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.
Inflation is trending down, central banks appear to be easing off an aggressive rate-hiking cycle, and there are still few signs the economy is sliding into anything more pernicious than a plain-vanilla slowdown.
By all accounts, gold – a bastion of stability and a store of value during market tumult – should be slumping. But it’s not. Many investors are thinking about whether to gain exposure to gold through physical ownership, stocks or an exchange-traded fund (ETF).
Some reasons for gold’s relative strength this year may be obvious. Conflicts that could widen are occurring in Ukraine and Israel. Stock and bond markets have whipsawed at various intervals in 2023. Still other forces have helped elevate bullion.
A significant under-the-radar driver of price strength has been rising demand from central banks for physical gold amid slow-moving but steadily growing pressures on the U.S. dollar’s reserve currency status.
On Nov. 10, ratings agency Moody’s lowered its outlook on the credit rating of the United States to a “negative” from “stable,” pointing to a sharp rise in debt servicing costs and “entrenched political polarization.” The agency said the change to its outlook reflected increasing downside risks to the country’s fiscal strength.
Such developments have led to a decoupling of gold prices from their usual inverse relationship to U.S. bond yields, according to BMO Global Asset Management (GAM). That has pushed bullion in recent months toward around US$2,050 an ounce. That’s considered a key technical level, looking at historical price action to identify patterns and predict with some accuracy future price action. Should gold push through that threshold, higher prices “will likely persist,” BMO GAM strategists said in a November research report.
That, combined with the rate cycle perhaps turning, and the U.S. Federal Reserve’s shifting tack in advance of potential cuts, means it’s perhaps time to consider a gold exposure, says Andrew Pyle, senior advisor and portfolio manager at Pyle Wealth Advisory in Peterborough, Ont., part of CIBC Wood Gundy.
“When rates start to fall, the value of the U.S. dollar probably will weaken. And that should give gold an opportunity to move higher. If we are going to go into a period where there’s increasing credit quality questions around sovereign governments, and possible currency influences, then gold is one place to look to for some protection against that.”
Multiple gold-focused ETFs have become available in recent years to Canadian investors. They’ve flocked to the funds because of their cost efficiencies, ease of accessibility and ample liquidity, allowing them to trade in and out of them as gold prices move.
Gold mining stocks are proven proxies for the metal itself, and their shares tend to move in tandem with gold prices. The biggest miners also pay modest dividends. However, investors should consider general equity market volatility, as well as other risks.
“The cost of labour, the cost of materials and the cost of borrowing are risks that could impact a gold miner,” Mr. Pyle says. “It’s not to say investors shouldn’t buy gold companies. There are a lot of great ones out there that do extremely well. We just want to be mindful those additional risks.”
Physical ownership is another option for some investors, says Rica Guenther, an advisor at Spiring Wealth Management in Winnipeg, part of Wellington-Altus Private Wealth.
“The physical bullion itself is in limited supply. So there is an appeal to some clients who are seeking a safe place to park value if there’s fear that a currency, like the U.S. dollar, is going to devalue.”
Investors can easily replicate a physical exposure through an ETF, says Robert Howard, advisor at Howard Wealth Management Group in Vancouver, part of National Bank Financial. He says many ETFs purchase gold and hold it “unencumbered,” or free of other investments using the gold as collateral.
“I want to have clients in unencumbered gold. I don’t want an ETF that has pledged its gold out to some third party. I want to know to the best of my knowledge that it is sitting in the vault at the Royal Canadian Mint,” Mr. Howard says.
He adds that when you buy a physical ETF (one that invests in the actual commodity, not in mines or proxies like derivative securities), you don’t have to worry about mining margins, or factors like the cost of oil or labour. “My preference is always straight physical, to keep the variables down as low as possible.”
All three advisors abide by a conventional allocation approach, saying that 5 per cent is an appropriate weighting in a balanced portfolio. “An asset like gold should exist on the periphery of a core strategy,” says Mr. Pyle, who also uses ETFs as his preferred instrument.
While some physical gold ETFs cost more than others, they tend to be relatively less expensive, he says. ETFs aim to replicate the spot price of gold as closely as possible, by rolling over contracts constantly to reflect the most recent price. It can be difficult to replicate the exact market price for gold 100 per cent of the time, so reducing tracking errors means mirroring the spot price as closely as possible.
“We want an ETF that is going to be relatively low cost, and have a minimal tracking error against the price of gold,” Mr. Pyle says.
Comments