Q Concerns about global growth have driven gold higher, but the price moves have not all been one way in 2019. Where next for gold?
Many of the reasons gold gained are still present. There is a great deal of economic uncertainty, and even if the US and China reach some kind of a trade agreement, I doubt it will be a final resolution. So concern about global growth is likely to persist, which will support gold.
The gold market’s pause in September, when investors started to feel more positive about the economic outlook, was interesting. It’s typical for the market to stabilise after the kind of rapid rise we saw in the summer. But the gold price didn’t fall by as much as one might expect, holding up at around US$1,500 per ounce (oz).
Q If global growth slows further, how would you expect gold to perform?
Past periods of slower growth, especially when accompanied by falling equity markets, have generally been positive for gold. They have also often been positive for gold equities, which tend to follow the gold price. Gold and gold stocks are seen as a ‘haven’ when people are worried about the world economy, and so they are not correlated to equity or bond markets. That makes them useful diversifiers.
Q How might positive economic data or progress in the US-China trade dispute affect gold?
I wouldn’t expect the gold price to collapse because the bigger-picture worries will continue to support it. Gold equities are particularly interesting, because I think they represent good value. Gold companies are very different to how they were in 2011-2012. Back then, they were making terrible capital-allocation decisions and carrying enormous debts. They were clearly on borrowed time. Now, in contrast, gold companies are profitable and generating cash that they are starting to return to shareholders. Even if gold prices stay flat next year, I expect gold companies to continue to perform well.
Q So you think gold businesses have learned their lesson?
Never say ‘never’, but they have certainly realised they cannot do what they were doing 10 years ago. Gold companies are acting much more responsibly. They are not growing too fast, they haven’t ramped up gold supply excessively, and they are focusing on generating cash flows and looking to return some of that to shareholders.
Q What are the risks for gold investors?
Resolution of the trade war and a genuine economic recovery — perhaps due to Chinese stimulus — would reduce uncertainty and likely lead to gold prices coming back down, at least initially. Of course, at that point other parts of investors’ portfolios should be doing well, highlighting that gold is a useful diversifier.
For gold equities, other than the obvious risk of a falling gold price, investors need to be wary of currency moves. The strong US dollar has been great for miners in Australia, Canada, South America and elsewhere, because relatively weak local currencies have helped keep costs down. That has increased profits. If the US dollar weakens, gold prices might rise. But investors will need to keep a close eye on miners’ margins, because their costs could increase sharply.
Q How is the gold strategy positioned heading into 2020?
The portfolio is tilted very much towards gold and silver equities, though we also invest in physical metals via exchange-traded funds. We have also reduced the number of holdings to focus on companies that are achieving some growth, generating good levels of cash, and looking to return cash to shareholders.
Another thing we’re watching closely is how gold companies are responding to investors’ increased focus on ESG (environmental, social and governance) issues, in terms of how companies are run and also in how they report climate-change and other sustainability-related risks.
Q Why is ESG particularly relevant for gold investors?
Gold companies have had to address sustainability concerns for a long time. But with investors increasingly focused on ESG considerations, particularly relating to climate change, we are starting to see their responses to these issues separating companies out. Those that are responding well are outperforming. It is not often that every company is faced with the same challenge at the same time. As an active manager, it has been really interesting to see which companies have responded best.
Q Is addressing sustainability causing costs to rise?
There are obviously cost implications. But if you are reducing emissions — be that water, carbon or anything else — there can be a cost benefit too. Companies are not only conserving energy, but looking to source energy from renewables. For example, some companies are installing solar plants at their mines, which often reduces costs over time. So for many companies, addressing ESG is improving the way they are run and helping them find cost savings. We are starting to see that reflected in performance.
All investments carry the risk of capital loss.