Manager Bets on Gold in Volatility

Rising bullion would stimulate the gold stocks held in Dynamic Precious Metals, which has delivered an impressive year-to-date performance. For the 10 months to Oct. 31, the F Series delivered a gain of 55.5%, more than 22 points ahead of the Morningstar Global Gold Index. Longer-term returns also shone brightly, with a one-year gain at Oct. 31 of 69.8% and a three-year average annual compound gain of 30.3%, both well ahead of the index.

Gold’s Got Legs
Important factors influencing the behavior of gold, the king of precious metals, are inflation, the level of real interest rates, the strength of the U.S. dollar and investors’ sense of risk or need for a safe haven.

Tax cuts and soaring expenditures contributed to unprecedented levels of government borrowing in the U.S. under President Trump and the stimulus will likely continue under President Biden in the wake of the coronavirus pandemic and the severe economic toll that it’s taking.

And a similar wave of government stimulus is rolling through countries all around the world. Although the official inflation rate of around 2% in the U.S. and Canada is not yet cause for concern, history has shown that skyrocketing debt and fiscal irresponsibility ultimately erode the purchasing power of paper currencies and boost the value of hard assets like gold. 

“I’m pretty positive about the outlook for gold, it’s still got legs,” says Cohen. He adds that government stimulus has become a way of life. “A deteriorating economy will lead to even more stimulus and more government debt. Debt is at untenable levels already, and it’s getting worse and worse.”

Volatile Stocks = Rising Gold
Stock markets have had a good run since the abrupt correction last March triggered by COVID-19, but gold’s value as a safe haven asset and source of stability could increase if there’s more turbulence ahead in financial markets.

“There is a co-relation between the gold price and rising stock market volatility,” Cohen says.

Civil unrest and violence in the streets could also spur investors to seek the safe haven of gold, Cohen says.

For the year-to-date at Nov. 6, the gold bullion price was up 28%, while the S&P/TSX Global Gold Index gained 44%. By comparison, the S&P/TSX Composite Index was down 4.6% and the S&P 500 index was up 8.6%.

What About Miners?
Cohen, a mining engineer who formerly worked in the field, seeks best-in-class companies that operate in safe jurisdictions. He likes to do his own modeling of mining company scenarios “from the ground up”, and looks for companies with ample ounces in the ground and the potential to find more, as well as talented management teams and technological expertise.

“It’s always been a stock-picker’s game,” he says. “Many gold stocks are still cheap relative to net asset values and the underlying gold price. A lot of companies have cleaned up their balance sheets and rectified the mistakes of the past.”

The fund typically holds between 35 and 45 companies and has little overlap with TSX Global Gold Index. Although it can invest globally, it has 56% of assets based in Canadian-based firms and 42% in Australian-based companies. There is also a smattering of holdings in the U.S. and West Africa. About half the fund’s holdings are companies in production, and the other half includes companies in the exploration phase.

“We focus on the companies that truly excite us and are looking for the mines of tomorrow, and that pushes us to development companies,” he says.

Stocks in Focus
A key holding is Northern Star Resources, an Australian company that Cohen has owned in the fund since it traded at a US$1 a share. It now trades at close to US$12 a share. The company has been an astute buyer of operating mines, and subsequently improves their operations and increases efficiency. “The management team always has an insight on how to improve operations,” he says.

Another favorite is Bellevue Gold of Australia. It is developing the historic Bellevue mine, that was one of Australia’s highest-grade gold mines from 1986 to 1997. The mine was closed for 20 years but is now benefitting from advanced exploration and development techniques. The company has a skilled management team with a record of discovery success and has been drilling extensively this year. “It has conducted a massive amount of drilling and expanded the resource size,” Cohen says. “There have been some fabulous discoveries, with high grade gold content in the rock.”

A Canadian firm in the top holdings is Agnico Eagle Mines, a company that is good at both building mines and also acquiring smaller companies with promising discoveries.

Cohen isn’t a huge fan of silver, which he says doesn’t have the same investment allure as gold bullion for individuals or central banks. However, the fund has a few silver holdings, including SilverCrest Minerals, which has a valuable discovery in Mexico. “I’m not a silver pundit, but if a good opportunity comes along, I want to be part of it,” he says.