21-Nov-2024: 5pm: Gold had a hiccup due to Trump 2.0, but geopolitical tensions appear to have scared the hiccups right out of gold now, and it's back on the "up" track:

Monday's ASX sector moves (18th Nov):

Tuesday's ASX sector movements (19th Nov):

Yesterday's (Wed Nov 20th) ASX sector movements:

Today's ASX sector movements:

I reckon it's reasonably safe to say the gold bull run ain't over yet.

14-Nov-2024: I have done a little trading in my SMSF today, based on this data below from today's GMD (Genesis Minerals') AGM Presentation [14-Nov-2024]

The larger the bubble size above middle and above right, the higher the Reserve/Resource Grades are.

However, the higher up the chart the bubbles are, the more expensive they are, so you're paying more for each ounce of gold they own (underground). Ideally, you want companies towards the bottom right corner of those two bubble graphs, being cheaper (lower) and with a higher gold Reserve (middle graph) or higher gold Resource (right graph).

On that basis, both Westgold and Genesis look good. I've topped up my Genesis (GMD) shares and added a Westgold (WGX) position to my SMSF today, after selling all of my Perseus (PRU) and my IOO ETF out of my SMSF. I rate PRU's management a lot more highly than WGX's management, as I've mentioned here before, but I think WGX probably offers a better risk/reward trade-off from current levels, at least for the next little while. Despite PRU's share price coming back recently from a $2.98 high to $2.48 today (-16.8%), WGX's SP has fallen further, from $3.32 down to $2.67 (-19.6%) and WGX are 100% WA, while PRU are 100% West Africa (Ghana and Côte d’Ivoire).

It wouldn't have made any difference to my decision to sell, but I was still in profit on PRU, having bought them at lower levels previously.

Westgold (WGX) still don't make it into my top 7 Aussie Gold Companies List (my fave's) but I think they're good for a trade from these levels, even if they drop further along with the gold price before rising again. They're in the ASX200 now and I do like the Karora acquisition.

It pays to note that the companies included in that slide above are only those that Genesis regard as their peers, so there are only 100% WA gold miners there, and no large caps, so Newmont, Northern Star and Evolution have been excluded because of their size (all being ASX100 companies) and Emerald, Perseus, WAF and Resolute (RSG) have all been excluded because their gold producing assets are all overseas. Further details below:

I don't normally update my trades as I make them, however I am aware that I was talking down Westgold (WGX) here (in this forum thread) recently, and now that I've bought some in my SMSF I reckon I ought to mention why I've changed my mind on them. A bit. Enough to hold them for a trade anyway.

THIS IS MY GOLD STRATEGY PIECE--

GOLD STRATEGY

Why does Gold play a part in a portfolio?

From my point of view, gold has some unusual characteristics which make it appealing as part of a portfolio. Firstly, it is not correlated to the financial markets be it equity or bond markets. Finding uncorrelated sources of alpha is a holy grail in investing. Gold has been used as a source of value for a long time and is freely exchanged. In the past gold has been convertible for currency by governments and had backed their currencies. That points to its legitimacy, IMO. Gold is unlike other commodities that are either exhausted on use such as oil or coal or have large industrial uses such as iron ore or base metals that have their pricing largely driven by their usage. Almost all gold ever mined is still in use or storage somewhere. The existing pool of gold available to trade overwhelms its annual production, unlike almost all other commodities. Most gold is held as a store of value, unlike other commodities. Therefore total potential supply and pricing are largely not dictated by current production like other commodities.

Gold the currency

From an investment perspective, gold should be viewed as a hard currency, IMO. Gold production increases at 1-2%pa. Money supply in the large developed economies increases by varying amounts but easily exceeds gold production, causing the ratio of money, say M2, to increase relative to gold, supporting an increasing gold price over time. The US m2 has increased by about 6% pa.

The investment case for gold relies on governments continually increasing the monetary base above the rate of gold production. It is hard to think that won't continue indefinitely.

Difficulty in valuing gold

There are two chief difficulties in valuing gold, especially in the short term. If we agree that the gold price is a ratio of the monetary base (MS) divided by the total gold reserves we get an “intrinsic” value for gold. Measuring the stability of that ratio is difficult. The ratio of the MS/total Gold ounces generates a reasonable baseline, but we must realise that the velocity of money will play a part and is almost impossible to identify or measure over the short term. That is, M2 can vary due to credit creation, so it is a good proxy but still a proxy. The velocity of money is the rate or speed that money cycles through the economy the faster it cycles the more apparent its impact (eg inflation), while if dormant its impacts are not apparent and will be less obvious. Having said that, the important fact is that MS growth exists and its ability to accelerate or decelerate should have a limited impact on gold over the very long term.  Expectations on how the MS grows and how velocity changes also impacts the gold price. We can see that if the money supply contracts the resultant shortage of USD for instance, leads to an increase in the US dollar price, that is interest rates and also that supports the USD. Therefore short-term moves in gold may be most probably influenced by those factors. Like everything in investing, it is not written in stone but the long-term trend is evident.

One way to view it is that MS growth drives the LT story and velocity through its impacts on inflation, USD, and interest rates, which provide movements around the trend.

That said we can see some correlations in the following charts. We can also see some interesting points.

Current pricing

The above graphs highlight two interesting outcomes for me.  Gold has done very well over the recent past but we can see serious lagging around 2015 and post-C19. The market waited a long time to gauge whether the excess money supply due to C19 would be withdrawn but has now decided that the reduction effort has passed. That is, we have a largely permanent increase in the MS. Both the US and the Euro appear to be in the easing cycle. Gold has responded to catch up.

Secondly, I have put in the CNY due to its size. However, it is not a freely exchangeable currency. You would have to think if it was ever freely exchangeable there would be serious buying of gold and probably many other assets by CNY holders.

Using this measure the gold catch-up has largely played its part.

Future?

In this framework, the future gold price is largely dependent on CB’s continuing to print currency. This ongoing debasement supports gold. There is the ever-present, low-probability outcome of a major government completely letting its currency go. That would be very bullish for gold but the second-order impacts are difficult to judge. There should be a small option for gold for this possible event.

The bull thesis is that CBs continue to issue currency. We have evidence that in the last two crises, the GFC and C19, were both met with aggressive currency issuance. There may be no other alternative in modern finance policy, given where we are in social contract and debt terms.

The bear case is that there is a permanent and large contraction in the money supply leading to a severe contraction, that doesn’t trigger a fear of financial meltdown. The further the CBs go down the currency issuance path the further away any long-term easy fix becomes. That is, the current policy continues to play for gold.

Like all assets gold can become expensive and cheap.

Ways to invest in gold.

I see four main ways to play the gold theme.

1.     Bullion. Is the purest play. Usually best owned through a gold-backed ETF. Bullion also is the most conservative way to play the theme, as there is no operational risk and less leverage, up and down.

2.     Royalty/streamers. These are companies that play in the space with contracts that derive income in a mix of ways but mainly avoid the expense performance of the miners. They usually take a stream of ounces, a percentage of revenues or a mix of both. Usually, the streamer pays a fair price for these assets and makes excess returns well down the track, when the operator expands the mine, the royalty company participates in the increased production, usually without any further capex. These are then usually a lower-risk way to play the sector and are in nature quite a long-term investment.

3.     Established miners. These are operational mines and depend on the attractiveness of their deposits and the operational efficiency of the management team in extracting the ore. These companies expose investors to operational risk to a greater degree than the royalty companies. Factors to consider are, the number of operational mines is important to diversify risk, and the quality and geography of the deposits. I have some interest here but only for well-run and with quality long-lived assets.

4.     Developers/Exploration. These are miners who have yet to develop a deposit or find a deposit. There can be an enormous risk as the deposits are developed into mine and the thesis here, IMO, moves away from a gold play and becomes speculation on successful development to a greater degree. That is fine if investors have a particular skill in identifying all the issues concerned with deposit development and want to take on that risk. I have limited interest here.

Two things are at play here, where we are in the gold price cycle, low, fair or full and how each subsector is valued, depending on how far through the above risk spectrum you want to position yourself given relative value.

The structure of portfolio exposure could move as more or less leveraged exposure is considered appropriate given the apparent relationship between monetary growth and the gold price. I expect to hold some gold exposure for the long term.

Most recent moves in the portfolio.

The mix now in my portfolio is Bullion 39%, Royalty/streamer 35% and Developed miner 25%, with overall 5.1% gold exposure but this mix is now a more conservative exposure given the catch-up in price. If gold rallies strongly from here I would reduce the developed miner and maybe keep the overall exposure flat.

That’s all I have DYOR

11-Nov-2024: Resolute Mining (RSG) down -33% today as the company confirmed this morning that their Company’s CEO, Terence Holohan, and two other employees, have been detained in Mali by Government Officials. I posted a straw about this earlier - see here: https://strawman.com/reports/RSG/Bear77?view-straw=27463

The Money of Mine (MoM) podcast crew gave some more colour around this one in their pod today:

You can jump straight to the RSG coverage by clicking here: 0:32:40 Resolute CEO detained in Mali

The Australian (I'm not a subscriber to The Australian so relying on the MoM version of this) apparently reported that the Mali government wanted $250 million from RSG and the RSG CEO and two staff went to talk about tax-related matters with the Malian anti-corruption and financial crime unit and they were subsequently arrested in their hotel in Bamako, the capital of Mali. JD says that apparently a broad range of matters were discussed including claims of unpaid royalties and dividends to the Malian government; RSG claim those allegations are completely unsubstantiated and that they (RSG) have played by the book and paid everything that they were supposed to under existing agreements.

Apparently, a lot of this relates to a new mining code that Mali developed and implemented in 2023 that applies to all new mines in the country, most likely as a direct result of the Morila gold mine debacle, and the Malian government having to seize Leo Lithium's (LLL's) Goulamina Lithium Project in Southern Mali to get some leverage over Firefinch (were FFX,asx, now delisted) who walked away from Morila and claimed zero liability for site rehabilitation or money owed to staff and contractors. Firefinch owned shares in LLL (they still own 17.61% of LLL) because LLL was created from Firefinch's spinning their lithium assets out into a new company, called Leo Lithium (LLL), so the only way that the Malian government could get Firefinch back to Mali to negotiate about Morila was through stopping all development at Goulamina until a satisfactory outcome was negotiated. LLL shareholders and Firefinch shareholders got screwed of course, but the management of both companies did pretty well. The short version is the Firefinch demonstrated reprehensible behaviour that gave Australian gold miners operating in West Africa a really bad name and really pissed off the people of Mali and their government.

Anyway, so, this new mining code was developed last year and it was expected that only new mines would be affected by the new rules, but it appears now that existing mines already operating in Mali are also expected to comply with the new code, hence RSG's management and the Mali government having different understandings of RSG's responsibilities.

Wagner is also very active in the north east of Mali - which of course means Russian involvement - and you basically can't operate in any areas where Wagner are active.

The world's second largest gold mining company, Barrick Gold operate two large gold mines in Mali, Loulo and Gounkoto, and Barrick have recently settled a similar dispute with the Malian government:

JD said that Barrick announced in October that they had agreed to pay the Mali government US$81 million, but the Mali government recently said that Barrick did not honour that agreement. As part of those negotiations back in September, four of Barrick's employees were detained in Mali, just as 3 of Resolute's employees - including their CEO - have been since Friday.

I won't go on. Just plenty of risk when operating in West Africa, and some countries are worse than others clearly. And Firefinch didn't help matters at all with how they behaved and with what they failed to do with regards to the Morila gold mine failure in Mali.

That'll do for tonight.

Disclosure: I don't hold RSG shares, and I didn't hold Firefinch or Leo Lithium (LLL) shares either. My direct exposure to West Africa is through Perseus Mining (PRU) who own and operate three gold mines in West Africa: Edikan in Ghana, and Sissingué and Yaouré in Côte d’Ivoire; PRU also owns the Nyanzaga Gold Project in Tanzania and the Meyas Sand Gold Project in Suda although that project is not being developed at this stage due to the situation in Sudan. I also have indirect exposure through Lycopodium (LYL) who do studies in West Africa and design and build gold mills there - they built the mills for Perseus' gold mines for example. It comes down to track records of excellent risk management, and that includes which countries they choose to operate in and the good working relationships that the miners have with the governments of the countries in which they operate - and also with the local communities around their mines. Perseus maintain a social licence to operate as well as actual licences to operate.

Trouble is, things can change in these countries, including government's. In Mali their military overthrew their own government in 2020 - and 9 months later in 2021 they staged another coup - see here: https://www.crisisgroup.org/africa/sahel/mali/mali-un-coup-dans-le-coup.

Talk about moving goalposts. Not a great place for an Aussie company to be operating a gold mine.

My advice: Preferably avoid West African gold exposure altogether, but if you want to invest there, do some DD and go with companies who have a good track record of both managing risk and providing great total shareholder returns (TSRs). RSG don't get a tick from me for either of those criteria.

Additional (14-Nov-2024): I sold out of PRU today - I explained why here.