• 506 days Will The ECB Continue To Hike Rates?
  • 507 days Forbes: Aramco Remains Largest Company In The Middle East
  • 508 days Caltech Scientists Succesfully Beam Back Solar Power From Space
  • 908 days Could Crypto Overtake Traditional Investment?
  • 913 days Americans Still Quitting Jobs At Record Pace
  • 915 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 918 days Is The Dollar Too Strong?
  • 918 days Big Tech Disappoints Investors on Earnings Calls
  • 919 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 921 days China Is Quietly Trying To Distance Itself From Russia
  • 921 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 925 days Crypto Investors Won Big In 2021
  • 925 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 926 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 928 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 929 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 932 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 933 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 933 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 935 days Are NFTs About To Take Over Gaming?
U.S Targets Russian Gold Stockpiles

U.S Targets Russian Gold Stockpiles

In its latest round of…

Could This Be The Most Exciting Lithium Play Of 2021?

Could This Be The Most Exciting Lithium Play Of 2021?

This Nobel Prize-winning breakthrough is…

Is It Time To Pay Attention To Gold Miners?

Is It Time To Pay Attention To Gold Miners?

The invasion of Ukraine by…

Arkadiusz Sieron

Arkadiusz Sieron

Writer, Sunshine Profits

Arkadiusz Sieron is a certified Investment Adviser. He is a long-time precious metals market enthusiast, currently a Ph.D. candidate, dissertation on the redistributive effects of…

Contact Author

  1. Home
  2. Commodities
  3. Precious Metals

How The M&A Trend In Gold Could Spark A Precious Metals Bull Run

Gold

Just a few weeks ago, Barrick Gold merged with Randgold Resources. The $18.3 billion-deal has created a sector-leading miner owning top gold mines and the largest reserve base among its peers. Initially, the new company had a market capitalization of more than $23.75 billion.

Before the dust fell, another piece news shook the bullion industry. Just a few days ago, it was revealed that Newmont Mining would be buying Goldcorp in a massive $10 billion deal. The resultant company will be the world’s largest gold producer by a number of ounces mined (about 8 million ounces annually), larger even than “New Barrick” (about 6.6 million ounces per year).

These two deals may be just the start of a big shake-up in the bullion industry. After all, the sector desperately needs consolidation. Lackluster bullion prices hit the miners’ profitability in the last few years, pushing gold mining out of favor for many investors. A new wave of mergers and acquisitions could, thus, reduce costs and bring profitability back to the gold mining sector. Hence, if we see a smart consolidation, mining stocks can go up. Given the very low valuations relative to the S&P 500 (see the chart below, which compares the market value of New Barrick with Newmont and the general stock market index), it might be a buying opportunity (however, it’s not easy to invest in mining stocks, picking the right mining stock, etc.).

(Click to enlarge)

Chart 1: New Barrick’s market value (blue line), Newmont’s market value (green line) and the S&P 500 (orange line) over the last ten years.

Implications for Gold

What does the new wave of M&A in the bullion industry imply for gold? Not so much, at least not directly. The consolidation may improve the situation of the sector, but it will not affect the gold prices, set in the international markets in London and New York. Gold production costs may fall, but gold bulls should not worry – costs do not drive prices. It works the other way around – the lackluster gold prices have finally pushed gold producers towards consolidation, whose purpose is to reduce costs and boost productivity.

However, there might be an indirect positive effect. What we mean here is that the improved valuations of gold stocks may spur some interest in gold. Gold mining was out of favor for several years. Any positive changes could, thus, create positive sentiment toward the whole gold market. Related: Zimbabwe Pulls Plug On Internet Amid Fuel Price Protests

Having said that, we do not believe that this effect will be strong. If at all, there will be a reverse link, i.e. a stronger interest in gold as an asset class may trigger more positive sentiment toward companies which mine bullion. You see, the consolidation in the bullion industry usually occurs around gold bottoms. The last big wave of M&A took place in the late 1990s, just at the end of the bear market in gold, which was obviously a tough period for the mining industry. Just as a reminder, gold bottomed at $253 in 1999, as one can see in the chart below.

(Click to enlarge)

Chart 2: Gold prices (London P.M. Fix) from January 1996 to January 2019.

Now, the situation is somewhat similar. After the sharp fall in gold prices in 2013, gold prices were trading sideways around $1,200, a level lower or only slightly higher than total gold production costs. In other words, the recent wave of M&A suggests that gold may be bottoming.

The current macroeconomic outlook – i.e., the economic slowdown both in China and the U.S. and the pause in the Fed’s monetary tighteningis also favorable for gold. If the greenback enters the bear market, gold should rally. Will that happen? We will see. Today the ECB holds its monetary policy meeting, while the FOMC gathers next week. These events might be key for the gold market this year. Stay tuned!

By Arkadiusz Sieron via Sunshine Profits‘ Gold News Monitor and Market Overview

More Top Reads From Safehaven.com

Back to homepage

Leave a comment

Leave a comment