Head of Equity Strategy
Summary: History shows that gold miners have not been able to deliver a value add relative gold spot underperforming significantly since early 2004. A long period of steady higher prices led to high operating costs which have made it difficult for gold miners to regain their profitability after 2013. In addition the new focus on ESG has caused the valuation spread to global equities to decline adding additional pressure.
Our view on gold has been positive for years as monetary policy has been more and more desperate in terms of easing maybe except for the Fed’s policy. But with the Fed now joining other central banks in expanding its balance sheet and moving the policy rate close to zero with market expectations even looking at negative rates our view on gold has improved even further. We expect gold to reach a new all-time high this year as investors demand a safe-haven from debasement of the world’s largest currencies. A positive gold outlook begs the question of how to get exposure to gold.
If we look at the gold market since early 2004 we can see that gold spot has been a fantastic trade outperforming the global equity market delivering 9.2% annualized return. In the same period global equities have delivered 6.3% annualized. One would think gold miners would be attractive given their leverage on the balance sheet providing investors with a leveraged play on gold spot. History suggests this is a myth and that gold miners apparently have difficulties delivering a value add for shareholders beyond the selling price of the actual commodity. Gold miners have returned 3.6% annualized since early 2004 and the industry leader Newmont has delivered 3.7% annualized hardly beating the global inflation.
Two things have hit gold miners hard since the gold price decline started back in 2013. The 13 years leading up to this regime shift in the gold price was one long march higher bolstering profits and likely causing the same illness as we observe among oil producers today; namely too high costs and inability to change the cost structure to lower gold prices. In addition to high operating costs the ESG (environmental, social and governance) theme rose to prominence on Wall Street with an entire investors class suddenly demanding ethical business practices to receive both index inclusion and investor money. Gold miners are not exactly top of the lists of ESG companies and thus the valuation spread to the global equity market has come down over time.
History tells us that gold miners do not provide any value add beyond gold spot so investors and traders should just focus on gold spot. Liquidity is also better in gold spot which is attractive. However, there is one main risk owning physical gold, most likely through an ETF, and that’s the risk that governments might make private gold ownership illegal if governments suddenly cannot control inflation following the current monetary and fiscal stimulus. This thesis was presented last week by hedge fund manager Crispin Odey.
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
