Investors Move Toward Gold
Contributed Opinion

A month ago, we wrote about the drivers of the gold price and, in particular, who was buying; at that point, it had gone up $190 in the previous month. Now, it is up another $150 over the past four weeks. Though central bank buying remains the prime driver of higher gold prices, there are indications of a shift from institutional and retail investors that could see gold move significantly higher from here.

Most reports on various avenues of gold buying are lagging, so we can't be sure what has happened in the past few weeks. Central banks, which bought 1,037 metric tonnes in 2023, a little shy of the 2022 record, are continuing to buy this year. Complete global data for February is not yet available, but the countries that have reported suggest continued buying. So far, almost 19 tonnes of net buying has been reported. That's down from over 45 tonnes in January.

So far, some of the largest recent buyers have reported, including China, which bought over 12 tonnes in February, up from ten the month before and the highest number since October. A broad range of countries also bought, including the Czech Republic, Kazakhstan, Qatar, Turkey, and Mauritania. The buying was offset by a large sale of almost 12 tonnes from Uzbekistan, which has been both a large buying and selling over the past two years. We do not know where the February number will end. So far, though strong, it represents a slowing of the trend of the last two years.

Retail Buyers Are Still Not in the Market

Similarly, we do not have global reports for coin sales, but anecdotal evidence suggests only a slight shift toward buying in recent weeks. Coin dealers in both the U.S. and Europe are reporting a pick-up in interest from gold buyers but still say flows are neutral at best; coin premiums are reflecting weak sales.

We do, however, have up-to-date data for gold ETF flows, and that shows a shift in the last few weeks. There have been inflows the last two days (Wednesday and Thursday; Friday's data have not yet been reported) as gold tackled $2,300, but outflows for four of the five days before. So, it is too soon to say that there has been a clear reversal, though any inflows are somewhat encouraging after 18 months of steady outflows. The selling

has continued this year, for a total of 3.4 million ounces so far. (See graph on next page.) In context, the ETF buying on Thursday, 37,484 ounces or just over one tonne, is little more than one-third of what the central banks have been buying every single day.

So, it seems clear that retail and institutional investors are not what is continuing to drive the gold price.

Ongoing reports on central bank buying will tell much of the story. However, there also appears to be a new source of demand, and it is not retail or traditional investors.

Rather, we suspect it is wealthy families and institutions, primarily in the Middle East and Asia but also in Europe, looking for an insurance asset to protect against financial instability. Gold's strength in the face of factors that are usually headwinds — a strong dollar, high interest rates, a (seemingly) strong economy, and buoyant equity markets — suggests that it is not traditional investment demand.

Of course, renewed expectations of Federal Reserve rate cuts favor gold. We have said repeatedly over the past 18 months that the gold sector will move when the Fed cuts rates before it has quashed inflation, and investors now sense that we are very close to that point. However, this past week, Fed chairman Jerome Powell showed a more hawkish tone than he had exhibited at his last post-meeting press conference. That, along with the strong jobs report and other economic reports this past week, would not increase the expectations of an imminent rate cut. Yet, upward drove the gold price.

The Economy Is Not as Strong as It Would Seem

Much economic data — including consumer debt levels — is also not encouraging and suggests that the Fed may cut rates soon. And the market knows it. Powell has specifically said that higher unemployment might prompt a rate cut.

And we know that the labor market is not as strong as the headlines suggest. The labor participation rate is still below pre-Covid. Government jobs have been one of the largest components of new hires. The ongoing difference between the household and payroll reports suggests many people have two jobs.

This year, indeed, there has been a loss of over 1.5 million full-time jobs but a gain in part-time jobs, according to government reports. (Thanks to Independent Speculator.) Even with all that, the headline unemployment rate has been inching up over the past year.

Early Signs of Some Interest as Gold Stocks and Silver Outperform Gold

The hard data on ETF and other fund flows clearly indicate that this segment is not responsible for gold's recent move, again pointing to over-the-counter purchases by large buyers that are not reported. Such buying is most likely from a relatively small number of very wealthy buyers. If these individuals are buying as an insurance asset, they too, like the central banks, will be long-term holders.

Another very interesting development is that both silver and gold stocks are now outperforming gold itself, something that normally signals a strong market and an increase in investor interest. Since the beginning of last month, gold and silver stocks have outperformed silver, which has outperformed gold. The stocks have returned more than twice that of gold.

So in sum, although looking at the year as a while, it would appear that central banks, and perhaps some very large family investors, have been buyers while institutional and retail, particularly in the West, have continued to be sellers, there has definitely been a shift in the last month.

If this continues, the moves could be explosive. The size of the gold and silver equity markets — a total market cap of about half a trillion, compared with over $3 trillion for Microsoft alone — suggests that only a small shift in assets from the erstwhile market leaders into the gold stocks will see stocks move dramatically higher.

Franco Buys Small Royalty as Large Transactions Are Elusive

Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) purchased a royalty from Scottie Resources on some exploration ground in the Golden Triangle, British Colombia, for just over CA$8 million.

The Golden Triangle has been a key focus for Newmont since its Newcrest acquisition. This is a very small deal for Franco and on early-stage exploration.

What is noteworthy, perhaps, is that Franco also bought CA$1.5 million in equity, another sign of Franco being prepared to shift away from the straight royalty or stream transactions as there are fewer opportunities to deploy large amounts of capital.

Offering equity, as it has done in some other recent deals with debt, perhaps helps the company win the royalty. As with Wheaton, we can probably expect to see more small transactions in the current environment.

We continue to like Franco as a core holding. It can be bought by investors who do not currently own it.

Altius Loses Takings Appeal

Altius Minerals Corp. (ALS:TSX.V) reported that the Alberta Court of Appeal had upheld the earlier decision to summarily dismiss Altius's takings claim over its royalty on the Genesee coal mine. When the Alberta government ordered the power plant that was

Genesee's sole customer to switch away from coal, the mine owners were compensated, but Altius, the owner of a royalty on the mine, was not. The court ruled that the legal test for constructive taking was not met. Altius said it will determine if any further legal steps are warranted.

While disappointing, we do not believe that any potential award was priced into Altius' share price. Altius continues to be a core holding for us, with broad exposure to the commodities space.

We are holding.

TOP BUYS this week, in addition to the above, include Nestlé SA (NESN:VX; NSRGY:OTC), Gladstone Investment Corp. (GAIN: NASDAQ), and Orogen Royalties Inc. (OGN:TSX.V).

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1. As of the date of this article, officers and/or employees of Streetwise Reports LLC (including members of their household) own securities of Franco-Nevada Corp., Altius Minerals Corp., and Orogen Royalties Inc.
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