Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
Gold has had a surprisingly strong run through much of the year, rallying further in October as the conflict between Israel and Hamas escalated, before the price of the precious metal pulled back more recently as investors await signals from the U.S. Federal Reserve Board on the direction of interest rates.
However, the decline may prove short-lived presenting a window of opportunity for investors that is perhaps already closing in light of events on the other side of Asia – the annual festival season in India.
Indeed, demand for gold in India usually strengthens toward the end of the year, which coincides with the traditional wedding season and major festivals, including Diwali, when buying gold is considered auspicious. India is the world’s second-largest gold consumer.
The phenomenon is being felt in Canada, where advisors like Robert Howard say clients are inquiring about how they can benefit from the seasonal lift in prices spurred by the Indian festivals.
“I have [several] clients who are asking about physical ownership. They want to buy and store it,” says Mr. Howard, wealth advisor with Howard Wealth Management Group at National Bank Financial Wealth Management in Vancouver.
His advice to investors looking to gold as an investment in an overall financial plan is to avoid the risks and illiquidity issues that can come with physical gold.
“From my perspective, my strong preference would be to stick with listed vehicles that clients can use to get that same physical exposure,” he says.
While interest in gold is high at this time of year because of seasonal factors, he says clients should be looking to bullion for the tactical benefits it has historically lent portfolios, typically when economic conditions are uncertain or when geopolitical instability is ascendent such as now.
“The majority of investors don’t understand the gold market and hence, don’t understand the potential benefits it can provide,” Mr. Howard says. “How I look at gold right now is where are we in the cycle? My view is we have a recession coming – I don’t think we’re going to avoid it.”
He likens the current environment to previous cycle inflection points that led to downturns, in which gold outperformed stocks and bonds such as in 2008 to 2009 and 2000 to 2002.
“Those were great times to have some exposure to the gold sector. And my sense is that we’re at a similar period of time right now,” he adds.
Market strategists see reasons why gold may demonstrate continued strength in 2024 based on fundamentals and technical analysis.
Ongoing geopolitical tensions underpin longer-run bullish fundamentals including the rising demand from central banks for physical gold amid growing pressures on the U.S. dollar’s reserve currency status.
Earlier this month, credit-rating agency Moody’s Analytics Inc. lowered its outlook on the U.S.’s credit rating to “negative” from “stable,” pointing to a sharp rise in debt servicing costs and “entrenched political polarization.” The credit-rating agency said the change to its outlook reflected increasing downside risks to the U.S.’s fiscal strength.
Such developments have led to a decoupling of gold prices from their historically inverse relationship to real fixed-income yields, according to a recent BMO Global Asset Management (GAM) report, pushing bullion in recent months toward key technical levels of around US$2,085 an ounce.
Should gold push through that threshold, higher prices “will likely persist,” BMO GAM strategists said in the November research report.
“Typically, interest rates and gold are inversely related. However, this past year, that’s not been the case,” says Rica Guenther, investment advisor with Spiring Wealth Management at Wellington-Altus Private Wealth Inc. in Winnipeg.
“We’re almost in a space now at which we don’t necessarily have precedent to refer back to, which may be contributing to a level of uncertainty that’s benefiting gold.”
However, Ms. Guenther continues to abide by a conventional allocation approach, advising clients that anything more than 5 per cent for gold in a portfolio is probably too high.
It’s a weighting Andrew Pyle, senior investment advisor and senior portfolio manager with Pyle Wealth Advisory at CIBC Wood Gundy in Peterborough, Ont., also follows.
“That’s pretty standard,” he says. “The holding could be in physical gold, public companies or other ways of playing that exposure, but when we think of a 60-40 portfolio, or a balanced approach for an average Canadian, an asset like gold should exist on the periphery of a core strategy to get some protection against inflation or uncertainty.”
Many investors want to own the gold companies themselves, Mr. Pyle says, but he cautions that a pure-play equity investment may carry higher volatility risk.
He notes the spot price and the S&P 500 Gold Subindustry Index, which tracks mining shares, have both risen by about 50 per cent over the past decade. Yet, gold-mining share prices have fluctuated far more than the underlying commodity, Mr. Pyle says.
Mr. Howard of Financial Wealth Management adds that exchange-traded funds are his preferred instrument, providing efficient, liquid access to the gold market.
All three advisors also note what gold, generally, cannot deliver to a portfolio – income. For example, it doesn’t pay interest nor do gold miners offer generous dividends.
“If an investor has an income objective – which a lot of clients, especially retirees, do – gold would not be acting in concert with that,” Mr. Pyle says.
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