Macro puts spotlight back on operating leverage of underhedged miners
February 14, 2024
Key Observations:
Two main impulses propel the bull case for gold prices: (1) bullion buying in Asia as a safe haven and physical store of wealth amidst China's economic and financial market stresses, (2) institutional investor buying of gold futures and other paper derivatives as an anti-dollar hedge against potential inflation, geopolitical tensions, and financial crisis.
Impulse No. 2 relies on a general condition of falling U.S. short rates and less confidence in USD. Since November, and especially since Powell's pivot on Dec. 13, investors have been counting on at least three and as many as six FOMC policy rate cuts in CY2024.
However, as the stronger-than-expected U.S. growth and hotter-than-expected U.S. inflation numbers have rolled in, expectations have been pushed out further in time (e.g., March was off the table, and maybe May is now too) and in scope (e.g., –150bp looks stretchy).
Hence, the precious metals selloff from gold's all-time high ($2130 per oz, 2-Dec-2023). Yesterday, Feb-24 CMX gold closed at $1993 for the first sub-$2000 GC1 print since Dec. 13. Prompt CMX silver closed at $22.15 per oz, for the weakest settlement since Oct. 12.
Source: S&P Global, Bloomberg, Blacklight Research. Note: following yesterday's hot U.S. CPI report, the prompt CMX silver futures price slumped –2.7%, while CMX gold fell –1.3% and LME copper eked out a +0.3% gain. The higher beta in silver is typical, as the chart above illustrates. It's why investors want silver in the portfolio when macro conditions are favorable and must shed silver risk when they suddenly are not (A silver lining for the copper/gold ratio, 26-Nov-2023). Tuesday's price action in silver futures suggests macro will remain a near-term challenge for dedicated silver producers, such as Pan American Silver Corp (PAAS). Likewise, Barrick's update on its production costs is a key data point to watch today.
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