New highs propel gold into 2024

Gold recorded a new intraday, all-time high of US$2,135 per ounce in early December during overseas trading hours. Gold also managed to establish a new at-the-close all-time high of US$2,077 per ounce on December 27, and ended 2023 at US$2,063 per ounce, up 13.1% for the year.

Gold equities ended the year strong as well, outperforming gold bullion in the last two months of the year. However, gold equities have yet to fully close the valuation gap against the metal. In 2023, NYSE Arca Gold Miners Index rose 9.92% compared to gold’s 13.10% gain.

Recapping key drivers

The main drivers behind gold’s rally to new all-time highs were:

• Heightened global financial risk—gold closed at a yearly low of US$1,811 per ounce at the end of February, bouncing back and trending above US$2,000 per ounce as markets tried to digest the news and assess the ripple effects of the rapid collapse of Silicon Valley Bank and Signature Bank over the course of a weekend in March. Gold found further support as the risks spread to Europe, with major bank Credit Suisse needing a rescue.
• Record central bank net gold purchases—investment demand, as gauged by the holdings of gold bullion ETFs, declined in the second half of the year. However, this was offset by strong buying from the official sector, with gold purchases from central banks around the world set to beat the record levels reported for 2022. This kept gold well supported above the US$1,900 per ounce level throughout most of the year, leading to highest annual average gold price in record of US$1,943 per ounce in 2023.
• Heightened geopolitical risk globally—because of the ongoing war in Ukraine and the tragic developments in the Middle East in early October. Gold closed at US$1,820 per ounce on October 5, and demonstrated, once again, its historically proven role as a safe haven, climbing above US$2,000 per ounce after Hamas’ attacks on Israel.
• Federal reserve policy—changing expectations around the US Federal Reserve’s (Fed’s) monetary policy path were a major driver of gold prices in 2023. The Fed’s projections for rate cuts in 2024, released at the conclusion of their December 13 Federal Open Market Committee meeting, sent gold prices to record levels at year end.

Gold seems to have established strong support at around the US$1,900 to US$2,000 per ounce level, and at present, we see real opportunity for it to test new all-time highs this year. The four main drivers highlighted above should continue to support gold in 2024. Increasing western investment demand due to a rising need to hedge portfolios this year, could once again become a dominant and positive driver of gold prices.

Chart 1: Slowing outflows in gold-backed ETFs

Source: World Gold Council. Data as of December 2023.

Making a case for miners

It is important that investors consider not just gold bullion but also gold equities when they look at gold as an asset class. We think gold miners are positioned to benefit from sustained, record-high gold prices as investors seek leveraged, diversified exposure to gold. Gold prices will continue to have a meaningful impact on the performance of the gold equities, with a rising gold price environment providing opportunity for gold equities to outperform the metal.

A declining gold price, in contrast, would lead to weak share price performance by the miners relative to gold. We view gold equities, at present, as undervalued, trading at low multiples both historically for the industry and relative to gold. We believe this valuation gap provides an opportunity for gold equities to outperform gold even in a sideways gold price environment, especially if that price action develops around the US$2,000 per ounce level.

Industry cost inflation has subsided, and operating costs appear to be contained, with all-in sustaining costs on average at around US$1,300 per ounce. While we reiterate our outlook for higher gold prices in 2024, we want to highlight that at current spot gold prices of around US$2,040 per ounce, gold miners, as a group, should be able to enjoy margin expansion and enhanced free cash flow generation this year.

We expect gold companies to have the ability to produce solid operating and financial results that can withstand the volatility of the gold price and demonstrate that they can sustainably operate profitable businesses throughout the cycles. We believe proving this resilience to the markets should lead to increased incorporation of gold equities as an asset class in the broader investment universe, and lead to a rerating of the gold mining sector.