Gold miners: the belle of the 2020 ball?, June 2020

While it remains the investor’s marmite (you either love it or hate it), having some allocation to gold in a portfolio may not be a bad idea at the moment.

Firstly, the asset can act as a safe haven and, given this is one of the most uncertain economic situations in history and central banks are in uncharted territory, it is hardly surprising investors are reaching for something which has the history and certainty of gold.

Secondly, gold benefits from very low interest rates. We may now enter a world of negative interest rates and, in this environment, gold obviously becomes really valuable as it doesn’t produce a negative yield.

Thirdly, while physical gold does not produce a yield itself and can’t compound, gold mining companies can and do - and are still paying out when many other sectors are now cutting their dividend payments.

The allure of gold miners

Ned Naylor-Leyland, manager of Merian Gold & Silver fund, which is on the Chelsea Selection, is very positive about both gold and silver and, in particular, gold miners.

“Over the past 20 years, gold miners’ profit margins have been under pressure, and sustainable earnings growth AWOL,” he said. “The sector has had brief moments in the sun, but investors have, on the whole, been happy to shun it.

“Yet it is primed to become the next big story in financial markets. Gold miners are in the eye of a perfect storm. The operating environment looks far better than it has done in decades; margins are now set to increase in sustainable fashion as, along with collapsing energy (oil) inputs, gold/silver producer currencies such as the Australian dollar, have fallen by 25-30% versus the US dollar.

“With a firm sector tailwind, genuine and sustainable earnings growth prospects, and a dearth of opportunity elsewhere, the sector is fully dolled-up as the belle of the 2020 ball.” 

What do non-gold specialists think?

While you would expect a gold manager to talk positively about his own asset class, a number of more generalist managers have been topping up on gold and gold equities too.

Back in July last year, Vincent Roper, co-manager of Elite Rated TB Wise Investments Multi-Asset Growth fund, was very positive on gold and still holds a number of funds including Merian Gold & Silver.

Vincent Ropers said: “Gold is considered a safe harbour for investors amid gathering market storms. Often investors might opt for government bonds over gold, as they carry interest payments. However, as we see global bond yields declining in reflection of a gloomier growth backdrop, gold becomes more attractive on a relative basis.”

Dr Niall O’Connor, manager of Brooks MacDonald Defensive capital has around 5% invested in gold mining stocks. “When you have low real interest rates gold does better,” he said. “There is no need to hold it when US government bonds have a decent yield, but that is far from the case today. Gold miners are a leveraged play on the asset’s potential.”

John Chatfeild-Roberts, co-manager of Jupiter Merlin Income, has added also some gold mining companies to the fund. “Gold companies will be throwing off cash,” he said. “The cost of extraction has been falling, as it’s an energy intensive business. We bought gold shares on 17 March and, so far, they are up some 40%.”

Single strategy funds have also added to gold miners. For example, Fidelity Asia Pacific Opportunities, which is on the Chelsea Core Selection, has seen the allocation to these companies increase as the manager thinks this sector will be one of the winners over the next decade.

And Henry Dixon, manager of Man GLG Income, which is also a Core Selection fund, holds gold miners too. Holding Centamin has seen its share price perform well recently. “The company reported quarterly results that confirmed the main Sukari mine operations have not been affected by COVID and that they have sufficient staff and supplies to last them through to the end of the next quarter,” Henry said.

“Strong operational performance has also been supported by strength in the underlying gold price. The company also confirmed the payment of an interim dividend.”

Please note that, like all investments, the price of physical gold and gold equities can fall as well as rise. Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius's views are his own and do not constitute financial advice.

Published on 01/06/2020