Rising Gold Price on Fed Rate Cuts to Benefit Juniors

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If the adage, "history repeats itself," is valid then with each of the U.S. Federal Reserve's interest rate cuts expected in 2024 and 2025, gold will rally.

The consensus among analysts is the Fed will lower the rate another 50 basis points (50 bps) this year and another 100 bps next year, reported Frank Holmes with U.S. Global Investors.

Looking back to 1982, the time of the first U.S. easing cycle, defined as a move up or down 100 bps, "Fed rate cuts have generally been a bullish catalyst for gold prices, according to Forex.com. Gold has risen for one year following the first Fed rate cut of a new cycle in six of the seven cycles that occurred in 2020. This rise, on average, has been 11%.

Historically, the relationship between interest rates and gold prices, CBS News explained, has been inverse, with lower rates typically supporting higher gold prices. 

As for the effects of a single 50 bps rate cut, the gold price appreciated an average of 8.5% in the six months afterward, as shown in data since 2020, Will Rhind, chief executive officer of investment company GraniteShares, told CBS News.

After about 4.5 years of no easing, the Federal Open Market Committee lowered short-term interest rates on Sept. 19 by 50 bps.

"The first-rate cut from the Fed in a new cycle has, for the past 40 years, always sparked a gold rally, and this time was no different," wrote Adrian Day of Adrian Day Asset Management in his Q3/24 Portfolio Review.

During the day of the announcement, gold hit a new all-time high of US$2,625 per ounce (US$2,625/oz), reflecting a US$31/oz increase, reported Jim Rickards in the Crisis Trader. The yellow metal ended the day at $2,575/oz.

Two weeks later, Brien Lundin wrote in his Oct. 3 Gold Newsletter issue, "Even after a few down days, we're still looking at a gain of well over US$150 (6.2%) over the past month and an eye-popping US$827 (45.3%) over the past year!"

Leading up to the rate cut, Lundin reported, investors began buying gold and selling the dollar as well as moving into gold-backed exchange-traded funds (ETFs) and gold mining stocks. Since the cut, flows into the SPDR Gold Shares ETF continue.

"Thus, the Fed pivot has been the biggest fundamental factor working in gold's favor," added Lundin. "This gold bull market has proven its mettle time and again, and there's a quiet confidence that nothing is going to stop this train."

Holmes highlighted in a Sept. 26 article that for the first time since 2022, the 50-day moving average for gold holdings has risen above its 200-day moving average, "a sign that the gold rally could be starting to gain serious traction among investors." He also wrote that "while gold is hitting new highs, the real story could be in the undervalued gold mining stocks that many investors have overlooked."

Just Last week Lundin purported that the precious metals mining sector must outperform gold for this bull market to be "full-fledged," or "duplicate the three previous secular gold bull markets (in the early 1970s, the late 1970s and the 2000s)," and this has not happened yet. Instead, gold equities now are significantly undervalued, presenting an "incredible" buying opportunity for investors.

He also purported that talk of the gold price reaching US$2,700 or US$3,000/oz is not outlandish. Rather, "these are the kinds of numbers that even the most storied Wall Street institutions are now predicting for the near future."

Among them is Goldman Sachs, forecasting US$2,900/oz gold by early 2025, resulting from a combination of lower global interest rates, greater central bank demand and the metal's hedging benefits, Business Insider reported.

Here are two gold companies that could benefit from an increase in gold price:

Thesis Gold

Thesis Gold Inc. (TAU:TSXV; THSGF:OTCQX; A3EP87:WKN), a mineral explorer, headquartered in British Columbia, is unlocking the gold-silver potential of the province's Toodoggone district. OWNERSHIP_CHART-10373]

The company recently released an updated preliminary economic assessment (PEA) encompassing its Lawyers and Ranch deposits, which, according to Hannam & Partners Director of Mining Research Jonathan Guy, outlined as "a materially more attractive project than Lawyers on a standalone basis."

At the time, the investment bank raised its target price on Thesis 22%. The new target implies a 188% return on investment.

In his Sept. 6 report, Guy reported that compared to the previous, 2022, PEA, the mine life is two years longer, average production is 32% higher and the project economics are better. Using a US$1,930/oz gold price and a US$24/oz silver price, the net present value discounted at 5% (NPV5%) is US$1.3 billion, and the internal rate of return (IRR) is 35%. The new study includes an optimized mine plan as well.

Guy pointed out that an expansion of the Ranch resource could further enhance the combined deposit project. To grow the resource, Thesis Gold is drilling along the Thesis Corridor and at the Bonanza Ridge, Bonanza South, JK and BV deposits. Plus, there are nine targets that have not yet been drilled.

"We believe Ranch has the potential to ultimately be comparable to other large-scale, high-sulphidation epithermal systems and host a deposit several times larger than its current size," wrote Guy.

Ventum Capital Markets Analyst Philip Ker reported in his Sept. 5 report that the 2024 Lawyers Ranch PEA outlines an operation producing 3,000,000 ounces (3 Moz) of gold equivalent (Au eq) over a 14-year LOM at an all-in sustaining cost of US$1,013/oz of Au eq.

"Considering 3 Moz Au eq of recoverable ounces and a robust upfront mine plan, we see Thesis continuing its evolution of becoming a leading gold developer within the Canadian landscape and a rarity asset with greater than 5 Moz Au eq potential," Ker wrote.

He reiterated his Buy rating and his price target, now reflecting an 80% lift.

According to Thesis, about 66% of the company is owned by institutions, and about 4% is owned by insiders. The remaining 30% is retail.

Top shareholders include Franklin Advisers Inc. with 7.82%, Merk Investments LLC with 7.58%, Delbrook Capital Advisors Inc. with 5.5%, Sprott Asset Management LP with 4.63% and Van Eck Associates Corp. with 2.45%. Director Nicholas Stajduhar owns 1.09%.

The company said it has 196 million shares outstanding, 198.9 million fully diluted. Its market cap is CA$158.39 million, and it trades in a 52-week range of CA$1.00 and CA$0.37.

Dakota Gold

South Dakota-based Dakota Gold Corp. (DC:NYSE American) is exploring Maitland and Richmond Hill, two gold projects at its 48,000-acre land package covering the direct northern extension of the historical Homestake mine that produced more than 40 Moz of gold during its 124 years in operation.

BMO Capital Markets initiated coverage on Dakota Gold on Sept. 6 with a Speculative Outperform rating and a target price implying a 168% upside from the share price at the time of the report.

"Dakota appears to have one of the crown jewels of exploration in its cross-hairs — it has made a high-grade discovery that could have scale," Mikitchook wrote in his initiation report, referencing the JB gold zone at Maitland.

The analyst described the JB gold zone as among the most notable new discoveries globally and the main valuation driver for Dakota Gold. He wrote, "The proximity and geological similarities to the long-running Homestake mine suggest potential for scale at the JB gold zone."

At its other project, Richmond Hill, Dakota Hill defined an initial oxide, near-surface gold resource analogous to that of Coeur Mining's nearby, operating Wharf open-pit, heap-leach mine.

"This asset could represent a near-term modest gold production opportunity that could generate cash flow to fund advancing the JB gold zone discovery," noted Mikitchook. The Unionville zone and undrilled targets at Richmond Hill "provide synergies to value creation at the JB gold zone and Richmond Hill oxides."

According to the company, approximately 25% of its shares are with management and insiders. Out of management, Co-Chairman Robert Quartermain holds the most shares at 8.1%; President, CEO, and Director Jonathan Awde is next at 6.1%; while COO Jerry Aberle holds 4.7%, the company said.

About 26% of the shares are with institutional investors, according to Yahoo Finance and Edgar filings. Top institutional holders include Fourth Sail Capital with 5.3%, Van Eck Associates with 4.1%, Blackrock Institutional Trust Co. with 3.7%, The Vanguard Group Inc. with about 3.2%, Fidelity Management, and Research Co. LLC with 2.7%, and CI Global Asset Management with 2.6%.

About 16.5% is with strategic investors, including Orion Mine Finance, which owns about 9.9%, and Barrick Gold Corp., which owns about 2.5%. The rest is retail.

Dakota Gold has a market cap of US$221 million, with 90.9 million shares outstanding. It trades in a 52-week range of US$3.25 and US$1.84.