La Française: What's driving the surge in gold?

La Française: What's driving the surge in gold?

July 29, 2024

Gold
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Gold has reached a new all-time high in recent weeks, surpassing $2,400 an ounce. The increase has been driven by Western investors, via purchases of gold ETFs, and the more favorable financial environment for this asset class. Given the downward trend of the USD (versus other currencies) and US real interest rates, we expect the gold trend to continue.

The upward trend in gold prices goes back to 2022. The factors behind this movement are 1- sustained demand for jewelry, 2- investment in physical gold (coins and bars) by Asian investors and 3- massive purchases by central banks in emerging countries, and China in particular, wishing to diversify their foreign exchange reserves and thereby reduce their exposure to the US dollar. Even if China, after 17 consecutive months of buying, seems to be taking a break, we believe that central bank purchases will remain a supporting factor, as their gold reserves still represent just 4 to 5% of their foreign exchange reserves.

In a tactical or strategic asset allocation, gold and the gold sector play a diversification role, as they have an inverse correlation with other financial assets. Gold can improve the risk/return profile of a portfolio over the medium and long term. Within a portfolio, exposure to gold can be achieved through listed gold mining companies. Moreover, gold producers are currently operating in a favorable environment: high production, high gold prices (average price Q1 24 $2073/oz, Q2 2024 $2337/oz), controlled production costs (Average All In Sustaining Costs: $1400 per ounce). This environment is generating free cash flow and shareholder returns, two drivers conducive to company value enhancement. This recovery has already begun, as of February 28th, 2024 when the Nyse Arca Gold Miners jumped by more than 44% while gold rose by only 18%.

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