2024: The continued case for ASX gold miners
As central bankers navigate the confusion of an easing rate path, investors may still look to gold as protection against sticky inflation.
A year of distress and corporate collapses sent panic through the financial system, from the concerns of the US regional banking collapse to the forced Credit Suisse acquisition and threat of runaway inflation. The growing number of external shocks in 2023 raised questions over the quality and durability of every portfolio's asset base. The economic shocks had comparisons to prior distressed market signals from the ‘08 GFC, the OPEC oil crisis, and as far back as the inflation woes of post-World War 2 in the late 1940s. The common thread across these events is market confusion and, in the latter two, panic-driven price pressures. The blended mix of historical comparisons has made the current economic period incredibly difficult to define, with no clear reference point for investors trying to predict the economic outlook. A defining characteristic in today's market is the record level of liquidity disguising any potential weakness in the underlying economy and therefore understating recession risk. The economic symptoms of excess liquidity have filled investors with doubt. Yet there is one certainty in the current market cycle: the end of the debt-fueled growth model has been signaled by the Fed, and the world has followed its stance, forcing investors to reposition into more defensive assets. The appetite for risk has evaporated in a world of changing economic policy, as the restrictive paths of central banks erode demand. Gold is the insurance investors need to consider in a deleveraging global economic system. A traditional safe haven for investors, gold has performed strongly over the last 18 months, with the spot price hitting record highs, even with an elevated cash rate. The favourable conditions for a strong gold price appear resilient, boding well for ASX gold producers in 2024.
The global economy in the last 18 months has been defined by central banks' reactionary pivot to history's fastest and steepest tightening cycle. A delayed change in stance attempting to contain the cause of potential runaway inflation, an exuberant consumer, and increasingly speculative investment in a supply-constrained world. The policy gear shift, a stark contrast after 15 years of quantitative easing, the path of tighter policy has been the singular driving force in repricing global assets. The post-GFC world was put on life support by active government policy in the absence of global demand, and the pandemic significantly accelerated years of questionable excess liquidity, as the negative shock of Covid forced governments to restore investor confidence and consumer demand.
The debt-fueled growth model reached its expiration in May 2022 when the RBA first lifted rates, signaling Australia and the rest of the world are on a new trajectory to deleverage the economic system. However, 18 months into the tightening cycle, we remain in a risk-off environment as investors eagerly await the lag effect of rates to take hold, demonstrating inflation is reverting to the target of 2-3%. For now, the reversion remains unclear as excess liquidity persists, and the lingering market impacts of pandemic mania are yet to be absorbed by increased funding costs. The prevalence of excess liquidity and its sizable risks to inflation are distorting investor confidence to near recession lows, not reflecting the relative strength of the underlying economy.
The disequation of confidence and market conditions is being relayed in the choppiness of market-based data with an absence of any clear signal indicating that inflation is being contained. As the robustness of unemployment and consumer data portrays resilience in the underlying economy. Regardless of the conflicting data, it appears central banks are near the top of the mountain, with only one more rise forecast for the first quarter of 2024. It must be remembered the RBA is treading an incredibly narrow path balancing the competing pressures of inflationary expectations and the world’s ‘most tipped’ recession. Market perceptions towards the stabilisation of liquidity levels in the first quarter of 2024 will be critical in determining its success or failure.
We are living in a world of immense financial change; with change comes the friction of uncertainty. Changing market thematics have skewed investor preference towards gold, reaching record highs in late 2023. The path of macroeconomic uncertainty will continue through the new year as central banks look to tentatively cut rates, last month igniting a preemptive market rally into an overbought soft landing trade. The ‘inflation wrestle’ of policymakers and equity markets raises the opportunity for sustained record gold prices through 2024.
The recent all-time high in the gold spot price is a reflection of the strong investment change pushing investors to seek refuge from capital destruction. The market interpretation of central bank hawkish rhetoric characterised 2023. Investor attempts to decipher the nuance of central bank language became a focal point to understanding the economic climate and more popularly confirm a market narrative. Whichever camp you may sit, it cannot be ignored that any market thesis is held on marginal conviction, as conflicting data challenges a uniform market consensus pushing capital to the sidelines for nearly two years, in a game of wait and see. The prolonged hesitancy of investment strategy will be carried into the first quarter of 2024 as potential upside inflation surprises continue to threaten market stabilisation. In particular, the spending of the Australian consumer over the Christmas period and any further wage growth in a local labor market that remains tight. Yet, the underlying Australian economy maintains defiance in the face of these domestic price risk factors. As record net migration supported aggregate demand through 2023 alleviating recession risk, and for now maintaining the plausibility of the Goldilocks scenario. However, the likelihood of a soft landing could weaken very quickly, even if the local economy holds steady, as the world hangs in a period of heightened tensions from trade disputes and regional conflicts. Namely the Russia/Ukraine conflict, the siege of Gaza threatening to extend through the Middle East, China’s growing influence in the region and a proactive OPEC determined to see oil prices return near $100 per barrel. Energy prices pose the strongest price pressure to the inflation fight, considering weakening demand pushed prices near the 52-week low for the last quarter of 2023, aggressive OPEC cuts and rate cuts could cause a significant uplift to energy prices in 2024.
The growing concerns of geopolitical risks are a considerable threat to derail the RBA’s delicate management of a soft landing; furthermore, it is likely the new year will signify a divergence of policy amongst global central banks adding to the external pressures. As different rate paths between countries will push distorted amounts of capital to regions comparatively ahead of the cycle. Investment arbitrage on locality significantly shortens the margin of error for central bankers. The already narrow path for policy success appears to be reaching a bottleneck of competing concerns, 2024 will be the true test for the RBA as they look to cut rates. Will inflation targeting off retrospective data remain as the determining guidance? The year ahead promises increasing uncertainty as the policy environment pivots when it is still unclear if the lag effect of rates has done enough to contain inflation. Policymakers too eager to call a victory on inflation by pushing ahead of the necessary cycle constraints are forcing investors to consider maintaining gold positions or increasing exposure despite the record prices. The come off will prove to be the trickiest part of the rate cycle and as such gold will be the necessary insurance to carry into the first half of 2024.
After the steepest and most aggressive tightening cycle in recent history, we are entering uncharted waters without a compelling global narrative. The logic of a rational investor would suggest, ‘something’ has to break more than the data points of a technical recession, but when? The timing of this cycle has been incredibly difficult to predict, as discussed, excess liquidity and relatively strong demand have prolonged sideways inflationary pressures of what was considered supply side factors. It appears we are moving into a dislocation of regional and country-specific inflation paths, the global divergence will only add to the difficulty in quantifying the direction of inflation. An investor with a greater appetite for risk may maintain faith in Powell and the Fed, to steer the world along the path of a soft landing. As Australian based investors there is cause for concern in directionless data, will the RBA be able to get an accurate inflation read when it appears to be cooling and rising with every new print? Or will it be held hostage to Fed policy? Gold must play a continued role in defensive portfolios during 2024 as the on again off again ‘localised’ inflation risks will disintegrate the formation of a global investor narrative. The ‘goldilocks scenario’ may be held with conviction to specific regions later in the new year, but regardless the significant breakdown and divergence of regional inflation paths will be a decisive factor in continued demand for gold as central banks cut and investors continue to look for safety in a year of uncertainty. ASX gold producers will be facing favourable conditions with a strong spot price, seeking to maximise production after the recent headwinds of Covid and labor shortages. The gold sector in Australia consolidated and restructured during 2023, a smaller number of bigger players are now positioned to take full advantage of the best period in the cycle for the precious metal.
The major producers in the Australian market began to strengthen late last year as calls for rate cuts grew in popularity. The biggest local gold miners, Northern Star Resources (ASX: NST) with a $13.96 Bn market cap and Evolution Mining (ASX: EVN) with a $6.14 Bn market cap both rose over 30% in the final quarter of last year. The start of 2024 has seen a cool-off in their respective trading price as expectations of rate cuts tempered. Newmont Corporation, the only gold miner listed in the S&P 500 index and the largest producer in the world began trading on the ASX in October last year through the acquisition of Newcrest Mining, is down 10% since its ASX debut, the dual-listed gold company is now trading at a 52-week low. Despite the recent drop in share prices across the sector, it is unlikely that the gold rally has reached its peak as the risks of a tight labor market and inflation are carried into the new year. The current spot price of around $US2019 an ounce may prove an attractive entry point for mid-cap producers Perseus Mining (ASX: PRU) and De Grey Mining Ltd (ASX: DEG) trading at a lower P/E than their larger competitors and over a 40% discount to their 52-week high, both of these producers will benefit to any increase in the spot price as central banks move through the rate cycle. The threat of persistent inflation and elevated liquidity levels as the policy stance shifts towards a cutting phase, makes a strong case for even small cap ASX gold producers. These smaller producers do carry a higher level of risk, particularly on the production side and may not be as correlated with the spot price as their larger peers. However, the relative P/E discount and the bullish outlook for gold over the next 12-18 months provide an opportunity for smaller caps to be considered, some notable mentions under $2Bn market cap: Gold Resources (ASX: GOR), Genesis Minerals Ltd (ASX: GMD), and Ramelius Resources Ltd (ASX: RMS). The Fed, the RBA, and other major central banks are looking to cut in 2024, the trajectory of an easing rate path raises a number of questions and holds a strong investment case for Australian gold producers.
Last year continued an implosion of capital destruction, despite the chaotic disturbance to valuations the direction of assets and rates were a predictably safe assumption for investors. As we progress in the cycle, identifying the peak of price-sensitive inflation prints and the negative correlation to asset prices is where investor safety is lost. As the breakdown of this hypersensitive relationship will not occur until mandated inflation targets are met. The market equilibrium in the year ahead will be controlled by range-bound policy setters, as they grapple with timing the invisible finish line to inflation. The anticipation of central bank decisions will outweigh typical supply and demand dynamics, ultimately driving the direction of the market in 2024. Balancing the policy uncertainty of an easing rate path whilst maintaining the trajectory towards target inflation significantly skews global economic risks to the downside. Gold exposure is an each-way bet that best considers the precarious state of today's markets. It is the necessary insurance if the Goldilocks scenario is missed, protecting investors from the possibility of a recessionary overshoot on rate hikes or an undershoot embedding runaway inflation. In a world of falling yields and sticky inflation, demand for physical gold and its producers will be sustained as investors seek to insulate capital from the choppiness of a cooling rate environment. Until certainty and clarity can be assigned to the direction of market information conditions will remain favourable for gold.