Four reasons gold is going to $US2000

Gold is set to test its record highs over the coming year as the spectre of deflation...
22nd May 2020
Resources Rising Stars

Gold is set to test its record highs over the coming year as the spectre of deflation, too much debt, the prospect of resurgent inflation and currency debasement propels the precious metal towards $US2000 an ounce (reports The Australian Financial Review).

That's the bullish call from VanEck's Joe Foster who, as portfolio manager of the world's largest gold exchange-traded fund, is wary of the consequences of the $US9 trillion ($14 trillion) unleashed by central banks and governments to support growth amid a sharp contraction in the global economy.

"Over the next 12 months we expect to see gold test the $US2000 an ounce level," he said.

"If we do have an inflationary cycle further down the road or if we have a worst-case scenario, then all of us can imagine right now, gold could be trading higher than $US2000 an ounce in the next several years."

Gold has rallied hard this year amid the economic and financial market chaos unleashed by the coronavirus pandemic.

US dollar gold has rallied 38 per cent over the past 12 months and is trading at an eight-year high around $US1750 an ounce. It hit an intraday record high of $US1921 an ounce in September 2011.

The Australian dollar-denominated gold price has advanced 44 per cent to $2670 an ounce. It hit a record closing high of $2768 on March 24.

Mr Foster is concerned the massive expansion of central bank balance sheets – the US Federal Reserve's is approaching $US7 trillion – and yawning government deficits will only magnify the gathering systemic risks from growing debt.

Debt-to-GDP is trending towards 300 per cent among the Group of Seven nations.

He said the global financial system was being "overwhelmed" by liquidity and that the level of debt was "overwhelming".

"Remember, this is just to get us through the crisis. We haven't even started the recovery phase yet," Mr Foster said.

"We expect to see the stimulus continue for quite some period to get the economy back on track."

Apart from rising levels of sovereign debt, he sees three other sources of systemic risk that will bolster the appeal of gold as a safe-haven asset.

First, gold offers protection against the short-term deflationary shock unleashed by COVID-19 and the lockdowns of the world's largest economies.

Second, exposure to the precious metal provides a hedge against the threat of inflation "somewhere down the line" given the potential for the unprecedented levels of stimulus to deliver a 1970s-style cycle of double-digit inflation.

Another risk is a loss of confidence in the fiat currency system.

"In my opinion, governments are trashing the fiat currency system that's been in place since 1971. If foreigners and investors lose confidence in this [US] dollar-based fiat currency system, then we could see a systemic collapse and gold trending much higher," Mr Foster said.

He has around 20 per cent of his portfolio allocated to Australian gold miners and development stage companies.

Mr Foster said the drop in the Australian dollar about five years ago had rejuvenated the industry and brought on more exploration.

"Australia is really on par now with the rest of the world in terms of the range of companies that are operating there. It's a much bigger part of our portfolio today than it would have been 10 years ago," he said.

He said Australian companies were no longer trading at a discount to North American gold miners and many – such as Newcrest Mining, Northern Star Resources and Evolution Mining – had started to invest in North America.

He said mid-tier producers like Evolution, Northern Star and Saracen Mineral Holdings were "all great companies".

VanEck also likes Australian companies that are developing projects and moving into production.

"We were early supporters of Gold Road and that stock had a really nice re-rating last year as they went to production," Mr Foster said.

"We're seeing a similar thing happen this year with West African Resources. They've developed a property in Burkina Faso in West Africa and they've done a great job of developing it.

"The first gold pour was in the first quarter and we're seeing a re-rating of that stock."

West African Resources' shares are up 155 per cent over the past 12 months.

He also likes Bellevue Gold, which raised $26.5 million in March to develop its namesake project in Western Australia. "It has an exciting new discovery that we expect to go to production over the next several years."

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