The accelerated decline of US dollar real interest rates, to which the gold price moves inversely, is behind the USD gold price rise of over 6.9% in the last month. Gold competes with interest-bearing assets for investor capital and so, with negative yields becoming more prevalent, the opportunity cost of holding the metal is quickly falling away.
The gold price has now breached some important technical and psychological resistance levels, including $1,500, leaving a lot of headroom until the next major “ceiling”. The all-time high of $1,896 in 2011 is now just 26% away and it could well head towards $2,000 in 2020.
Going forward, I expect central banks to pursue ever more accommodative monetary policy, pushing nominal rates lower and thus benefiting the gold price. The upcoming Jackson Hole meeting of central bankers and finance ministers should provide further policy clarity.
Central banks appetite for gold shows no sign of abating and earlier this month the World Gold Council revealed that they bought 374 tonnes of gold in the first half of 2019. This represents their largest ever accumulation of the yellow metal in the first half of a year. Furthermore, generalist investors are finally showing interest in the asset class and, given that the average investor allocation to gold is negligible, there is scope for exposure to increase significantly.
Consolidation among gold mining companies has already begun with the Barrick Gold-Randgold Resources and Newmont Mining-Goldcorp mergers creating two market giants. A continued rally in the gold price could lead to an explosion in deal activity as the balance sheets and shares prices of the majors strengthen further, enhancing their spending power. As well as having the potential to outperform the gold price, given their operational gearing, the shares of the mid-cap gold mining companies – on which we are focused – could attract hefty takeover premiums.