Gold May Be Experiencing Overheating as Speculators Push It Beyond Bitcoin

Gold’s rapid ascent past $3000 per ounce may have impacted another favorite among speculators, Bitcoin, yet the 40% increase in gold prices over the past year is giving rise to questions regarding its longevity.

The phrase “too far, too fast” aptly captures the concerns surrounding gold, which is fueled by a mix of investor anxiety over the global economic outlook, inflation fears, central bank purchases, and geopolitical unrest.

Nevertheless, the swift move beyond Bitcoin over the last year suggests substantial speculative trading that may dissipate just as quickly.

A few figures illustrate the gold versus Bitcoin narrative. In the last year, gold has appreciated by $880/oz, or 41%, currently trading at $3030/oz.

Conversely, Bitcoin has seen a decline of $23,772, equating to a 22% drop, with prices at $82,921.

The contrast between these two assets, both of which do not yield returns or dividends, has become distinctly apparent over the last two months, as gold increased by 11% while Bitcoin dropped by 22%.

This influx into gold has bolstered the stock prices of many gold mining companies, with leading firms like Newmont rising by 39% since last year, aligning closely with gold’s price. In contrast, Barrick Gold has gained 24%, lagging behind gold’s performance.

Value Concerns

However, doubts arise regarding the gold price’s potential for ongoing increases or even its ability to maintain current high levels, especially in professional assessments of gold mining companies that aid investors in determining fair share prices.

A proposed merger in Australia encapsulates the difficulties in keeping pace with shifting gold prices.

Northern Star Resources and De Grey Mining agreed late last year on a $3.1 billion share-swap merger, initiating a methodical independent valuation process ahead of forthcoming shareholder meetings.

KPMG, a global accounting firm, was selected to conduct the valuation and submitted its report earlier this month, revealing an unexpected finding.

Northern Star, Australia’s largest locally based gold miner, is offering a price exceeding KPMG’s valuation for De Grey, which ultimately led to the conclusion that the terms were fair and reasonable for De Grey’s shareholders.

The fairness of the complex swap, which consists of one Northern Star share for every 0.119 De Grey share, remains a separate discussion, particularly regarding Northern Star shareholders.

KPMG assigned De Grey a value range of A$1.68 to A$1.99, with an average of A$1.83. In comparison, the implied value at the time of the bid ranged from A$1.92 to A$2.08, averaging A$2, suggesting that Northern Star is paying A$0.165 more per share than KPMG’s midpoint estimate for De Grey.

Investor sentiment appears skeptical about the merger’s value for Northern Star, evidenced by an 8% increase in its share price since the announcement on December 2, compared to a 40% rise for De Grey and a 14% lift in gold prices.

A motivating factor for Northern Star’s premium could be De Grey’s possession of Australia’s largest undeveloped gold asset, the 11-million-ounce Hemi project, located near the north-west iron ore export hub of Port Hedland.

Another potential reason is Northern Star’s strategic intent to craft a “knock-out” offer to dissuade competing bids, particularly from Gold Road, which holds a 17% stake in De Grey.

If the gold price continues to ascend, and Northern Star effectively develops the Hemi resource, the deal may benefit Northern Star investors.

However, should the gold price decline, KPMG has already cautioned that they may be overpaying for De Grey in the current heated market.