The coronavirus pandemic has driven the gold price towards all-time highs, but some investors are arguing the best is still to come for companies that mine the precious metal.
Funds investing in gold miners, often dubbed a ‘leveraged play’ on the already volatile gold price, have soared over the last 12 months.
Despite March wobbles as most asset classes sold off, gold has reasserted its safe-haven status and is trading around $1,725 an ounce, having risen as high as $1,755, though that was still nearly $150 off its 2011 peak.
That leaves the precious metal up around 14% in 2020, but looking over a year its 35% rise from around $1,280 reflects the tailwinds at work before the current crisis.
Interest rates change the game
Evy Hambro (pictured), manager of the BlackRock Gold and General fund, said that while gold had benefited from a flight to safety amid the coronavirus pandemic, longer term trends were behind the momentum for the precious metal.
‘It hasn’t just been the last year. It’s been on pretty much an upwards trend now for several years,’ he said.
‘The things that have been correlating with the strong performance of gold have mostly been related to the decline in interest rates, principally in the US, and the vast amounts of “money printing”.
‘The thing that has always been the enemy of gold has been the opportunity cost, with gold not paying you any interest,’ said Hambro.
Citing the Bank of England’s recent issue of negative-yielding bonds for the first time, Hambro argued that with real interest rates negative in much of the world and ‘dramatically bigger’ rounds of financial easing now taking place than previously, gold had become more attractive.
‘It’s an environment that makes gold unbelievably competitive. It’s an opportunity carry rather than an opportunity cost,’ he said.
Miners better placed to benefit
George Cheveley (pictured), manager of the Ninety One Global Gold fund, agreed the ‘amount of money being printed’ meant the argument for gold as a store of value and hedge against inflation remained as sound as it had ever been.
But more important, he argued, was that wider economic uncertainty meant gold was unlikely to fall far and that miners were in a better position to capitalise than when gold previously hit highs.
‘I think it’s unlikely it’s going to fall in the next year or two and on that basis I’m happy to own the equities because I think they can generate very good profits and increasingly pay high dividends, which I think will attract a broader investor base,’ he said.
‘I don’t need gold to go any higher from today’s price. In fact, even if it fell back by $100 from here, these companies are still very, very profitable.’
In April, Newmont, the world’s biggest gold miner, increased its quarterly dividend by 79%, illustrating the potential for higher income in the sector.
The manager said the sector was in the best shape for 20 years, in contrast to 2011, the last peak for gold, when companies made some ‘crazy’ decisions in terms of acquisitions.
‘We sit here today with these companies with low debt levels, the highest margins we’ve seen in years and increasing returns to shareholders,’ said Cheveley. ‘Particularly this year, you compare that to any other sector and that’s pretty remarkable.’
‘We’ve got strong management teams. Costs have been brought under control,’ he added.
Additionally, less than a tenth of annual production around the world was hedged, Cheveley estimated, meaning increases in gold’s price go ‘straight to the bottom line’ of miners. The low oil price, reducing fuel costs, is another positive.
Hambro also emphasised the improved profitability of gold miners in contrast to their position in 2011, when ‘ you saw rapidly rising gold prices but at the same time you saw gold shares underperforming’.
‘That is because costs in the sector were rising as fast if not faster than the price of gold was rising. In today’s environment what we’re seeing is a completely different situation,’ he said.