Article without link$3,000 gold within the next year is not...

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$3,000 gold within the next year is not farfetched in the current economic and geopolitical environment, and the implications of a 15-20% rise in the yellow metal’s price on mining stocks are profound, according to John Hathaway, Senior Portfolio Manager of Sprott Asset Management.

In an interview with Bloor Street Capital's Jimmy Connor, Hathaway said the miners are being held back by a very top-heavy equity market that’s highly concentrated in a handful of tech stocks.

“One of the things that I think is missing for gold mining stocks is the comfort level that mainstream investors have with how they're positioned,” he said. “They're positioned in all things AI, they're positioned in a very few stocks that explain the movement of the S&P, and it's a very crowded trade. I think if that crowded trade starts to unwind, people will look around and say ‘well, what else is there?’ And they will discover the opportunities in precious metals mining stocks. That is the setup that I see for gold mining stocks, and also for precious metals.”

After discussing the Federal Reserve’s tight monetary policy and the real possibility that they could cause a recession by keeping rates too high for too long, Hathaway was asked why the miners were still trading at a deep historical discount relative to the metal.

“I don't think the average investor is paying any attention because they're very comfortable in their current investment program,” he said. “While there's been some recognition that the gold price is in record territory, the connection between what that means for earnings and cash flow of mining companies is pretty much an academic exercise and of little interest as long as there's a comfort level with current investment positioning.”

“We have mining companies that are trading at historically cheap discounts to NAV, big disconnect, not so much this year but over the last five years, let's say, of the relationship with gold mining stocks to the gold price,” Hathaway said. “I think there's a huge mean reversion trade ahead of us, assuming gold prices stay at these levels. And then I could make an argument for why they could move even higher, if and when people lose their degree of comfort and complacency with how they're currently positioned. I think that lies ahead, and that's why I would say we are at the cusp of a big move in mining stocks even if the gold price stays where it is.”

Hathaway also pushed back against the idea that the central bank buying, which has boosted gold prices since 2022, is unsustainable and sovereign demand will dry up.

“The reason central banks are buying, had been buying, is that we're seeing a shift in the way trade is taking place particularly in the BRICS nations,” he said. “A lot of the emerging market economies are trading among themselves, and they are not recycling trade surpluses into U.S. Treasuries. The way the trade is taking place is that Saudi Arabia sells China oil, China pays in renminbi, their currency. The Saudis are now accepting Chinese currency whereas before the Chinese would have had to acquire U.S. dollars to pay for the oil. That's no longer taking place.”

“What that means is China's starting to sell things to Saudi Arabia that the Saudis pay for with the renminbi that they've accumulated,” he said. “At the end of the day, maybe there's a trade surplus on the Saudi side, which always used to be the case, and they would take that surplus and they would invest it in U.S. Treasuries, and they would collect interest. That was the way it was done.”

“What they're now doing now is they are asking the Chinese to settle up the surplus in gold,” Hathaway said. “That's the utility of gold for the BRICS countries. It's not happening for the U.S., it's not happening for Europe, but it's happening in the BRICS part of the world, which is I think more than a third of the global land mass and probably a third of the global GDP. A lot of trade is taking place that way, I think 20% of energy is now traded away from the U.S. dollar.”

“So that's why central banks have been buying gold, to recycle trade surpluses, to settle trade deficits and surpluses with gold, which is a neutral reserve asset, as opposed to U.S. dollars,” he said. “That has implications down the road which may not become apparent for a few years… [but] the pool of capital that used to find us Treasuries useful, because they could recycle trade surpluses into them, is not doing that anymore so we have supply of us treasuries going up and demand outside the US going down.”

“I don't think central bank buying, which is the big explanation for where the gold price is today, at record highs, is a bubble,” Hathaway insisted. “I think it's a reflection of reorientation of the global trading system which has sustainable characteristics. It's not the algos in New York and London and Europe buying gold because it's going up and just piling into it, an unsustainable scenario. It's [because] gold is thought to be more useful and preferable than U.S. Treasuries to play a part in trade among a big part of the world.”

Hathaway was then asked where he thinks investors should position themselves, given the ongoing geopolitical risk surrounding the Middle East and Ukraine combined with the U.S. challenges of a slowing economy, record high debt levels, sticky inflation, and a contentious presidential election.

“I would suggest that they reposition themselves more in the direction of gold and related money,” he answered. “The exposure to gold, and that would be gold and mining stocks, is the lowest it's been in five years among financial advisers in the United States. I would just say to think about that. If you were to agree with some of the things I've said, why wouldn't you reweight your exposure to gold, which is almost nothing? Maybe reweighted from 1%, which is about what it is, to maybe 2% or 3%.”

“I think people will do that if the economy falters the way I think it will,” Hathaway said. “They'll be forced to do it, because the investment positioning that they have now will not be working and their clients will be asking them ‘what else should we be doing?’ I think that's the sort of sequence that I would see for gold to move higher from where it is today, maybe 15, 20%. It's not crazy in my mind to think about $3,000 gold.”

When asked what the implications of this kind of move would be for mining stocks, Hathaway said it would be very significant.

“That means that many gold mining stocks, which to me are still depressed relative to their earnings power and relative to where the current gold price is, have significant upside over the next 12 months,” Hathaway said. “I'm not sure that I'll have a lot of people listening to me right now, but that's what I think they should do, and that's what I think they will do if we head into a recession.”