Gold mining funds see further equities upside as gold price tops USD2,000

Gold bars and coins

Funds focused on gold mining equities have flourished thanks to a buoyant gold price reaching all-time highs over USD2,000 per ounce and boosting net asset values.

Gold has rallied 31 per cent year-to-date, with investors seeking out ‘safe-haven’ assets as global markets face volatility and uncertainty as a result of the coronavirus pandemic. At the same time, gold mining equities have outpaced the commodity by gaining 47.7 per cent.

Evy Hambro manages the BlackRock Gold and General Fund and the BGF World Gold Fund, which both ranked among the top three for best fund performance across all sectors in July. The two funds delivered returns of 10 and 12 per cent respectively during the month, according to data provider Morningstar. 

“It is no surprise to us to see gold at new highs, given the almost zero rate environment and strongly negative real rates around the world. In addition, governments seem set to stimulate growth by spending, which will further debase paper currencies and this has always been supportive for gold,” says Hambro.

Low interest rates across the world are likely to persist, notes Hambro, supporting the gold price. With the US 10-year Treasury real rate now at -1 per cent, he says the “opportunity cost of holding gold is significantly reduced”.

Aside from the physical commodity, gold equities have been particularly strong performers because gold prices are rising while the companies’ costs stay flat, suggesting a positive outlook for earnings. Miners including AngloGold and Centamin have hiked dividends, at a time when expected earnings and dividends are seeing large cuts in most other sectors.

Sprott Gold Equity Fund has posted runaway returns of 43 per cent this year. Paul Wong, market strategist at Sprott, says: “Gold has staged a breakout in a spectacular manner driven by plunging real yields, and now with the USD topping out. Deep negative real yields and a falling USD are potent drivers for gold.”

He explains: “All these factors are related, and all are likely to continue. The current fiscal relief bill will have a USD1 trillion floor, and more future relief spending is expected and sizeable fiscal stimulus programs will continue. Extreme accommodative monetary policy is here to stay indefinitely, even if conditions improve. The USD has just started a major down leg. All the arguments we have made for being bullish on precious metals over the past year remain in place and have only accelerated or magnified.” 

Wong predicts these factors will lead to a “multi-year bull market” for the commodity. 

“We see strong arguments for adding to gold and gold equities for diversification given equity markets have bounced back strongly and the full economic impact of the Covid-19 crisis remains unclear,” says Blackrock’s Hambro.

Investment trust Golden Prospect Precious Metals, which focuses on the smaller gold miners and developers in their fund, has doubled its share price so far this year. 

Its co-founder, Robert Crayfourd notes that while large cap miners are mostly trading at a fair equity valuation at spot gold, there's further opportunity for smaller developers since they still trade at a big discount when the current gold price is taken into account. He says that opportunity is there for either a “valuation catchup” or for them to be taken out with M&A deals by the largest companies, which have underexplored for years.

Specialist commodities ETF provider WisdomTree sees even further rises for the price of physical gold, predicting the price could reach a price of USD2,640 by next July, providing even more upside for gold funds. 

“When you've got negative real yields on treasuries, gold is far superior because it’s got zero yield. Zero is better than negative,” explains commodities strategist Nitesh Shah at WisdomTree.

Shah says traditional balanced bonds-and-equities fund managers could benefit from having a sizeable allocation towards gold, as high as 30 per cent of the portfolio, based on historical simulations carried out by WisdomTree. 

While most of the gold price’s current drivers are related to recessionary economic forces, Shah says that gold has “asymmetric qualities” that make it an all-weather allocation. “Yes, it performs fantastically well when the whole world's going to pot – we saw that in the first quarter of this year with the big equity market crashes, and at that point, one of the only assets producing positive performance was gold.” 

Gold won’t do as well under an economic recovery, says Shah, but gold is also a good hedge against inflation, which typically happens in environments of economic growth. 

“I think many people right now are really eager to participate in a cyclical recovery by buying assets like equities, oil, and industrial metals, all the cyclical assets, but knowing all the risks around it, they like to hedge themselves,” says Shah.

Golden Prospect’s Crayfourd says gold has been unfashionable with generalist managers for the last few years as the bear market has taken hold, but may now be reconsidering their allocations: “I think we're in a different environment now. The ‘insurance policy’ of holding gold has not paid out fully for a number of years for many of these generalists, and so I think that the effective size that they have held in their funds has whittled down over time. Now what we're seeing is that it is starting to pay out, and lots of investors are saying ‘We've got gold hitting record highs, but I've kind of missed this run’.”