Gold has seen a double-digit YTD advance in 2019. Gold mining equities have also posted notable returns. Fueled by lower interest rates worldwide and the growing risk-off sentiment, gold is proving its mettle as a safe-haven investment and non-correlated portfolio diversifier.
Tocqueville Asset Management's John Hathaway and Ryan McIntyre join Ed Coyne, Senior Managing Director at Sprott Asset Management, to discuss their outlooks for gold bullion and gold equities. They explain why the current bull market is just in its early stages and suggest the optimal gold portfolio allocation for most investors.
Ed Coyne: I am Ed Coyne, Senior Managing Director of Sprott Asset Management. Sprott is a global asset manager with more than $10 billion in assets under management with expertise in precious metals and real assets. Due to our recent announcement of the acquisition of the Tocqueville Gold Strategy, I've asked John Hathaway, Senior Portfolio Manager of the Gold Strategy and Ryan McIntyre, Portfolio Manager, to join me.
John, let's start with you. Last year was the first year since 2011 that gold outperformed the S&P 500, gold was off about 1% and the S&P 500 was off 4%. This year, through the middle of October, both are up mid to high teens. In your view, what's changed in the last couple of years?
John Hathaway: I would say the big thing is monetary policy. Chairman Powell and the rest of the Fed have essentially capitulated on any pretense of being tight money, i.e., tightening the interest rate cycle. And in January, Powell had a press conference and said they were not going to continue to run off the balance sheet and that's when gold started to take off. I think that also helped stocks, that is just more easy money. If I had to single one thing out, it would be a change in the central bank’s stance in terms of tightening.
Ed Coyne: You know, it's funny, I always hear that often when we talk to our investors, who talk about trying to be their own central bank as they're looking at what's going on in the broader market. I think you're right that a lot has changed in the monetary policy space recently.
Ryan, we spend a lot of time talking physical precious metals, but how should investors be thinking about the market today from an equity point of view?
Ryan McIntyre: Speaking of changes, there has been significant change at the top of the gold mining sector. We saw a lot of consolidation at the end of last year and early this year when some of the largest gold mining companies combined. Barrick acquiring Randgold, then Newmont acquiring Goldcorp. And this is very significant because typically these types of transactions occur at inflection points in any market cycle. In our case, the bear market cycle. We think we're now coming off the bottom and hopefully moving in a more constructive environment for gold equities. It should be very interesting going forward.
The other thing I would highlight in terms of changes and interesting facts is that the price at which the junior gold mining companies are trading at now are some of the lowest we've ever seen to the point now where it's actually cheaper for other companies to buy companies who have defined resources instead of going out and spending their own money, time and risk to find them. There is considerable discrepancy from a value standpoint.
Ed Coyne: John, you have been investing in gold since the late 1990s, and you've seen multiple market cycles. As investors look to reallocate back to the gold space today, what should investors be thinking about in terms of an allocation to gold and gold equities?
John Hathaway: The first thing is that gold is a defensive asset and it is an excellent portfolio diversifier. Having some exposure to gold protects capital during down periods in the stock market. I know that hasn't happened to a large extent, and I think that's one reason that gold is so under owned. But I would say it seems to me that in this world with super-easy money and the rest of the landscape with a very fractious political climate in the U.S., late cycle concerns about a possible recession, all of that. I would think some exposure to gold, at least 5%, would make sense. If you have a point of view where you want to be more dynamic, you could go from 10% to 15%; but that's an individual decision.
Ed Coyne: It comes down to how the investor is allocated in the rest of their portfolio, how much is in traditional stocks, bonds and so forth.
John Hathaway: There's no single answer.
Ed Coyne: Ryan, it's interesting at Sprott we believe that we're in the early stages of a bull market. When you look statistically at what's gone on in the last two decades, several indicators show that we are in the early phase of a bull market for gold. When that happens, when gold is flat to rising over a full market cycle, what does that typically mean for gold equities? Why do gold equities traditionally do well in that type of environment? And how should an investor allocate to the gold equity space given that we do think we're in the early stages of a bull market?
Ryan McIntyre: We are firm believers in holding both physical gold and gold equities. The key decision for us when we talk to people is really how much in terms of gold mining equities should they own. We think investors should treat gold equities like any other sector. To the extent that there is a lot of optimism in the sector, you should probably underweight the sector. But in a situation like today, when there's extreme pessimism in the gold mining equity sector, my recommendation would be to overweight the sector. I think to the extent that any investor is picking individual securities like what we're doing, I think our overriding philosophy should be followed by investors as well. That is to pick companies that are adding value independent of the gold price. These include the components of adding successful exploration, development, maybe production optimization, but not be beholden to the gold price itself and focus on the quality of the assets. Those are the things that are going to deliver a high return on capital opportunities.
Ed Coyne: I think that's an important point because so often people think of allocating to gold equities as simply a leveraged trade to the price of gold. But to your point, gold companies are companies also. They have management and balance sheets. You have to pay attention to those things in order to have long- term success. The Sprott-Tocqueville partnership that is set to close in January 2020, I think speaks volumes to that quality mindset. We think the same way as you. We're excited to have you guys be part of our firm, and we're looking forward to that. I agree, focusing on quality is extremely important.
John, I know some people may cringe at this last question, but we always like to get your outlook on where you think the world's headed. This is where you get your crystal ball out give us your predictions, both from an economic standpoint, just the broader market as a whole. Also, gold's role in a portfolio, whether it's physical or equity or a combination of the two. What do you think the next couple of years are going to look like, and how will that gold allocation potentially benefit investors over that cycle?
John Hathaway: First of all, it's important to note that gold has broken out of a six-year basing pattern. Not to sound too much like a technician, but rarely does this sort of thing happen and then fizzle out. It seems clear just from very conventional technical ABCs that gold has much more to go on the upside. What'll drive that remains to be seen, and we'll never know at this stage of the game. But it seems to me when you think about various assets, stocks are at a cycle high, bonds are at a cycle high, but gold isn't. For gold to go to a cycle high it would have to exceed its old high of $1,900 in U.S. dollars and I would say maybe by 50%. Again, I hate giving specific prices connected with a date, so I'm not going to provide a date. But I think that's where we're headed. And the reasons are legion, including easy money, geopolitics,
shortage of gold relative to demand. There are many bullish factors that could take us there.
Ed Coyne: It’s interesting to note that gold's at a high in many currencies already.
John Hathaway: The definition of a gold bull market is when it's rising in every currency, and that is what gold is doing now.
Ed Coyne: Thank you for that. I appreciate your time and your views on gold and gold equities.
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