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Gold bullion and gold stocks have surged ahead recently as governments around the world unleash a torrent of monetary and fiscal stimulus measures to stave off the damage inflicted by COVID-19.
The unprecedented level of government spending is designed to stimulate economies and help consumers pay bills in the face of broad-based business shutdowns and job losses. But the cascade of economic support and sheer size of the stimulus could also lead to massive government deficits and currency debasement down the road, says Chris Beer, co-manager of Gold-medalist RBC Global Precious Metals F.
Gold has a low correlation to other asset classes and can be a useful portfolio stabilizer during times of turbulence. Combined with low to negative interest rates in various countries, and gold’s historical role as a safe haven in times of turmoil, the outlook for gold bullion and related securities is taking on a new shine.
“Gold has a lot of positive things going for it as an asset class, and stock valuations are still attractive in many gold companies,” says Chris Beer, vice president and senior portfolio manager at Toronto-based RBC Global Asset Management. “A lot of producing companies have been consolidating and cutting costs during the past several years of sluggish gold prices and are in better shape than they’ve ever been. It looks like a good runway for higher gold prices right now.”
Fund co-manager Brahm Spilfogel, vice president and senior portfolio manager at RBC, says there have also been rotating shutdowns at various mines around the world due to COVID-19 measures, and the limiting effects on supply could provide another positive force for gold prices. “If you think of gold as an alternative currency, central banks can’t simply print more of it, and it has no debt,” says Spilfogel. “In most countries, government debt is ballooning and expanding faster than my waistline.”
In 2019, gold bullion had its best performance since 2011, rising more than 18% in U.S. dollar terms, and it has continued to rise in 2020. Investor appetite for gold is showing up in demand for gold stocks as well as for Exchange Traded Funds backed by gold bullion, which saw record inflows in the first quarter of 2020. At April 29, RBC Global Precious Metals F boasted a year-to-date gain of 21.9% and a one-year gain of 80.7%.
But gold can be volatile in both directions and there are some headwinds to watch out for, including a strong U.S. dollar and low inflation if global economies crumble. “A deep recession could be bad for everything,” Beer says.
One of the key trends recently boosting RBC Global Precious Metals has been the outperformance of its top holdings – large-capitalization miners such as Newmont Corp (NGT), Barrick Gold Corp (ABX), Kirkland Lake Gold (KL) and Agnico Eagle Mines (AEM). While the majority of fund assets are in large caps, the team also looks for opportunities in mid-caps. A key holding is K92 Mining (KNT), a debt-free firm with a high-grade, low-cost mine in Papua, New Guinea.
“After several years during which gold miners’ stock performance lagged bullion, stock prices have outperformed bullion in recent months,” Beer says. “There was a brief downdraft in mid-March when investors were selling anything not bolted down, but since then gold stocks have been strong. Our focus has been on the large, liquid names and the more established companies.”
These companies have been doing a better job in recent years in allocating capital, he says. They’ve paid down debt and in some cases have used excess cash to pay dividends and buy back shares, rather than indiscriminately “throwing it back into the ground.”
“The bigger and safer companies like Barrick and Newmont are growing selectively, and enjoying a better return on invested capital,” Beer says.
On a geographic basis the fund’s current 69 holdings are about 75% in companies based in North America, with the rest primarily in Africa and Australia. The strength of the team has been in stock selection, and the goal is to find companies with attractive assets as well as strong management teams, trading at attractive valuations. Beer has worked as a geologist, while another member of team, Jeff Schok, portfolio manager and senior analyst, is an engineer.
“We like mining companies that are not just expanding their resources, but that have assets in stable jurisdictions,” Shok says. “When it comes to mergers and acquisitions, we want companies that are selective.”
Also influencing whether a holding makes it into the RBC fund are a company’s environment, social and corporate governance (ESG) practices. “It is important that companies have a social conscience,” says Spilfogel. “If they don’t have community support, they may have the highest-grade property in the world but there will be problems getting a mine into production. Good community relations are an indicator of success.”
As the value of gold stocks has increased this year, the percentage weighting of the sector in the S&P TSX Composite Index has been increasing. The S&P TSX Global Gold Index has risen from a market weight of about 7.5% at the end of 2019 to more than 10% at the end of April, with gold bullion trading in the range of US$1,700 an ounce. At the same time, companies in the energy and financial sectors are facing challenges due to COVID-19 and have lost significant value.
Spilfogel expects many other fund managers who are generalists may be soon be moving to increase their gold holdings from previous underweight positions, and their buying power could provide another boost to stocks. In late 2011, when gold bullion prices peaked at just under US$2,000 an ounce, the gold sector accounted for around 15% of the TSX Composite Index.
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