What’s with gold?

Can you provide an update on gold stocks?

Q – I would be grateful if you could provide an update on gold stocks in general, and FNV (Franco-Nevada) in particular. Do you continue to rate FNV as a buy, a cornerstone stock? Do you still think that money will continue flowing to gold in coming months?

The gold price itself is down about 17% since its summer high. FNV has lost about 35% of its value since peaking this summer. Other gold stocks such as GOLD and IAM are doing even worse, almost 40% down.

I am puzzled as to why we’re seeing such downward pressure on gold stocks, as renewed concerns about inflation are starting to materialize (which, theoretically, should be good for gold stocks, but that’s not how markets are behaving). I’ve read other analysis saying that rising interest yields are bad news for gold as investors recalibrate their gold assets in favour of bonds (is that true? Seems to contradict your thesis).

In short, we’re in a very different environment than when you last covered gold this past summer. I’d be grateful for an update: are those current levels a buying opportunity? Or is it the contrary and time to exit a sector that seems to be losing investors’ favour by the day? – A.C.

A – Actually, it’s a great time to buy FNV and indeed other precious metal stocks on our list such as Agnico Eagle and Pan American Silver. Gold miners always act as a leveraged play on the price of the metal, as costs are relatively stable over time. So, every change in the price of gold drops straight to the bottom line, either increasing or reducing profits proportionately.

When gold is doing well, as was the case for most of the last five years, gold miners will tend to outperform but there may be periods when that relationship doesn’t hold. When gold falls, as in the last few months, miners will tend to fall further.

The rising popularity of crypto currencies such as Bitcoin may account for the lagging performance of gold. Investors worried about the money printing by central banks have chosen to use Bitcoin as a safe haven, helped by endorsements from such luminaries as Elon Musk, who bought $1.5 billion worth for Tesla last month.

While the gold ETF (GLD) was up 44% over the last five years, Agnico was up 52%, Barrick 38%, and FNV 65%. Newmont more than doubled (up 112%) and Pan American almost tripled. In the last year, GLD is up 9% but FNV is down 4%, due to the under performance in the last few months, and Barrick is down 5%. But Agnico is up 12%, Newmont is up 21%, and Pan American 49%.

In the short term, as is evident, gold miners will move on company specific information, with FNV and Barrick’s results being regarded as a little disappointing, but over time they will move with the metal.

Chairman Jerome Powell of the Federal Reserve promises that inflation would be allowed to run above the 2% target for an extended period and that short term interest rates will not be raised until 2024.

Meantime, the $1.9 trillion stimulus package passing the U.S. Congress at a time when the vaccine roll out is accelerating means the chances of inflation moving higher seem pretty certain.

The break upwards in the yield on the benchmark 10-year U.S. Treasury bond from below 1% at the beginning of the year to over 1.6% at one point on Friday has resulted in the third worst two-month performance for government issues in the last thirty years. When absolute yields are so low, even a small rise in rates has a negative effect on bond prices, and the move has been very large.
In these circumstances, owning companies that produce a metal that has been a store of value for over 4,000 years and is only increasing supply by 1% annually seems to be a very sensible idea.

Incidentally, FNV has been one of the best performing recommendations over the last decade, up over five times while gold round tripped from US$1,800 per oz. to US$1,050 and back again. So, sticking with FNV makes sense. The stock remains a Buy and I’ll discuss its results and those of the other miners in an upcoming issue of IWB.

– Gavin Graham