Unfortunately for us, the price of gold continued to fall in October despite persistently persistent inflation.
The yellow metal is suffering from the strength of the king dollar, stimulated by the speech of the Fed and the spectacular rise in key rates in 2022.
Since last March, the Federal Reserve has raised its rates by 275 points, a scenario that we had not expected. We thought that the authorities were going to act much more gradually in tightening their monetary policy. That said, we continue to believe that the Fed will refuse to raise rates above a certain threshold. Would it be 6%, 7%, or 8%? We will soon have the answer.
In the meantime, investors around the world are taking refuge in Uncle Sam’s Treasuries while waiting to see more clearly. On this point, the US dollar is currently a more popular haven than gold bullion.
The popularity of the greenback makes all assets look bad: stocks, bonds, and natural resources.
On Friday, October 14, an ounce of gold was selling for US$1,641, down 9% since the start of the year. In Canadian dollars, the picture is much less hopeless since the loonie continues to depreciate against the currency of our neighbor to the south. An ounce of gold is selling for $2,280 Canadian, down only 1% since the start of the year.
According to Jeffrey Christian of the CPM Group, the weakness in the price of gold will last for a while, with a possibility that the price will go down to US$1630.
Like him, we believe the price of bullion will rise once the value of the US dollar stops rising.
This will be the case if other countries follow the lead of the United States and raise their interest rates as sharply as the Fed. Europe is lagging in this regard. Their economic situation, with the war just around the corner and the energy crisis it triggered, is tempering the enthusiasm of the European Central Bank in this regard.
England, which was the first to raise its rates, entered a zone of turbulence caused by the clash between the expansionary budgetary policy of the new Prime Minister and the monetary policy of the Bank of England. We’ll know more about that next week.
Japan has not yet started raising its key rates. Result: the yen plummets. The Canadian dollar is 17% more expensive against the yen than at the start of the year. It’s time to plan your vacation in the Land of the Rising Sun!
Another plausible scenario, there could also be concerted action by central banks to limit the strength of the greenback. A strong dollar has the disadvantage of importing US inflation to its trading partners. Emerging countries are suffering since their debt is often denominated in US dollars.
Don’t think that too strong a US dollar suits the Yankees either. Yes, it’s convenient for overseas travel, but US exporters lose their competitiveness while US multinationals’ overseas profits melt like snow in the sun when converted to US.
In a more likely scenario, the US dollar will lose its luster the day the Fed announces the end of rate hikes or even a relaxation of its monetary policy. Unfortunately, that day seems a little further away with each new inflation figure.
As for gold stocks, the results for the third quarter are expected in the coming days. No miracles on the horizon. Margins are under pressure with a falling gold price and input cost inflation.
At least Barrick (ABX, in Toronto, $19.72) assures that it will produce the announced quantity of gold in 2022.
Orla (Ola, in Toronto, $4.57) also had good news for its shareholders. In the third quarter, Orla produced 28,876 ounces of gold, more than expected by analysts. The grade surprised on the rise by 0.88 g/t instead of 0.75 g/t and a production rate of 19,200 tonnes of ore per day exceeded expectations. Orla increases its production forecast for 2022 by 10,000 tonnes, to 110,000 tonnes. It now has US90 million in cash.
Of note, the publication of the sulfide envelope resource update to appear in economic details regarding development options at its Camino Rojo deposit in Mexico has been postponed again, this time to the first quarter. 2023. It had been promised for the first half of 2022, then for the end of 2022.
Since February 2021, Orla stock has sold in a price range of $3 to $7. Over the past two years, the stock price has often stayed above $4.40. Scotia has a target price of $7 within a year.
Orla’s main shareholders are Newmont and Pierre Lassonde.