Gold pushed through the US$1,250 mark for the first time in well over a year on Thursday, bouncing in tandem with oil, and somewhat unexpectedly iron ore.
So does this mark the start of a rally and a consequent bout of corporate activity?
Certainly it’s nice for the gold companies to have an extra bit of margin on their production, and to bring add a few more bucks to their dollar-per-ounce-in-the-ground valuations.
It’s worth noting though, that on a five year graph this year’s strength in gold hardly shows at all.
So, if the recent rise is the start of a trend, well and good. But if we’re taking measurements of the here and now then the recent strength is not game changing.
Not at all.
After all, although the oil price has recovered somewhat from its absolute troughs, no-one’s talking about renewed strength in oil. And in iron ore, new projects, and ambitious new companies are non-existent.
So what is it with gold?
The great thing about gold is the narrative that goes with it.
Gold is about fear.
Never mind that the gold price often moves with oil, or that US dollar weakness writes itself into the gold price in a way that currency movements in South Africa or Canada or Australia do not, even though these countries are significant producers of the metal.
And never mind that even as there is a glut in oil and a glut in iron ore, so too there is a glut in gold, which is actually rarely ever used, aside from some specialist applications in certain electronics, and after its been dug up out of the ground and extracted from its ore is then returned underground to be stored in bank vaults.
The point isn’t about how much gold there is, or isn’t. The point is the fear.
When markets look vulnerable, or the Middle East looks particularly explosive, or Chinese data looks even more unreliable than usual, then fear stalks the trading floors of the world and the whisper is gold.
And this is borne out in the stories that the gold miners themselves tell. Junior miners with small assets in South America will hit town on a small fundraising expedition and suddenly be able to talk as experts on Middle Eastern politics or the intricacies of the deliberations of the Federal Reserve.
The sensible ones will try not to be drawn into predicting where the gold price will go, of course. But they can only sit on the fence for so long, because if gold falls significantly shareholders will want to know why they weren’t warned.
And in that context it’s interesting and ironic that just as hedging was at last beginning to creep back into a market that turned virulently hostile even to the very idea, the gold price is ticking up.
Peter Hambro looked good with his hedge on production from his Russian mines. But anyone who’s done one of the new so-called “collar” deals, which allows for the guaranteed sale of gold within a certain price range will not be enjoying the calls from shareholders if the upper end of the collar was set at US$1,250, which didn’t look so unreasonable three or four months ago.
It’s a fickle market, to be sure, but the recent gold price strength has given renewed vigour to another hackneyed old market narrative: the revival of M&A activity.
But would it have got signed with gold at US$1,200 and lower? – almost certainly. There can be little doubt that most of the substantive discussions took place with gold closer to US$1,200, if not below it.
And the idea that corporate activity in the gold sector is an off-on kind of thing is open to question itself in any case. Another way of looking at it is that it’s always on, and it’s just a slow-burn.
On that view consolidation has actually been going on for several years now, with obvious examples including Endeavour’s (YSE:EDV) takeout of Adamus, B2Gold’s (TSE:BTO) takeout of Volta, Eldorado’s (TSE:ELD) takeout of European Goldfields, Alamos and Aurico’s (TSE:AMI) combination and so on and so on.
But on the negative side of the ledger, Endeavour took a pop at Amara before, and failed, and the ink is still drying on the newspapers that reported the collapse of a tie-in at a larger level between AngloGold (NYSE:AU) and Randgold (LON:RRS).
Corporate activity ebbs and flows, as does the gold price.
So will there be more deals? Yes. Will they depend on the gold price? Only partially.
And are some marginal companies now being given a lifeline they didn’t expect? Yes, but that’s another story.