- The best performing precious metal for the year was gold, but still down 3.64% on the threat of the Federal Reserve beginning to raise interest rates in 2022 and that inflation will subside substantially in the second half of 2022 as supply bottlenecks are cleared. That perceived outlook as we close out the year is the base case, but as we know, there are always deviations and unexpected events to look forward to in the precious metals space in 2022.
- Gold exploration budgets have increased 43% year-over-year to a total of $6.2 billion in 2021, outpacing the 35% increase in the global nonferrous exploration budget. Gold's surge has been driven by higher junior company financings and exploration plans carried over from 2020. Funds raised by junior and intermediate companies totaled $5.5 billion in 2021, the most since 2012 and a clear sign of heightened investor confidence in the yellow metal. This has allowed the junior sector, which had been on a general downtrend in terms of exploration since 2012, to fund its exploration plans. There are more than 200 additional companies exploring for gold in 2021 than in 2020.
- Retail gold sales in China have rebounded with bracelets, pendants, earrings, and necklaces that draw on dragons, phoenixes, peonies and other traditional Chinese patterns and symbols being strongly desired by consumers. Sales are strongest to those in their 20s and 30s, helping drive a rebound in gold demand in the country after a pandemic-induced slump. Chinese consumers must be doing better economically as a rise in demand for what is known as “heritage” gold jewelry, which requires intricate craftsmanship and can command premiums of 20% or more over conventional gold jewelry, are finding willing buyers.
Weaknesses
- Palladium was the worst performing precious metal, down 22.35% for 2021. Substitution for palladium by platinum is the cure for high prices and has become a stronger force as we closed out the final quarter of the year. In addition, gasoline car sales, where palladium is used to clean emissions, have been impacted by COVID related work issues including no computer chips to build the car with.
- Silver was the second worst performing precious metal for the year, falling 11.74%, on somewhat lighter solar cell supply. The U.S. dollar regained almost all the 6.69% fall it experienced in 2020 with this year’s bounce back from coming out of the throws of the pandemic.
- While the dollar moved higher, surprisingly the real rate on the generic 10-year TIP started the year at -1.087 and finished 2021 at -1.099, essentially the same place we began. Yet, gold is around 3% lower. The Fed may have real issues getting rates up and the workforce, our labor supply, has much more to say about where the economy is going. Labor is now more likely to make gains in unionizing in order to have more bargaining power.
Opportunities
- Industry consolidation began to take place in more earnest this year. Size matters, and that’s what may have been behind Agnico Eagle Mines’ bid to buy Kirkland Lake Gold. There certainly are operational synergies that can be garnered from the deal. It does give Agnico access to the Detour Lake assets which are likely to be long lived but could see some issues if energy prices rise too much.
- In another move to acquire more assets in mining jurisdictions, Newcrest Mining agreed to buy Pretium Resources Inc. in a cash and shares deal valuing the Canadian gold producer at about $2.8 billion. Newcrest and others were patient to wait out the story and really see what the mine was capable of before inking the deal. This gives Newcrest a strategic view to other major mineral discoveries in the region.
- Scarcity. Is that the new issue in the industry that the majors are contending with? Can’t find enough +10-year life mines that can produce 300,000 ounces of gold per year? You do that by exploring or buying ounces in the ground or in the most recent example, Kinross Gold buying Great Bear, you bought exploration. What is fascinating is there is no publicly calculated resource on the discovery, but the drill data is available on the company’s website, so it really wasn’t a black box acquisition. However, it does signal the gold industry may be more willing to do deals more aggressively in the future. There are plenty of good assets in the junior miners and the explorers too that are likely to be on the wish list for next year.
Threats
- Bitcoin remains a key competitor to gold. Like gold, Bitcoin functions as an absolute store of value. Most analysts expect gold to gradually decline over the next few years. The post-pandemic recovery, Fed tapering, and a stronger dollar will all weigh on the metal, which will fall to $1,700 an ounce by year-end and then decline further in 2022, UBS Group AG strategists including Wayne Gordon and Giovanni Staunovo, said in a note. However, new government regulation over Bitcoin and other electronically traded crypto assets could change their desirability for ownership.
- Exchange-traded funds have been selling gold, with this year's net sales being 9.24 million ounces, according to data compiled by Bloomberg. Total gold held by ETFs fell to 97.82 million ounces. Rising real rates are the ultimate threat to gold prices but there is great concern that the U.S. can withstand rising rates. Who can take the medicine? It took 20-years to leave Afghanistan, how easy is it going to be to walk away from “easy money”?
- Demand for platinum group metals (PGMs) are facing decline due to the growth of battery electric vehicles. Sibanye Stillwater CEO Neal Froneman said palladium could decline to about $1,000 an ounce after 2025 as automakers switch to using more platinum in auto catalysts used to curb pollution from vehicles. If platinum prices rise with a pickup in fuel cell use, the change in the two PGMs prices may balance out somewhat on their income statement.
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