Sponsored spotlight: Mithril Resources Ltd (MTH:ASX) is a precious metals exploration company focused on discoveries, acquisitions and production of silver and gold in Mexico’s Sierra Madre Gold Silver Trend — with one of the highest-grade silver jurisdictions in Mexico.

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The price of gold is soaring, and only one thing can stop it.

All the anchors that have traditionally slowed the rise in gold prices in the past, from the strength of the dollar to high interest rates, have so far failed.

Instead — barring a black swan event — only the outcome of the US election, can stop its rise. But, we warn, this may in fact only exacerbate the problems and drive gold higher.

So, firstly, what is driving the price of gold to record highs?

Central banks

Central banks across the world have bought up a record amount of gold, accounting for more than 20% of annual gold demand in 2022 and 2023, in the last two years:

• 2022, 1081.9 tonnes of gold, an historic high
• 2023, 1,037.4t, the second highest on record
• and, in Q1 2024, central bank demand totaled 290t, the strongest Q1 on record

Some of the reasons central banks have been buying gold at record levels include:

• diversifying foreign exchange holdings
• a hedge against inflation
• diversification of their reserves
• insurance against financial or geopolitical instability
• support currencies, facilitate trade, and reduce dependence on the US dollar

And, the largest buyer, by far, is China.

China

The latest rally in gold looks like it is being driven by factors inside China.

Gold exchange-traded funds (ETFs) are experiencing significant inflows, driven predominantly by Asia, especially China. In April 2024, Chinese gold ETFs saw record monthly inflows exceeding US$1 billion, marking the continuation of a remarkable 14-month streak.

In comparison, North America saw a second consecutive monthly inflow in April 2024, while Europe led outflows with US$4 billion in April, representing the eleventh consecutive month of losses.

Instead, the average daily trading volume of related products on the Shanghai Gold Exchange almost doubled in April.

Why? The main reason, as always with gold, is that it is seen as a safe-haven asset.

Two of the main risks include the collapse of China’s housing market and as a hedge against the risk of a potential devaluation of renminbi.

A devaluation would be no simple thing and we are not here to speculate whether China will or will not devalue their currency, but there is significant speculation they may be forced to, especially with the fall of the Yen.

For example, the IMF, in its latest country report on China’s economy, suggests: “Against the backdrop of monetary policy divergence vis-à-vis advanced economies and sustained depreciation pressures, this would help counter disinflation pressures.”

The renminbi is already down more than 2% against the dollar in 2024.

However — and this is the give-away — it’s really all about the dollar.

(This is also highlighted by the news that the People’s Bank of China has not bought gold for its reserves for a second consecutive month in June. The price has “slipped” but it could not be described as much more than that for now)

Financial risk

The S&P500 may be hitting record highs, but not all is well in the US (and global) economy, to take a handful of examples:

• core price inflation remains stubbornly high 
• interest rates have been held at 5.5% since August 2023
• annualized interest payments on US government debt are now above US$1 trillion
• the 10 largest US stocks now account for 33% of the S&P 500’s market value, above the 27% share reached at the peak of the tech bubble in 2000
• US GDP growth slowed to 1.6% in Q1 2024, below estimates of 2.4% and the 3.4% growth rate in Q4 2023
• US consumer savings have hit 3.2%

Geopolitical risk

As well as financial concerns, there are also a growing number of global geopolitical flashpoints with significant risk that are pushing to investors to gold as a safe haven, including:

• Russia’s invasion of Ukraine
• the Israelis-Hamas war, leading to direct conflict between Iran and Israel
• tensions between China and US, especially over Taiwan
• and, in 2024, more voters than ever in history will vote in elections across at least 64 countries, representing about 49% of the people in the world — brining with it significant volatility, such as in France

And, arguably the most important geopolitical event of 2024, is the US election.

Interest rates and US dollar

So, why is the US election the only thing that might stop the rise in the price of gold?

Firstly, the US election itself is deemed a geopolitical risk and with what looks like a controversial election, this risk will likely only increase the nearer we get to the election.

For example, companies are accelerating their financing needs ahead of November to get ahead of any potential market volatility in the presidential race. Corporate borrowers have issued $606 billion worth of dollar bonds so far this year, according to LSEG data, up by two-fifths compared with the same period in 2023 and the highest total since at least 1990.

In the run up to the election, we expect more money to be “pumped” into the stock market and economy to support President Biden’s campaign. To note, this is not a political advertising on behalf of any party, every president pulls financial levers ahead of an election to improve their chances of victory.

For example, Treasury Secretary Janet Yellen has been accused by GOP lawmakers of artificially stimulate markets in the run-up to the election.

Federal Reserve Chair Jerome Powell has stated the Fed will soon be appropriate to slow the pace Quantitative Tightening, therefore slowing the drain of liquidity from the financial system, which is likely to be positive for stocks.

And, ahead of the election, we expect only a toughening of the US stance against China, for example, with President Biden’s recent 100% tariff on electric vehicles from China. This will put further pressure on China’s economy.

“America is rising. We are the strongest economy in the world.”

— President Biden said in a reelection campaign speech in the battleground state of  Pennsylvania

All of this will likely stop inflation from falling much further in the US, with Powell warning interest rates are to be delayed. 

But, central banks and finance ministers from across the world are voicing concern about the impact a strong dollar and an overheated US economy will have on their currencies (eg the Yen and Renminbi) and the global economy. 

The IMF has warned that huge US fiscal deficits have pumped up inflation and posed “significant risk” to the global economy.

“The big elephant in the room here is the US election”

— Marcelo Carvalho, London-based economist at BNP Paribas told Bloomberg

The US election

In other words, we do not see any potential resolution to the underlying drivers creating economic and geopolitical volatility that is pushing up the price of gold until after the US election. 

But, it’s also just as possible, that there may be no resolution after the election either — depending on who wins and the direction of their economic policy.

Jewelry and Supply

There are, of course, a variety of other factors supporting the high price of gold, in particular:

The stagnation of supply from gold miners, with annual production increasing only 1% year-on-year in 2023, as “substantial new discoveries are increasingly rare”, according to the World Gold Council.

A new gold mine takes, on average, 15.7 years to develop from 2020-23, up from 12.7 years from 2005-9, according to S&P Global.

And gold in initial resources have now fallen for a second year in a row, with total gold contained in initial resources declining to a 4-year low of 37.1 million ounces in 2023, 7% lower than the 40 Moz announced in 2022.

This tightening in supply is happening just as demand increases.

(Not least, it must be mentioned, the resilient demand for gold jewelry in China and India, holding at 2,093t, even in the very high gold price environment.)

Conclusion

The potential for gold prices in 2024 will be shaped by a complex interplay of economic and geopolitical factors — with their centre of gravity focused on the US dollar and interest rates.

Whoever wins the next election will have to make decisions on ballooning deficits, the possibility of replacing the Federal Reserve Chair and the corresponding impact on interest rates, potential weaponization of the dollar in conflicts such as the Russia-Ukraine war, trade wars and tariffs against China, and much more.

Only the US election can stop gold’s rise, but it may well just push it higher.

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Sponsored spotlight: Mithril Resources Ltd (MTH:ASX) is a precious metals exploration company focused on discoveries, acquisitions and production of silver and gold in Mexico’s Sierra Madre Gold Silver Trend — with one of the highest-grade silver jurisdictions in Mexico.

Mithril is currently progressing a fully funded drill program in the Copalquin District following its successful maiden JORC resource estimate delivered in November 2021 after only 15 months of drilling and with an all-in discovery cost of USD14.30 per ounce gold equivalent.*

Maiden JORC Mineral Resource Estimate summary:

2,416,000 tonnes @ 4.80 g/t gold, 141 g/t silver (6.81g/t AuEq*) for 373,000 oz gold plus 10,953,000 oz silver (Total 529,000 oz AuEq*) using a cut-off grade of 2.0 g/t AuEq*

28.6% of the resource tonnage is classified as indicated

*AuEq. = gold equivalent calculated using and gold:silver price ratio of 70:1. That is, 70 g/t silver = 1 g/t gold. The metal prices used to determine the 70:1 ratio are the cumulative average prices for 2021: gold USD1,798.34 and silver: USD25.32 (actual is 71:1) from kitco.com

Find out more: Mithril Resources Ltd