Speaking at RIU Sydney Resources Round-up, Forwood suggested inflation would have to be at 10% and nominal interest rates at 3% for the gold price to be under seriously genuine threat.
He further suggested markets may be of the belief – given the gold price hasn’t tanked – that the increasing interest rate cycle now underway many not be as prolonged or as significant as some may fear because debt levels are so high and economies wouldn’t be able to bear major hikes.
He agrees there is a chance stagflation could kick in, but again, history has also evidently shown gold is the place to be in such circumstances.
Elsewhere, he noted commodities always do well in an inflationary environment, and claimed pricing is still well below equivalent levels seen in 2008 when compared to the Dow Jones levels at that time.
Other positives for the sector is the major lack of investment by miners in their own businesses – with capital instead deployed on dividends and share buy backs – and a lack of M&A.
On the other side of the equation, negatives to keep in mind would include strongly rising interest rates, opex and capex cost escalation, and a very strong US dollar.
Regarding China, Forwood said the current situation with China in light of city lockdowns and stimulus talk was akin to sitting in a car with feet on both the accelerator and brake.
Once that’s resolved, China could “take off like a scolded cat”.
So far as junior equities were concerned, he noted the sector was up 16% to the end of April versus the Dow Jones losing 9%.
He believes some sector rotation could potentially be in train, and that if that trend is true (and continues), “the sky is the limit” given the small size of the resources sphere compared to the rest of the market.
