Ingot we trust: Are gold equities worth their weight?
If investors can stomach the volatility, stronger management could mark gold equities as an opportunity.
Gold has had a torrid time of it so far this year. Its price fell to $1,191.21 an ounce in June, the lowest price since August 2010 and representing the worst quarter for gold since 1968 but since then has recovered somewhat while remaining volatile.
But despite its volatility, there are some fund managers who believe the commodity, and particularly gold equities, represent a good opportunity.
Psigma Investment Management chief investment officer Thomas Becket prefers to see gold equities as separate to gold prices, allowing him to take a more focused approach based on company fundamentals.
He says: “When gold prices recovered, gold equities have continued to be a leveraged play. Our view on gold equities has to be driven by the headline view and having certain insurance policies still remains sensible.
“The market is starting to focus more on better management and advisers and clients need to be much more selective when it comes to choosing between gold equities. We are starting to see more of a tolerance in general for mining equities from value investors. However, given the incredible volatility we have seen of late, we do need to see stability in gold prices as well.”
Investec Asset Management resources specialist Scott Winship also points to management improvements at mining companies which could boost value.
He says: “There are some very good gold equities still with solid management teams. They have some of the best assets in the world, and have also issued dividends.
“Equities always discount lower than gold price, and they look cheap relative to their history. However it is likely they will never get that premium they once had. If investors want to play at a lower risk, the best way is through an exchange traded fund.”
Smith & Williamson Global Gold & Resources co-fund manager Ani Markova is concerned the impact of management changes on mining stocks is yet to play out.
She says: “All the miners that are currently producing are focused on reviewing their mining operations and cutting costs. This comes on the wave of executive changes that have taken place in the past couple of years, with more chief executives coming from the financial side of the business. There have been many promises of profitable production, but we are yet to see the results from this strategy shift.
“As most company budget reviews are still underway, it is difficult to know how much overall flexibility there is in the industry to remain profitable at significantly lower commodity price levels. ”
Charles Stanley Direct chief investment commentator Garry White is unconvinced about the prospects of gold equities, arguing they carry additional investment risk, not to mention that overall market sentiment points away from holding gold.
White says: “If you invest in miners directly you expose yourself to operational risk. There are strikes, mining accidents and financial issues such as the new mining tax in Mexico.
“Gold is a fear investment and typically used as a hedge against inflation. Inflation is falling and risk is reducing so we would need bad news for gold to turn around.”
Hargreaves Lansdown senior investment manager Adrian Lowcock is also wary about the sector. Lowcock says: “It was the case that throughout the summer there was a lot of pressure on gold equities. And behind all this you still have issues that gold companies have not been as well run as they could have been.
“Some of these companies are restructuring, but there still could be some bad news to come out too.”
Neil Gregson, fund manager of the £1.1bn JP Morgan Natural Resources fund, has reduced his exposure to gold and continues to do so.
He says: “We are not adding to our holdings of gold. In fact, as prices have rebounded at various instances, we have continued to sell down our holdings. We reduced our allocation to gold prior to the April sell-off and now have less than 15 per cent allocation.
“We expect to see some further consolidation in the industry and investors need to be mindful of the relative corporate debt loads these companies are carrying when differentiating with in the sector. We think the long-term view for gold is challenging. We see significant headwinds including the broadly strengthening global economic outlook.”
Winship says while he sees the value in some gold stocks, other base metals may be a better bet.
He says: “We have a few select gold equities in the portfolio. The better way of accessing investments is through platinum and palladium miners.”
But Becket believes for value investors with a long-term view, there are some gold companies worth seeking out. He says: “If you can stomach the volatility, holding gold equities seems sensible.”