The Gold ‘Mega Melt’ Up Is Here
It was the sector that was left for dead…
The value of the commodity fell so sharply, that for some companies it simply became too expensive to mine.
Blue prints for new plants were shelved.
Existing operations were shut.
Firms gave up looking for it.
Only idiots were sticking their money in this asset…
2014 was a bad year
The year was 2014.
Bitcoin was still only a novelty for the indoorsy, gamer type. Nobody had heard of the ‘FAANG’s’.
The Fed had yet to begin raising interest rates. And that year, the best performance sectors of the US stock market were real-estate and utilities stocks.
Close to home, our own Reserve Bank of Australia had set the cash rate to 2.50%.
Iron ore prices fell 46% and oil continued to slide by almost half.
So, it comes as no surprise that the Aussie dollar tumbled along with commodity prices. Falling 13% against the US dollar, from 89 US cents in January to 77 US cents by December that year.
In spite of all of this, the S&P/ASX 200 somehow manage to end the year higher by 9.3%.
And then there was gold.
The 2011 gold bullet market was over.
In the three years since its US$1,900 peak, the yellow metal was down a whopping 35% by the end of 2014.
Yet even the falling Aussie dollar couldn’t protect the Aussie dollar gold price.
Once the metal reached AU$1,390, many gold miners in Australia closed up their gold operations.
Smaller gold miners were rapidly becoming unprofitable. Even major gold mining companies struggled. Both Newcrest Mining and St Barbara saw almost no share price gains that year.
The sector was dead.
Surely only a fool would put their money in gold.
What happened when you weren’t looking
Things all began to change in 2015.
Oh don’t get me wrong, the yellow metal dropped another 10% in US dollar terms.
However while investors were dumping their gold stocks…other investors were moving into physical bullion.
But those investors just happened to be central banks.
Not major central banks either.
The smaller ones…the sort of emerging markets no one pays any attention too.
Central bank gold reserves – 2000–2018
Source: Palisade Research
While most of the West wasn’t looking, China, India, Russia, Turkey, Mexico and Kazakhstan slowly began to increase their physical gold position.
Gold rush 2.0
That brings us to today.
The yellow metal is now back around the US$1,300 mark — give or take a buck or two.
And last year, central banks bought more gold in 2018 than ANY year since 1967.
This time, Poland, Egypt and even Hungary were keen to publicly announce their decision to hold more physical bullion.
For the first time, a small collection of central banks is on the front foot.
They are preparing to protect their countries wealth with a robust physical gold holding.
Once again though, their moves are invisible to the rest of the market.
Yet, there is a new gold rush underway. And you don’t need to analyse the moves of central banks this time.
The new gold rush is playing out in mainstream headlines as we speak.
It began last year, when Newmont Mining made a bid for Goldcorp.
Two months later, Canadian based gold giant Barrick Gold made an offer for Randgold. Together those two became a US$24 billion gold behemoth with the largest gold reserve base in the world.
Yet the ink had barely dried on that merger, and Barrick has come out swinging again. This time with a US$18 billion bid for Newmont.
Newmont’s management have rejected the offer. Saying Barrick has undervalued the company.
But for gold investors, this is a very big signal for what’s to come.
The gold mining giants are fighting over each other’s assets.
Essentially they are setting stage for a mega melt up in gold companies. That is, a rush to buy up one another to become the gold miner with the largest resource base.
This excitement filters down through to the smaller and mid-cap stocks as well.
Giving us a modern day gold rush.
Gold in the ground is getting harder and more expensive to find.
For gold miners that want to expand and increase their share price, mergers and acquisitions are often the only way to go.
In other words, to become bigger and leaner in the expensive world of digging for gold, companies need to buy each other out.
This is the year gold mine assets become controlled by just a few.
Until next time,