What Drives The Price Of Gold? Part 1
By Jan Nieuwenhuijs of The Gold Observer
In general, the gold price in U.S. dollars is set by long-term inflation expectations and interest rates in the United States. The price of gold in other currencies depends on the exchange rate between a particular currency and the dollar.
In a previous series of articles we discussed how the international gold market functions, and how the price of gold is set by institutional supply and demand. In this series, we will examine what economic variables change supply and demand of gold, and thus the gold price. To save your precious time I will start this article with a summary and add a historical background, to subsequently expand on the details in forthcoming articles.
In my opinion it is important to understand the current framework, if only to question its longevity. Since 2006 the price of gold in U.S. dollars is inversely correlated to (expected) real interest rates derived from the 10-year U.S. Treasury Inflation Protected Security (TIPS), as you can see in the chart below. This correlation is what I refer to as the current framework.
Note, in the chart above the axis of the TIPS rate is inverted, because when the TIPS rate falls, the gold price rises, and vice versa*. The reasoning is that when the real interest rate on government bonds falls, it becomes more attractive to own gold, because gold is the only international reserve asset without counterparty risk. When the real interest rate rises, it becomes less attractive to own gold, because gold doesn’t yield (if not lent out).
The 10-year TIPS bond is a U.S. government bond that compensates the owner for consumer price inflation (CPI). If, for example, the TIPS rate is 2% and annual inflation 3%, the owner of the bond receives 5% interest (2% + 3%). Because a correction is added when interest and the principal are paid, the market sets the TIPS yield lower than the yield on regular U.S. government bonds (nominal Treasuries). Basically, the market keeps buying TIPS bonds, driving down its yield, until the market is indifferent between holding TIPS bonds or nominal Treasuries, based on what they expect average inflation to be over the next 10 years.
The difference between the 10-year TIPS rate and 10-year nominal Treasury rate is thus what the market expects average inflation to be in the next 10 years. This market-based inflation expectation is also called the breakeven rate.
TIPS rate = Treasury rate – breakeven rate
Or, in other words:
Expected real interest rate = Treasury rate – inflation expectations
For those interested, after 2008 the 10-year breakeven rate became more tightly correlated to the price of oil. As energy is the lifeblood of the economy, a rise in energy prices will be translated in higher prices of consumer goods.
For those that like to access an interactive chart that includes the gold price and the 10 -year TIPS rate please click here. Click here if you want to access an interactive chart that includes the 10-year breakeven rate, 10-year TIPS rate, and 10-year nominal Treasury rate.
A Historic Perspective on Gold as a Store of Value
Gold has been an inflation hedge for thousands of years. Though gold is not a perfect constant, as such an asset doesn’t exist in economics.
People in the East are still accustomed to giving their peers gold at childbirth and marriage. This old tradition makes sure communities survive all monetary regimes by using gold as a store of value and share the metal when people reproduce. They had learned early on that government issued money eventually loses its purchasing power. For wealth to be passed on from one generation to the next a store of value is needed that is immutable and can’t printed: gold.
China has never been on an official gold standard, but as early ca. 475-221 B.C. gold circulated for large payments and was used as a store of value. On the picture below you can see what was called “cube money.” pic.twitter.com/OzNP4Xwjlb
— Jan Nieuwenhuijs (@JanGold_) November 14, 2021
In developed economies people have lost their affinity with gold to a degree, because financialization started earlier in West, offering higher returns. Although Western central banks are holding on to their vast monetary gold reserves. Ironically, they are fully aware of their shortcomings and hold gold as their preferred back up currency.
Central bank of Italy:
“Gold is an excellent hedge against adversity and high inflation. Gold cannot depreciate or be devalued. Gold … is not an asset ‘issued’ by a government or a central bank and so does not depend on the issuer’s solvency.” https://t.co/9iwqAd3zdk
— Jan Nieuwenhuijs (@JanGold_) October 27, 2020
The chart below shows the depreciation of three fiat currencies against gold since 1900 without interest rates being calculated. After all, many people don’t have fiat savings that yield.
During the last form of a gold standard (Bretton Woods) the U.S. dollar was pegged to gold at a price of $35 per troy ounce, and all other major currencies were pegged to the dollar. Technically, Bretton Woods ended in 1968 when the United States allowed the gold price to float in the free market, after they had printed too many dollars and the gold peg was untenable. From that moment on the gold price started rising. Once again it was clear that no currency issued by a government can compete with gold.
Remarkably, the gold price would rise before consumer prices went up. If the market expected inflation to soar, investors would take shelter in gold and the gold price reacted accordingly. Gold became a proxy for inflation expectations. If the price of gold went up, consumer prices would follow within two years.
Chair of the Federal Reserve Alan Greenspan stated in 1994:
I think that what the price of gold reflects is a basic view of the desire to hold real hard assets versus currencies. … [Gold] is a store of value measure which has shown a fairly consistent lead on inflation expectations and has been over the years a reasonably good indicator, among others, of what inflation expectations are doing.
Greenspan even based his monetary policy partially on the price of gold.
The connection between inflation expectations and the gold price is still relevant as we saw in the introduction about TIPS bonds.
After double digit inflation numbers and deeply negative real rates in the 1970s, investors were lured out of gold by high positive real rates in the 1980s. Because prior to 1997 there were no TIPS bonds, real interest rates could only be calculated as the nominal interest rate minus the prevailing CPI print. Academics call this the ex-post real interest rate, while they call the TIPS rate the ex-ante real interest rate.
In the chart below you can see 10-year (ex-post) real rate, calculated as the 10-year nominal Treasury rate minus CPI in the United States from 1968 through 2021.
Obviously, (ex-post) real rates are very important to the gold price. In the 1970s gold skyrocketed when real rates for two times in a row hit -5%. Can it happen again if inflation proves not be transitory and real rates stay negative?
To find answers we will do a deep dive into TIPS bonds in part 2.
*Note, in this article I have addressed correlations without prove of causality.
New Found Gold Neighbor Canstar Resources Might Be Sitting on Canada’s Next Big Gold Discovery
Canstar Resources (TSXV: ROX) might have discovered the biggest gold deposit in Canada’s hottest mining province, Newfoundland…
( ) might have discovered the biggest gold deposit in Canada’s hottest mining province, Newfoundland. The small-cap junior gold miner is currently drilling in a region that turns out to sit alongside the same tectonic boundary as another recently discovered billion-dollar gold project.
While manydiscoveries have emerged in recent years, few have remained surprisingly unnoticed by the broader mining community. One of which is the flagship gold project of , Golden Baie. In some samples, early testing has seen gold concentrations as staggeringly high as 4,485 g/t.
Despite this,is still operating under the radar at the moment. However, given the other billion-dollar gold projects located nearby in the province, it’s only a matter of time before it starts gaining a lot more attention from the mining community.
Is Newfoundland the New ‘El Dorado’ for Canadian Gold Miners?
In recent years, Newfoundland has emerged as one of the most exciting areas for gold discoveries. Millions of years of tectonic activity created geological conditions ripe for high-grade gold mineralization.
However, the area has remained largely unexplored. Whether due to a lack of technology or technical knowledge, past prospectors dismissed what would later turn out to be multiple, massive gold deposits all along the province.
There are a few notable examples, but one of the most recent was the Queensway project, a 1,510km area owned by. This was a company that went it went public back in September 2020 at just $1.4 per share.
Thanks to the excitement surrounding the Queensway project, shares quickly surged to over $10 earlier this year, with the company boasting a $1.2 billion valuation.
However, by the time most investors heard aboutand its gold project, shares had already shot up substantially. For those who felt like they missed the train on Newfound Gold, the good news is that history might be repeating itself, but this time with .
New Found’s Queensway project and Canstar’s Golden Baie are frequently compared side by side. Not only are both just a couple of hours drive away from each other, but both happen to be located on the same tectonic boundary. In layman’s terms, multiple deposits are likelier to be found on a tectonic boundary due to how plates shift over thousands and millions of years.
So far, Golden Baie is currently at an earlier stage of exploration than Queensway, which does mean it’s still a bit more of a speculative risk. However, analysis on the Golden Baie project shows that, based on surface-level gold concentrations, there’s likely a deep-seated gold system with multiple big deposits ripe for the picking.
What’s more, these early results have shown similar grades of gold as the Queensway project, which single-handedly transformedfrom a penny stock into a billion-dollar gold miner.
How Big is Canstar Resource’s Golden Baie Discovery?
At 622 square km, Golden Baie isn’t the largest project by surface area. However, over 95% of the total site remains completely unexplored.
Initial exploration attempts took place in the earlier 1980s and continued for almost 27 years, with geologists finding little at the time besides small gold deposits. It’s a common story with most Newfoundland gold discoveries, as many were initially passed over before their true potential was rediscovered.
It was only until 2019 that prospectors realized Golden Baie was likely sitting on top of a tremendous gold deposit. Some recent samples have shown incredibly high gold grades, including some rock pulp samples having as much as 4,485 g/t of gold. But even more down-to-earth results are impressive, such as over 289.3 g/t of gold at the Skidder site.
As for how large the Golden Baie gold deposit could be, that’s still to be determined. However, when you look at other nearby gold discoveries, even the most conservative estimates could make Canstar a fortungi
The smallest of nearby discoveries is owned by Anaconda Mining, whose Point Rousse project, located on the northern end of Newfoundland, contains over 119,000 ounces of gold. Marathon Gold has a closer deposit called the Valentine Lake project. These reserves are estimated at being over 3.1 million ounces of gold, the high end of what’s been found in Newfoundland.
Two other big projects include Matador Mining’s Cape Ray project, with 526,000 ounces of gold, and‘s Hope brook project, with around 844,000 ounces.
Given that all of these discoveries are within a couple of hundred kilometers of the Golden Baie project, we think the odds are that we’ll see similar results when further drilling data comes in. A rough estimate of between 500,000 and a million ounces of gold seems realistic, although it’s possible Golden Baie is even larger than that.
To put that into perspective, one million ounces of gold, at current spot prices, is just under $1.8 billion in mineable reserves. In contrast,is worth just $25.3 million at the moment.
Just like how the Queensway project catapulted Newfound Gold into a billion-dollar stock, so could Golden Baie transforminto a billion-dollar mining company, or around 40 times higher than its current market capitalization.
Some of the world’s top mining analysts agree. Billionaire mining investor Eric Sprott, one of Newfound Gold’s biggest backers, also owns a 32% stake in. While not every junior mining pick from Sprott turns into a billion-dollar success story, the odds are looking pretty good that Canstar might just be one of them.
What Should Investors Expect fromin 2022?
Given how undervalued and ignoredis at the moment, it’s a prime candidate for investors looking for a mining stock with exponential growth potential. The key, however, is to buy in before the market catches wind of it.
In other words, early investors looking for triple-digit gains should stock up on shares before further news about Golden Baie gets announced. The company is in the process of raising an extra $6 million to finance further drilling after releasing early drilling results in early November. Results were largely encouraging, suggesting that further, potentially larger gold deposits remain to be discovered.
Canstar has been focusing primarily on an 8km strike length, which is still just a small portion of the expected 95km gold corridor that’s at the heart of the Golden Baie property.
It’s also worth noting that, besides its flagship gold project,also has a couple of other operations. This includes the Buchans-Mary March project, another Newfoundland site, which has historically ranked as some of the world’s highest grade volcanogenic massive sulfide (VMS) deposits. VMS deposits are one of the richest sources of copper, lead, and zinc, but the Buchans-Mary March project has found gold and silver as well as those other metals.
While Canstar’s other projects remain promising, its main catalyst for future price growth is still big gold project. Investors should expect more drilling results in 2022, news that could quickly transform Canstar into a nine-or-ten-figure valuation for lucky investors.
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Looking for Leverage? Silver Sands at a Sub $10 Million Valuation Offers the Highest Leverage Drilling Play Around
Nearing the end of a phase III drill program, this high-leverage silver/gold play couples enormous upside with an unusually low risk profile. Eric Sprott is the largest shareholder…
Nearing the end of a phase III drill program, this high-leverage silver/gold play couples enormous upside with an unusually low risk profile. Eric Sprott is the largest shareholder.
Veteran analysts predict gold and silver are on the cusp of another bull run, with some speculating that after a year of consolidation we may see prices rise to $50 per ounce for silver and $2,500 per ounce for gold near term. A further leg up is forecast, and some say precious metals will hit unheard of levels over the next few years as the US dollar staggers. This is big news considering that past silver bull markets have delivered gains ranging from 330% to 900%.
Which brings us to and why its Phase III drill program currently underway makes it the best high leverage silver junior around. ( ), SAND started out with a silver resource of 15 million ounces at its Virginia project in Argentina last year and this is their third round of drilling. Their goal is to have grown that to 50 million ounces by the time Phase III is finished, on their way to 100 million.
But that’s the low-risk part. The leverage comes from drilling the silver/gold Santa Rita vein field in the northern part of the property first explored by Mirasol and Hochschild in 2007. Surface sampling and channel sampling highlights included 340 g/t silver and 5 g/t gold. Mirasol put 7 green field exploratory drill holes into the structure and came up with mineralization in 6 of 7 holes before Hochschild dropped it to focus on their San Jose discovery (now mine).
Silver Sands largest shareholders areand Eric Sprott, who has invested twice – increasing his initial investment by 300%. Commenting on the silver market, Sprott said:
“There’s going to be a shortage of silver. We get information from dealers looking for supply and paying premiums, which is almost unheard of. And when I look at the amount of silver going into ETFs and India, we know a shortage is on its way. The last time silver had a breakout, the price went up 10-fold. Do I think that could happen again? Absolutely.”
Sprott is not the only one with Silver Sands on his radar. In his Gold Newsletter, well-known precious metals expert Brien Lundin firmly put the company into the buy column, reiterating his previous buy recommendation. Speaking to the high leverage nature of Silver Sand’s Virginia project, he described the company as “a great ongoing lever on …… silver.”
SAND is near the end of a Phase III exploration program at its Virginia project located in mining-friendly Santa Cruz, Argentina, in close proximity to four producing precious metal mines. Virginia started out with a silver resource of 15 million ounces, and the goal is to grow that to 50 million ounces by the time Phase III is complete.
The right people, place, and resource
Silver Sands hits the mining trifecta of people, place, and resource. The company is overseen by market veteran Keith Anderson who brings to the mix a successful 20-year history of structuring and financing resource companies. Leading a deeply experienced management team, Keith has brought in a top-class investor, executed operations under budget, and delivered a clear roadmap towards the development of a significant resource.
The company’s flagship Virginia project is located in mining-friendly Santa Cruz, Argentina, in close proximity to four producing precious metal mines. This year, Argentina was rated the 5th most attractive region in the world for investment, and a global top 10 of silver mining jurisdictions. Furthermore, Santa Cruz ranks above Mexico on the investment attractiveness index.
Following up on highly successful Phase I and II exploration programs, Silver Sands is nearing the end of its Phase III program which comprises 2,685 metres of drilling across more than 16 holes. The program is targeting seven silver vein structures along with the high priority Santa Rita silver-gold prospect.
Overall, the Virginia property has the markings of an exceptionally large epithermal vein system yet only a tiny fraction outcrops at or near surface. Silver Sands has just started to scratch the surface of the property’s potential. By the time Phase III is completed, the company believes it will have grown its resource from 15 to 50 million ounces, on the way to 100 million plus.
Phase III will comprise 2,685 metres of drilling across 16 holes and is targeting seven silver vein structures along with the high priority Santa Rita silver-gold prospect. This will all be driven by a low-risk model that involves mostly drilling gaps and extensions between high-grade intercepts along known vein structures.
Adding ounces on the low-risk journey to massive upside potential
The 59,750-hectare Virginia project is a low to intermediate sulphidation epithermal silver deposit nestled in the mineral-rich Deseado massif, roughly 100 kilometres south of Newmont’s Cerro Negro Mine, one of the largest gold mines in the world.
Through initial discovery in 2009 and four follow up drill programs between 2010 – 2012, defined an indicated resource of 11.9 million ounces of silver at 310 g/t and an inferred resource of 3.1 million ounces of silver at 207 g/t, which were documented in an NI 43-101 technical report filed in 2014. Mineral resources are contained within seven conceptual open pits including Naty, Julia North, Julia Central, Julia South, Ely North, Ely South, and Martina.
Phase I and II drilling subsequently identified four new conceptual open pits – Ely Central, Ely North Extension, Julia South Extension, and Martina NW. Drilling confirmed the Ely structure can be traced over 2.3 kilometres in strike length from north to south, open along strike and at depth. The Naty-Julia structure now extends to over 3 kilometres in strike length, open to the north and south, and at depth.
Phase I focused on exploring new high-grade silver zones to expand on the existing NI 43-101 and consisted of 2,831 metres across 18 drill holes along with 80.5-line kilometres of IP surveying. Phase II followed up and yielded some impressive results, testing several new prospective zones through 3,104 metres of drilling across 20 holes. New discoveries were made in areas of lower IP chargeability, showing potential for strike extensions of known veins, as well as new discoveries within previously untested linear trends of lower intensity.
Phase II also led to the discovery of a new high-grade zone at Ely Central, where drilling intersected strong and continuous Ag grades in four drill holes over a 200-metre strike length that lies within a 580-metre untested gap from original drilling in 2012. Furthermore, drilling intercepted high-grade silver mineralization at the Ely North, Martina, and Julia South targets.
Highlights from Phase I and II exploration programs include:
• 639 g/t Ag over 9.60m
• 625 g/t Ag over 10.80m, including 1,110 g/t Ag over 5.70m
• 560 g/t Ag over 9.98m, including 1,578 g/t Ag over 2.87m
• 476 g/t Ag over 4.0m, including 929 g/t Ag over 1.85m
• 198.5 g/t silver over 33.5m
• 123.43 g/t silver over 8.5m, including 168.34 g/t silver over 3.9m