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Gold continues to defy the trend

6 June 2024 14:17
LSE: KAV

Gold prices have been soaring in 2024, reaching all-time highs in May breaking US$2400/t. This surge is notable because it’s happening despite a strong U.S. dollar performance and rising equity markets, which usually have an inverse relationship with gold.

This is puzzling many experts, as the current economic environment is far from the risk-off market where investors seek a safe haven. In 2024, gold prices are up 17% year-to-date, while the S&P 500 is up about 12%.

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Figure 1: 12 month gold spot price in USD/t.oz Source: Trading Economics

Central banks driving demand

Central banks are continuing their strong buying trends, with analysts attributing gold’s returns to their accelerated purchasing, particularly in emerging markets, and strong retail demand in China and the U.S.

Since the GFC, Central Bank demand for gold has slowly increased. Given gold is perceived as a safe haven asset, investors and central banks turn to gold as a store of value that is less susceptible to market volatility and political instability.

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Figure 2: Central Bank gold demand from 1960-2023. Source: The Oregon Group

Rising geopolitical risks in Europe and the Middle East have only added to gold’s appeal. This has peaked even further since Russia’s invasion of Ukraine, prompting the Central Bank to purchase 1,136t of gold in 2022, the most since 1967.

Increased physical gold transactions

The high prices have spurred more people to buy physical gold, such as bars and coins, sometimes even at retail chains like Costco. Costco has started selling gold bars online, often selling out quickly. According to Wells Fargo, Costco’s gold sales are estimated to be between $100 million and $200 million monthly.

Numbers are showing that there is a strong gold demand in China also, with a 34% increase in purchases in early 2024 compared to 2023. High premiums in Shanghai indicate robust market demand. Millennials and Gen Z in China are also buying gold, often in the form of affordable gold beans.

NFP report due Friday

The key report everyone is waiting for is the U.S. Non-Farm Payrolls (NFP) data, due on Friday. This report is expected to show 189,000 new jobs added, up from the previous figure of 175,000. The outcome of this report will not only influence trading on the day but could also set the tone for the rest of the month.

If the report comes in lower than expected, traders may anticipate the Fed to start introducing rate cuts. This should be seen as the ideal scenario for gold prices, as lower rates typically weaken the dollar and make gold more attractive.

If the report exceeds expectations, it may signal that the Fed will continue with its rate hike policy. This could lead to an economic downturn, which may still prompt traders to turn to gold as a safe haven.

As the gold price continues to surge on, smaller cap mining companies continue to reap the rewards. Here are two UK stocks to keep an eye on if gold continues its rise.

Kavango

Kavango Resources (LON:KAV) is an exploration company dedicated to discovering world-class base and precious metal deposits in Botswana and Zimbabwe.

Kavango recently inked its first contract to start immediate gold production at the Hillside Project, southeast of Bulawayo in southern Zimbabwe, and have returned significant assay results since.

Among the standout results from BRDD001 are the interception of 9.95 g/t gold over 7.2 metres, commencing from a depth of 50.64 metres, with a subsection yielding 31.57 g/t gold over 1.61 metres.

KAV’s London Stock Exchange-listed share price is currently selling at 1.52 pence (2:00 pm UTC+ 8 hours).

First class metals

First Class Metals PLC (LON:FCM) is a minerals exploration company listed on the main market of the London Stock Exchange. They have recently secured an earn-in agreement for the Kerrs Gold Project, located in Northeastern Ontario and renowned for its historic resource estimate of 386,467 ounces of gold under the NI-43-101 standard. 

FCM have also conducted channel sampling at their Sunbeam Project, where promising results from the stripping at Roy indicated a defined zone of mineralisation, peaking at 18.8 g/t (ppm) Au in one 0.3 metre channel sample.

FCM’s London Stock Exchange-listed share price is currently selling at 2.6 pence (2:00 pm UTC+ 8 hours).

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