A year ago Robert Cohen did not anticipate that gold bullion's price would weaken, nor did he believe it would fall as much as it has.
"I looked at the gold price climbing a staircase over the last 10 years. I didn't expect it to take an elevator down," says Cohen, lead manager of the $230 million Dynamic Precious Metals and vice-president at Toronto-based GCIC Ltd. Gold bullion peaked in October 2012 at almost US$1,800 an ounce, and gradually fell to US$1,600 last April. Bullion then dropped about US$200 in just five days, and after making up some of the losses it dropped another $US200 in June; gold now trades at about US$1,235.
Cohen attributes the abrupt meltdown to several factors, though top of the list is the unexpected strength of the U.S. dollar. "Last year, 26 countries devalued their currencies, and then we had Japan [with its aggressive monetary easing program]. There is a currency war going on. But the U.S. is not reacting," says Cohen, who believes the strength of the greenback is unsustainable.
In Cohen's view, the highly indebted U.S. and European governments will have to rely on an inflationary surge to reduce their debt burden. The question is when that will happen. "QE3 (the third round of quantitative easing by the U.S. Federal Reserve), is still on-going, at US$85 billion a month. There is a lot of chatter of that ending. The consensus is too bullish. But that has yet to be seen."
Gold's weakness has wracked severe punishment on producers and pushed profit margins down by about 35%, causing investors to exit en masse. "But I expect some of this to calm down," argues Cohen. "As bullion falls, so do costs."
The stronger purchasing power of the U.S. dollar means it will cost less to buy equipment, materials and chemicals. In addition, miners can adjust their grades upwards and process fewer marginal ore bodies. "Normally, miners lower the grades at higher prices. The corollary is that at lower prices, they raise the cut-off grade. The industry will adjust."
An engineer by training, the Vancouver native has been interested in mining all his life. "I've been exposed to the industry since I was a child," says Cohen, who followed in the engineering footsteps of his father and brother and graduated from the University of British Columbia in 1992 with a degree in mining and mineral process engineering.
Cohen got his feet wet by working for six months as a mineral process engineer at the Escondida copper mine by BHP Minerals Pty. Ltd. in Chile That was followed by a summer job at LAC Minerals Ltd, in Northern Ontario. Then he returned to Chile where he worked for three years at Aurex Resources Corp., a junior copper producer.
It was at Aurex that Cohen learned how to value companies. "I really wanted to get into this end of the business, either on the sell side or the buy side," recalls Cohen, who returned to UBC where he earned his MBA in 1998.
That year, Cohen joined Goodman & Co., where he had previously worked as a summer intern. Cohen became part of the Goodman equity team and in November 2000 he was promoted to manager of the precious metals fund. Since August 2009, he has also managed the $153 million Dynamic Strategic Gold Class.
The latter fund is a hybrid product since it has about 57% of its assets under management in gold bullion. While that positioning cushioned some of the decline, the fund lost 40.3% for the 12 months ended June 30. On a three-year basis, it had an annualized return of -17.7%.
Over the long term, the 1-star rated Dynamic Precious Metals has been a second- or third-quartile performer. It returned an annualized 6.5% and 3% over 15 and 10 years, respectively. And though the fund generated exceptionally strong numbers in 2003 and 2006, it has been a miserable few years of late. For the three years ended June 30, the fund had an annualized return of -29.8%, versus -20.9% for the median fund. In the last 12 months, the fund lost 54.8%, compared to the median fund's 43.8% loss.
The negative numbers are largely attributable to Cohen's emphasis on mid-cap and development-oriented players, which have taken a much heavier beating than senior gold miners such as Goldcorp Inc. G.
While Cohen expects gold bullion will move back to around US$1,600 an ounce within a year, he has also concentrated the portfolio by lowering the holdings to 26 names from 40. Single positions are limited to about 10%. Turnover has been modest, at 16.4% for the six months ended Dec. 31.
One favorite name is Alamos Gold Inc. AGI, a mid-tier firm with mines in Mexico that produces about 175,000 ounces a year. Its shares have fallen by 30% since last fall, to around $14.
"It's trading at fair value, using the spot gold price and an eight per cent discounted cash flow rate," says Cohen. For now, he adds, investors are staying clear. "But with a tailwind behind the gold price, rather than a head-wind, the discount rate could drop. By dropping the discount rate, you could argue that the stock could go up as much as 50%."
