While investors have slowly moved away from investing in individual gold mining companies, interest in buying gold as an investment increased towards the end of 2022.

However, the lack of investor interest in stock, and the resultant lack of capital expenditure for mines, continues to negatively influence the gold mining industry, says research and consultancy company CPM Group MD Jeffrey Christian.

Gold prices were relatively strong at the start of 2022, but started falling in the second and third quarters, continuing to weaken well into October; however, starting in early November, prices rose and the increase accelerated into January.

“This fluctuation was a reflection of weaker investment demand throughout most of 2022, with investors becoming more interested in gold in November, December and January.”

He attributes this renewed interest to institutional and individual investors acknowledging gold’s outperforming of stocks and bonds during the first ten months of the year.

“There are some economic and fundamental factors strengthening the price, particularly its seasonal strength on the back of investment and fabrication demand,” says Christian.

He notes that the gold industry had to deal with a multitude of problems in recent years, including increased mining restrictions, owing to the pandemic, resource nationalism and environmental regulations. There have also been supply chain disruptions.

As a result, the industry has not performed to its potential, and not least because of the industry’s general stock performance.

“On an operational level, the gold mining industry has been doing relatively well. However, from a financial perspective, stock prices, in general, have not risen at the same rate as gold prices.”

As a consequence, many mining companies did not have the capital required to run or expand their operations.

Christian notes that the increased role of institutional investors – along with institutional and individual investors’ increased emphasis on investing in stock indexes and exchange-traded funds, rather than companies – has created a division between the stock market and capital formation. This has further exacerbated the financial constraints hampering gold mining companies.

Gold investment demand is a major factor in determining gold price performance – when investors, having evaluated the economic, political and financial environments in which they live, recognise a hostile growth environment, they typically choose to store their wealth in gold, particularly if this hostility is expected to last for a protracted period.

He adds that, since 2002, more investors have spent more money buying gold than ever before, and this trend is continuing with a secular upward shift in investment demand.

In 2020, demand for gold increased because of the pandemic, as investors sought a “safer” investment option.

Investment demand for gold in the same year was about 40-million ounces and since then, demand has reached about 27-million ounces a year of net investment demand in the form of gold bullion. This trend is expected to continue into 2023.

Recession on the Horizon

Christian points out that, in the early 2000s, CPM Group predicted that the economic and political environment would become more hostile over the next decades, and the firm’s outlook has not changed. While there was a manufactured recession in 2020,

in response to the pandemic and lockdown, the likelihood of a recession in 2024 or 2025 is significantly high.

However, with some positive factors emerging, the recession might be postponed further.

“While inflation is negative for the economy, it can be a positive for gold and gold prices because investors see gold as a good inflation hedge.

“Overall, the stock market is moving sideways and the economic environment is not particularly constructive for overall stock prices at present. Gold often does well in economic and stock market environments similar to what we have now. Stocks are high, but investors see them as vulnerable to sharp drops. Often when this happens investors buy physical gold, taking profits in high stock prices before such a decline occurs,” concludes Christian.