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Topical Research – Gold Market Trends

- March 1, 2024

Summary:

With continued U.S. dollar purchasing power erosion due to inflation, gold continues to serve as a resilient store of value, outperforming bonds over the past five decades. Exhibiting low correlations with major asset classes, gold can serve as a strategic portfolio diversifier. Amid lower demand from U.S. investors, strong demand from central banks and geopolitical and financial risks helped drive gold to all-time highs in 2023. While there are major risks, current fiscal policies, geopolitical tensions, central bank dynamics, expected rate cuts, and the bullish potential arising from the current negative sentiment could bode well for gold returns in the coming years.

Key Themes:

  1. Geopolitical tensions, especially after the 2022 seizure of Russian assets, have reaffirmed gold’s reputation as a ‘safe haven’. An increasing number of central banks are favoring gold over U.S. Treasuries, which has helped maintain its value despite rising real interest rates and a lack of enthusiasm from U.S. investors.
  2. Speculative positioning in gold futures has declined, even with prices near all-time highs, hinting at the potential for further upside.
  3. Potential risks to gold include higher real interest rates and the emergence of bitcoin as a mainstream alternative.
  4. Despite near-record prices, the mining sector faces challenges with profitability due to rising costs and operational hurdles, yet there are glimpses of cost stabilization, suggesting margin improvement if prices remain at these levels or move higher.
  5. The growing interest in bitcoin among investors may be cannibalizing gold demand; we advocate for a blended approach that includes physical and digital assets as we seek to hedge portfolios for the inevitable erosion of purchasing power resulting from inflationary monetary policy.
  6.  While performance of the miners has been disappointing, especially given near-record gold prices, we see the potential for higher production at attractive margins. We recommend maintaining some exposure but suggest tax-loss harvesting and, if company fundamentals do not improve, redirecting capital towards the physical metal.

Contents

Secular Trends

Inflation

Over the last century, the purchasing power of the U.S. dollar has steadily eroded as a result of ongoing inflation

Long-Term Returns

As an alternative store of value or‘safe haven’, gold has handily outpaced bonds for more than 50 years

Gold’s Duration

Gold’s implied duration of ~26 years means that allocating 5% of a bond portfolio to gold may synthetically act as a one-year duration extension

Diversification

Gold consistently demonstrates low correlations with major asset classes, reinforcing its role as a strategic diversifier in investment portfolios

Gold consistently demonstrates low correlations with major asset classes, reinforcing its role as a strategic diversifier in investment portfolios

Gold consistently demonstrates low correlations with major asset classes, reinforcing its role as a strategic diversifier in investment portfolios

Gold vs. Monetary Base

If gold prices align with the increase in per capita global money supply, anticipated long-term annual returns should average around 6%

Gold vs. Core Asset Classes

When priced in terms of gold, U.S. large cap stocks remain substantially below their peak levels reached during the Tech Bubble era

When measured against stocks, gold appears cheap; despite reaching new nominal highs, it still hasn't surpassed its 2011 peak value vs. U.S. Treasuries

Cyclical Market Trends

Returns from Key Dates

Gold has outperformed everything but stocks since the pre-GFC high, but has lagged almost everything since the 12/12/23 ‘Powell Pivot’

Returns by FX

Notwithstanding the 2013 bear market, longer-term returns for gold have been surprisingly consistent across multiple currencies

Gold Return by Currency

While gold recently made a new all-time high in USD terms, recent moves in JPY, CNY, and GBP have been even more pronounced

Supply & Demand

Excluding over-the-counter (OTC) trading, gold demand fell by 5% y/y to 4,448 metric tons in 2023 but remained above average

In 2023, gold supply reached the highest level since at least 2010; approximately 75% of supply comes from gold miners

Rate Hiking Cycles

Rate cutting cycles have tended to be positive for gold as the prospects of rate cuts reduce opportunity costs and cuts tend to occur into a deteriorating fiscal deficit

Real Yields

Real yields, which have historically had a strong inverse correlation with the price of gold, only recently reentered positive territory after being negative for more than two years

Gold & Treasuries

Gold’s resilience despite rising real rates is likely due to sovereigns favoring gold, accompanied by ‘flight to safety’ demand given geopolitical tensions and U.S. fiscal indiscipline; whatever the reason, high real rates remain a risk

India and China have been increasing gold reserves; while India’s holdings of U.S. Treasury securities has remained relatively flat, China has been dramatically reducing Treasury holdings; Japan holdings have declined since 2022

~$300bn of Russia’s sovereign assets(including gold and FX reserves) were confiscated when the war in Ukraine started, with nearly half of the reserves situated in Western countries

Futures Markets

Gold futures market remains in contango (‘spot’ lower than futures, which is normal), which is primarily a function of storage, interest, and other carry costs

Spec positioning in gold futures has dropped despite gold reaching new highs in early January, potentially providing fodder for further upside; spec positioning in silver has declined alongside silver prices

ld vs Silver

Gold has outperformed silver by 38% since the local low in the gold/silver ratio in Feb 2021; while silver appears cheap, it’s likely not at an actionable extreme

Gold vs. Bitcoin

We believe it is likely that bitcoin is cannibalizing gold demand from younger investors given shared characteristics of both investments(and investor groups)

Fund Flows

Gold and bitcoin markets combined now represent about $15 trillion (“benchmark” ratio of two is ~93/7), about a tenth of the global fixed income markets

U.S. fund flows make a compelling case that bitcoin is cannibalizing demand for precious metals

U.S. fund flows make a compelling case that bitcoin is cannibalizing demand for precious metals; precious metals ETFs have had outflows of $30 billion since 2020

Even though the price of gold is near all-time highs, out flows from U.S. ETFs suggest U.S. investor sentiment is negative

Over the past two decades, gold holdings have spiked during periods of uncertainty; Asian interest in gold has been increasing since 2020

Gold Miners

Miners vs. U.S. Core Assets

The top miners have failed to capitalize on rising gold prices as poor production levels and rising costs have hampered profitability

Miners vs. Physical

On the surface, gold miners look extremely attractive vs. physical, but miners have been plagued by rising costs, country-specific issues, and labor challenges, among other things

Benchmark Holdings

Newmont, Barrick, Agnico, Gold Fields, and Northern Star together comprise 40% of GDX, and present a relatively well-rounded cross-section of the gold mining industry

Costs

While costs have been rising, there appears to be some stabilization around $1,200-$1,300/ounce with margins remaining above average

Top 5 Gold Miner Profiles

Newmont’s production challenges have been related to strikes, environmental, and other issues; the company is consolidating operations post Newcrest merger

Barrick’s declining production over the past three years is largely attributed to one-off events(storms, equipment failure, delays at specific mines) & lower grades, but growth is expected to pick up later in 2024 and 2025

Agnico Eagle has boosted production through strategic consolidations, acquisitions and optimization within the company

Gold Fields has faced safety issues, skills shortages, lower grades being mined, and the
completion of mining at certain sites, which has led to lower production

Northern Star has had exploration success with new gold deposits discovered near several existing mine sites, which has increased mining capacity, but costs have also increased

Overall, physical gold mined has been relatively steady, even marginally increasing; majority of 2023 declines were driven by Newmont

Newmont’s current decline is nearly as steep as it was during the GFC

Appendix

Historical Corrections

Gold’s post-COVID rebound was within the range of historical draw downs that occurred within bull markets

Case Studies: Stock Market Declines

Case study: gold returns during stock market declines

Gold has had mixed historical returns during stock market declines

Case Studies: Significant Market Events

Case study: gold returns during more recent significant market events

Gold has had mixed historical returns during more recent significant market events

Case Studies: Rising Inflation

Case study: gold returns during periods of rising inflation

Gold has a decent track record as an inflation hedge, but it is by no means a portfolio panacea during these episodes

Strategic vs. Tactical Asset Classes

Strategic or core asset classes are assigned strategic target weights greater than zero. Under normal market conditions some level of exposure is maintained to strategic asset classes throughout the market cycle. Tactical or non-core asset classes are assigned strategic target weights of zero and are added opportunistically based on the risk-reward opportunity set relative to the rest of the portfolio.

Asset Class Benchmarks

Asset class performance was measured using the following benchmarks:

U.S. Large Cap Stocks: S&P 500 TR Index

U.S. Small & Micro Cap Stocks: Russell 2000 TR Index

Intl Dev Large Cap Stocks: MSCI EAFE GR Index

Emerging & Frontier Market Stocks: MSCI Emerging Markets GR Index

U.S. Interim-Term Muni Bonds: Bloomberg Barclays 1-10 (1-12 Yr) Muni Bond TR Index

U.S. Interim-Term Bonds: Bloomberg Barclays U.S. Aggregate Bond TR Index

U.S. High Yield Bonds: Bloomberg Barclays U.S. Corporate High Yield TR Index

U.S. Bank Loans: S&P/LSTA U.S. Leveraged Loan Index

Intl Developed Bonds: Bloomberg Barclays Global Aggregate ex-U.S. Index

Emerging & Frontier Market Bonds: JPMorgan EMBI Global Diversified TR Index

U.S. REITs: MSCI U.S. REIT GR Index

Ex U.S. Real Estate Securities: S&P Global Ex-U.S. Property TR Index

Commodity Futures: Bloomberg Commodity TR Index

Midstream Energy: Alerian MLP TR Index

Gold: LBMA Gold Price

U.S. 60/40: 60% S&P 500 TR Index 40% Bloomberg Barclays U.S. Aggregate Bond TR Index

Global 60/40: 60% MSCI ACWI GR Index 40% Bloomberg Barclays Global Aggregate Bond TR Index

INDEX DEFINITIONS

S&P 500 Index: Widely regarded as the best single gauge of the U.S. equities market. The index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. The S&P 500 Index focuses on the large-cap segment of the market; however, since it includes a significant portion of the total value of the market, it also represents the market.

MSCI ACWI: (ACWI: All Country World Index) a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets.

MSCI EAFE Index: (EAFE: Europe, Australasia, Far East) a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada.

MSCI EAFE Small Cap Index: (EAFE: Europe, Australasia, Far East) a free float-adjusted market capitalization index that is designed to measure the small cap equity market performance of developed markets, excluding the US & Canada.

MSCI EM Index: A free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.

Russell 1000 Index: Measures the performance of the 1,000 largest companies in the Russell 3000.

Russell 2000 Index: Measures the performance of the 2,000 smallest companies in the Russell 3000 Index.

Russell 3000 Index: Measures the performance of the 3,000 largest U.S. companies based

Cambridge Associates U.S. Global Buyout and Growth Index: Based on data compiled from 1,768 global (U.S. & ex – U.S.) buyout and growth equity funds, including fully liquidated partnerships, formed between 1986 and 2013.

Cambridge Associates Private Equity Index: Based on data compiled from 1,468 U.S. private equity funds (buyout, growth equity, private equity energy and subordinated capital funds), including fully liquidated partnerships, formed between 1986 and 2017.

Cambridge Associates Venture Capital Index: Based on data compiled from 1,807 US venture capital funds (1,161 early stage, 210 late & expansion stage, and 436 multi-stage funds), including fully liquidated partnerships, formed between 1981 and 2018.

Bloomberg Barclays U.S. Aggregate Bond Index: A broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency).

Bloomberg Barclays Global Aggregate Index: A multi-currency measure of global investment grade debt from twenty-four local currency markets. This benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers.

Bloomberg Barclays Global Aggregate ex-USD Index: A multi-currency measure of investment grade debt from 24 local currency markets. This benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. Bonds issued in USD are excluded.

Bloomberg Barclays Municipal Index: Consists of a broad selection of investment- grade general obligation and revenue bonds of maturities ranging from one year to 30 years. It is an unmanaged index representative of the tax-exempt bond market.

Bloomberg Barclays US High Yield Index: Covers the universe of fixed rate, non-investment grade debt. Eurobonds and debt issues from countries designated as emerging markets (sovereign rating of Baa1/BBB+/BBB+ and below using the middle of Moody’s, S&P, and Fitch) are excluded, but Canadian and global bonds (SEC registered) of issuers in non-EMG countries are included.

Bloomberg Barclays 1-3 Month U.S. Treasury Bill Index: Includes all publicly issued zero coupon US Treasury Bills that have a remaining maturity of less than 3 months and more than 1 month, are rated investment grade, and have $250 million or more of outstanding face value. In addition, the securities must be denominated in U.S. dollars and must be fixed rate and non-convertible.

Bloomberg EM USD Aggregate TR Index: Includes U.S. dollar denominated Brady bonds, Eurobonds, traded loans and local market debt instruments issued by sovereign and quasi-sovereign entities.

Alerian MLP Index: A composite of the 50 most prominent energy Master Limited Partnerships (MLPs) that provides investors with an unbiased, comprehensive benchmark for the asset class.

Bloomberg Commodity Index: Composed of futures contracts on physical commodities and represents twenty two separate commodities traded on U.S. exchanges, with the exception of aluminum, nickel, and zinc.

S&P Global Ex-U.S. Property Index: Measures the investable universe of publicly traded property companies domiciled in developed and emerging markets excluding the U.S. The companies included are engaged in real estate related activities such as property ownership, management, development, rental and investment

MSCI US REIT Index: A free float-adjusted market capitalization weighted index that is comprised of equity Real Estate Investment Trusts (REITs). The index is based on the MSCI USA Investable Market Index (IMI), its parent index, which captures the large, mid and small cap segments of the USA market. With 150 constituents, it represents about 99% of the US REIT universe and securities are classified under the Equity REITs Industry (under the Real Estate Sector) according to the Global Industry Classification Standard (GICS®), have core real estate exposure (i.e., only selected Specialized REITs are eligible) and carry REIT tax status.

Cambridge Associates Private Real Estate Index: Based on data compiled from 1,001 real estate funds (including opportunistic and value-added real estate funds), including fully liquidated partnerships, formed between 1986 and 2017.

S&P Global Infrastructure Index: Designed to track 75 companies from around the world chosen to represent the listed infrastructure industry while maintaining liquidity and tradability. To create diversified exposure, the index includes three distinct infrastructure clusters: energy, transportation, and utilities.

LBMA Gold Price Index: The global benchmark prices for unallocated gold and silver delivered in London. ICE Benchmark Administration Limited (IBA) operates electronic auctions for spot, unallocated London gold and silver, providing a market-based platform for buyers and sellers to trade. The auctions are run at 10:30am and 3:00pm London time for gold and at 12:00pm London time for silver. The final auction prices are published to the market as the LBMA Gold Price AM, the LBMA Gold Price PM and the LBMA Silver Price benchmarks, respectively. The price formation for each auction is in US Dollars.

HFRI Indices: Equally weighted performance indexes, utilized by numerous hedge fund managers as a benchmark for their own hedge funds. The HFRI are broken down into 4 main strategies, each with multiple sub strategies. All single-manager HFRI Index constituents are included in the HFRI Fund Weighted Composite, which accounts for over 2200 funds listed on the internal HFR Database.

HFRI Equity Hedge Index: Investment Managers who maintain positions both long and short in primarily equity and equity derivative securities. EH managers would typically maintain at least 50% exposure to, and may in some cases be entirely invested in, equities, both long and short.

HFRI Event Driven Index: Investment Managers who maintain positions in companies currently or prospectively involved in corporate transactions of a wide variety including but not limited to mergers, restructurings, financial distress, tender offers, shareholder buybacks, debt exchanges, security issuance or other capital structure adjustments.

HFRI Relative Value Index: Investment Managers who maintain positions in which the investment thesis is predicated on realization of a valuation discrepancy in the relationship between multiple securities.

HFRI Credit Index: A composite index of strategies trading primarily in credit markets. It is an aggregation of following 7 HFRI sub-strategy indices. HFRI ED: Credit Arbitrage Index, HFRI ED: Distressed/Restructuring Index, HFRI ED: Multi-Strategy Index, HFRI RV: Fixed Income-Asset Backed Index, HFRI RV: Fixed Income-Convertible Arbitrage Index, HFRI RV: Fixed Income-Corporate Index, and HFRI RV: Multi-Strategy Index.

DISCLAIMER

Magnus Financial Group LLC (“Magnus”) did not produce and bears no responsibility for any part of this report whatsoever, including but not limited to any microeconomic views, inaccuracies or any errors or omissions. Research and data used in the presentation have come from third-party sources that Magnus has not independently verified presentation and the opinions expressed are not by Magnus or its employees and are current only as of the time made and are subject to change without notice.

This report may include estimates, projections or other forward-looking statements, however, due to numerous factors, actual events may differ substantially from those presented. The graphs and tables making up this report have been based on unaudited, third-party data and performance information provided to us by one or more commercial databases. Except for the historical information contained in this report, certain matters are forward looking statements or projections that are dependent upon risks and uncertainties, including but not limited to factors and considerations such as general market volatility, global economic risk, geopolitical risk, currency risk and other country-specific factors, fiscal and monetary policy, the level of interest rates, security-specific risks, and historical market segment or sector performance relationships as they relate to the business and economic cycle.

Additionally, please be aware that past performance is not a guide to the future performance of any manager or strategy, and that the performance results and historical information provided displayed herein may have been adversely or favorably impacted by events and economic conditions that will not prevail in the future. Therefore, it should not be inferred that these results are indicative of the future performance of any strategy, index, fund, manager or group of managers. Index benchmarks contained in this report are provided so that performance can be compared with the performance of well-known and widely recognized indices. Index results assume the re-investment of all dividends and interest and do not reflect any management fees, transaction costs or expenses.

The information provided is not intended to be, and should not be construed as, investment, legal or tax advice nor should such information contained herein be construed as a recommendation or advice to purchase or sell any security, investment, or portfolio allocation. An investor should consult with their financial advisor to determine the appropriate investment strategies and investment vehicles. Investment decisions should be made based on the investor’s specific financial needs and objectives, goals, time horizon and risk tolerance. This presentation makes no implied or express recommendations concerning the way any client’s accounts should or would be handled, as appropriate investment decisions depend upon the client’s specific investment objectives.

Investment advisory services offered through Magnus; securities offered through third party custodial relationships. More information about Magnus can be found on its Form ADV at www.adviserinfo.sec.gov.

TERMS OF USE

This report is intended solely for the use of its recipient. There is a fee associated with the access to this report and the information and materials presented herein. Re-distribution or republication of this report and its contents are prohibited. Expert use is implied.

DEFINITIONS

Asset class performance was measured using the following benchmarks: U.S. Large Cap Stocks: S&P 500 TR Index; U.S. Small & Micro Cap: Russell 2000 TR Index; Intl Dev Large Cap Stocks: MSCI EAFE GR Index; Emerging & Frontier Market Stocks: MSCI Emerging Markets GR Index; U.S. Intermediate-Term Muni Bonds: Bloomberg Barclays 1-10 (1-12 Yr) Muni Bond TR Index; U.S. Intermediate-Term Bonds: Bloomberg Barclays U.S. Aggregate Bond TR Index; U.S. High Yield Bonds: Bloomberg Barclays U.S. Corporate High Yield TR Index; U.S. Bank Loans: S&P/LSTA U.S. Leveraged Loan Index; Intl Developed Bonds: Bloomberg Barclays Global Aggregate ex-U.S. Index; Emerging & Frontier Market Bonds: JPMorgan EMBI Global Diversified TR Index; U.S. REITs: MSCI U.S. REIT GR Index, Ex U.S. Real Estate Securities: S&P Global Ex-U.S. Property TR Index; Commodity Futures: Bloomberg Commodity TR Index; Midstream Energy: Alerian MLP TR Index; Gold: LBMA Gold Price, U.S. 60/40: 60% S&P 500 TR Index; 40% Bloomberg Barclays U.S. Aggregate Bond TR Index; Global 60/40: 60% MSCI ACWI GR Index; 40% Bloomberg Barclays Global Aggregate Bond TR Index.