January 30, 2019 | (10 mins 15 secs)
Financial Journalist Liz Claman interviews Ed Coyne, EVP at Sprott Asset Management, on his 2019 outlook for gold bullion and gold equities. Gold beat U.S. equities for the month of December, the fourth quarter, and the full calendar year of 2018. Sprott believes that precious metals are poised for a multi-year uptrend, and we advocate a 5-10% permanent portfolio allocation for most investors.
Liz Claman: Welcome to Asset TV and we're talking about all kinds of assets. Why not talk about gold, which is suddenly, well not so suddenly, but has really raised its head and started to shine. Ed Coyne is the guy who knows all about this. He is Executive Vice President at Sprott Asset Management. We'll get to how gold has performed and behaved lately, but right off the bat, how would you characterize the position that gold should have in a portfolio?
Ed Coyne: Sure. For decades it's always been thought of as a commodity and of course it is a commodity as an asset, but from a performance pattern standpoint, really over the last two decades, gold's really bifurcated or segregated itself from the commodity pack. And what I mean by that is from a performance pattern standpoint, gold has performed very differently than commodities in general. So a lot of investors think, "Well, I've got my gold exposure 'cause I own a commodity fund." The reality is you're not really getting the benefits of owning gold if you own it within a commodity fund. In fact, if you look at the performance patterns, really over the last two decades, gold has handily outperformed commodities in general as an asset.
Liz Claman: Let's get to how it performs against equities. I mean, fourth quarter of last year we had a push me pull you situation.
Ed Coyne: That's right.
Liz Claman: We had equities pulling back and selling off and shocking everybody and then gold making a run.
Ed Coyne: Yes, gold was up over 7% in the fourth quarter and a lot of people were shocked by that. And the reality is if you look at every dislocation we've had in the market for decades, in many cases not only does gold hold up, but gold actually outperforms. Or actually in some cases like in '87 gold did very well, it was up over 40% relative to the S&P. In the housing crisis, it did very well and then most recently. But every time there's a dislocation in the market, gold traditionally not only holds up, but actually outperforms in a pretty meaningful way.
Liz Claman: And what would you say looking forward to the rest of 2019 considering we are in the 10th, I mean depending on how you measure it, year of a bull market.
Ed Coyne: That's right.
Liz Claman: So you're saying that gold performs well, certainly when we have "dislocations."
Ed Coyne: Sure.
Liz Claman: But is it now, after having had a 7% run up in the last quarter, tell us exactly what you think happens in 2019.
Ed Coyne: Sure. I don't want to go as far as say that 7% run up is the tea leaves of the future, but the reality is that I think we are getting indications that gold should be a permanent part of a portfolio given where we are in the market. As you mentioned, a 10 year run in the market. I'm not saying we're going into a recession tomorrow. What I am saying is we're probably entering a cooling off period in the equity markets, right? Rates may take a pause, but rates certainly have an upward trajectory.
Ed Coyne: In general, markets are actually, and the currencies in general, have sold off substantially relative to the dollar. The dollar was very strong last year. That's probably going to cool off. You've got a lot of geopolitical headwinds. There are a lot of things out there that are sort of head scratchers for the general market and so gold in those types of environments has historically done well for multiple market cycles.
Ed Coyne: So don't think a 7% run means that it had its moment in the sun and it's over. In fact, what I would tell people is that you have to have that core allocation to gold over multiple market cycles because it's not just a protector of assets on the downside. In fact, if you look at gold's performance patterns over the last two decades, most people are surprised when they look at the numbers, it's actually outperformed both the S&P 500 and the Russell 2000 on an annualized basis for the last two decades.
Ed Coyne: So it really stands to reason you need to think about gold as a core allocation. Whether you think the market's selling off or if the market's going to continue to be strong, gold needs to be a permanent sleeve.
Liz Claman: For the financial advisors watching right now, there are multiple ways to allocate to gold. There is the physical gold.
Ed Coyne: That's right.
Liz Claman: There are the ETFs. Are you a believer in one side versus another?
Ed Coyne: Sure.
Liz Claman: How do you look at the real opportunity in investment?
Ed Coyne: Well, I think that's an important component to talk about because really mutual funds, closed end funds, ETFs, that's really modernized gold in the last two decades. If you think about gold as an investment, say 30 years ago, it was very difficult, right? You had to take ownership of it, you had to store it, you couldn't put it on your client's balance sheet. So for a typical advisor today, they can have a position in a mutual fund or an ETF and it's on their balance sheet as part of their portfolio. So today, mutual funds, ETFs and so forth have created gold as a real asset, made it really a liquid, transparent, low cost way to allocate to gold.
Ed Coyne: What's unique about our firm, if I can just talk about Sprott for a moment, is we've actually created a series of trust and what's unique about our trust is it goes beyond just giving you exposure to spot price, it actually allows you to physically own the metal directly in our trust. And by owning in our trust, you actually get a potential tax advantage because it's treated as an asset, not as a collectible.
Ed Coyne: So with Sprott we take it a step further than just giving you exposure to spot price. We actually allow you to have physical ownership of the metal itself.
Liz Claman: Do you look at numismatic investments?
Ed Coyne: Well we do at times, but for us, if you think about Sprott as a firm as a whole, we do have the different physical features of the gold, silver, or the platinum plating trust. We do have equities both in the senior mining and the junior mining space and we do have credit and debt. So we do offer a full suite of solutions in that space.
Liz Claman: Let me get to the minors right now. Do you expect to see in 2019 some M&A where the big guys are swallowing up some of the smaller miners?
Ed Coyne: We do. In fact we started to see that last year. There were some big acquisitions out there last year, Barrick being one of them that had a large acquisition. We think that's going to continue. A lot of the senior miners are on the backend of their mine life cycles and they're looking to either buy or build, right. And it's very difficult to build because the five to 10 year lead time to get one of these mines up and running. So we think the buy component or the M&A cycle is starting to percolate up, particularly in the junior mining space.
Ed Coyne: We offer actually two factor based ETFs. We offer a senior mining ETF that gives clients exposure to the big guys or the large cap miners. And then we have a junior mining ETF or a small cap ETF that gives you exposure to the junior miners.
Liz Claman: And are you identifying some of the juniors as potential acquisitions?
Ed Coyne: We are. In fact, we are so excited about this space that we're actually announcing a joint venture this year with one of our partner firms to go after special situations that we think are going to be ideal companies that we think are candidates for the M&A market. So we're very excited about this space for the next two to three years and I tell people, take your direction from the price of gold, right? Gold probably needs a breakthrough, say 1350, breakthrough and hold before we get really excited about the equities. Equity started to perform nicely in the fourth quarter because gold started having an upward trajectory.
Ed Coyne: It if breaks above $1,300, and it's very close to that now and holds that position, then I would expect the gold equities to do very well. And if that starts to happen, I think you'll continue to see the M&A market become very robust over the coming years.
Liz Claman: Do you guys look at any other metals?
Ed Coyne: We do. Sure.
Liz Claman: Platinum, silver.
Ed Coyne: In fact, as you know, palladium has done very well. Everyone's talking about it right now. In fact, I saw on the news yesterday people were talking about it.
Liz Claman: Palladium.
Ed Coyne: Yes. Platinum and palladium.
Liz Claman: Which helps catalytic converters convert.
Ed Coyne: That's right. That's about 75% of its use is in that market. And platinum and palladium are interchangeable at some degree, but it's had a wonderful run up. One of our trusts is a platinum palladium trust. So it does give you exposure to the physical metal itself. We do look at other metals like cobalt and lithium and so forth in the battery marketplace, but we don't have a trust specifically to those now, but we're very aware of those from an equity standpoint.
Liz Claman: Anything involving rare earths?
Ed Coyne: We don't get too involved with the rare earths, partly because they're very hard to source. So from an investment standpoint they're very difficult. Now from an equity standpoint, we look at companies that are mining rare Earths and those will certainly be part of our portfolios. But from a physical metal standpoint, you don't see a lot of rare Earths in our portfolios.
Liz Claman: I know we sort of touched on this, but I think it's good for advisers to hear your perspective on how gold specifically performed during the volatility in October that we saw.
Ed Coyne: Sure. Sure. So what happened is I was initially quoting October 9, because that was really the first day that the market really started to say, wow, something's wrong. But September 21st was the S&P high. So a lot of advisors I talked to, they like to reference that date. And gold has done very well over that market cycle. In fact, if you just talk about the fourth quarter alone, the S&P was off close to 15%. It was like 13 and a half, somewhere along there. And the Russell 2000 was off close to 20%.
Liz Claman: Yes, correct.
Ed Coyne: And gold was up over seven. And so in that market environment, you had a 20 to 25, 30% spread between what gold did relative to the S&P. That's substantial, right. And that has gotten people to take notice and say, "Look, maybe a 5% allocation probably makes sense in this space today given where we are." That really started kind of in the summer, that when you look at the return patterns, it started really going back into the summer. You started seeing cracks in the landscape, because [inaudible 00:08:57] was talking about the Fed going up, you'd see Trump there with his hands folded.
Liz Claman: Furious.
Ed Coyne: Yes. It was definitely a standoff between the two and no one knew who was going to win out on that, but it's clear that [inaudible 00:09:09] may take a pause. The fact of the matter is whether rates go up or go down really hasn't have a negative effect on gold. Gold's done very well in rising rate environments. What's really concerning is that we've got so much debt on our balance sheets. Everyone knows about this, right? That hasn't gone away.
Liz Claman: People don't feel it, so they don't see it.
Ed Coyne: Debt doesn't matter until it does and when it does, it's all that matters.
Liz Claman: And then gold, you expect, will really start to shine.
Ed Coyne: It does very well in those types of environments. So the landscape hasn't changed at all. I mean the 7% run up was nice. We think that can continue. We think as long as volatility and uncertainties in the market, gold should be a permanent sleeve in the portfolio and we don't see any reason for that to change.
Liz Claman: Well, for as long as I've been covering business news, uncertainty is part of the conversation.
Ed Coyne: That's right.
Liz Claman: Great to see you once again.
Ed Coyne: It's great to see you as well.
Liz Claman: Ed Coyne is Executive Vice President at Sprott Asset Management talking gold and all kinds of metals. We'll be right back always with much more on Asset TV.
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