This is of course my subjective opinion and not the financial advice. Nevertheless, my overall stance is positive on the gold price and the mining companies in 2023.
I see several factors that support this viewpoint, including the highest dividend yields in history, the highest cash levels in decades, a lack of investment in the industry in recent years, the lowest price-to-earnings ratio since 2008, a shortage of new discoveries of large gold deposits, central banks making large purchases of gold, metal prices being at extremely low levels compared to the money supply, and the inversion of the yield curve previously indicating a favorable environment for gold and mining companies.
Few points from 2018
Throughout 2018, the price of the precious metal in question was experiencing a decrease. This was due to central banks making significant purchases during this time. However, in the latter half of the year, the rate of decline slowed down, and a rally began in the autumn. This was in part due to an inversion of the yield curve, which is considered to be a highly effective indicator that warns of an impending recession.
The market came to the realization that the recession would in fact occur, which would lead to central banks pursuing looser policies and governments allowing higher deficits. This, in turn, would result in higher inflation and relatively low interest rates, leading to real negative interest rates, which is a favorable environment for precious metal prices to rise. This eventually led to a two-year-long rally.
Fast forward to 2022
The situation is eerily similar to 2018. The price of the metal was once again falling, central banks were making large purchases, and a slowdown in the rate of decline in the latter half of the year was followed by a rally in the autumn. The yield curve also experienced a significant inversion. The market again predicted a recession and even went so far as to disagree with the Fed chairman, Jerome Powell, who stated that the Fed would raise interest rates.
However, the market believed that the Fed would only be successful in raising interest rates once before being forced to lower them. As a result, central banks are expected to take a looser approach, and deficits related to the recession are expected to occur. This will once again create a favorable environment for precious metals.
Given the similarities between 2018 and 2022, the question arises as to whether we can expect a repeat of the 2019 rally in the coming months. To answer this question, we see two potential scenarios:
- The Fed is forced to quickly cut interest rates due to the deteriorating economy. In this case, gold will likely experience a strong rally, similar to that of 2019.
- The Fed decides to stick to its plan and raises interest rates, leading to more expensive credit. The Fed also sells off assets, which would result in a drop in the markets. Despite this, gold will still perform well against other assets, but increases of 25% are unlikely.
I also believe that 2023 will be better for mining companies compared to 2021 and 2022. However, it’s important to note that both gold and producer stocks are currently experiencing a strong rebound, so there may be a correction before further increases occur. As for silver, our outlook is also positive, and we are preparing a comprehensive report on its prospects for the rest of the decade that will be available to everyone.