A geopolitical insurance

With political uncertainty waning in Europe and the US (President Trump is being kept well in check by his administration), and inflation still contained, the gold price has moved down from its April peak of USD 1285/ounce to some USD 1210/ounce (as of July 11).

This 6% correction has triggered a far greater correction in goldmine stock prices, with Goldcorp down 17% and Barrick Gold an even larger 20%. Both are now trading at 2017 lows, although gold itself is still well above its 2016 year-end price of USD 1147/ounce.

goldGraph(Source : Bloomberg)

We see no specific reason for such a discrepancy, taking into account the numerous efforts that have been made by mining companies to lower their operating costs, their divestments of non-core assets and the fact that they are running (ample) free cash flows – allowing them to pay out dividends. A partial shift from direct gold holdings into gold mines thus seems a good idea, focussing on the larger companies operating in “safe” geographical areas (e.g. Goldcorp, Barrick Gold and Newmont Mining).

As regards the future evolution of gold itself, we remain convinced of its upward price potential, slowly should real interest rates remain negative (i.e. if Central Banks maintain interest rates below inflation as we would expect) or more abruptly in the event of a military conflict in the Far East (US vs. North Korea or Japan vs. China) or in the Middle East (Saudi Arabia vs. Iran).