Gold And Silver Appear Ready To Run Higher

Strengths

• The best performing precious metal for the week was silver, up 4.35%. Gold steadied after a two-day advance as investors weighed comments from Federal Reserve officials indicating that interest-rate hikes aren’t imminent. Increases to U.S. interest rates aren’t coming “anytime soon,” Cleveland Fed President Loretta Mester said Wednesday – though the central bank will act if warranted by inflation expectations. Bullion has fluctuated recently as traders attempt to gauge the pace at which pandemic-era stimulus will be reined in by central banks. Rising energy and commodities costs and disrupted supply chains are creating inflation headaches for the global economy, boosting expectations for earlier rate hikes that can curb the allure of non-interest-bearing gold.

• Russia's gold reserves have been increasing in the last few years, but it seems that inflationary woes in particular have the nation stocking up on the yellow metal again. The Russian central bank has been raising interest rates to try and combat the issue. This now means that the Russians are hedging against this problem by increasing the amount of gold it holds. Serbia plans to boost its gold reserves from an already record-high 37 tons to prepare for challenges such as the energy crisis rattling Europe, President Aleksandar Vucic said.

• Maverix Metals is increasing and expanding its royalty interest in the Omolon hub. The increased royalty is expected to more than double current gold equivalent ounces received from Polymetal's Omolon operation to 5,000 ounces per year (an incremental 3,000 ounces). The new 2.5% royalty will now cover 13 of Omolon's licenses, up from the previous 2% on 2 licenses (in essence, the royalty now covers all production from Omolon versus previous royalty interest on a portion of production covering certain deposits). Total cash consideration for the increased and expanded royalty is $23.5 million.

Weaknesses  

• The worst performing precious metal for the week was palladium, down 2.73%. K92 Mining reported third quarter production of 24.1 gold ounces from its Kainantu Mine in Papua New Guinea. This was 4% below consensus. COVID-19 travel restrictions are still impacting the operations. Current guidance is 115,000-135,000 ounces. To hit the low end of guidance will require production of a record 47,000 ounces (the current record is 29,800 ounces in the last quarter of 2020).

• More than $10 billion USD has been pulled from the biggest gold exchange traded fund (ETF) this year and pension funds physical gold hoards have also been selling down, according to Bloomberg data. The price of gold has declined 6.1% this year to $1,782 a troy ounce on Wednesday.  Bitcoin has meanwhile doubled in price to a record high of more than $67,000 this week. Some investors have begun to view it and other cryptocurrencies as an inflation hedge, even if none existed during the world’s last serious bout of inflation.  Veteran gold traders acknowledged times are changing. “There is zero interest in our strategy right now,” said John Hathaway, senior portfolio manager at Sprott Asset Management, a precious metals investment group. More than half the hedge funds surveyed in Europe and the U.S. said that rising inflation was a main driver of their attraction to digital assets, with nearly eight in 10 of the surveyed investors stating that cryptocurrencies have a place in a portfolio. 

• Metals and mining fundraising increased 31% month-over-month in September to $1.77 billion in 160 financings. The number of financings completed fell for the third consecutive month, however, and is at its lowest since April 2020 when 136 financings were recorded during the peak of lockdowns due to the COVID-19 pandemic. The number of financings declined, however, with 1,843 financings completed compared with 2,106 in the same period of 2020.

Opportunities

• Silvercorp Metals reported operating results for its fiscal second quarter. Second quarter production results were modestly weaker than consensus due to lower grades at both mines. Silver grades at the Ying Mining District were 283 grams per tonne, compared to consensus of 303 grams per tonne.  However, Silvercorp also mentioned it won an auction to acquire the Kuanping Project with is 33km from their Ying Mine. What is interesting is Silvercorp has rarely been able to secure new opportunities in China.

• Current financial metrics being demonstrated by gold mining companies present a great opportunity for generalist investors to take notice. Dividend yields for Newmont Mining and Barrick Gold are north of 3% while the indicated yield on the S&P 500 Index is just 1.3%. With inflation becoming more mainstream generalist investors will be looking to protect their wealth and gold miners need to take this opportunity of scarcity to raise investor awareness. Perhaps some gold miners should withhold a portion of their production; Holding the supply chain as gold is too cheap to sell at these prices. 

• Silver miner Hochschild PLC plans to spin off the rare earths project it bought two years ago and list the new company in Canada. Hochschild, which mines silver and gold in Peru and Argentina, bought the Chilean project in 2019 for about $56 million. Hochschild will keep a 20% stake in the business. Rare earths companies have come into play with China being the world’s largest producer of rare earth metals with other countries trying to secure stable supply chains.

Threats

• The U.S. Forest Service is being sued by an environmental group that asserts it unlawfully fast-traced approval for a land exploration drilling project on public lands. In September, the government agency had given approval of the permit to KORE Mining.

• Gold demand in India is likely to face challenges from a declining household savings rate and lower agricultural wages, according to the World Gold Council. Rising income is one of the biggest drivers of gold demand, suggesting that as India’s economy grows, sales of the precious metal should increase. However, “households are saving proportionately less than they used to, which may reduce the amount of capital they allocate to gold,” it said.

• Vale announced that copper concentrate production has been suspended at its Salobo operation as a fire has partially affected a conveyor belt at the mill. Due to the timing of concentrate shipments/refining, the shutdown is largely expected to impact first quarter 2022 gold deliveries to Wheaton's 75% gold stream on the operation.

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