Gold Investing: Soros's Latest Move

George Soros builds another gold position...

 

IN HIS 36-year career, Michael Ballanger, director of wealth management at Richardson GMP, has seen good markets and bad. As a true contrarian, he sees opportunity in the undervalued precious metals assets and lauds George Soros's recently reported large gold-related positions. In this interview with The Gold Report, Ballanger discusses market sentiment. 

 

The Gold Report: A news story in mid-May reported that billionaire hedge fund manager George Soros had almost $240 million ($240M) in gold-related positions. Moreover, on May 16 he had purchased $25M in call options on the Market Vectors Junior Gold Miners ETF (GDXJ). What are your thoughts on that move?

 

Michael Ballanger: All one needs to look at is the historical relationship between gold and gold shares to see the logic behind such a move. With every market on every continent now surging to record high levels in response to central bank stimuli, it would be reasonable to manage risk by owning one of the most beaten-down sectors I can ever recall.

 

TGR: Why does someone like Soros buy gold-related instruments and not equities, even the large caps?

 

Michael Ballanger: In the case of the GDXJ, he is actually buying a "basket" of equities related to gold/silver mining and exploration. By doing this, he spreads his risk over a large population of companies in the same space. Picking individual companies in this space invites execution risk because as we have seen in numerous cases in the past decade, a one-off event such as politics or natural disasters can undermine a correct call on the sector as a whole.

 

TGR: Are you aware of other big-time players that are making similar moves?

 

Michael Ballanger: Not specifically and certainly no one as notable as Mr. Soros. It is interesting that the managers who were early in the gold trade such as Eric Sprott are more bullish today than ever and that is noteworthy given gold's performance since 2000; despite this current correction and in my view, it is a correction rather than a secular bear.

 

TGR: When last we spoke you were convinced the market had found a psychological bottom. You noted that at the end of 2012, the TSX Venture Exchange (TSX.V)—acting as a proxy for the junior mining sector—was trading at 0.71 times the gold price. As of May 31, it was 0.69 times the gold price. Do you see the TSX.V-gold price ratio moving further sideways for the foreseeable future?

 

Michael Ballanger: I based my "bottom call" on sentiment. The sentiment in the junior space in January was abysmal and it is just as abysmal today. However, weak sentiment numbers, while historically reliable, do not tell you that the price has stopped declining. In that context, I was early because not only has the Venture Exchange dropped to new lows under 1,000, the TSX.V-gold ratio has recently hit .66 versus the bull market high over 5.0, which is actually quite remarkable.

 

TGR: What's your thesis for investing in mining equities (large, mid and small cap)? Precious metals investors want to know what they should do over the course of the summer months. What's your advice?

 

Michael Ballanger: There is always a degree of seasonality to the mining sector and the numbers dictate that one should wait until mid-August to begin initiating positions but I suspect that may be too "cute" because of the severity of the valuation compression we are witnessing in the juniors. Companies that were considered good value at $75/ounce (Measured) are now trading at under $20/ounce and so these prices may not wait for mid-August if gold decides to reverse or if sentiment shifts early back to the bull camp.

 

TGR: In our last interview you discussed "well incubated" junior mining companies, ones with a core of investors that understand how the game is played and have the long play in mind. Where are those companies?

 

Michael Ballanger: In a nutshell, some have done quite well but most have been disappointing. Despite either positive earnings reports or new discoveries, each time they try to lift off the bottom, they have been sold as a liquidity event. It is almost a Pavlovian reaction; they sell off because they have sold off in the past and until new volumes come in to relieve the supply that will not change until sentiment changes.

 

TGR: Before we let you go, please give our readers something to ponder.

 

Michael Ballanger: Whenever I am interviewed for my comments on the precious metals sector, I am usually addressing an audience that is predisposed to understanding the value of holding gold or silver bullion or equities in their portfolios, but what is rarely addressed is the correct allocation. There are some who believe that it is the ONLY asset that one should own and there are others that believe that it should be used as a balancing tool within a larger mix of assets.

 

No greater example of the need for a correct mix of assets could have been more obvious than the behavior of gold versus the S&P 500 since mid-2011. While bullion has dramatically outperformed the S&P 500 since 2000, the S&P 500 has been a superstar versus gold for the past 18 months. For this reason, it is critical to be flexible in your allocations because while I am certainly one of the most fervent believers in the importance of gold in protecting the purchasing power of portfolios, as a wealth manager I have to maintain a balance and that is something everyone must remember.

 

TGR: Thank you for your time.