Haro Julie
The gold market has seen significant consolidation over the past two and a half years as the financial system moved into the ‘new normal’. After real interest rates reached a new peak in 2020, the price of gold fell sharply It rose on a more hawkish Federal Reserve stance. In addition, rising US real interest rates sent the US dollar’s currency value skyrocketing to all-time highs, weighing gold against the US dollar.
Fortunately, gold’s consolidation pattern may come to an end. Gold has risen more than 20% since late autumn and is back near its peak. The rise was driven by a slight decline in US real interest rates and a significant reversal in the strength of the US dollar. In the past 2020 recession, gold has done very well as his massive QE stimulus and rate cuts by the Federal Reserve responded to the contraction.Assuming it looks like Gold could face another uptrend if a pattern emerges underpinned by a lower inflation outlook.spread between Gold futures and physical bars is very high, indicating stronger retail demand for the metal than the futures market reveals.
In my view, one of the best ways to gain liquid exposure to gold is through large gold mining stocks like Newmont (New York Stock Exchange:Nem). Newmont is the world’s largest gold mining company. 6 million ounces We do a variety of projects around the world every year. Newmont also holds a sizeable gold reserve to ensure long-term value and pays a high dividend yield of around 4%. Despite the sharp rise in gold prices, NEM is still below its 52-week high, so it may be undervalued in the short term. Of course, NEM is subject to a number of risks for investors to consider, including rising production costs due to a global labor shortage.
Is gold the beginning of a new bull market?
The US dollar price of gold has not risen since the 2020 surge. The rally came as investors weighed the prospect of massive quantitative easing versus record-low real interest rates in the market. Currently, the Federal Reserve is still a long way from moving to such a dovish strategy. . Gold gained significantly in the Japanese Yen and Euro last year, but is now rebounding in the US Dollar due to a reversal in US dollar strength. refer to the following:
The fact that gold is a global commodity with “different” prices in different currencies is often overlooked. In fact, Newmont’s fate is highly dependent on the “pan-currency” value of gold. This is because as the US dollar appreciates, its operating costs (in foreign currency) fall. The euro and yen have partially recovered against the dollar in recent months. However, as gold rose so quickly, its value in euros or yen did not fall, it rose slightly. Gold, of course, grew fastest in US dollar terms as the dollar fell. From this perspective, I think it’s clear that the recent ‘global gold bull market’ started in his second half of 2021, benefiting from rising currency volatility around the world.
Gold is typically closely and negatively correlated with the real interest rate on US Treasury bonds, or the interest rate on government bonds minus the expected long-term average inflation rate. Today, inflation is “expected” to average 2.27% over the next decade. However, that number fell as the Federal Reserve hiked interest rates. A drop below current levels seems unlikely due to strong support. But real interest rates are now starting to fall as bond investors prepare to end hawkish monetary policy. refer to the following:
Over the past few years, gold has had a very strong negative relationship with real interest rates. Of course, real interest rates rose very quickly in 2022, but the value of gold barely fell (and never returned to pre-pandemic levels despite real interest rates rising). . Moreover, while gold has risen sharply in recent months, relatively A small drop in real interest rates. This pattern suggests strong demand for gold and low interest in short-term monetary policy. It seems to me that the gold market (or gold investors) believes that hawkish changes in monetary policy will eventually meet with more significant dovish changes during recessions. am.
In my view, the statistical evidence for a recession in 2023 is generally strong. One is the manufacturing and services PMI. 50, strongly indicated contraction. Moreover, rising costs of living and falling real wages have led to low personal savings levels, suggesting that many households will need to cut back on spending. That said, high job openings could underpin the labor market. refer to the following:
The Federal Reserve aims to maintain price stability and support full employment.Today the economy has very high levels of employment overall, but at higher levels Pay “White Collar” “Blue-collar” jobs are facing a labor shortage, while layoffs are rising sharply. This fact and inflation in general complicates monetary policy, especially with respect to the gold market and the possibility of a recession. While a “recession” seems likely, the economy also appears to be in a fundamentally different position due to the divergence of the “digital” and physical aspects. Specifically, the “digital economy” appears to be in deep recession, while the “physical economy” (which has a larger workforce) appears to be very strong.
With “most” inflation slowing and the labor market “strong,” the Federal Reserve is unlikely to make significant policy changes anytime soon. ( low wage labor Data obfuscation powers), which could eventually lead to a solid dovish argument for lowering interest rates or pursuing QE. In my view, the Federal Reserve may race towards her QE in the event of a recession to keep the economy liquid. That said, doing so would likely spur even greater inflation, as volatility would rise significantly across the global monetary system. In addition, the Ministry of Finance “~1 trillion dollar coin“Avoid the debt ceiling, thereby adding ample money supply without significant oversight.
Newmont Corporation Value Potential
I believe we are in a new bull market that could push the metal to even higher highs, potentially above $2300, based on gold’s dollar-adjusted price. We don’t need a “dovish” Fed pivot, but more European hawkish pivot Or any other big economy. That said, if the U.S. economy slips into recession, I believe gold will gain strength as it could return to a dovish policy stance despite financial volatility.
We believe NEM is one of the best investments to capitalize on this trend.NEM is trading at the lower end of the 2020-2021 range, more than 35% below its 52-week high. increase. Of course, NEM may have had too much momentum last year, pushing it to unsustainably high levels. shows that NEM is the go-to trade for hedging such currency volatility.
My bullish thesis for NEM relies on the broader economy, which I believe is increasingly supporting gold. That said, NEM also needs to trade at a sensible valuation to provide a safe and stable exposure to gold prices. It produces gold and 1.3 million ounces of ‘GEO’ metal equivalent to gold. Most precious metals have recently risen with the price of gold, so I think NEM’s financial outlook is best predicted using the price of gold. Once gold returns to its $1950/oz high, NEM is expected to generate around $14.24 billion in annual revenue (GEO total of 7.3 million ounces). The company’s overall AISC guidance is currently $1,130/oz, so at current prices, it should yield about $820/oz, or $5.99 billion in annual operating profit. That’s far higher than TTM’s operating profit, but when gold peaked in 2020, the company was almost producing that figure. After deducting the company’s interest expense of about $200 million and calculating an estimated 32% tax rate, NEM’s projected annual net income is about $3.95 billion, or EPS of about $4.87.
Based on this outlook, NEM’s current future “P/E” is up to 11x. In my view, NEM may be slightly undervalued given that it is a large mining company and probably has the lowest operational and balance sheet risk profile of all gold mining companies. there is. Of course, as the US dollar falls (as some international costs rise in dollar terms), NEM AISC is likely to rise, so NEM’s net profit could fall below the estimate provided. That said, the gold price is likely to rise by several hundred dollars an ounce over the next year, potentially boosting Newmont’s income significantly.
Conclusion
The macroeconomic backdrop facing gold is the main driver of the value of almost all gold miners, as their income is closely dependent on gold. Newmont is one of the best ways to gain exposure to gold because it does not take on the counterparty risk that can be problematic in the gold futures market. There are operational risks, but their huge diversification makes them less risky than many regional gold mining companies. Therefore, I view the company as an indirect and much more liquid investment in physical gold. Even if gold doesn’t go up in value, I believe it could go up because NEM seems to be undervalued given the recent rally in gold. If gold and its AISC remain constant, NEM’s forward ‘P/E’ will be well below its normal range.
In a best-case scenario, continued volatility in international currency markets will lead to a weaker US dollar and a significant rise in gold’s US dollar equivalent. A recession may be on the horizon, but unusual trends could contradict the data and increase the likelihood of monetary policy conflicts (creating fiat currency volatility, as seen last year). are available). Of course, NEM is a strong hedge today as it is likely to rise significantly in a recession that will spur a dovish turn by the Federal Reserve.Finally, the debt ceiling issue May If the Treasury takes steps to speed up currency printing (to avoid closing the debt ceiling), it will benefit gold.
In a worst-case scenario, lower inflation and a return to economic strength could lead to broader economic normalization, lower currency volatility, and lower the value of gold. If gold falls below pandemic levels, NEM should fall, but overall downside risks are reduced as it is trading below its 2020-2022 range. can be seen as a return to the paradigm of low commodity prices in 2019. In my opinion, based on available data, this seems unlikely, but possible. Of course, equities are likely to perform very well in this scenario, so if you own a portion of NEM (and peers) and traditional equities, your portfolio stability will be much better. may become. Overall, I am very bullish about NEM and believe it is a solid risk/reward trade-off heading into 2023.
