This column’s record with gold miners is chequered at best, dreadful at worst, showing that even sitting on a gold mine is no guarantee of riches.

Last week’s full-year results for 2022 from Centamin did not particularly shine, and nor did guidance for 2023, but there may yet be grounds for persisting with this precious metal producer, and indeed sector peers Resolute Mining and Shanta Gold.

Centamin’s 2022 numbers got a cool reception as the shares slid back below the 100p mark.

A 13pc increase in the all-in sustained cost of production outstripped output growth of 6pc, while selling prices came in flat and interest costs rose, with the result that profits fell, adjusting for an asset impairment charge in 2021.

Cash conversion was weak (albeit due to investment in energy efficiency and mine optimisation at the Sukari site that should bring long-term benefits), the dividend was lower than the year before and a long-term legal case in Egypt rumbled on.

So far, so bad, you might think. But Centamin has a net cash balance sheet and has a market cap ($1.5bn) that barely exceeds net asset value ($1.3bn) and even an unchanged dividend implies a forward yield of more than 4pc for 2023.

Moreover, the gold price, some $1,900 at the time of writing, still exceeds the all-in sustained cost of production of some $1,400 by a good margin, and the precious metal is doing what it is supposed to, which is to act as a buffer in times of stress.

As soon as Silicon Valley Bank went down and Credit Suisse wobbled (yet again), the gold price jumped, and this is really why that trio of miners reside in the Questor portfolio – protection when markets question the narrative of central bank control.

Gold is perceived to be a good hedge against inflation, thanks to how it rocketed from $35 an ounce to more than $800 during the 1970s but there was no real inflationary threat in the first decade of this millennium when the metal surged to $1,900. That was thanks to the chaos and disorder that came with the financial crisis.

Policymakers had to resort to unorthodox tools such as zero interest rate policies and Quantitative Easing (QE) to preserve the foundations of the global financial system.

Gold did little in the 2010s as central banks lay fresh claim to being back in charge, but the metal has made fresh gains in the 2020s.

It is possible to argue that one reason behind SVB’s collapse, besides the bank’s own weak risk controls, is not the sharp interest rate increases pushed through by central banks in the past year, but the lengthy period of zero interest rate policies and QE that preceded it. 

A period of central bank manipulation to keep the cost of money artificially low – albeit you can argue for good reason in an era of the financial crisis, the European debt crisis and Covid – encouraged risk taking on an epic scale.

As interest rates and bond yields rise, we are now discovering what may be the genuine cost of money, with the result that capital is again at risk as appetite wanes and capital is treated with greater respect.

Just look at the price charts of cryptocurrencies, special purpose acquisition vehicles (Spacs), many Initial Public Offerings (IPOs), meme stocks like GameStop and, yes, Silicon Valley Bank from March 2020 to March 2023.

It is almost as if the last three years never happened. Prices that went up like a rocket have come down like the stick, back to where they were, if not lower. The tide of cheap liquidity that carried all these assets has now started to go back out.

These asset price drops, last autumn’s Gilt market chaos and now banking shivers show it may not be easy for the central banks to extricate themselves from zero interest rate policies and QE without something breaking somewhere.

Markets have been baying for a pause in interest rates and then a pivot to rate cuts, but in the hope of a cooling in inflation and a gentle economic slowdown, not in response to fresh financial market chaos.

They may have to be careful what they wish for.

A return to rate cuts, or even QE, at a time when inflation could still be above target may boost interest in real assets, at least if history is any guide, and that could include commodities, and quite possibly gold.

Source: The Telegraph 

BDST: 1129 HRS, MAR 22, 2023
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