Strengths
- The best performing precious metal for the year 2021 was gold, but still down 3.64%, according to Bloomberg data. The closing price comes on the potential 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.
- Funds raised by junior and intermediate gold companies totaled $5.5 billion in 2021, according to company reports, the most since 2012 and a potential 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.
- Retail gold sales in China rebounded in 2021 with bracelets, pendants, earrings, and necklaces that draw on dragons, phoenixes, peonies and other traditional Chinese patterns and symbols being strongly desired by consumers in the region, reports several Bloomberg stories. Sales of gold jewelry seem to eb strongest by those in their 20s and 30s, helping drive a rebound in gold demand in the country after a pandemic-induced slump.
Weaknesses
- Palladium was the worst performing precious metal, down 22.35% for 2021, according to Bloomberg data. Substitution for palladium by platinum is one option 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 cars with.
- Silver was the second worst performing precious metal for 2021, falling 11.74%, on somewhat lighter solar cell supply, according to Bloomberg data. 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 U.S. dollar moved higher in 2021, surprisingly, the real rate on the generic 10-year TIP (treasury inflation-protected securities) started the year at -1.087 and finished 2021 at -1.099, essentially the same place it began. Yet, gold is around 3% lower.
Opportunities
- Industry consolidation began to take place in more earnest during 2021, as seen throughout various company announcements. One example is Agnico Eagle Mines’ bid to buy Kirkland Lake Gold. There appear to be operational synergies that can be garnered from the deal. This bid gives Agnico Eagle 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.
- It appears the gold industry overall may be more willing to do deals more aggressively in the future. There are plenty of good assets in the junior miners’ space, and the explorers too, that could be on the wish list for 2022.
Threats
- Bitcoin remains a key competitor to gold. Many financial analysts expect gold to gradually decline over the next few years, although these are merely expectations. The post-pandemic recovery, Federal Reserve tapering, and a stronger U.S. dollar could all weigh on the yellow 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 at year-end. 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 one potential threat to gold prices but there is great concern that the U.S. can withstand rising rates.
- 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.
Looking to gain exposure to a wide-ranging portfolio of companies within the gold mining industry, including production and gold royalty companies? Look no further!
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor
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Disclosures: Investing involves risk, including the possible loss of principal. Shares of any ETF are bought and sold at market price (not NAV), may trade at a discount or premium to NAV and are not individually redeemed from the funds. Brokerage commissions will reduce returns. Because the funds concentrate their investments in specific industries, the funds may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries. The funds are non-diversified, meaning they may concentrate more of their assets in a smaller number of issuers than diversified funds. The funds invest in foreign securities which involve greater volatility and political, economic and currency risks and differences in accounting methods. These risks are greater for investments in emerging markets. The funds may invest in the securities of smaller-capitalization companies, which may be more volatile than funds that invest in larger, more established companies. The performance of the funds may diverge from that of the index. Because the funds may employ a representative sampling strategy and may also invest in securities that are not included in the index, the funds may experience tracking error to a greater extent than funds that seek to replicate an index. The funds are not actively managed and may be affected by a general decline in market segments related to the index. Gold, precious metals, and precious minerals funds may be susceptible to adverse economic, political, or regulatory developments due to concentrating in a single theme. The prices of gold, precious metals, and precious minerals are subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5% to 10% of your portfolio in these sectors.
Fund holdings and allocations are subject to change at any time. Click to view fund holdings for GOAU.
The companies mentioned in this writeup that are not held by the GOAU ETF include the following: Agnico Eagle Mines, Detour Lake, Newcrest Mining, Pretium Resources and Sibanye Stillwater.
Distributed by Quasar Distributors, LLC. U.S. Global Investors is the investment adviser to GOAU.