Commentaries

Gold Fund Commentary

Gold Fund Commentary

Market Overview

As of September 30, 2024

While gold’s strong performance during the first half of 2024 was notable for its disconnect from traditional price drivers, its persistence through the third quarter largely represented a return to form.

With tailwinds from falling real interest rates, a weaker dollar and an increasingly unsettled geopolitical landscape, gold continued to plow higher, setting a succession of new nominal highs during the period as it climbed 12.9% to finish around $2,630/oz.1 Typically a leveraged play on movements in the price of gold, the FTSE Gold Mines Index surged 21.2%. Silver was also robust, advancing 7.0%.2

Gold Rally Picks up Pace in Third Quarter

 Gold’s inverse relationship with changes in real interest rates histor- ically has been the most important driver of its price, and we saw this axiom reassert itself in the third quarter. Real rates eased as consis- tent improvements in inflation data paved the way for the Federal Reserve’s first rate cuts since the March 2020 onset of Covid-19. September’s oversized 50 basis point cut was broadly in line with market expectations and brought the central bank’s key policy rate to a range of 4.75–5.00%. Meanwhile, the narrowing interest-rate differ- entials between Treasuries and non-US government debt weighed on the dollar, providing another source of support for the gold price. One carryover influence on gold from earlier in the year has been the recognition of increased global risks. With its history as a perceived “safe haven” during periods of turmoil, gold often holds particular appeal amid uncertain circumstances such as the ones we face today. Unrestrained government debt globally has raised the specter of currency debasement, for example, while geopolitical risk— headlined by Ukraine/Russia and broadening military engagement in the Middle East—shows no sign of relenting. A global computer outage in July caused by a faulty software update from cybersecurity company Crowdstrike resulted in widespread disruption—grounded aircraft, canceled surgeries, inaccessible bank accounts—and a renewed appreciation for a physical potential hedge like gold in a tech-dependent world. And all eyes now have turned to the conten- tious race for president in the US, the results of which may have broad policy implications affecting both domestic and cross-border actors.

Global central banks are among the potential gold buyers sensitive to these issues, and in recent years they have very actively accumulated the metal in an effort to diversify their reserves. That said—and even though central bank purchases have made a new all-time record in the first half of 2024—the pace of this increase, thus far in 2024, has been markedly slower than the pace we saw during the record-set- ting levels of 2023.3 Notably, China’s gold holdings have been flat since May after 18 consecutive months of net adds.4 But while central banks seem to have moderated their purchases, financial buyers have been increasing theirs. September represented the fifth consecutive month of inflows into physically backed gold Exchange- Traded Funds (ETFs)—which capture investment demand from both institutional and individual investors globally. Annual gold ETF flows haven’t been positive since 2020.5

Sidestepping the Future

In our last commentary, we marveled at gold’s resilience in the face of circumstances that typically would weigh on its price. This quarter, meanwhile, we reflected on a rally that was driven by dynamics more traditionally supportive of gold. And while a number of gold market analysts are predicting the price will continue to climb for the balance of 2024, we accept that we can predict neither the drivers of the gold price nor how gold will react to them in the short term.

Take interest rates, for example. Fed Chair Powell characterized the September rate cut as a “recalibration” of central bank policy reflecting its growing confidence that labor-market strength could be preserved amid healthy economic growth and cooling inflation. While data in early October seemed to back up the central bank’s confidence, unflagging strength in the labor market could spark a resumption of inflationary pressures, compelling the Fed to shift back toward a hawkish bias sooner than expected. In other words, this rate-cut cycle—and the tailwind for gold that it represents—may not be as deep or as durable as some had expected only a few weeks ago. But who knows?

The future is inherently uncertain. As such, we advocate for strategic, rather than tactical, exposure to gold as a potential hedge against adverse market outcomes.  

Portfolio Review

Graph showing the relationship between market volatility, central bank policies, and gold's rising value in 3Q24, as analyzed in the Gold Fund Commentary.

Gold Fund A Shares (without sales charge*) posted a return of 16.13% in third quarter 2024. Gold bullion and gold-related equities both contributed to performance. The Gold Fund underperformed the FTSE Gold Mines Index in the period.

Leading contributors in the First Eagle Gold Fund this quarter included gold bullion, Barrick Gold Corporation, Wheaton Precious Metals Corp, Newmont Corporation and Northern Star Resources Ltd. The factors driving the performance of gold bullion during the quarter were discussed in detail in the Market Overview section of this report. Canada’s Barrick Gold is the second-largest gold producer in the world. The company reported production and expenses in line with guidance for its most recent quarter and reiterated expectations for increased production and cost improvements in the second half of 2024. Barrick also announced positive updates regarding the gold production at its Goldrush mine in Nevada and Pueblo Viejo in the Dominican Republic. Longer term, Barrick has highlighted a brownfield expansion project in Zambia and a greenfield project in Pakistan as potential growth drivers in the late 2020s. We continue to like Barrick’s organic growth opportunities, ability to execute in challenging environments and focus on returning cash to shareholders, including an opportunistic $1 billion share repurchase program. Canadian streaming and royalty company Wheaton Precious Metals reported production in line with expectations for its most recent quarter alongside better-than-expected costs and free cash flow. Wheaton also announced that construction activities have advanced at a number of sites and will begin producing in the next 16 months; these include the Blackwater, Goose, Platreef, Mineral Park and Marmato Lower mine projects. With a significant cash balance, no debt and an undrawn revolving credit facility, the company has a strong balance sheet and in our view is well positioned to acquire additional mineral stream interests. We believe Wheaton remains a well-run company with exposure to production from high-quality, low-cost mines. 

Newmont is one of the world’s largest gold miners and a major producer of silver. The company reported better-than-expected results for its most recent quarter and reiterated its prior guidance to increase production and reduce costs in the back half of 2024. The company is on track on its plan to divest noncore assets following its 2023 acquisition of Newcrest Mining, with proceeds used to reduce debt and buy back stock. It also has received contingency payments from asset sales that were not previously included in its divestiture pipeline, which has further supported share repurchases and debt prepayment. We remain constructive on Newmont’s strong fundamentals, long-term prospects and commitment to returning capital to shareholders through buybacks and dividends.

The leading detractors in the quarter were Pan American Silver Corp Contingent Value Rights 2019-22.02.29, JPMorgan US Govt MMKT Fund Capital Shares - Fund, Industrias Peñoles SAB de CV, G Mining Ventures Corp and Fresnillo plc.

Pan American Silver is a Canadian mining company with large silver endowments and a diversified portfolio of producing mines. As the contingent value rights are connected to the Escobal silver mine in Guatemala, their performance from quarter to quarter largely reflects expectations for the reopening of the mine rather than the underlying price of silver. The mine remains on care and maintenance pending government review of adherence to indigenous consultation guidelines1; no timeline has been set for the completion of the consultation process or restart of operations.

A subsidiary company of Grupo BAL, Industrias Peñoles is a world leader in silver production and Mexico’s largest producer of gold, zinc and lead. Peñoles derives a significant portion of its sales and earnings from its 75% stake in Mexican precious metals group Fresnillo. The company reported above-consensus revenue, earnings margins and free cash flow for its most recent quarter, but a union strike brought operations to an indefinite halt at one of its Mexican mines. Meanwhile, uncertainty around new leadership in Mexico has been an overhang for the country’s equities in general. G Mining Ventures acquires, explores and develops precious metal projects. The company was created in 2020 as an offshoot of G Mining Services, a provider of mining project execution services. G Mining Ventures’ flagship property, Tocantinzinho in Brazil, was acquired opportunistically during Covid-19 and went into commercial production in September. Its other gold projects include the development stage Oko West in Guyana and exploration-stage CentroGold in Brazil, which it acquired from BHP in September. The family-based G Mining management team are experienced contractors with a history of delivering projects on time and within budget.

We appreciate your confidence and thank you for your support. Sincerely,
First Eagle Investments

PDF