The U.S. budget deficit, stubborn U.S. interest rates and a record gold price
In this week’s video insight, David Buckland explores the U.S. budget deficit, steadfast U.S. interest rates, and surging gold prices. As the deficit surpasses projections and interest rates remain high, investors eye the soaring gold market. David delves into the performance of gold-focused companies like Gold Road Resources (ASX:GOR), Ramelius Resources (ASX:RMS), and RED 5 (ASX:RED), predicting a shifting landscape as the appeal of the U.S. Dollar wanes.
Transcript:
Hi, I’m David Buckland and welcome to this week’s video insight.
The U.S. budget deficit hit U.S.$1.06 trillion in the six months to March 2024, exceeding an annualised 7 per cent of gross domestic product (GDP) of U.S.$28 trillion. Net interest paid on public debt was up 43 per cent to $440 billion – and this was partly attributable to higher borrowing costs. Combined with increased spending on defence programs, it appears the budget deficit for the year to September 2024 is most likely to exceed the congressional budget office projection of U.S.$1.5 trillion.
And with U.S. ten-year bonds jumping from 3.80 per cent in late-2023 to the current 4.65 per cent and the Federal Reserve System (Fed) funds rate remaining stubbornly high in the 5.25 per cent to 5.50 per cent range, it is unsurprising that gold is having “a day out”. In 2024, gold has moved up by 15 per cent to nearly $2,400/oz., whilst the Australian dollar gold price sits at a record $3,700/oz. In the past 20 years, the U.S. gold price is up 6-fold (from U.S.$400 per ounce).
The Montgomery Small Companies Fund preferred gold exposure includes Gold Road Resources, Ramelius Resources, and RED 5, and a brief comment on each company follows.
Golden Road Resources: market capitalisation of $1.74 billion, with $146 million of net cash and cash equivalents, as well as an investment portfolio valued at $469 million at the end of March, including 20 per cent of De Grey Mining (ASX:DEG). Over the year to March 2024, gold production on a 100 per cent ownership basis exceeded 300,000 ounces at an all-in sustainable cost (AISC) of $1,850/oz. That said, the company recorded a tough March 2024 quarter brought on by a significant rain event.
Ramelius Resources: market capitalisation of $2.34 billion, with $407 million of net cash and cash equivalents. Fiscal 2024 guidance for gold production is around 290,000 ounces with an AISC of $1,600/ oz., with guidance for the June 2024 half-year much better than the December 2023 half-year.
RED 5: market capitalisation of $1.51 billion has fiscal 2024 guidance exceeding 200,000 ounces at an AISC of around $2,000/oz. If the proposed merger with Silver Lake Resources (ASX:SLR) is successful at 3.434 RED 5 shares for 1 Silver Lake Resources share, gold production will double to 425,000 ounces, and pro forma net cash and near cash would close to $400 million, assuming Silver Lake Resources 11 per cent shareholding in RED 5 is monetised or cancelled.
I believe the love affair with the U.S. Dollar is waning, and it will be interesting to see how far the gold price and selected gold companies can go.
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The Montgomery Small Companies Fund own shares in Gold Road Resources, Ramelius Resources and Red5. This article was prepared 29 April 2024 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Gold Road Resources, Ramelius Resources or Red5, you should seek financial advice.
Chief Executive Officer of Montgomery Investment Management, David Buckland has over 30 years of industry experience. David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
