This market is hot 🔥

Hope you are having a good Saturday!

I’ve been enjoying my son’s baseball games— 4 alone this weekend! So you know where I’ll be. I wanted to pass this along from our friends at Katusa Research about the recent surge in gold… for your weekend reading pleasure!

Cheers to you!

Why Aren’t Gold Stocks Kicking Ass With Gold’s Rise?

Do you know the business golden rule?

The man with the gold, makes the rules.

And right now, there’s a significant group of new rule makers in 2024….

Gold reserves reported to the IMF by Central Banks and governments around the world reached a record high of 1.16 billion ounces this year. 

This is an increase of 190 million ounces since the Global Financial Crisis in 2009. 

The chart below shows the massive increase in government and controlled reserves since the GFC.

These ounces today are worth a staggering $450 billion.

And that figure balloons when converted into local currencies that have depreciated against the US dollar over time. 

Those Central Bankers who have been buying gold have demonstrated that investing in gold over the last 15 years isn’t just smart—it’s strategic. 

Gold fortifies Central Bank’s reserves, anchoring local currency stability and shielding against devaluation.

• In a world where the only certainties are often said to be death and taxes, we must now add a third: relentless monetary and fiscal expansion. 

Such policies typically erode currency value, making gold an increasingly critical asset for preserving wealth.

Gold's value has not just held but soared across major global currencies. 

Whether you invested in gold in USD, Euros, Canadian Dollars, Yen, Yuan, Aussie Dollars, or Mexican Pesos, you’ve seen significant returns. 

Below, a chart vividly illustrates the robust gains of gold across different currencies over the past 20 years.

This trend is a clear signal. 

The time to act is happening in real time. 

 According to the latest data from the World Gold Council, by the end of 2023, institutional portfolios had earmarked a mere 4% of their total assets under management (AUM) for gold. 

This allocation is primarily in gold-backed ETFs (about half) and mining stocks (one-third).

With the balance in physical bullion, derivatives, and multi-asset funds—totaling around 81 million ounces in ETFs.

Traditionally, savvy investors have suggested allocating 5-10% of a portfolio to gold. 

• Consider this: Just nudging that figure from 4% to 5% could ignite a 25-50% surge in gold demand, representing tens of millions of ounces. 

While Western investors may hesitate…New Wealth across the world is not hesitating to move into gold.

The Global Stage Is Set for a Dramatic Shift in Demand…

This stark visualization is not just numbers—it's a wake-up call. 

The potential for gold is vast and underutilized, presenting a golden opportunity for those ready to seize the moment and capitalize on the market's slow response. 

The chart below starkly contrasts AUM in gold-backed and gold miner ETFs with those of major US ETFs tracking indices like the S&P 500, Nasdaq, and bond markets. 

History doesn’t always repeat but it does rhyme.  

As you can see, when AUM percentages get into the 2-3% range, there is a tendency to bounce strongly. 

Gold at record highs seems to be a reasonable argument for an increase in allocation to gold away from overvalued equities. 

It might surprise you, but to put it in perspective, since 2021 gold stocks are down nearly 30% as measured by the Gold Bugs Index…

Whereas gold bullion has generated a positive return over the same timeframe.

Gold developers have also suffered tough times, with some trading at steep discounts to intrinsic value. 

The Deal Market is HOT

And that spells opportunity.

In 2023, merger and acquisition in the gold sector totaled $21 billion marking one of the largest years in M&A in a decade. 

In 2023, the $21 billion in M&A consolidated 223 million ounces of gold, according to S&P Platts. 

This implies a deal value of roughly $94 per ounce.

If you take out the mega merger between Newmont and Newcrest, total sector M&A activity was $4.6 billion for 89 million ounces. This implies a deal value of roughly $51 per ounce. 

Currently, the gold developer sector is trading at roughly $30 per ounce…

And this leaves the door open for potential additional upside…

When Does The Mother of all Rallies Start?

Gold prices have ripped the past 2 years, rising over $550 per ounce, setting new all-time highs. 

Yet we are just beginning to see the miners take part in the rally. Year to date, most miners are up less than gold. 

Which seems odd given the leveraged upside exposure that gold miners carry. 

The key overhang lies in a rarely discussed indicator - The cost of capital. 

Mining is a high risk business and high risk means debt and equity providers need higher rates of return in order to incentivize investment. 

Even though the Federal Reserve has telegraphed lower rates in the future, this doesn’t hold up for mining stocks.  

Raising money is going to get harder and will become more dilutive for miners 

The weak and feeble juniors simply have no chance in this new high stakes world. 

In my opinion, it has never been more important to be aligned with companies:

1. With only the top tier management teams 

2. That have big assets, strong balance sheets and

3. That operate in politically stable jurisdictions.

All 3 of these points are critical. Such a key filter to de-risk your portfolio and expose your portfolio to upside potential.

Take these 3 criteria and check all your positions. 

There’s a good chance one or all of these are missing.

Monday June 3^rd, before market open…

The KR Special Situations Team will be releasing the name of one particular gold stock. 

It ticks all 3 boxes, and many more for me.

You can access it HERE on Monday. 

(Make sure to refresh that link right at 9AM EST).

When I tell you about the names behind this, you’ll know why.

Regards,

Marin Katusa and the KR Special Situations Team