17th November 2023
Gold has always been a contentious asset among investors. John Maynard Keynes called gold (or more accurately the gold standard) “a relic from a time when governments were less trustworthy” while Warren Buffett said of gold that “it gets dug out of the ground in Africa, or some place. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.” It is hard to argue with these esteemed investors given it has very little industrial use, is hard to value and offers no yield, but bulls of the asset will argue that it remains the ultimate safe haven in ‘risk-off’ investment environments when traditional investments such as shares and bonds will struggle to preserve capital. Further, in an era of fiat currency debasement where developed economy central banks have resorted to the printing press to stave off successive economic crises over the past 15 years, the latest being the global pandemic of 2020, gold remains the only true asset which is no-one’s liability, has no credit risk and has proven its value over centuries. Even Bitcoin and other crypto currencies have failed to provide sustained competition to gold in recent years. In our minds, the performance of gold over the last couple of years, staying elevated even while real yields have risen (historically the correlation between gold price and US real yields has been very strong given gold’s lack of yield), proves its standing as a safe haven in a world of heightened geopolitical risk. The gold price is also underpinned by record central bank buying, which has accelerated in the past two years following the weaponisation of the US dollar in the aftermath of Russia’s invasion of Ukraine, with further impetus provided by the determination of many nations to diversify their reserves away from US Treasuries and the US dollar.
There are two ways to gain exposure to the gold ‘complex’, physical gold bullion and the gold miners. We have consistently had exposure to the gold complex in different proportions and varying weights across our three Hawksmoor funds for at least the last 10 years. Physical gold has only featured in Vanbrugh since bullion’s aforementioned qualities suit the more cautious mandate, but all three funds have consistently owned gold miners. In recent months, our allocation to gold miners has moved to the lowest in the funds’ history. The reasons behind the reduction earlier this year are primarily because conventional equities and bonds that have become more attractive, especially index-linked gilts offering a positive real return for the first time in decades. Additionally, despite their attractions in a rising gold price environment, mining companies have struggled in a post-Covid era of higher input costs, labour shortages and supply chain disruptions that have combined to shrink margins, causing earnings downgrades and poor share price performance. Their weak performance over the past couple of years has therefore been rational, especially at a time when global investors are apparently only interested in the Magnificent 7 companies (which themselves seem to have become the new safe havens) and shun most other sectors, especially miners that fall foul of most ESG screens.
Looking forward we believe the dynamics are much more favourable for miners now the issues that have caused their recent weakness seem to be firmly in the rear-view mirror. Mining companies finally have their costs under control having been held to ransom in recent years by staff and suppliers who knew they had to keep mining to maintain volumes and had no choice but to pay higher wages and higher prices for equipment and energy bills. Now, we hear management of mining companies are even tracking the mileage of their trucks and making drivers turn off engines while waiting to load and unload to make them as fuel efficient as possible. It seems remarkable that it has taken 3 years before the effects of Covid are easing for the sector, when for most others it was a distant but painful one-off experience, covering mainly 2020 and 2021. Energy bills are further reduced by installations of solar farms alongside mines supplying much of the energy required to get the gold out of the ground (will this be sufficient to attract the interest of less stringent ESG investors I wonder?). Capital discipline remains a top priority for companies who, under pressure from shareholders, no longer splash excess cashflow on acquisitions that in the past were purely motivated by volume growth and less about profits. Dividends and share buybacks are commonplace which provides further comfort that shareholders will benefit from the higher gold price.
Over the long term, gold miners have acted as a geared play on the gold price, typically outperforming physical gold by as much as three times when the gold price rises. That relationship has broken down since Covid because of the cost pressures and other factors explained above, but from this starting point, we believe it is possible to once again say that if you are bullish on the gold price then you can be bullish on the gold miners. While we don’t make macro predictions, it is fairly consensual to say we are closer to the peak of bond yields than the trough so if yields begin to fall as the bond market discounts an economic slowdown, this would be supportive for gold especially when combined with its proven safe haven status in an increasingly fragile geo-political world. As the gold miners are one of the most volatile assets we own, we will limit the funds’ exposure to it to tolerable levels but nevertheless it makes sense to start increasing our exposure again.
Daniel Lockyer – Senior Fund Manager
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