Newmont Corp.: Gold’s Next Bull Market Gaining Momentum (NYSE: NEM)

The gold market has strengthened significantly over the past two and a half years as the monetary system transitions into the “new normal”. The price of gold has fallen substantially after hitting a new peak in 2020 as real interest rates It rose on a more hawkish stance from the Federal Reserve. In addition, the rise in real interest rates in the United States caused the exchange value of the US dollar to rise to all-time highs, which affected gold in terms of the US dollar.

Fortunately, the gold consolidation pattern may be coming to an end. Gold has risen more than 20% since late fall, and is back near its extreme value. This rally was driven by a slight decline in real interest rates in the United States and a significant reversal in the strength of the US dollar. In the previous recession in 2020, gold did very well as deflation was offset by a massive stimulus from the Federal Reserve of quantitative easing and interest rate cuts. Assuming a similar The pattern is showing that, supported by declining inflation expectations, gold may face another wave higher. spread between Gold futures contracts and physical gold bullion exceptionally high, indicating stronger retail demand for the metal than may be evident in the futures market.

In my view, one of the best ways to gain liquid exposure to gold is through large gold mining stocks such as Newmont (New York Stock Exchange:number). Newmont is the world’s largest gold mining company, producing around 6m oz annually with diversified operations all over the world. Newmont also has large reserves of gold, ensuring its value in the long run, and it pays a higher dividend yield of about 4% – likely to rise if gold enters another higher phase. NEM may also be undervalued in the short term as it is still trading below its 52-week high despite the sharp rise in the price of gold. Of course, NEM is subject to many risks that investors must take into account, such as rising production costs due to a global labor shortage.

Has gold started a new bull market?

The price of gold in US dollars has not increased since its 2020 rally. This rally occurred when investors were weighing the potential for massive quantitative easing and record-low real interest rates in the market. For now, the Fed is still a long way from turning toward such a cautious strategy. However, the increasing instability in the global fiat currency market may sufficiently boost gold. Gold rose significantly in the last year in the Japanese yen and the euro and is now bouncing in terms of US dollar rates due to a reversal of dollar strength. see below:

The fact that gold is a global commodity is often overlooked, with a “different” price for each currency. In fact, Newmont’s fortunes depend largely on the “overall currency” value of gold as operating costs (in foreign currencies) fall with the strength of the US dollar. The euro and the yen have partially recovered against the dollar in recent months. However, gold has risen fast enough that it has not depreciated in euros or yen and has risen slightly. Of course, due to the depreciation of the dollar, gold has grown as fast as it can in US dollar terms. With this in mind, I think it’s clear that the “global bull market for gold” started in late 2021, taking advantage of the increased monetary volatility around the world.

Gold is usually closely correlated to the US real interest rate on Treasury notes or the price of Treasury notes minus the expected long-term average rate of inflation. Today, inflation is expected to average 2.27% over the next ten years. However, this number has decreased as the Federal Reserve raised interest rates. It seems unlikely that it will go below current levels due to its strong support. However, the real interest rate is now starting to fall as bond investors prepare for an end to monetary tightening. see below:

Over recent years, gold has had a very strong negative relationship with real interest rates. Of course, real interest rates have risen exceptionally quickly in 2022, while the value of gold has barely fallen (it hasn’t fallen back to pre-pandemic levels despite the rise in real interest rates). Moreover, gold has risen instantly in recent months though relatively A slight drop in real interest rates. This pattern indicates that demand for gold is strong with less regard for short-term monetary policy. To me, it seems that the gold market (or gold investors) believe that any hawkish shift in monetary policy will eventually be met with a more pessimistic change in a recession.

In my view, the statistical evidence for a 2023 recession is generally strong. For one, the Manufacturing and Services PMI below 50, indicating strongly that A contraction. In addition, given the high cost of living and low real wages, levels of personal savings are shallow—suggesting the need for spending cuts in many households. However, higher job opportunities may support the job market. see below:

The Federal Reserve aims to maintain price stability and help full employment. Today, the economy is enjoying overall peak employment levels, albeit higher push “collar” Jobs are seeing a sharp rise in layoffs while “blue collar” jobs are facing massive worker shortages. This fact, and inflation in general, complicates monetary policy – particularly with regard to the gold market and the possibility of a recession. While a ‘recession’ seems likely, it also appears that the economy is in a very different position due to the bifurcation between the ‘digital’ and physical aspects. Specifically, the “digital economy” appears to be in a significant slump, while the “physical economy” (which has a larger workforce) appears to be very strong.

With inflation “slowing more” and the labor market “stronger”, the Fed is unlikely to make any significant policy changes soon. However, given that higher-paying job sectors face weaknesses (with Low wage employment The power of data opacity), can finally make a strong dovish case for cutting interest rates or pursuing quantitative easing. In my view, the Fed may race towards QE in the event of a recession to preserve economic liquidity. However, doing so could spur greater inflation due to the large increase in volatility across the global monetary system. In addition, such outcomes may occur without the Fed if the Treasury tries to produce “~1 trillion dollar coinTo avoid the debt ceiling and thus add ample money supply without much oversight.

Potential value at Newmont Corporation

I think gold is in a fresh bull market that could push the metal to much higher levels, perhaps above $2300, based on the dollar-adjusted price of gold. The main catalyst is the decline in the US dollar, which does not require a pivotal “dossary” approach from the Fed, but rather more Axis Hawks in Europe or other large economies. However, if the US economy enters a recession, I believe that gold’s strength will increase due to the possibility of a return to pessimistic policy stances despite monetary volatility.

I think NEM is one of the best investments to take advantage of this trend. NEM is trading at the lower end of the 2020-2021 range which is 35% below its 52-week high. Of course, NEM may have had a lot of momentum last year and was pushed to an unsustainably high level. However, this rally occurred at a time when the yen and the euro were collapsing relative to the US dollar, suggesting that NEM is the go-to trade to hedge against such monetary instability.

My bullish theses for NEM depend on the broader economy, which I believe is increasingly supportive of gold. However, NEM must also trade at a reasonable rate to provide safe and stable exposure to the price of gold. According to the company’s latest update, it produces about 6 million ounces of gold annually and 1.3 million ounces of “GEO” gold-equivalent metals. Most of the precious metals have been rising recently with the price of gold, so I think NEM’s financial outlook will be a better prediction using the price of gold. With gold back as high as $1,950 an ounce, I would expect NEM to generate around $14.24 billion in annual revenue (at 7.3 million ounces total GEO). The company’s total AISC guidance is currently $1,130/oz, so it should generate operating income of about $820/oz at prices where they are, or about $5.99 billion annually. While this is much higher than its operating income in TTM, the company was achieving this figure roughly when gold was at its peak in 2020. Subtracting approximately $200 million in interest costs for the company and factoring in an estimated tax rate of 32%, NEM’s net income is the outlook About $3.95 billion a year or earnings per share of about $4.87.

Based on this outlook, NEM will only have a forward P/E of 11X today. In my view, this makes it likely that NEM is somewhat undervalued, given that it is a large miner with perhaps the lowest operational risk profile and balance sheet risk of all gold mining companies. Of course, NEM AISC is likely to rise as the US dollar declines (with some international costs rising in dollar terms), so NEM’s net income may be lower than the estimate provided. However, I think gold will probably go up by a few hundred dollars an ounce over the next year, which could increase Newmont’s income significantly.

bottom line

The macroeconomic background facing gold is the primary driver of value for almost all gold miners since their income is highly dependent on gold. Newmont is among the best ways to gain exposure to gold because it does not carry counterparty risk which can be problematic in the gold futures market. While it does have operational risks, its sheer diversification gives it lower risk than many regional gold mining companies. Thus, I view the company as an indirect, more liquid investment in physical gold. Even if gold doesn’t go up, I think NEM could go up due to what appears to be an undervalue, given the recent rally in gold. If gold and its AISC remain flat, the forward P/E for NEM will be well below its normal range.

In the best-case scenario, continued volatility in the international currency markets will push the US dollar lower and cause gold to rise significantly against the US dollar. While a recession may be just around the corner, abnormal trends are at odds with the data and may increase the potential for monetary policy wrangling (leading to fiat currency volatility – as we saw last year). Of course, the NEM is a strong hedge today because it is likely to rise significantly in a recession that triggers a dovish Fed turn. Finally, the issue of the debt ceiling may be You benefit from gold if the Treasury takes measures to speed up the printing of the currency (to avoid closing the debt ceiling).

In the worst case scenario, lower inflation and renewed economic strength will lead to widespread economic normalization that reduces monetary volatility and lowers the value of gold. If gold falls below pandemic levels, NEM should decline, but the overall downside risk is reduced given that it is trading below the 2020-2022 range. This scenario can be seen as a return to the 2013-2019 model of weak commodity prices. In my opinion, based on the available data, this does not seem likely, but it is possible. Of course, in this scenario, stocks are likely to perform very well, so if one owns a portion of NEM (and peers) and traditional stocks, there is probably more excellent portfolio stability. Overall, I’m very bullish on NEM and think it’s a solid risk-reward trade-off for 2023.