of the operational performances. That's an incredibly tricky offering for anyone that is inexperienced when it comes to investing in mining equities. And obviously, the risk profiles grow significantly when you go down the market cap scale. For companies that have got large production volumes, cost profiles that are well understood, you can get leverage to the gold price, but it's not material. The real beta opportunity is in the small-caps, but obviously the risk profiles are much higher.

Space exploration companies, junior exploration companies, they are the highest risk of all. And they come with the highest returns potential. The thing is with that is you need to choose your horse very carefully based on the economics of said projects or the geology and geographies. Each of those projects need to be investigated thoroughly. The investor in question needs to appreciate that the further down the market cap scale you go, the higher the probability of losing all your investment.