Where is gold headed from here?

After a two-day policy meeting last week, the U.S. Federal Reserve said it will maintain its accommodative monetary policy (read easy money) and will keep its overnight interest rates near zero and continue to purchase roughly US$120 billion of treasury bonds and mortgage-backed securities each month.

That should be good news for gold. The metal finished February at US$1,743 per ounce (the worst monthly performance since November 2016) and then dipped to a nine-month low of US$1,697 per ounce at the end of the first week of March. By the end of the third week of March the metal was back up to US$1,744.90 per ounce and as The Northern Miner went to press, gold was hovering at around US$1,739.60 per ounce. The question is where is it headed from here?

Alan Oster, group chief economist at Australia National Bank (NAB), and his colleague Gerard Burg, the bank’s senior economist, said they don’t see big moves in the metal over the next year or two. “In the near term there appears to be limited upside pressure on gold – given an improving economic climate, and low interest rates that are likely to persist,” they wrote in a research note on March 10. “The key uncertainty is inflation, with fears that large scale stimulus could drive inflation higher, increasing the appeal of precious metals. That said, there remains spare capacity in a range of major economies, which could constrain this pressure. We see only limited upside to gold over the next two years – with gold prices averaging US$1,806 an oz. in 2021 and US$1,838 an oz. in 2022.”

If you listen to gold pundits like John Hathaway, who has been investing as a gold specialist since 1998, there’s never been a better time to invest in gold mining companies. On a Sprott Gold Talk radio podcast on March 10, the managing director and senior portfolio manager of Sprott Gold Equity Fund declared that he has “never seen the values as compelling as they are right now.”

“Gold stocks are out of favor and gold mining stocks are even more out of favor,” despite the fact that gold mining companies are “very profitable” and are “generating significant” cash flow, he told podcast host Ed Coyne, senior managing director at Sprott Asset Management.

Hathaway is certainly correct about cash flow. In a recent research note earlier this month, Bank of America noted that the four senior gold producers in North America (Newmont, Barrick, Agnico Eagle Mines and Kinross Gold, along with the four senior streaming and royalty companies (Franco-Nevada, Wheaton Precious Metals, Royal Gold and Osisko Gold Royalties) reported free cash flow last year of US$8.5 billion, roughly 41.5% of the global gold industry’s FCF.)

Hathaway also noted that we are in “a world of overvalued securities, both bonds and stocks,” and pointed out that in a paper he wrote at the start of the year called One of the Greatest Bubbles in History, he explained that “the valuation of the S&P 500 was in the 100 percentile of all historical experience,” and “this can go on for a bit. … Gold mining stocks, which have had a correction going back to August, have come down to valuation levels where if the broader stock market were to sell off, which I think is a reasonable bet, you would probably have much less risk in gold mining stocks.”

As for the price of the precious metal, Hathaway said he believes “that we could see another leg up in the gold price that takes us to new highs, which I think would inject a tremendous amount of buying into this sector.”

John LaForge, head of real asset strategy at Wells Fargo Investment Institute, says he has become “increasingly positive” about gold over the last three years and has a 2021 price target on the metal of US$2,100 to US$2,200 per ounce. “Gold prices have climbed over 40% since 2018, and we believe that more gains lie ahead,” he wrote in a March 22 report, noting that the gold price has been driven up by a combination of: low global real interest rates; “excessive” money printing; and a weak U.S. dollar. “These trends remain largely intact, and we remain gold bulls.”

In our next print issue, which goes to press on March 23, we take a closer look at gold — not only at the flurry of recent M&A deals with Evolution Mining taking out Battle North Gold, Newmont’s acquisition of GT Gold; Gran Colombia’s bid for Gold X; and First Majestic’s purchase from Sprott Mining of the Jerritt Canyon mine (and we think there will be lots more M&A to come) — but at capital raisings for gold projects over the last 13 months based on data from our sister company Mining Intelligence; at juniors with interesting projects to watch, and Douglas Silver of Flydentity LLC’s keynote talk on global gold endowment over the past 30 years at this year’s recently concluded Prospectors & Developers Association of Canada conference.