PDAC: Insurance motive to keep pushing up gold prices

Insurance from currency devaluation is the main reason countries such as China are buying gold, driving up its price, panellists told the Prospectors and Developers Association of Canada conference. 

The yellow metal, which hit a historic high of $2,954.84 per oz. on Feb. 20, sat at US$2,870.90 per oz. on Monday. It’s gained about 28% over 12 months.

“If you buy gold, and a good percentage of the people who are buying gold — this would include central banks right now — are buying it not because they think the price is going to go up,” Brien Lundin, editor of the Gold Newsletter said. “But because they have a high confidence that the purchasing power of their currencies is going to go down.”

And the reason people have been buying gold is “really the answer”, Adrian Day, head of the namesake asset management firm, said on the same panel.

“The People’s Bank of China is not going to buy Newmont Mining, let alone Midland Exploration, they’re going to buy physical gold,” Day said. “Similarly, the Chinese consumers, who were big buyers a year ago, they eased off in the summer and then started to come back at the end of the year. And the reason (is) insurance is attracting you to physical gold.”

Insurance over investment

Lundin, not related to the Swedish-Canadian Lundin mining dynasty, said the bull market has mostly been fuelled by insurance and not investment. Day said some countries are shying from American dollar’s dominance in trade – a trend called dedollarization – as the U.S. administration uses the currency as a “weapon” in foreign policy.  

“The prime driver has been central banks buying to diversify their reserves in the face of dollar weaponization,” Day, told the Investment Leaders Forum moderated by The Northern Miner Group President Anthony Vaccaro.

“I’ll just ask a rhetorical question: Is that likely to change for the better, or is the need for central banks to continue to diversify still intact?”

Silver demand

Silver prices have similarly touched historic highs in recent years, and Vaccaro asked the panellists if there is a gold-to-silver ratio in terms of prices.

The silver market is at risk of a supply crunch driven by industrial demand for the precious metal, Lundin said.

But that supply issue with silver has been a long-standing trend, Day noted, explaining that for 50 years around 80% of silver production came from primary silver mines, whereas today it’s 25% at most.

“It’s probably less than that, because they count some gold-silver mines as primary silver,” Day said. “Look at the silver companies, for example, Pan American Silver (TSX, NYSE: PAAS). Fifty-five per cent of their revenue last year (was) from gold. Fortuna Silver changed its name (to Fortuna Mining (TSX: FVI; NYSE: FSM) because they don’t produce enough silver, and so on.”