Gold: Gambling with America’s Future
The peace talks between Vietnam and the United States took many proposals, rounds of talks and ended with the Paris Peace Accord signed in 1973, nine years later. Huge swings have resulted from on-again, off-again, and then-on talks in the second month of the Iran war. Hopefully it won’t take nine years. Market gyrations aside, it is like watching a tennis match. The only certainty is uncertainty. But what does the president want? “Unconditional surrender,” an Iranian leader of his choice or victory? Victory, even a unilateral one, will come at a cost. For sure the cost is rising, and while the Trump administration might want a diplomatic peace deal before the US midterm elections, damage done, what are the consequences?
First, the Middle East is again a tinder box that will shape the world economy for years to come, and the attack on Iran sets up a nightmare scenario becoming a reality. Iran has held the world economy hostage and are unlikely to cede their chokehold on the strategically critical Strait of Hormuz, raising the cost of war everywhere. The International Energy Agency (IEA) asked governments to jointly release a record 400 million barrels of oil from their strategic stockpiles, yet the oil price kept rising. Second, the spike in energy prices has sent shock waves around the world sparking a global economic calamity with higher inflation, particularly when affordability became a major issue in the West. In the Seventies, the OPEC oil embargo caused a stagflation shock that spiraled into near-hyperinflation and a serious recession. Guns and butter choices too were prevalent then.
Third, the president’s military adventurism in support of a “might is right” stance has left America’s allies cautious, if not defenseless. The oil-rich Gulf nations’ long reliance on US protection was tested and they no longer feel as secure after their hotels, energy facilities and airports were bombarded, despite having more Patriot missiles than Iran. Fourth, the no war-forever president is stuck in a forever war and, cannot afford to fight wars on multiple fronts with both his economy and military stretched. Ironically while the US has lifted sanctions on Iran and allowed India to buy cheap Russian oil, Iran’s dozen neighbours lose costly revenues and Iran now exports more oil through the Strait than any other producer, and at higher prices. Simply this war that Mr. Trump started, has no good ending.
Mr. Trump promised a new “Golden Age” in America. He was right. Gold has doubled since his inauguration. Consider that large successive shocks from a series of wars, Covid, tariffs and dysfunctional geopolitical politics had already sapped America’s strength and while all too real, the scarcity of energy in the ground, raises the risk of hyperinflation. After surviving the energy crisis following Russia’s invasion of Ukraine, the world again faces another energy shock, with fears that Trump’s “Operation Epic Fury” will tip America and the world into another Great Recession or, Depression.
Modern Middle East is mired in regional chaos and Iran’s regime and enriched uranium stockpile remains in place, despite Israel and America bombing the very people that Trump hoped to save. Where are the new leaders? Under rubble. Once a haven of safety and stability, the Arab Gulf states have soured on America as the false distinction of America First has left them to their own defenses, exposing their vulnerability. And Iran still has weapons to use with their proxy, the Houthis ready to join the war after blocking the Red Sea for two years, hurting both Saudi Arabia and Egypt. The prospect of having two chokepoints closed would paralyze shipping. Therefore what is there to win? In Vietnam, Iraq and Afghanistan, America won every battle but lost the war. This war may be a military success, but a political failure.
Trump Has Opened Pandora’s Box
The consequence is that the president has opened the Middle East’s “pandora box” creating, according to the IEA, “the largest supply disruption in the history of the global oil market,” which could severely damage the global economy. Iran has waged war with the global economy, sowing doubts about the strength of traditional alliances. The US-Israeli war has expanded into a worldwide energy crisis, with the effective closure of the Strait of Hormuz blocking 20 percent of the world’s oil and nearly a third of the world’s fertilizer shipments. Mr. Trump has demanded that countries send warships to keep the Strait open but instead spurned his call and are negotiating with Iran for safe passage of their ships, in a coalition of the unwilling. The disruption to supplies, from wheat to oil, has the potential to spark worldwide inflation, and the increase in rates has already resulted in significant fluctuations in the world's stock markets. In opening the box, Donald Trump has no means to close it.
America was unprepared, thinking that Iran would be a quick victory. Iran otherwise tested America’s vaunted defense umbrella with an escalating barrage, attacking neighbouring energy infrastructure, depleting America’s and Israel’s multi-million-dollar Patriot missiles tasked to take down their cheap drones which cost a few thousand dollars. Ironies of ironies, the Gulf nations have approached Ukraine for their drone defenses, in a possible swap of Patriots for drones. America can only build about 800 Patriots a year, so allies and adversaries are concerned because of the need to replenish their complex and costly air defenses. America’s Gulf allies are bearing the brunt of Iran’s attacks, so they want a quick end to the war to resume exports because their fuel storage facilities are limited and vulnerable to drones. Similarly escorting ships through the Strait is considered too expensive and risky. Mr. Trump’s golden age is mired in risk and while he likes high risk, high rewards, he has gone all-in. Will the world join him?
Furthermore the longer the war lasts, the more difficult to bring back production as the oil and gas wells will require work to resume production. The costs are staggering with Rystad of Norway estimating the Middle East states face a $25 billion repair bill. Estimates suggest that the war is costing America $1 billion a day with the first six days of strikes estimated to have cost nearly $11 billion, according to Elaine McCusker, a top Pentagon official. The Pentagon has sought Congress for an additional $200 billion to fund the war, which is more than the total cost of Afghanistan and Iraq in 2008, because the conflict also exhausted years' worth of vital weaponry. With a grip on the Strait of Hormuz and an arsenal of inexpensive drones, Iran is playing the long game. With the cost adding up, energy markets might force Mr. Trump to end his war soon with some 20 countries now militarily involved in the conflict, challenging the economics of Trump’s incursion. The question is, “who will foot the bill”?
Energy Shock Damages Inflation Psychology
Nine oil price shocks have occurred since the Suez Crisis in 1956, four of which have caused market selloffs and a US recession. The roots of the escalating crises go back to the strikes by oil workers who toppled the Shah’s regime in 1978, the first Gulf War in 1991, the second in 2003, followed by 9/11, and the Oct 7 Hamas attack. Here we go again. Oil prices doubled in the 1970s, causing an energy shock as well as a spike in rates and inflation. OPEC was able to weaponize oil thanks to the first Arab oil embargo in 1973–1974, and the Iranian revolution in 1979 which nearly brought the West to its knees, causing another global energy shock. US inflation reached 13.5 percent in 1980, forcing double-digit interest rates. As recently as 2008, oil spiked to $150 a barrel at a time when subprime loans tested the system, as a prelude to the 2008 financial collapse.
For better or worse Mr. Trump has handed Iran a second weapon along with its nuclear capability, leverage and control of the Strait of Hormuz. History shows that Middle East wars tend to drag on and always risk escalation, particularly when Iran is locked in an existential war for regime survival. Qatar has warned that the bombing of vital gas wells is “dangerous” because Iran’s South Pars is part of the world’s largest natural gas field and an extension of Qatar’s North Field, which helped Qatar supply 77 million tonnes of LNG annually, or more than the combined demand from UK and Italy. A damaged Ras Laffan will cost 17 percent of Qatar’s annual production, underscoring how rapidly the war has spiraled. The Iran war also allows Russia to tighten its grip on energy markets, at the expense of the Gulf states as Russian crude enjoys a $150 million a day windfall, helping fill its war chest with billions.
The American economy will be severely damaged as a result of the refocus on inflation due to rising oil prices, which will result in higher borrowing costs. According to an OECD forecast, the Middle East conflict will fuel a 4.2 percent surge in inflation. America’s ten-year US Treasuries had already jumped to 4.45 percent while UK borrowing costs are at the highest since 2008, as costlier oil drives up inflation expectation. When the war began, public support was the lowest of any conflict undertaken by the US in nearly a century. And while the fog of war sets on the Trump administration, they are asking Congress for another $200 billion to reopen Hormuz, which was open before the US bombarded Iran. Our concern is that the cost alone will cripple the US economy at a time when its fiscal and monetary firepower is low. After that, it is tempting to think that things can only get better.
Mr. Trump is losing the war at home
Just a few months ago protesters flooded the streets. It was a test of the government’s power to use violence against its own citizens. Iran? No, it was the streets of Minneapolis as the Immigration and Customs Enforcement (ICE) and Border Protection agents killed two citizens in the streets, paving the way for an eventual withdrawal of 3,000 federal officers and a change of top officials. True, the entry of undocumented immigrants has stopped, but the political problems of populism is exacerbated by America’s deteriorating balance sheet, leading to the DHS shutdown. ICE’s budget has risen from $9.99 billion in 2024 to $11.3 billion, not including access to the $75 billion fund in last year’s One Big Beautiful Bill. Those immigrants could tip the coming midterms. Given the deepening polarization, Mr. Trump could be pushing America closer to civil war.
Ahead of the midterm elections to fix affordability the president resorted to populist handouts, a proposed cap on credit card interest, and tax cuts in a spending driven stimulus gambit. Ironically the war, tariffs, and sanctions has made affordability a bigger problem. Tariffs were to save the day. Trump believed that foreigners would pay for his tariffs but it turned out according to Federal Reserve research, America’s businesses and households paid nearly 90 percent of Mr. Trump’s tariffs, contributing to higher prices. Although Mr. Trump’s tariffs has not achieved its primary goal with the US balance of payments deficit wider, not narrower as promised, the cost is high. The conflict and tariffs have also slowed down consumer spending, which accounts for roughly 70 percent of US GDP. According to most recent data, the trade deficit on goods and services was a staggering $901.5 billion last year, nearly unchanged from the previous year. Trump’s rising protectionism isn’t working, neither reducing the trade deficit nor creating new jobs. The most recent wave of tariffs will harm the US GDP six times more than it will harm the rest of the world, according to the Yale Budget Lab. This president has a problem.
America Is Heading into Bankruptcy
After all, Mr. Trump is losing the war at home. In his second term he has operated a reckless financial system whose main characteristics are a rising stock market and a rising deficit. With massive and unsustainable deficits of 8 percent of GDP, the actual concern is that the US economy cannot afford both guns and butter, problematic because debt to GDP stands at a stunning 125 percent. With debt passing $39 trillion and climbing to unprecedented peacetime levels, Mr. Trump is spending more than any president before him with the next casualty of war, America’s balance sheet. Despite the war, stock markets are in elevated territory, surpassing the dot-com boom with total market capitalization of US stocks relative to GDP, a whopping 226 percent versus 132 percent in 2001. Affordability remains a major problem. The disconnect between the bubble markets and the deteriorating economy is real. Ominously, consumer confidence fell in March for the nineth straight month to a 12-year low, according to the Conference Board. US producer prices, lead indicators of inflation are at 0.8 percent in January. America's ability to pay for its enormous obligations can no longer be taken for granted because the war must be funded at a time when inflation is on the rise. Long term Treasury prices have spiked with 30-year Treasuries at the 5 percent threshold, a level that in the past hurt stock prices.
American companies are suffering significant losses in this purportedly "golden" environment, while government debt is at levels never seen during peacetime. The independent Congressional Budget Office (CBO) estimates that Trump’s policies will add $1.4 trillion to the deficit (excluding the $1 billion a day cost of the current war) and the long-term outlook is dire with annual deficits set to rise from $1.9 trillion to an unsustainable $3.1 trillion by 2036. America is heading into bankruptcy. And Trump’s dumping of Biden’s green initiatives brings back fossil fuels and in eliminating EV subsidies, leaves the domestic car industry reeling with $50 billion of losses. Then there is the Supreme Court’s decision reigning in the unilateral authority of the Tariff Man. More than 300 companies have served the United States with $175 billion of refunds injecting yet another period of uncertainty. DOGE too proved to be an expensive bust. Law firms are a major beneficiary, however as hundreds of cases, from tariffs, to civil rights, to immigration, to the environment, challenges Mr. Trump’s policies.
Guns and Butter Era Returns and Inflation
Trump’s economic boom was a high-stakes experiment in supply-side economics but proved to be more of a mirage as the chart busting growth was due to the Great Beautiful tax cuts, huge doses of government spending, an unprecedented spending on artificial intelligence (AI) and now, a budget busting Middle East war. The reality is that the president’s high stakes gamble stoking easy money, pushing for even lower rates and filling the Federal Reserve with supplicants, has helped the president turn government into his personal cash machine. While there are hopes that AI would lead to a productivity boom, a bust would hurt confidence since some 40 percent of the American public has some of their wealth tied to the stock market.
The war exposes the vulnerability of global and logistical supply systems, causing another global supply shock. Similar to the spike following COVID-19 or the Russian invasion of Ukraine, there is a chance that supplies of everything from food, to fertilizer, to gasoline will run out during a period of weak global economic growth. In fact, monetary policy continues loose as governments, in particular the United States pursues both a guns vs butter policy that has already morphed into a bond shock, further hurting government finances. The inflationary shock caused by rising energy costs, could be "the straw that breaks the camel's back," similar to earlier blowoffs.
Mr. Trump’s guns vs butter choice is reminiscent of President Lynden Johnson’s pursuit of both his Great Society and spending on the Vietnam War at the same time. This 1960s precedent mattered because what followed was the Great Inflation of the 1970s and early 1980s, that forced then Fed Chair Paul Volcker to raise interest rates to double-digit levels at the cost of a severe double dip recession and Jimmy Carter’s presidency. Of concern today is that Mr. Trump’s choice to have both, also underscores the uncomfortable parallels with the guns and butter era of Germany and, what followed was the Weimar Inflation which resulted in hyperinflation, wars and the Great Depression. This experience should serve as a warning.
The US administration wants a short war but from Vietnam, to Iraq, to Afghanistan, conflicts that began with much bravado and lacked clear objectives, left Americans with costly and inflationary outcomes. The greater risk however is that the President uses the war as an excuse to call for a state of emergency and delays those midterms. After all, that is what he did for tariffs.
The Swamp Is Draining
Particularly worrisome is that amid growing questions over debt, economic growth was a paltry 0.7 percent in the fourth quarter. Loosened financial regulations have led to excessive leverage, weaker cash flows, and an influx of unsophisticated investors, all of which have created an epic stock market bubble and favorable conditions for defaults. In particular the estimated $1.8 trillion unlisted private credit market bubble has deflated with defaults now threatening to become a systemic implosion as Wall Street’s biggest fund managers, by the likes of Blue Owl Capital, Apollo, BlackRock and Blackstone limit redemptions. Private equity may be the first domino of a meltdown amid fears of credit quality and AI’s “SaaSaccre” impact on software companies which are disproportionately reliant on private credit borrowings. Worrisome though is the Trump administration’s plans to allow private assets as an alternate investment in the mammoth $10 trillion retirement market, a formula for disaster. The bankruptcy of Market Financial Solutions (MFS) in Britain also rekindled concerns about the collapse of structured lending. All this and now the energy shock will drain market liquidity, significantly raising the risks of a contagion, reminiscent of the early days of the Bear Stearns’ financial implosion in 2008 which was driven by credit worries of sub-prime mortgage loans, that eventually sank many of Wall Street’s biggest titans.
We think that moral hazard and the current low penalty of fiscal delinquency makes the political issues surrounding debt and deficits worse. Not surprisingly deficit financing of the economy and stock markets led to the corruption of its institutions. For example the government’s tendency to spend more and tax less has become the norm such that US regulators have dumped or relaxed rules (e.g. private credit) to stimulate credit growth in the quest for revenues. Government has even helped gambling become part of societies’ moral compass, as “get-rich fast” schemes takes hold, blurring the lines between investing, sports and gambling. In fact, only sixteen minutes before Mr. Trump announced that talks with Iran had started, someone made $760 million in suspicious trade by purchasing oil futures. Because "prediction markets" allow participants to wager on actual events under the pretense of gamifying reality, the proliferation of sports betting and prediction trading platforms like Polymarket has already produced a poisonous atmosphere, outside regulatory control and another form of entertainment. With "dispersion" trades, which entail purchasing a single stock’s volatility (like Nvidia) while selling an index volatility against Tech indexes, volatility has become the standard on Wall Street, appealing to its gambling inclinations. These derivatives have become big profit makers benefiting from the large swings of individual companies. Wall Street has similarly created a complex strategy to hedge against loans to software groups should loans go sour. Gambling has become de rigueur and déjà vu.
All Roads Lead to China
Mr. Trump has enthusiastically adopted China's state capitalism of taking stakes in private companies, industries, picking winners and losers in underwriting public/private partnerships. His economic intervention has helped those “connected” to his administration, sometimes with handshake deals. Noteworthy too was Mr. Xi Jinping’s purge of Zhang and Liu, top generals of the People’s Liberation Army’s (PLA) in a further consolidation of his power over the party and government, echoing Trump’s own firings of top military officers and government officials. By contrast and a key difference however is China’s usage of soft power, using foreign policy priorities to protect itself through programs like the trillion-dollar Belt and Road Initiative, which has reshaped global trade and China’s influence by building transport, energy and critical minerals infrastructure. China’s near monopoly of rare earth supply chains and 70 percent of processing gives it leverage in the trade war with the US. Chinese clean electro tech are now globally competitive, dominating everything from electric vehicles, renewable energy, telecommunication and now AI. The renminbi is the world’s largest trade finance currency yet plays a limited role in official reserves. As China seeks a greater role in the new world order, we believe that will change as China seeks to elevate renminbi’s global reserve status, as part of its 15th five-year plan.
China is the world’s largest consumer of oil and relies on Iran for 13 percent of its crude imports, exposing its vulnerability. To mitigate that reliance, China decreased its dependency on crude but wisely also boosted low-cost renewable energy, electric vehicles and biofuels which cannot be blocked by the Strait of Hormuz. The current turmoil hurts China less because of their dominance in renewable investments, notably solar and wind power. China also built up a huge Strategic Petroleum Reserve (SPR) pool estimated at more than 1 billion barrels of oil while the US Strategic Petroleum Reserve currently stands at 30-year lows, before the US dumped 172 million barrels of oil or about 40 percent of what’s left. Moreover, to protect its domestic market, China has limited exports of jet fuel, diesel and fertilizer, further tightening global supplies. Still China relies on the Strait, Suez and Panama for management of its goods by containers ships. Control of the high seas is paramount for everyone. Yet China has the ultimate leverage. What if China refuses to provide the critical and rare minerals needed for Russian, Israeli and American missiles?
Although there is still competition in the rapidly expanding field of artificial intelligence, China's superior technology has allowed it to discreetly overtake its own open-source DeepSeek. Today Hong Kong listed Knowledge Atlas Technology Joint Stock known as Zhipu AI, its market value has soared 35 percent after revenues doubled, yet lags America-backed valuations of Open AI or Anthropic. The difference of course is demand but noteworthy is that Zhipu AI charges a fraction of its American counterparts for comparable results suggesting like TVs and EVs, that Chinese technology will soon undercut its American rivals – the laws of supply and demand apply to both countries. China’s ability to innovate, use technology and forward plan has enabled it to dominate in renewable energy and now, AI will become yet another engine in its economic strength, giving it even more leverage. The significance does not need spelling out. With the exception of Mr. Trump, whose visit was rescheduled until May, China has used its geopolitical influence to welcome Canada, Britain, Finland, South Korea, and Germany—all of America's allies.
Investors are Underestimating Risk
At the same time with the international order increasingly fragmented and its foundations eroded, America’s long standing haven status has reversed into a “Sell America” dedollarization move in a time of crisis. The Middle East war is the latest example with countries diversifying and derisking, not wanting to be more dependent on the United States, particularly when US economic and geopolitical policies have become so erratic. Trust in America is damaged by the country's ongoing deficits, tariffs, and capricious termination of deals. Iran too distrusts America after Trump tore up the nuclear agreement and bombed the nation twice in a year. Of concern is that Iran could emerge from the war with its nuclear capability intact and, control of the Strait. Behind these crises is the end of American hegemony and the arrival of a multi-polar or multilateral era. Canada and Japan consequently have signed deals with India and the EU is closing deals with China. “America First” means America alone as a year of tariffs, threats and insults burns through decades of goodwill.
What is worrying today is that sixteen months into his second term, Mr. Trump’s intervention at regime change defies traditional diplomacy and the sovereignty of America’s foes. To be sure the capture of Nicolás Maduro and the assassination of Iran’s leaders has shoved diplomacy aside but more subtle are reports that Trump’s MAGA officials have held talks with Alberta’s fringe separatist movement, the Alberta Property Project who are pushing for an independent state. The Financial Times reports that officials met in Washington on several occasions, to the point where BC Premier David Eby stated that the sessions "were not particularly respectful of Canada's sovereignty." It is not China that we must worry about, but our neighbour to the south who wants to make us the 51st state.
Tipping Point on the Dollar
Consequently there are signs that the global dominance of the dollar is coming to an end slowly, then likely, all at once. Despite a number of factors that should support the currency such as higher rates and global tariffs of 15 percent, instead we have a period of market chaos. Investor confidence has been shaken by Mr. Trump's wrecking ball to government, institutions, economy, and now international regulations, which have undermined America's longstanding advantages. America’s seizure of Venezuelan and now Iranian oil may be a form of Trump leverage, however the bigger risk is that the longer-term impact pushes up bond yields and inflation. The stark reality is that economic growth is abysmal, interest rates are higher and budget deficits wider, exposing pre-existing vulnerabilities. Growth and now funding the war is debt dependent, much like it was in 1929. History shows that markets can only absorb so many shocks. While investors hope that these crises will prove temporary, sometimes they don’t.
The problem is that debt monetization is needed to finance this government spending through money creation and debt issuances. The central bank creates that debt and buys that debt with newly minted money. The Fed recently announced that they will purchase $40 billion of short-term Treasuries every month, and that was before the Iran war funding. Normally such a move would put cash into the banking system, however with the US Treasury market at $30 trillion, rather than liquify the system, the purchases have offset the selling from other central banks and foreigners who have been selling some of their $9 trillion Treasury hoard. Problematic because the Treasury must borrow up to $5 trillion at a time, or more than what the nation spends on healthcare. Debt on debt is not good. America’s debt machine is working overtime.
The string of profligate spending has already resulted in a government DHS shutdown that has become annual affairs. Hedge funds, mauled by the market are forced to unload Treasuries. And with interest charges alone on America’s debts exceeding $1 billion, the government must look elsewhere to finance its ever large and growing deficits, difficult in the more fragmented geopolitical environment. The US needs foreign capital to finance this debt but foreigners already own $9.3 trillion, the second highest on record. Of concern his challenge of central bank orthodoxy can turn that flow into a two-way street because the US is not immune to capital flow reversals, with a huge negative international investment position.
Over the half century Washington and the Gulf States had a grand bargain that led the US dollar to be the primary currency for oil transactions in exchange for US protection, with those petrodollars frequently recycled into US assets like Treasury bonds. As the Gulf states have most of the world’s savings, they are awash in dollars. That grand bargain underpinned the dollar’s reserve status but in the past few years, dedollarization following the Ukraine/Russian war and China’s emergence as a superpower, Iran and the Gulf countries now take euros, renminbi, and rupees in place of dollars. Furthermore, a "shadow" financial system has emerged outside the Western-backed SWIFT system as a result of US sanctions against numerous nations. This unpredictable president who follows rules when he wants to, and doesn’t when he wants, appears to have no guardrails. Markets could stop him.
Today 40 percent of the foreign currency reserves of the world’s central banks consists of US Treasuries. Noteworthy is that three of the four big Gulf economies – Saudi Arabia, the United Arab Emirates, Kuwait and Qatar are big supporters of US debt. However bearing the brunt of Iran’s attacks, pressures on their budgets places some $2 trillion of holdings in jeopardy. There are fears too that China might also dump its vast holdings of Treasuries which would further weaken the dollar, add to inflationary pressure and rates damaging the world’s most indebted economy. In Washington, there is little concern.
America has used sanctions, tariffs, weaponized the dollar as well as access to the SWIFT payment system to defend the dollar, replacing trust. Like energy supplies, Mr. Trump’s erratic domestic and international policies have hurt dollar investment, undermining the role of US debt, once the cornerstone of capital markets. Mr. Trump’s weaponization of the dollar system to punish countries he dislikes, forces countries to diversify. America’s global standing simply is being eroded whilst its fiscal capacity to support its huge balance sheet has become increasingly fragile and unsustainable. Currencies come and go. As was the case with Britain's sterling in the 19th century and the Dutch Republic's guilder fall in the 17th and 18th centuries, the same is happening now with the dollar. For half a century, the dollar’s supremacy was earned through stability. The dollar is not forever, as Washington’s current path turns privilege into liability.
As Good as Gold
All this means that cracks are widening as the “everything market” falters, amid credit fears, inflation, tariffs and now a war of attrition. Will the president spend another $200 billion to reopen the Strait of Hormuz that was open only a month ago? The transition in the rules-based world order to disorder has investors seeking hedges and sanctuaries, at the same time an inflation tsunami is about to hit the economy.
In the last two years, the price of gold has doubled. Everywhere in the world, there is a noticeable drop in trust. An alternative to the dollar is gold and the warning signal is quite clear as gold, not government is what we trust. Gold has retained its value for thousands of years, and against this background, gold has become central banks’ second most held reserve asset after the dollar. Markets, it is said, climbs walls of worry. Gold is going to be a good thing to have because what is different today, is that there is more than a single wall of worry.
Until recently gold was on a record-breaking run, topping $5,500/oz. Trees don’t grow to the sky and gold corrected about 25 percent. Still the price is double a year ago, yet the bandwagon is lighter today on the downswing and fears of central bank selling. We disagree and believe that central banks will continue to be buyers. China’s central bank has purchased gold for the 16th conservative month. The centre of gravity for gold and silver has shifted eastward with the Shanghai Gold Exchange becoming the largest gold player in the world. Central banks who were the largest buyers in the past few years are expected to continue to buy gold to protect themselves from the geopolitical threats, inflation and the risk of vindictive sanctions.
Institutional investors while earlier initiated stakes in gold and gold shares are expected to continue to be buyers, because as a percentage of assets, gold remains at historic lows. The primary driver for both is the need to diversify after realizing the folly of leaving everything in the dollar basket. There are also supply problems as supplies of gold become limited because there have been few gold discoveries in part because it can take up to 10 years to build a gold mine. Last year except for a handful, reserves declined while the cost of mining increased. As a result M&A activity has been hot, but like a game of musical chairs, there are so few that are free. Sovereign buyers, like China’s Zijin have been on a buying spree buying Canada’s Allied Gold for $4 billion or $370/oz in-situ P+P reserves. We continue to believe gold’s bull run is intact and that gold will top $6,000/oz. Among the majors we like Barrick and Agnico Eagle. We favour developers B2Gold, Endeavour and Lundin.
Recommendations
Agnico Eagle Mines Ltd.
Agnico Eagle plans to boost production by 20 to 30 percent in the current decade. Agnico produced 3.45 million ounces last year at AISC of $1,300 per ounce. Importantly free cash flow was $4.4 billion of which a good part was returned to shareholders through dividends and buybacks. Significantly, Canada’s largest gold producer plans to grow organically by extending Meadowbank’s mine life to 2030, with Canadian Malartic adding 9 million ounces. Exploration continues at East Gouldie which will produce in the current quarter opening another mining area. Detour Lake achieved record mill throughput of 28 million tonnes and high-grade Fosterville in Australia had a strong performance. More capital will be spent at Detour underground (ramp started) and Upper Beaver this year. Detour’s investment was boosted to $300 million, the same at Upper Beaver. Hope Bay in Nunavut was also circled for another $300 million for infrastructure upgrades. Importantly Agnico reported that reserves increased by 2.1 percent to 55.4 million ounces reflecting the acquisition of the Marban deposit. Hope Bay will use the existing processing facilities at Amaruq and Meliadine providing synergies. Agnico has been adept at growing their Tier 1 mines from LaRonde to Meadowbank and Canadian Malartic. We thus expect a steady production profile of 3.5 million ounce over the next couple years before the above pipeline expansion secures Agnico’s growth. We continue to like the shares here.
Barrick Mining Corp.
Barrick's earnings doubled over the previous quarter with a boost in production, producing 3.26 million ounces last year in line with guidance. Barrick, operating 14 mines, recorded $7.7 billion in operating cash flow and reinvested $3 billion. The company is going ahead with plans to sell off 10 to 15 percent of its 61.5 percent stake in the world’s largest gold complex. Nevada Gold Mines and the spinoff is part of the belief that “the parts are worth more than the whole.” However we believe that Barrick would be better off increasing their stake in the Nevada Joint Venture rather than spinoff a minority interest. Barrick has the largest array of Tier 1 assets and long-life mines include very profitable African/Asian assets. Lumwana the big African copper producer was a major contributor. Barrick has replaced top management by giving the group more of a growth mandate as well as extracting value from existing assets. As an example, Barrick continues to develop Fourmile in Nevada, a potential 20-million-ounce discovery last year which is a key asset and could be a key part of the Nevada Joint Venture, even with a steep 10 percent NIP royalty to Teck. In Mali, the government and Barrick’s new management have settled over the important Loulo-Gounkoto complex with Barrick retaining ownership and the restart on schedule. Barrick's reserves and assets totaled 85 million ounces last year, although Reko Diq, one of the world’s largest undeveloped copper/gold projects was put on hold due to the current security situation. Despite Barrick enlisting support of various governments, construction of the Pakistan project had not yet started. Nonetheless we continue to like Barrick’s array of Tier 1 assets, management and continue to recommend the shares here.
B2Gold Corp.
B2Gold had a strong year with cash flow of almost $900 million producing 980,000 ounces last year. B2Gold's Fekola mine in Mali had a strong quarter with the Fekola underground coming on stream contributing 20,000 ounces. B2Gold’s Otjikoto mine in Namibia produced the upper end of their guidance and the Goose mine in Nunavut had their first gold pour despite crushing problems. Commercial production is slated later this year. B2Gold's long awaited agreement under the 2023 Mali Mining code for the underground expansion at Fekola will result in production of 60,000 to 80,000 ounces this year, contributing to total Fekola production of 300,000 ounces. Goose is a seasonal operation and the company is expanding the crushing circuit which should improve production. B2Gold’s Antelope underground at Otjikoto has potential to be major contributor with targeted production of 110,000 ounces from 2029 and on. Despite contributions from Goose and Fekola underground, lower output from Otjikoto and Antelope production is expected this year. Noteworthy is that Clive Johnson has retired with experienced miner Kelvin Dushnisky becoming Executive Chairman giving the mine steady guidance. We like B2Gold here for Goose’s growth prospects. Buy.
Centerra Gold Inc.
Centerra Gold had a strong quarter with net earnings of $1.12 per share on production of 275,000 ounces. Centerra has a strong balance sheet with a cash hoard of $529 million and almost $1 billion of total liquidity. Mount Milligan in BC produced about 44,000 ounces and 13 million pounds of copper keeping Mount Milligan's all in cost low. Öksüt in Turkey produced 127,700 ounces. Meantime the Langeloth metallurgical facility sold 3.6 million pounds of moly but operations continue to be a drag on results. Growth is a problem for Centerra so they have dusted off the old Kemess project which refuses to die. Kemess’ update PEA shows NPV of $1.1 billion but only a modest IRR of 16 percent, using $3,000/oz gold and $4.50/lb. copper. Nonetheless Centerra is proceeding in building out Kemess which has a resource of 3.3 million ounces of gold and 1.2 billion pounds of inferred copper. Kemess’ initial capital however will cost $770 million in non-sustaining capital and $277 million in expansionary capital over the next two years. While Centerra has the balance sheet, a prefeasibility study is slated sometime in 2027 so the project is further down the road. Meantime with the Thompson Creek restart, Centerra continues to pour good money after bad into Molybdenum Business Unit, dragging down profitability. While currently in shutdown, Centerra is producing moly but no revenues will be forthcoming from the next little while. Centerra is in need of a flagship and neither moly, Kemess nor Goldfields in Nevada fits that bill. We prefer B2Gold here.
Eldorado Gold Corp.
Eldorado had a strong quarter earning half a billion dollars or $2.56 for the full year on production of 488,000 ounces at AISC of $1,700/oz as the Lamaque Complex in Québec produced almost 50,000 ounces in the fourth quarter. Eldorado’s Skouries mine in Greece reached 90 percent completion and the company is stockpiling ore from the open pit. Skouries’ first concentrate production is expected in the third quarter and commercial production is expected before year-end. Skouries is a high-quality asset which will be a major contributor. Kışladağ in Türkiye remains a major contributor and Eldorado continues to look for ways to extract efficiencies from this mature mine. Surprisingly, Eldorado appears not satisfied in bringing on Skouries and is acquiring Foran Mining for $3.8 billion which is a Canadian copper/zinc polymetallic operation in Saskatchewan that is also near production. However we believe that the all-stock-deal significantly dilutes existing shareholders as well as gold exposure. Although the project is 80 percent complete, there are execution risks. We believe that the company would have been better off bringing on Skouries, before making another big bet. Shareholders do not need another “on the come” project at this part of the cycle. Coincidentally, George Burns, CEO has retired leaving new CEO Christian Milau to handle potential problems. We have liked Eldorado for some time, but believe that Foran’s Mcllvenna Bay acquisition is a deal too far. Sell.
Endeavour Mining PLC
West African producer Endeavour Mining with mines in Senegal and Côte d’Ivoire had a sterling year with over $1.1 billion of free cash flow on production of 1.21 million ounces at AISC of $1,433/oz. Sabodala-Massawa in Senegal is hugely profitable and is a key contributor with continuing high grades coming from Massawa and underground. The BIOX plant is operating well. Other contributors were Assafou and Ity. Importantly Endeavour is bringing on Tier 1 Assafou Project in Côte d’Ivoire. Endeavour is an aggressive company and plans to discover 12 to 15 million ounces of gold over the next five years at an advertised discovery cost of less than $40/oz. The company is the largest player in Africa and cash flow is sufficient to enable them to achieve a good part of the goal. After all, Africa hosts some 30 percent of the world’s gold reserves and believe that despite the Sahel geographic risk, the company has been able to produce at a healthy profit. Despite trimming its stake by 3.5 percent, La Mancha remains the major shareholder. Buy.
IAMGOLD Corp.
IAMGOLD had a good year with majority-owned Côté Gold producing almost 400,000 ounces on 100 percent basis. IAMGOLD had free cash flow of $1.2 billion, allowing the reduction of debt and repayment of a $400 million term loan. Côté is a low grade mine and thus higher throughput is needed to improve profitability since Côté’s all-in-cost are almost $1,900/oz. Côté’s throughput was 36,000 tpd, short of 50,000 tpd design capacity. IAMGOLD's Westwood operation also contributed but its operations are high cost. Essakane however is a crown jewel and continues to produce with all-in-cost of $2,000 per ounce (royalties are big part of the cost). Down the road, IAMGOLD plans to drill off nearby Gosselin using Côté Gold’s processing. The Westwood expansion has increased to $30 million and should produce between 110,000 ounces to 210,000 ounces. Nelligan is a development prospect but too far off in the future. IAMGOLD plans to release an update mine-plan later this year on Côté. We prefer Endeavour here.
Kinross Gold Corp.
Kinross produced 2 million ounces last year in line with guidance at AISC of $1,600/oz. Long running Paracatu in Brazil produced 600,000 ounces had a strong year with better grades. Tasiast delivered 503,000 ounces at $1,050/oz and La Coipa delivered 232,000 ounces in line with guidance. Kinross has a strong cash position with $1.7 billion at year-end and net cash of about $1 billion. Kinross paid down debt of $700 million. Kinross will spend $1.5 billion this year, largely on Phase X at Round Mountain, Curlew and Redbird 2 at Bald Mountain which is scheduled to come onstream in 2028. These projects are relatively low cost with the Phase X underground operation as well as Curlew leveraging existing facilities. However these mines are mature and Kinross is building out these operations but at higher costs. Great Bear is advancing but still is sucking money with first production not slated until late 2029. While the Ontario government has reduced regulations, the company hopes to fast track Great Bear but we believe that it may be too late in the cycle. We prefer B2Gold here.
Lundin Gold Inc.
Lundin Gold had a barnburner year with Ecuadorian based Fruta del Norte’s (FDN) free cash flow of almost $1 billion for the full year. Fruta del Norte produced almost 498,000 ounces of gold at a rich average head grade of 9.5 g/t with recoveries at 89 percent. All-in-cost was only $1,000/oz reflecting this high grade. Lundin paid total dividends of $664 million and has $630 million cash. Importantly, aside from dividends and buybacks, cash was spent on expanding reserves. The plant is operating well with recoveries and throughput as promised. At Fruta del Norte South for example, reserves were expanded as there appears to be a porphyry corridor nearby. Successful drilling has uncovered a fifth new porphyry system. Trancaloma, Castillo and Bona Sur are part of Lundin’s projected 133,000-meter drill exploration program. We believe there's a lot of gold and copper to be found in this budding district. We like Lundin’s shares here for the upside potential. Buy.
Newmont Corp.
Newmont Corp, the world's largest miner generated $7.3 billion of free cash flow last year on production of 5.7 million ounces of gold with mines in North America, South Africa and Australia. Newmont appears to have finished pruning its unwieldy portfolio inherited from acquisitions and now has core production of 5.7 million ounces. Yanacocha and Cadia production will be lower this year. The miner brought on Ahafo North producing about 300,000 ounces of gold production. Importantly Newmont has the largest gold resource base at 118 million ounces which is its strongest asset. Newmont's weakness however is growth. Brucejack's which it acquired is more of a long-term situation as well as Red Chris which is more of a development play. Feasibility studies are being reworked. While Newmont is spending exploration dollars on some twelve major plays, none appear to have Tier 1 potential like Barrick's Fourmile play. We believe Newmont needs focus and new president Natasha Vilijoen hopefully will shake up the “old school” board. Newmont is thus a long-term build-out situation and we prefer Barrick here.
John R. Ing
Please refer to the Legal Section of our website (maisonplacements.com) for our Research Disclosures for an explanation of our rating structure at https://maisonplacements.com/research-reports/.
********
