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ANALYSIS AND INSIGHTS
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Gold’s Stellar Performance and Promising Future
Gold can be a cornerstone of any investment portfolio and should continue to outperform going forward.
GOLD UPDATE
By Jeff Nielson, Business writer and analyst
July 15, 2024 | 7 minute read
Thematic Insights – Listen to the report
Stockhouse and The Market Online jointly present our latest Thematic Insights investor report, drawing from nearly 30 years of experience in delivering comprehensive information to the investor community, driving global economic trends. Our platform fosters a diverse investor community, facilitating informed decision-making through education, research, and dialogue. Our reports offer accessible education, essential financial tools, and the opportunity to engage in meaningful discussions on market complexities. We are committed to providing insightful analysis that transcends conventional metrics, believing in the importance of understanding underlying trends, industries, and innovations to empower informed investment choices.
The Future of Energy
Navigating our future economic needs and climate change goals will require a balanced approach relying upon nuclear power, oil & gas, and renewable energy.
Balancing the Energy Equation
Oil & gas and uranium (nuclear power) will remain primary sources of energy in the future. These asset classes will continue to generate robust investment opportunities.
ENERGY UPDATE
By Jeff Nielson, Business writer and analyst
July 15, 2024 | 6 minute read
In our last edition of Thematic Insights, The Future of Energy, we framed “the energy equation” in the following manner.
Geopolitical Risks Elevate Gold and Energy Markets: A Strategic Perspective
SUMMARY
By Jeff Nielson, Business writer and analyst
July 15, 2024 | 1 minute read
Looking back, we’re pleased to have offered investors a lot of useful and actionable investment information in our previous editions of Thematic Insights.
Looking ahead, gold investing and energy investing are generally very different propositions. However, one area where we see a strong degree of overlap is in terms of geopolitical risk.
Gold and energy markets (oil & gas) are extremely susceptible to upward price shocks because of geopolitical factors.
The “Doomsday Clock” (perceived risk of nuclear war) is currently at 90 seconds to midnight – the highest level of perceived risk in history, primarily because of the intensifying war between Russia and Ukraine ( and NATO tangentially).
Meanwhile, the increasingly horrific war in Gaza has already led to a near-complete closure of Red Sea shipping lanes by Yemen. Israel is threatening to broaden this war through an invasion of Lebanon.
Any additional escalation in hostilities could easily lead to Iran closing the Strait of Hormuz, which would lead to a massive-and-immediate explosion in oil & gas prices – not to mention the price of gold.
For these reasons, we continue to view gold as a best-buy. We remain very bullish on uranium stocks and we also see good opportunities going forward with oil & gas investing. As always, investors are encouraged to do their own due diligence.
- The increased use of nuclear power as the only existing technology capable of producing energy on a vast scale, at very competitive prices, and with minimal CO2 emissions.
- Continued reliance upon oil & gas to maintain a necessary level of economic efficiency for developed and emerging economies.
- The intelligent integration of renewable energy sources and electric vehicles into our economies, not to replace either nuclear power or oil & gas – but to prevent over-reliance upon those alternative power sources.
Capturing Market Trends with Insightful Analysis
brought to you by: Stockhouse and The Market Online
When we published our Gold Report in March, we called gold “a best buy” in 2024. At the time we wrote the report, gold was trading at USD$2,028 per ounce. Today, even after extreme recent volatility, the price of gold sits at USD$2,335.
That’s a rise of more than 15%. Not bad for 1/3 of a year, with one of the only asset classes that represents zero counterparty risk.
Source: yahoo!finance
For gold-savvy investors, this stellar return will not be a big shock. Over the 50-plus years since the end of the last vestige of the gold standard (and the beginning of a free-floating price of gold), gold has produced a compounded rate of return of 8+%.
Perhaps more importantly, the principal drivers of gold investment – wealth preservation and monetary demand – are becoming increasingly strong.
Thus, the long-term prognosis for gold is to expect an even stronger rate of return. But let’s take a closer look at the near-term picture.
When we examined “gold as jewelry” in our last report, we pointed to two important factors. We noted that increasing levels of Western poverty and a dramatic decline in disposable income in Western nations (along with a record price for gold) would put pressure on jewelry demand in the near term.
In fact, recently released data shows that jewelry consumption fell by 23% from Q4 2023 to Q1 2024.
Source: World Gold Council
However, looking ahead we advised investors to keep their eyes on the gold-silver price ratio. We pointed out that in Eastern markets (such as India) jewelry-buying – gold and silver – is an important vehicle of wealth preservation.
Because of this, Indian buyers are very price conscious. We told investors to watch for a decline in the gold-silver price ratio (i.e. silver outperforming gold), leading to an increase in gold jewelry demand – as gold becomes relatively less expensive.
At the time we published our previous report, the gold-silver price ratio was sitting at a very extreme level of approximately 90:1. Since that time, silver has outperformed gold.
Today, the gold-silver price ratio sits at 78:1. Expect gold jewelry demand to rebound sharply as 2024 progresses, led by India.
We also discussed gold as “the ultimate monetary asset.” Why has gold earned this title?
Gold perfectly preserves the wealth of the holder, with a track record that spans thousands of years.
In contrast, all “fiat currencies” (such as the U.S. dollar) always go to zero over time, i.e. they lose 100% of their value.
In the 53 years since the U.S. dollar was stripped of its gold backing, the USD has lost 98% of its purchasing power versus gold – and that rate of value-loss is accelerating. Other paper currencies have suffered even greater losses in value.
As these paper currencies go to zero, all assets denominated in these currencies (such as bonds) will also go to zero. This form of monetary crisis is known as “hyperinflation.”
Here, we pointed to central bank gold-buying.
Central banks are the manufacturers of these rapidly depreciating paper currencies. No one is more aware than these monetary charlatans of how quickly they are destroying the value of these paper currencies, through the “inflation” caused from grossly excessive money-printing.
Will these central banks put the brakes on this out-of-control currency creation? No, it’s too late for that.
With most governments around the world drowning in debt, printing vast quantities of this funny-money is all that stands between these governments and (literal) bankruptcy.
What central banks are doing, instead, is buying gold in record quantities. These shysters are trying to preserve their own balance sheets – as all paper-denominated assets (including their own currencies) move towards zero.
Source: World Gold Council
In data released by the World Gold Council since we published our Gold Report, we see that central banks just broke the record for highest Q1 gold purchases, barely edging the previous record they set in 2023.
Overall central bank gold-buying set an all-time record in 2023. Expect a new overall record in 2024.
In the case of the U.S. dollar, de-dollarization is an additional downward driver for the dollar (and upside driver for gold).
In the second half of 2024, the rapidly growing BRICS bloc is expected to roll out its own currency. This currency will not be for general circulation. Rather, it is expected to be a vehicle for the settlement of international trading.
Previously, the “vehicle” for the settlement of international trades has been primarily the U.S. dollar. As demand for the dollar plummets with the supply of dollars going exponential, the U.S. dollar (in particular) is facing substantial downward price pressures – and even an imminent risk of hyperinflation.
Lastly in our previous Gold Report, we examined gold as “the perennial top investment.” As we’ve already noted, gold has generated a return of 15% in the four months since.
What is important for investors is to understand why gold is increasingly outperforming most other asset classes.
We are living in an era of inflation. The 98% loss in value of the U.S. dollar over the past 53 years is all a manifestation of “inflation”: diluting the value of the dollar by radically increasing the supply of dollars.
As we pointed out earlier in this update (and in our previous Gold Report), this dilution/inflation must worsen as fiscally insolvent governments print up more and more of their funny money to soak up the radical increase in their own debt issuance.
This form of monetary Ponzi scheme used to be known as “monetizing debt.” Today, it’s called “quantitative easing.” It is the last measure in which insolvent governments engage to delay their own bankruptcy.
The hyperinflation that must ultimately be generated from this “quantitative easing” (sooner rather than later) is the primary cause throughout history of all fiat currencies going to zero.
Thus, gold must continue to be a top perennial investment. What does this translate into, expressed in the dying U.S. dollar?
UBS is predicting a gold price of $2,800 per ounce by the end of 2025. We see that as extremely conservative.
Noted gold market expert Ronnie Stoeferle recently said a price of USD$4,800 for gold by 2030 “sounds pretty realistic.”
This does look more realistic. However, we would add the caveat that this presumes that the U.S. dollar is still in circulation by 2030.
All fiat currencies go to zero. And when they do, all assets denominated in those currencies also go to zero.
Gold is eternal. Ultimately, this is why gold has been, is, and always will be a top perennial investment. For investors, the opportunity in “gold” also includes gold mining stocks.
Overall, these mining stocks have underperformed the rally in gold because of downward pressure from Big Bank trading algorithms. However, the recent trend for these stocks is increasingly positive.
After bottoming at the end of February, the NYSE Arca Gold Bugs Index (HUI), which represents large-cap gold mining stocks, has risen more than 30%.
The junior gold mining stocks have been slower to move, but as these companies begin to get traction, their performance is even more explosive.
One company that we tracked in our gold report in March was Quimbaya Gold Inc. (CSE:QIM). Back then, QIM was trading at CAD$0.39. Quimbaya Gold closed at $0.48 on June 24 (+23%). QIM has traded as high as $0.68 and is up more than 40% YTD.
Clearly, investors wanting to increase their portfolio allocation to gold will also want to look closely at opportunities in junior gold mining stocks.
Despite all the hype, renewable energy sources are not going to replace either oil & gas or nuclear power in meeting our current and future energy requirements. In large part, it’s because these technologies become increasingly less efficient when we reach larger scale.
On the upstream side, the massive investments in new metals production necessary for large-scale “green energy” would create enormous amounts of CO2 emissions.
On the downstream side, even more massive investments in renewable energy infrastructure would be required, much of which would also require huge additional amounts of metals (and metals mining).
This was never practical, at least not without enormous improvements in the cost and efficiency of existing renewable energy technologies. This means that going forward (barring such changes) the energy equation will continue to be dominated by nuclear power and oil & gas, as a fuel source and for power generation.
Looking at nuclear power and the investment potential in uranium, at the time we published our prior report U3O8 prices were hovering around $90 per pound. Apart from a brief spike above $100 per pound in February, this represents a 17-year high for uranium prices.
Since that time, the price for U3O8 has receded slightly to about $85 per pound. But this is a long-term investment opportunity in terms of the supply and demand profile for the uranium market.
On the demand side, we are in the early stages of a doubling in global nuclear power generation. Thus, strong demand is a given for decades to come – meaning a continued upward bias for U3O8 prices.
On the supply side, developing a new uranium deposit and then commissioning a mine is a process that (because of environmental considerations) almost always stretches out to well beyond a decade. Ramping up the supply of uranium is also a multi-decade investment proposition.
Beyond this, there isn’t much to “update” with respect to nuclear power and uranium. However, the energy equation becomes more dynamic when we look at oil & gas.
This was how we viewed the “Big Picture” for oil & gas at the beginning of May.
To moderate oil & gas prices and maximize the “energy surplus” from oil & gas extraction, we need robust oil & gas exploration to find and access the most efficient remaining sources of these fossil fuels.
This means there should continue to be a strong market in which to operate for oil & gas juniors. It also means investors looking to stake out positions in oil & gas should consider the drilling services companies.
Since that time, the IEA has released its World Energy Investment report for 2024. Among the findings, fossil fuel investment is expected to reach a 9-year high in 2024, rising to more than $1 trillion.
Source: International Energy Station
As we have argued throughout this edition of Thematic Insights, the optimal solution to the energy equation requires balancing the use of all three of these sources of power/energy.
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In short, fundamentals for the oil & gas industry look very solid going forward, and for the reasons we have previously given we expect this trend to continue.
However, for investors this is only one-half of the equation. To prosper by investing in oil & gas stocks, we also need to see supportive energy prices.
At the time we wrote our report, crude oil prices had retreated down to close to $78 per barrel. After a sudden dip at the beginning of June, we have seen a steady rise in the price quote for WTI crude, back above $81 per barrel.
Source: NASDAQ
This price action should not surprise investors. OPEC+ producers have made it quite clear through their actions and deeds that they consider $70-$80 per barrel to be a “floor” for crude oil.
This means the bias for oil prices going forward is higher, with numerous drivers (economic and geopolitical) that could lead to large or even explosive rises in crude oil prices.
As for natural gas, highly volatile gas prices were sitting near all-time lows – below $2 per MMBtu at the time we published our report. Thus, we’ve seen a sharp rebound since that time.
Source: NASDAQ
In fact, natural gas prices have risen approximately 40% since we published The Future of Energy, after briefly surging above $3 per MMBtu. While this is a highly volatile market, once again we clearly see a bias towards higher prices over the longer term.
Beyond the general economic fundamentals that support increasing natural gas demand, a political dimension is important: the LNG market.
Western economic sanctions have artificially severed most of the natural gas trade between Russia and the European Union. The only option for E.U. nations to replace this lost supply is in the form of increased LNG imports – primarily from the United States.
To accommodate this political shift in the global natural gas market, the E.U. and the United States have committed themselves to massive increases in the (very expensive) LNG infrastructure required to facilitate this trade.
Source: International Energy Station
This massive financial commitment means it will become a political imperative to employ this infrastructure near or at capacity – irrespective of natural gas prices or even domestic demand.
Even if substantial economic subsidies were required to make this increased supply of LNG economically viable, we can basically expect this increase in LNG infrastructure to lead to a structural increase in natural gas demand.
Western natural gas demand can be expected to remain strong. Increased incremental demand from the emerging economies of the Global South further bolsters the long-term picture for natural gas pricing.
For energy investors, a somewhat different strategy is required for uranium stocks versus oil & gas stocks.
While uranium has some volatility, given the multi-decade investment horizon, investors don’t need to be as selective regarding an entry point.
With oil & gas stocks on the other hand, choosing a strong entry point is more important. These volatile markets are prone to explosive price shocks to the upside. However, such spikes are generally brief.
This means oil & gas investors need to take positions in these stocks ahead of these inevitable, intermittent spikes to be positioned to take profits during short-term peaks.