Spartan M&A must be good for OBM, page-27

This is interesting
July 4, 2024Here’s one for the gold bulls – Citi reckons gold is headed to $US2700-$US3000/oz ($A4020-$A4468) next year. That’s some 14-27% higher than the current spot price and at either level, the previous records set in the US and Aussie gold price in May and April respectively would be smashed. Needless to say such an outcome would crank up the already increased M & A activity in the ASX gold space like no tomorrow, with advanced exploration/development projects to become easy pickings for growth-focussed producers. Why, even the struggling junior sector could get a leg up as the equity taps are turned on in response to the new paradigm. Now any outfit can make a bullish call on the gold price, or a negative one for that matter. But this one from Citi is different because it is based on a “new fundamental, physical investment-led framework” which the investment bank says helps to explain annual price movements over the past 55 years. More than that though is the core “notion” of the framework that investment demand (private and public sector) taken as a share of gold mine supply, is the primary driver of gold pricing. By extension, the importance the current generation of investors place on movements in real interest rates in determining gold prices is probably overblown. Citi noted gold investment demand in China and from central banks rose to 85% of mine supply during the first quarter of 2024, and averaged more than 70% of mine supply over the past two years – up from only 25% over the three years prior. “The increase in investment demand from China and global central banks has more than offset the negative investment demand impulse coming from higher US (real) interest rates which has required gold prices to move to record highs in order to destroy jewellery demand and incentivise scrap supply,” Citi said. It said the framework allows investors to “contextualise, model, and forecast scenarios for the various physical gold market drivers and prices”. “We hope that this framework can help to rejuvenate gold investment and trading, since many investors have avoided investing in gold owing to the lack of an intuitive, regime-independent, fundamental framework that can stand the test of the time .“There has potentially never been a better time to publish this framework since gold’s bellwether relationship with US real interest rates has broken down quite spectacularly over the past two years, with gold reaching all-time highs despite high real rates.” Its call on gold hitting new highs next year is based on investment demand absorbing almost all of mine supply during the next 12-18 months. The next move higher in investment demand and prices it is forecasting are driven by expectations of lower US interest rates (8 consecutive Fed cuts starting in September), continued Chinese and central bank buying, weakness in savings and property, weaker private sector sentiment and de-dollarisation. There is a bunch of other potential developments that could be supportive, including the potential for Donald Trump’s return to the White House to trigger a full blown trade war with China, perish the thought. Trump’s lead over the Biden camp in the polls has been growing post Biden’s sleepwalking performance in the recent debate. And if either camp is seen to be more likely to stir the pot and deliver market shocks of one type or another, and increased geopolitical risks, it is the Trump camp.