18 Jul 2016
In an Olympic year, it seems appropriate that gold has raced ahead.
The metal appreciated by 22% in the first three months of this year, its strongest quarter for 30 years, driven by sharply higher demand as a safe haven amid the volatility experienced so far this year and expected in the months to come. The weight of gold held in ETFs – 59 million ounces – is now the same as in late 2013, so over two years of outflows have been recouped in just five months.
But compared with the share prices of gold miners, physical gold is some way off the pace: the FTSE Gold Mines index surged by 94% in the first four months of the year.
As investors in gold equities, this naturally makes us assess whether the miners’ valuations have become stretched. We believe, though, that long-term valuations are still generally appealing, especially in the case of some mid-cap producers that can increase production over the next one to two years and so enhance earnings even in the absence of higher gold prices.
The rally means that stock selection will be critical, however. Take, for example, the South African gold miners. Some of these companies have very rapidly moved from being loss making to becoming profitable, but this has been partly attributable to the weakness of the South African rand. We are conscious that a cheaper currency often leads to higher domestic inflation, so in our portfolios we have shied away from chasing these recently high-performing stocks.
We have instead maintained our quality bias across the portfolios, sticking with companies that have strong management teams, premium assets, and robust balance sheets.
Looking ahead, as long-term active investors we also see other opportunities within the sector. One is in M&A. As the larger producers recover their confidence in the more buoyant market, we expect M&A activity will pick up. Many of these larger groups had cut their exploration budgets in the weaker environment of the past few years, meaning they will now need to look beyond their own existing assets to increase their production.
We have reflected this view in the portfolios by initiating positions in several pre-production companies with robust first-development projects and district-scale exploration potential in established jurisdictions such as Australia or Canada. An example is Pretium Resources in Canada, in which we built an off-benchmark position from an equity placing. This has given us exposure to one of the few world-class projects that will come into production by the end of next year.
So even in a grandstand year for gold equities, investors should remember that not every stock will finish on the podium: an active long-term approach is as important as ever.
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