The Case for Gold

November 14, 2022

Strategy: Aventine Dividend Fund – Franco-Nevada Corporation (FNV-US): 1.2% weight

Precious Metals have suffered dramatically during 2022, primarily due to the strength in the USD and increasing real yields. Looking forward, however, we believe that the outlook for gold is constructive for several reasons.

We own gold directly in client accounts through the SPDR Gold Shares ETF (GLD-US).  Additionally, we have exposure in the Aventine Dividend Fund by owning the leading gold-focused royalty and streaming company, Franco-Nevada, which has very little operational risk and whose cash-flows benefit directly from an increase in the price of gold.

1. Peak Hawkishness:

Typically, Gold tends to inflect when we see a peak in Federal Reserve rate hikes. While the market clearly expects more rate hikes into 2023, we believe that the risk of a hard landing and subsequent recession increases the likelihood that Central Banks globally will be forced to pause the hiking cycle and possibly reverse course.

2. Non-Transitory Inflation:

Capital markets are predicting a steep decline in inflation in 2023. Should inflation prove to be much more structural in nature, we should see the more traditional support for real assets, and Gold in particular.

3. Geopolitics:

There appears to be a growing risk of further conflicts globally with escalations in Ukraine, Taiwan, North Korea, and the Middle East.  While challenging to predict, any intensification could result in Gold reaching all-time highs.

4. Credit Risk:

Perhaps the greatest risk to capital markets will always be derived from the credit markets. As the adage goes, “sometimes we worry about the return on our capital and sometimes the return of our capital.” The extremely high debt levels globally mean that any continued weakness in solvency ratios will provide support for Gold.

5. Positioning:

In 2022, speculative positioning in precious metals has flipped from long to short, as trend followers and momentum traders follow the price action. A strong bounce from oversold conditions could result in another “positioning switch” leading to indiscriminate buying.

6. Gold vs USD:

While the performance of Gold in USD has been disappointing to say the least, Gold has performed extremely well when measured in other currencies. Gold in GBP has reached all-time highs and should global currencies weaken further, we see tremendous upside. A similar situation occurred in the early 2000’s when Gold was strengthening against all other major currencies, except the USD. Once the Federal Reserve underwent a policy shift, Gold underwent a multi-year bull market.

7. Central Bank Purchases:

Global Central Banks have collectively purchased 339 tons (~$20 Bn) of Gold in Q3, a record. According to Goldman Sachs, “Emerging Market Central Bank demand appears to be a reflection of geopolitical trends years in the making vs a one-off spike. We believe that structurally higher EM CB demand creates an asymmetric payoff for gold as it provides a floor to gold in case of further ETF liquidation in the case of further hawkish Fed surprises. In a scenario where a US recession leads to a turn in the US monetary cycle, we estimate that gold could rally by 20-30% depending on the degree of the cuts. Goldman Sachs remains constructive on gold with unchanged price targets of $1,850 in 3 months, 1,950 in 6 months, and $1,950/oz in 12 months”.


This communication is intended to provide you with information about the current thinking, views, and outlooks of Aventine Investment Counsel. Aventine Investment Counsel is a registered trade name of Aventine Management Group Inc. a securities registrant in multiple jurisdictions across Canada.  This letter does not constitute an offer or solicitation to anyone in any jurisdiction in which such an offer or solicitation is not authorized, or to any person to whom it is unlawful to make such an offer or solicitation. All investors should fully understand their risk tolerances and the suitability of any proposed investments prior to making any commitments to invest their capital.