With gold and copper prices hitting historic highs last year, is now the time to buy into gold and copper mining companies?
With an uncertain macroeconomic and geopolitical outlook going into 2023, precious metals and industrial metals tend to be impacted conversely. Copper is widely considered a lead indicator for economic growth. Gold however is viewed as a safe-haven asset during recession or as a hedge against inflation.
For investors seeking the high growth potential offered by mining companies, the combination of gold and copper assets could offer a strong hedge in an uncertain market. Throw into the mix, the economies of scale offered by gold and copper being mined in one process, then mining companies with both assets are attracting significant investor attention.
Prices for many copper stocks soared in 2022 as copper prices soared to a record high in March. Although prices pulled back from theses highs, the metal has rebounded in late 2022 due to tight supplies and forecasts of recovering demand in 2023.
Copper is seen as a reliable leading indicator for growth. A rising market price suggests strong economic growth, with a declining price suggesting the opposite. This is due to the wide use of copper in the global economy. In 2021, 46% of copper was used in the building and construction sector, 21% in electronics, 16% in transportation, 10% in consumer goods and 7% in industrial machinery. Every single major sector of the economy uses copper.
Interestingly, whilst copper is generally seen as a reliable leading indicator of an improving economic environment, it is also traditionally one of the best performing assets during inflationary periods. As such, copper can also be used a hedge against inflation. A Bloomberg analysis completed in 2017 shows that for every 1% rise in the consumer price index (CPI) from 1992, copper prices rose by 18%, twice as much as gold. More recent analysis from Global X ETFs shows this positive correlation continued in the high inflationary environment of 2022. Another benefit of copper as an inflationary hedge is that it is much cheaper than gold allowing a wider range of investors use it.
Copper’s compelling supply and demand dynamics due to global transition to electrification and renewable energies
The advent of the green economy means copper is one of the fundamental cornerstones to switching to net-zero emission due to its excellent conductivity. Research form Calamos Investments shows that renewable energy regeneration is five times more copper intensive than a conventional power grid. Offshore wind turbines use up to 15 metric tonnes of copper per megawatt of capacity. Electric vehicles require four times more copper than internal combustion engines and that’s before allowing for the copper used in charging stations.
S&P Global estimates that copper demand will double from today’s 25 million metric tonnes per year to around 50 million metric tonnes by 2035. The high level of demand is then expected to be maintained until 2050. Despite this nearly certain demand, the mining industry has spent the past decade moving much of its profits away from finding and developing major new copper projects. With high copper prices, many miners have expanded existing mines or targeted existing low-quality projects in a bid to profit from known deposits rather than take on exploration risks.
Exploration budgets in 2021 were 41.6% lower than in 2012. To date copper supply has kept up with demand, as the new finds of the noughties are now at the production stage.
However, this is set to change as older existing mines run out of resources and the pipeline of future projects is thin. Keeping up with current demand may prove a challenge to the mining industry let alone meeting the expected doubling in demand. For exploration companies, the discovery of a major new source of copper could lead to a highest bidder auction amongst the global miners.
A major risk of investing in copper is the close correlation to economic conditions, creating deep waves and troughs as it mirrors general economic growth and contractions. It is also not a store of wealth or considered a stable investment like gold. Copper consumption is also heavily tilted towards China. In 2021, China consumed over half of the copper produced in the world. Any big changes in the Chinese economy will change demand and prices for copper.
Gold grew in value in 2022, but only by 1.3%, well below expectations. Gold prices were hindered by aggressive Federal reserve rate hikes, diminished demand in China and the rising value of the US dollar. Despite many of these uncertainties continuing to cast a shadow on forecasts for 2023, many analysts predict gold is going to experience a sharp increase in value.
Below we look at the prospects for the gold market for 2023 given the current macroeconomic and geopolitical environment, along with the recent drivers and price forecasts from analysts.
The aggressive interest rate hikes in the US in 2022 resulted in US dollar strength. As the value of the dollar goes up, it becomes a safer investment, reducing demand for gold and lowering the price of gold. At the same time, gold becomes more expensive in foreign currencies, reducing demand further.
Traditionally, investors consider gold a safe-haven asset during recessions or periods of uncertainty but also as a hedge against inflation.
Gold as a Safe-Haven
With an economic consensus predicting stagflation for 2023, possibly the main reason investors are attracted to gold is the need to spread their risk and diversify their wider portfolio. For precious-metal investors, on average they tend to only make up a maximum of 20% of their overall self-invested wealth.
In 2022, precious metals helped investors spread risk and reduce the hit. A standard UK investment portfolio split 60% in shares and 40% in bonds would have returned 0.6% per year over the last 5 years, the worst performance since at least 1970. If 5% of that portfolio had been held in gold, the average return would have been boosted to 1.1%. Diversification pays.
Central banks around the world particularly China, Turkey and India have been buying gold at a record pace. The buying trend has been going on for the past 13 consecutive years but has accelerated considerably recently. Central banks have been increasing their gold reserves as a way to diversify their foreign exchange holdings and reduce reliance on the US dollar.
Hedge against inflation
Currency is only as valuable as society decides, whereas gold is a tangible, finite asset. That means even as paper loses value due to inflation, gold should hold its value. That would be completely true if gold was not denominated in US dollars with its inverse relationship with the greenback.
Looking at historic periods of high inflation, the use of gold as a hedge against inflation should not be taken as a rule of thumb and other economic and societal factors need to be considered. This is especially relevant today following the last few years of global upheaval.
Overall, gold showed remarkable resilience by averaging more than $1,800 per ounce for the first time ever over 2022 against both the steepest rise in US interest rates since 1980 and the steepest rise in long term bond yields ever. Such resilience offers a bullish signal for 2023.
In late 2022, as the Fed indicated a gradual softening of monetary policy, the dollar started to weaken and gold futures started an upward trend. Whilst bumps along the way must be expected, the overall outlook for gold in 2023 is shiny.
Gold started 2023 performing strongly backed by hedge funds investing heavily in gold futures and strong import demand ahead of the Lunar New Year on 22nd January. There has been a small sell-off since in line with the expectation of peaks and troughs throughout the year.
Nicky Shields, head of metals strategy at MKS Pamp Group feels there is a decent amount of bullish pent-up demand for gold that has been carried over from last year. He predicts an average price for gold in 2023 of $1,880, peaking at $2,100.
Eric Strand, manager of the AuAg ESG Gold Mining ETF predicts a new all-time high for gold and be the start of a “new secular bull market”. In his opinion central banks will pivot on their rate hikes and become dovish in 2023 resulting in gold ending the year at least 20% higher. He also predicted gold miners will outperform gold by a factor of two.
ABN AMRO expects gold to trade in and around $1,900 for 2023.
Ole Hanson, Head of Commodities at Saxo Bank on an economic standpoint predicts an eventual peak in central bank rates combined with the prospect of a weaker dollar and inflation not returning to the expected sub-3% level by year end. These factors combined with continued near record level buying of gold by central banks could see gold reach $3,000 per ounce this year.
Juerg Kiener, MD and chief investment officer at Swiss Asia Capital told CNBC late last year that current market conditions mirror those of 2001 and also 2008. In 2008 gold went from $600 to £1,800 in no time. As such he has a very bullish outlook predicting a major move with the price possibly surging as high as $4,000.
Most of these analyst forecasts assume an easing of monetary policy resulting in a weaker dollar. Two key headwinds that could exert downward pressure on the gold price could be higher nominal interest rates and a potential strong dollar.
Institutional investors have identified miners with combined copper and gold assets as offering an appropriate risk profile for the uncertainties of the year ahead. If there is a stronger economy than currently forecast, then copper could lead an upsurge in industrial metal prices; an increase in geo-political uncertainty or economic recession then gold can act as a safe-haven and both metals can offer a hedge against stubbornly high inflation.
This has also resulted in strong investor support for copper/gold exploration companies as seen with the successful AIM IPO of Fulcrum Metals Plc this morning.
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14 February 2023
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S&P Global ; The Big Picture 2023 Metals and Mining Industry Outlook October 2022
CNBC; Gold surges to 6-month high and analysts expect records in 2023 03.01.2023
Investopedia; Top Copper Stocks 13.12.2022
Investing News; The Red-Hot Case for Copper as an Inflation Hedge 11.01.2023
S&P Global Market Intelligence; Mining Sector’s Failure to Seek New Copper Jeopardises Entire Energy Transition 06.09.2022
Forbes; Gold Stocks are Rising in 2023 13.01.2023
Bitcoin News; Gold Prices Expected to Soar in 2023 08.01.2023
Capital.com; Gold Price Forecast for 2023 and Beyond 17.01.2023
Bullion Vault; 2023: Big Year for Gold, Silver and Platinum Prices 10.01.2023