Gold Soars to Fresh Highs as Regional Risks Rise
14 June 2024
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All fields required where indicated (*)Monthly gold market and economic insights from Imaru Casanova, Portfolio Manager, featuring her unique views on mining and gold’s portfolio benefits.
Gold Continues to Reach New Highs
Gold has been supported this year by strong central bank gold buying and robust demand from Asia, especially China. Rising geopolitical tensions in the Middle East have likely also contributed to gold’s strength. In May, gold continued to reach new highs, trading at an intraday record price of $2,450 and closing at $2,425.31 per ounce on 20 May. Gold eased during the remainder of the month, likely influenced by a stronger dollar and higher bond yields towards month-end. Gold closed at $2,327.33 per ounce on 31 May, registering a 1.8% ($41.08) monthly gain.
Miners Are Also Continuing To Outshine
Gold equities continued to significantly outperform gold bullion in May. NYSE Arca Gold Miners Index (GDMNTR)1 and the MVIS Global Juniors Gold Miners Index (MVGDXJTR)2 were up 5.98% and 10.62%, respectively. We believe miners’ amplified leverage to the metal reflects both: 1) gold stocks playing catch up, coming from oversold levels relative to bullion; and 2) overall strong fundamentals for the sector as evidenced by Q1 2024 financial and operating results, where “in lines” and “beats” outnumbered “misses”.
We have repeatedly brought attention to the importance of companies meeting expectations with respect to their share price performance and May is a good example of that. All else being equal, a gold price forecast of $2,300 per ounce for Q2 2024 (in line with the average spot price so far for this quarter) should result in significantly higher earnings and cash flow generation for the industry in Q2 compared to Q1, when the spot gold price averaged about $2,070 per ounce. Another strong earnings season for the sector should support further increases in valuation multiples assigned to gold equities.
In Focus: Regional And Country-Specific Risks
We have also highlighted the impact of jurisdiction risk on companies’ valuations. Gold mining companies face many risks related to the regions where they operate. Markets have a hard time differentiating between broader jurisdictional risk and risks to mining operations, specifically. Companies operating in a country or region with heightened political instability, for example, will typically trade at a discount even if their businesses have been operating normally and are unaffected by unrest or risk of turmoil.
Managing country exposure within a portfolio of gold equities is a challenging task. With more than 50 elections taking place around the globe in 2024, this task comes into sharper focus. Elections bring with them political, social, and economic uncertainty; they can be politically destabilizing, lead to social upheaval, or significantly change (for better or worse) the growth outlook of a country or region and, therefore, its general investment appeal. The outcome of an election can trigger impactful responses in the financial markets, as investors attempt to assess the potential ramifications of a new government.
Is Mexico Still In Its “Prime”?
The mining sector was closely watching the outcome of Mexico’s presidential election in early June. Mexico is the world’s largest producer of silver (accounting for about 25% of global silver production in 2023) and among the top 10 global gold producers (about 4% of global gold production in 2023). It also produced about 3% and 5% of the world’s copper and zinc, respectively in 2023.*
Despite many challenges, it is fair to say that Mexico, for a long time, ranked among the world’s most prime mining jurisdictions. However, this “prime” rating recently came into question when Andres Manuel Lopez Obrador (AMLO) was elected Mexico’s president in 2018. The market’s concerns were justified too. Under AMLO’s administration, no new mining concessions have been granted and a proposal to reform the country’s mining law was approved in 2023.
Some of the most significant changes in the new law (nicely summarized in a recent report by Scotiabank Global Equity Research) include:
- A 30-year limit on mining concessions (compared to a 50-year limit under the old mining law)
- Added grounds for cancelling current mining concessions as well as a more extensive list of requirements to maintain a valid mining concession
- Creation of additional environmental concessions for mining use (no new concessions will be granted in regions without availability of water, in natural protected areas or if there is a risk to the general population)
- Concession allowance on a per-mineral or per-substance basis (compared to previous mining concessions granted for the totality of the underlying resources)
At the end of his six-year presidential term, AMLO has also proposed a significant number of changes (20) to Mexico’s constitution, including two proposals that directly impact the mining industry. These include a proposal to no longer grant concessions for open-pit mines and to grant water concessions for domestic-use-only in regions with water scarcity.
Our discussions with the management of several mining companies with operations and/or projects in Mexico gave us reason to be cautiously optimistic, with most companies expecting that a new government (even if still a MORENA party government) would be a welcome change for the mining industry. President elect, Claudia Sheinbaum – a scientist, engineer and academic – was seen as a more pragmatic candidate and likely to have more moderate views compared to AMLO. However, a lot of the optimism also stems from the fact that approval of constitutional changes would require her party to have a super-majority in congress, and this was an outcome most market participants were not expecting. Her landslide victory came with the MORENA party achieving qualified majority in the lower chamber, and very close to also achieving super-majority in the senate. This took markets by surprise, with Mexican equities and the Mexican peso dropping to reflect a more negative outlook for the country.
As far as the mining industry is concerned, Sheinbaum has not specifically discussed her plans for the sector, but she has promised to continue to push forward AMLO’s agenda. It is still too early to predict what her approach will be towards mining, but her party’s position in congress gives her the power to make changes that could potentially adversely affect the industry. “More of the same” seems the most likely outcome for now, which is disappointing. Comments by the re-appointed Minister of Finance seem to have offered some reassurance to investors. The president elect’s acceptance speech appears to have also included promises for an autonomous central bank, adherence to legality and a commitment to boost private investment (both national and foreign). So, perhaps not all hope is lost. We continue to look forward to being able to upgrade Mexico in our rankings, making it a prime destination for mining investment once again.
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* U.S. Geological Survey, Mineral Commodity Summaries, January 2024.
1 NYSE Arca Gold Miners Index is a service mark of ICE Data Indices, LLC or its affiliates (“ICE Data”) and has been licensed for use by VanEck UCITS ETF plc. (the “Fund”) in connection with VanEck Gold Miners UCITS ETF (the “Sub-Fund”). Neither the Fund nor the Sub-Fund is sponsored, endorsed, sold or promoted by ICE Data. ICE Data makes no representations or warranties regarding the Fund or the Sub-Fund or the ability of the NYSE Arca Gold Miners Index to track general stock market performance. ICE DATA MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE NYSE ARCA GOLD MINERS INDEX OR ANY DATA INCLUDED THEREIN. IN NO EVENT SHALL ICE DATA HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. ICE Data Indices, LLC and its affiliates (“ICE Data”) indices and related information, the name "ICE Data", and related trademarks, are intellectual property licensed from ICE Data, and may not be copied, used, or distributed without ICE Data's prior written approval. The Fund have not been passed on as to its legality or suitability, and is not regulated, issued, endorsed, sold, guaranteed, or promoted by ICE Data.
2 MVIS®️ Global Junior Gold Miners Index is the exclusive property of MarketVector Indexes GmbH (a wholly owned subsidiary of Van Eck Associates Corporation), which has contracted with Solactive AG to maintain and calculate the Index. Solactive AG uses its best efforts to ensure that the Index is calculated correctly. Irrespective of its obligations towards MarketVector Indexes GmbH (“MarketVector”), Solactive AG has no obligation to point out errors in the Index to third parties. The VanEck Junior Gold Miners UCITS ETF is not sponsored, endorsed, sold or promoted by MarketVector and MarketVector makes no representation regarding the advisability of investing in the Fund.
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Important Disclosure
This is a marketing communication. Please refer to the prospectus of the UCITS and to the KID before making any final investment decisions.
This information originates from VanEck (Europe) GmbH, which has been appointed as distributor of VanEck products in Europe by the Management Company VanEck Asset Management B.V., incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). VanEck (Europe) GmbH with registered address at Kreuznacher Str. 30, 60486 Frankfurt, Germany, is a financial services provider regulated by the Federal Financial Supervisory Authority in Germany (BaFin).
The information is intended only to provide general and preliminary information to investors and shall not be construed as investment, legal or tax advice VanEck (Europe) GmbH, VanEck Switzerland AG, VanEck Securities UK Limited and their associated and affiliated companies (together “VanEck”) assume no liability with regards to any investment, divestment or retention decision taken by the investor on the basis of this information. The views and opinions expressed are those of the author(s) but not necessarily those of VanEck. Opinions are current as of the publication date and are subject to change with market conditions. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results. Information provided by third party sources is believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Brokerage or transaction fees may apply.
All performance information is based on historical data and does not predict future returns. Investing is subject to risk, including the possible loss of principal.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.
© VanEck (Europe) GmbH / VanEck Asset Management B.V.
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