Are we near the bottom for gold? Nigel Somerville reviews...

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Back in August the Gold price peaked at $2063 and it has been more-or-less downhill ever since. On Friday the gold price closed at $1700 – a 17.6% drop in around seven months. So is the gold bull story all over? Stock markets have been rising because everybody seems to think this long-awaited V-shaped recovery will come along and there has been the mother of all government splash-outs of helicopter money, QE and other forms of easy money. The expectation seems to be that this wall of money is sitting on the sidelines waiting for the shops to reopen and then everything will be OK. I wish it were that simple. There is the small matter of all that government debt which has been racked up. In the UK the cost of Covid is expected to be around £400 billion in the last year. How does the grateful taxpayer pay that off, given that the national debt exceeds £2 trillion? Or are we just going to see even more magic pounds being churned out by the Bank of England’s money printing machine? If that is the case, what about currency debauchment? We know from history that printing money has but one single outcome. In the meantime, the UK economy has shrunk by 10% - and that means the tax-paying base has shrunk sharply. And there remains the question of how many jobs will the Covid crisis have eventually cost? Her Majesty’s Government has just extended the furlough scheme yet again, this time to September. I continue to believe that a good many furloughed staff will return to work only to be handed a P45. For now the party can continue, at least into the summer, but I fear that the UK is heading for a grizzly autumn.

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What if this fabled V-shaped recovery doesn’t happen, and instead we see an almighty spending splurge followed by a big slow-down? Long bond yields have been rising, indicating inflation on the way and hence rising interest rates. But if rates rise by very much it will unaffordable – not just for the government, but for businesses. And if rates do not rise by enough to combat inflation then real interest rates will drop – and that is good for gold. If we don’t get inflation then real yields will fall again – good for gold. And what will the Gold price do if we face yet more QE to infinity? The current data is surely against me, but all this money printing has just papered over the cracks. If markets get wind that all is not quite so perfect, I suggest that Gold will start to strengthen and stock markets will fall – and since the market tends to look 6-9 months ahead, we could be on that point very soon indeed.

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It is a tough time to be a Gold bull, and my gold shares have suffered, but what is there to suggest that things might turn in my favour? Well, for a start, President Biden’s stimulus package just got through the Senate so that’ll be another $1.9 trillion coming off the Fed’s money printing machine. This will get spent on “stuff”. I suggest that will be largely imports and I would not be surprised to see supply chains struggling – which would send up prices. I also note the excellent Peter Brailey of these parts with regard to oil: $100 a barrel? I wouldn’t discount that. What would the world look like with $100 oil, the inflation genie out of its bottle and a hefty increase in inflation? Welcome back to the 70s! We already have NHS staff railing against a 1% pay-rise. Who will be next? I know I have been too bullish on gold, and the length and magnitude of the correction has taken me by surprise but I sense that the bottom is very close and that things will look very different over the summer. And so to my gold mining shares……

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I am waiting and waiting for Ariana Resources (AAU) to spill the beans over its special dividend, which I expect to be around 0.7p per share. It still has to get a corporate restructuring through the courts (later this month, I hope) but next month confirmation should arrive that the necessary distributable reserves have been created. That should produce a nice tasty cheque. Meanwhile we should get news on the Kiziltepe plant (capacity expansion) and surrounding gold deposits, an update on plans for a new mine and plant at Tavsan and perhaps some update on what I hope will turn into a decent operation at Salinbas, not to mention what CEO Kerim Sener has up his sleeve in terms of what he is going to spend the corporate action wonga on. If and when the gold bull resumes, I think Ariana has plenty of room left to travel and at 4.3p and up to 5.5p I retain a buy stance. Centamin (CEY) has been struggling in the face of the gold correction and the shares are now down to 105p. This is partly down to the ground movement issues last Autumn and I hope for more positive news on results day, March 22^nd – when the company has promised a  dividend. Golden Prospect Precious Metals (GPM) has been struggling too as the gold price and gold stocks have been sliding. Rather like the Junior Gold unit trust, Golden Prospect tends to outperform in both directions – great news in good times, not so good now. So right now I have egg on my face, but since I expect gold to head north again I am holding firm. An old holding of mine – Australian-listed Medusa Mining (MML, formerly of the AIM Casino some years back) offered up a nice surprise in the form of the resumption of dividends. And finally my little play on Panther Metals (PALM) of the Standard List although down, is still well up from when I bought it last year. Overall, my portfolio of gold shares is down but certainly not out.

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