a cura di Guy Wagner, cio Banque de Luxembourg
In the second quarter, the gold price was at its lowest since the first quarter of 2010, averaging USD 1,194 per ounce. Since the end of June, it has fallen a further 7%. Various signs point towards a sell-out on the gold market:
– on the New York futures market, the long positions of speculative investors are at their lowest level since December 2001;
– at the same time, bets on the price of gold falling have hit an all-time record according to the report of the US Commodity Futures Trading Commission dated 24 July (20.6 million ounces short versus 1.8 million ounces long);
– the gold reserves of exchange-traded funds (ETFs) have shrunk by around half.
Nor has gold recently responded to uncertainties or crises. At the same time, demand from China seems to be on the wane, and the price crash on the stock markets in China and Hong Kong might even have led to forced selling of the precious metal. The key factor behind the movements of the gold price, however, still appears to be the possibility of a hike in the interest rate by the US Federal Reserve in the autumn, a move that the market considers highly likely. Historically, gold has also been regarded as a long-term hedge against inflation and generally the price of gold increases as fears of inflation are on the rise. They are not doing this at the moment, however. The fall in the gold price is also hurting the share prices of gold mining companies. For instance, the Market Vectors Gold Miners ETF has lost more than 25% in value since the end of the second quarter.
Our assessment/position BL-Global Flexible aims to maintain a strategic allocation to gold of between 5% to 10%. This allocation is currently in the lower area of this bandwidth, at around 6%. This allocation is implemented via investments in mining companies, with a preference for royalty companies, because we believe their business model to be superior in the long term (targeted selection of projects/ mines that are financed, independence from rising energy and labour costs, etc.).
The decision for a strategic allocation to gold is based on our assessment of the economic environment and the global financial system, both of which we still regard as being exceptionally fragile. In other words, we view gold as a form of insurance. The question of whether gold has lost its protective function, as it has not responded in the most recent crises is, in our view, entirely moot, because these ‘crises’ were not much more than minor turbulences. This is also why, at the end of the day, the stock markets have scarcely reacted. The type of crisis for which we consider gold to be an insurance is based on a loss of confidence in paper money. Such a loss of confidence certainly cannot (yet?) be identified at the present time.
In our view, an investment in gold only makes sense when combined with a contrarian approach. This means buying positions when market sentiment is negative, and selling them when it is positive. On the other hand, some kind of timing is of the essence. We have therefore not yet substantially altered our gold allocation (see above). Should the gold price remain weak or fall further, we will increase this allocation.
As for the current valuations of mining companies, they are very low compared to their historical average. As already mentioned above, we are primarily invested in royalty companies. The only gold producer in the portfolio is Canada’s Agnico Eagle Mines. The company meets our criteria regarding a robust balance sheet, low cost structure and production growth. Even with a gold price of USD 1,100 per ounce, the business is well-positioned to generate a positive free cash flow.
The investments in royalty companies are spread across Franco Nevada, Royal Gold and Silver Wheaton, the latter being actually more of an investment in silver. For these companies, the current trend in gold and silver prices may not necessarily be a disadvantage in the longer term. Because many smaller producers have encountered financing problems due to the deterioration in the gold price, the royalty companies find themselves in a strong negotiating position. In turn, this allows them to make new investments at favourable conditions.
Conclusion
– since the second quarter, the gold allocation has cost BL-Global Flexible around 1% in performance
– it is currently at the lower end of the strategic allocation
– it is implemented via investments in high-quality gold companies
– it follows a contrarian approach and should therefore increase if the gold price weakens further.