The state of play for ASX gold miners as prices near 7-month highs of US$2,050

Gold prices briefly topped US$2,050 an ounce overnight – A six month high and on par with previous peaks in May 2023, March 2022 and August 2020.

The precious metal has finally been able to move more freely as pieces of the bullish narrative come together, including:

• Disinflation momentum: US inflation slowed to 3.2% in October from 3.7% in September and below market forecasts of 3.3%. While Australia's monthly CPI indicator came in much cooler than expected, down to 4.9% in October from 5.6% in September and below analyst expectations of 5.2%. German inflation also eased to 3.2% in November, a level not seen since June 2021.

• Peak Fed: Two of the most hawkish Federal Reserve officials who led the push for more hikes last year signalled they could be comfortable holding rates steady for now, according to Bloomberg. "For several more months ... three months, four months, five months ... we could start lowering the policy rate just because inflation is lower," said Governor Christopher Waller.

• Rate cuts to come: The market now expects the first Fed cut to take place in May 2024, with nearly 100 bps in easing seen for the full year. Two months ago, it only expected 50 bps of easing.

Charts to Watch

The US 10-year yield is down 77 bps since its October 23 peak.

US 10-year yield daily chart (Source: TradingView)

The US Dollar Index is down around 3.7% this month to a near 4-month low.

US Dollar Index daily chart (Source: TradingView)

Gold has rallied back to previous peaks. It's within 2% of all-time highs.

Gold weekly chart (Source: TradingView)

The VanEck Gold Miners ETF is breaking out to a 4-month high.

VanEck Gold Miners ETF daily chart (Source: TradingView)

The State of Play

Gold might be on the verge of breaking out to record highs but most gold names like Evolution Mining (ASX: EVN) and Northern Star (ASX: NST) are trading 30-50% below all-time highs.

If you look at the cost side of things, it's pretty clear why miners are struggling.

Evolution Mining: September Quarter 2023 (in Australian dollars)

• Average realised gold price: $2,907 an ounce

• All-in sustaining cost: $1,612 an ounce

• All-in cost: $2,387 an ounce

• Mine cash flow before major capital: $245 million

• Group cash outflows: $26.4 million

Northern Star: September Quarter 2023 (in Australian dollars)

• Average realised gold price: $2,815

• All-in sustaining cost: $1,939 an ounce

• All-in cost: $2,748 an ounce

• Mine operating cash flow: $306 million

• Group cash inflow: $36 million

To add some perspective, Evolution's all-in sustaining cost was $1,043 an ounce back in FY20.

What does the data tell us?

• Painful cost inflation: Costs for Evolution have climbed around 60% since FY20. So realistically, gold at US$2,000 an ounce in FY20 vs. US$2,000 in FY23 are two very different things.

• AISC vs. AIC: You'll notice a big jump between all-in sustaining costs and all-in costs. That is because all-in costs include all capital expenditures such as new projects, expansions and exploration. Bringing new projects online is no easy feat in this environment.

• Poor cash flows: As a result of the above two points, gold miners are struggling to deliver meaningful cash flows. Evolution is a $7.0 billion company posting $26.4 million in cash outflows in the September quarter. To add some perspective, the $6.0 billion Whitehaven Coal posted $269 million in cash flows in the same quarter.

A Rising Tide Lifts All Boats

A rising gold price is a positive tailwind for gold miner valuations. Especially if prices can break above the previous record of US$2,081 an ounce.

"For current pricing to persist, geopolitical tensions need to remain, or real yields need to move lower," Morgan Stanley analysts said in a note last month. They pointed a few interesting data points including:

• "Gold ETF holdings are now at the lowest level since early 2020 with almost continuous outflows since April 2022."

• "Central bank gold purchases continue to be strong, led by China, which has now increased holdings for 11 consecutive months, as well as increases in Poland, Turkey, Libya and others."

Two Charts of Interest

A report from Longview Economics spoke about how junior uranium miners were outperforming large caps.

“That phenomenon is typical at the beginning of a commodity super-cycle, as promising junior miners often have small mines with high-growth potential," the analysts said. This could be a theme to watch if gold is in the midst of a breakout. Now on two interesting charts.

Red 5 (ASX: RED) operates the King of the Hills Gold Mine in the Leonora region in WA. This area has been subject to plenty of M&A and consolidation, notably Genesis Minerals' acquisition of St Barbara's Leonora assets for $600 million earlier this year.

The chart looks like a staircase with the tendency to experience shallow pullbacks to the 20-day moving average (red). This could be one of those classic rallies where the trend is your friend (until it isn't). I'll be watching to see how the stock handles its first pullback and whether or not it'll catch a bid (should it hit something like the 50-day (green).

Red 5 daily chart (Source: TradingView)

Resolute Mining (ASX: RSG) was one of the best performing gold stocks on Wednesday (the day where it was a sea of green for gold miners). The stock is breaking out of a four-month long base, where price action has been extremely tight.

One thing to note is that Resolute is an African-focused gold miner with projects in Mali and Senegal.

Resolute Mining daily chart (Source: TradingView)