Golden Prospect Precious Metals 26 September 2024
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Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by Golden Prospect Precious Metals. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
Golden Prospect Precious Metals (GPM) offers exposure primarily to gold mining companies. Managers Rob Crayfourd and Keith Watson take a highly active approach to the sector, concentrating on the smaller end where the potential returns are higher, and investing in companies listed around the world, which chiefly means Australia and Canada. They can invest in the miners of silver or the platinum group metals (PGMs ) too, but c. 79% of the portfolio is currently in gold. Gold is currently well supported by a number of factors discussed below, including rising geopolitical risks, emerging market investors and institutions diversifying away from the dollar, and expected interest rate cuts.
Gold miners typically offer geared exposure to a strong gold price. However, until recently they had been out of favour in the light of high inflation which has weighed on operating margins, even though gold has repeatedly hit new highs. Over the past six months though, the miners have rallied, leading GPM to post strong returns (see Performance section). Rob and Keith argue that this is likely to be only the beginning: they expect miners to increasingly report improved profit margins as inflation subsides and gold remains strong, while falling interest rates should lead to lower funding costs for the companies. Even after good short-term returns, miners remain at some of the cheapest levels they have ever been versus the gold price.
The managers have taken some profits in their winners and rotated into value names and some higher-risk opportunities (see Portfolio section). They have allowed their Gearing to drift down slightly although it is still in double digits. The Discount remains wide at 19.6% at the time of writing.
We think gold can have an important role to play in a portfolio as a hedge against geopolitical risks. These are currently high and show no signs of abating: the ongoing war in Ukraine and tensions between the US and China have created a tense atmosphere in which having a tail risk hedge seems wise. We also think there is a multi-year de-dollarisation process underway which is likely to lead to gold being more important for many sovereigns, central banks, and institutional investors. It may not be that the dollar’s days as the world’s reserve currency are numbered, but at the least it is clear that central banks are deemphasising their dollar assets, while China in particular, the US’ largest creditor, is keen to lessen its exposure and increase its financial independence. In the short term, the signs also look good: US interest rate cuts should be good for gold as they reduce the opportunity cost of holding the non-yielding asset (which typically takes the place of cash or cash-like investments).
Investors could buy gold itself. However, gold is at all-time highs, so we think there has to be a risk that investors have positioned themselves for falling rates and therefore in the short term the market might pull back when the cuts finally come. Miners, on the other hand, remain exceptionally cheap versus their own history and their typical trading range versus gold. They therefore offer a form of insurance that looks cheap just as it is likely to be needed. As a measure of Rob and Keith’s own conviction in gold miners, we note they are substantially overweight the sector in their diversified commodity fund, CQS Natural Resources Growth & Income (CYN).
Bull
- The divergence between the price of bullion and mining shares offers opportunity
- The gold mining sector is cheap
- Strong structural outlook for gold market, even at all-time highs
Bear
- Portfolio is concentrated and so has single stock risk
- The sector is volatile, and gearing further magnifies that to the downside as well as the upside
- The small size of the trust means the charges are relatively high