Gold News

Gold as a Fear Mirror

Gold expresses the notion that money isn't worth what it used to be...

DOUG GROH has 25 years' experience in the investment industry. Before joining Tocqueville in 2003, Doug Groh was director of investment research at Grove Capital, and before that a senior sell-side analyst for JP Morgan and Merrill Lynch.

Doug Groh began his career as a mining analyst and worked as a precious metals portfolio manager at US Global Investors and American Express Financial Advisors in the 1980s and early 1990s. 

In this interview with The Gold Report, Doug Groh, explains why the Gold Price is like a mirror that reflects peoples' concerns about global economic and political events... 

The Gold Report: The situations in Greece, Ireland, Spain and Portugal are proving the unsustainability of deficit financing and are effectively killing the Euro as a safe haven currency. As these worries escalate, have you seen more money come into your fund? 

Doug Groh: Yes, we've seen funds flow into our gold fund product, but that's been the case over the last year or so. I attribute it primarily to the rise in the Gold Price. Some investors see gold as an attractive alternative to other investment vehicles and they're buying the Gold ETF (exchange traded fund) and gold equities. 

Gold Bullion itself has outperformed equities this year. Some people feel there's security in owning gold, but it seems they're reluctant to buy the equities because of the risk. In addition to the market and equity risks, mining companies have risk — whether operational or political — with regard to developing their deposits. 

TGR: What's the Tocqueville Gold Fund worth right now?

Doug Groh: As of June 27th, the fund is valued at about US$2.4B, with about 6% of the fund in bullion. 

TGR: Are you buying bullion now? 

Doug Groh: No. We've been pretty steady in terms of the number of ounces in the fund for five to six years, although it has appreciated in value over the years. In percentage terms, it can go up or down relative to the equity positions in the fund. 

We have that position because we feel that, as a gold fund, we should own gold as well as gold mining equities. It's not something we necessarily trade; it's just a core position for us. 

TGR: In 1980, about 22% of all financial assets were invested in gold-related instruments. Today, estimates put the current global investment at around 3%. Why aren't more investors buying into the thesis that gold will only go higher as paper currencies or fiat currencies lose value?

Doug Groh: We think gold is a unique investment vehicle. You can look at gold as a mirror that reflects concerns about a number of factors around the world: uncertainty in Europe, the Arab Spring, US monetary policy and debt, for example. 

When you analyze it, you might conclude that there's no real utility to gold. In fact, gold's utility is that investors see it as an alternative asset. Gold collectively expresses the notion that money isn't worth what it used to be. 

TGR: People are starting to whisper about contagion, much like what happened in Thailand in the mid- to late-'90s and spread to other Asian economies. Do you see contagion as a real risk?

Doug Groh: It seems appropriate that one consider that risk in one's investment analysis. Greek debt is owned by a number of European banks; banks that also own debt from Spain, Portugal or Ireland. If Greece defaults, restructures its debt or cannot meet its obligations, its debt will be worth a lot less. This would put pressure on the balance sheets of those institutions holding Greek debt.

TGR: Would that spread to the United States? 

Doug Groh: I think it's certainly possible. If there's a problem with debt in any part of the world, people will make comparisons. That's where I think there's a real risk. People would start to say, "If it could happen there, it could happen here." 

That kind of mentality is what concerns me most. As a result of that mentality, you're going to see the markets start to price that probability into the market. In essence, you're already seeing that. I believe that's why we've had a pretty tough couple of months in the equity market. 

TGR: Let's turn back to gold. Does the Tocqueville Gold Fund invest in junior mining companies that are strictly exploring for precious metals? 

Doug Groh: We have exposure to gold mining equities across the spectrum, from those that are exploring and aren't even mining yet to those that are developing and those that are actually producing gold. 

Our approach is to have about a 35% weighting in smaller cap, exploring/developing-type companies. It's a little hard to characterize because some of the explorers are actually developing. We think of them as exploring/developing companies. 

They comprise about a third of the fund. Others are producing cash flow and trying to become bigger. One can consider those as major producing companies and they account for another 40% to 50% of the fund 

TGR: And the fund was up about 58% in 2010, correct?

Doug Groh: Net of fees, the Tocqueville Gold Fund was up 53.33% during 2010, which compares to the Philadelphia Gold and Silver Index, which was up 35.94% during 2010. 

TGR: That's very impressive. In February, you told us that you were "cautious about investing new funds into gold equities." Is that still the case or has the pullback in gold equity prices created a buying opportunity?

Doug Groh: At the end of last year and beginning of 2011, many of the equities that we held had performed very well. It seemed as if the market was well ahead of itself. Year-to-date, however, gold equities have not performed well. 

The Gold Mining equities in general are down relative to gold, which is up. That spread between the rising Gold Price and the decline in gold equity values, in our view, has created a very good investment opportunity. 

At this time of year, you're probably best served by adding more aggressively to your gold equity portfolio, I believe. Seasonally, we generally see a low valuation point this time of year. The second half of the year, particularly September through November, has seen good performance for gold equities over the past several years. In that regard, now may be an appropriate time to get positioned for that. 

TGR: Do you still believe in a Dollar-cost-averaging approach to buying equities?

Doug Groh: Yes. If you're not working full time on the gold space, the best way to invest, I think, is to average the cost of the investment over the course of the year. If you're paying close attention to the gold equity market, you can appreciate that these values don't reflect what's going on in the Gold Price. There can be some good buys in the space. 

And so, for those that have the time and ability to pay closer attention, it makes some sense to take advantage of the attractive values in the current market. However, the discipline of averaging the investment costs over time is also a good strategy. 

The Gold Price is up over US$100 since the beginning of the year. That US$100 is falling right to the bottom line for gold producers, generating significant cash flow. The gold equities aren't reflecting that cash-flow-generating ability. The margin has expanded, even though costs are up somewhat, but the investor base has lost interest in the cash flow that's being generated. 

A number of catalysts are coming into the market that could reinvigorate investors in gold mining equities. First of all, you'll see good earnings and cash flow per share for the second quarter. Companies may increase their dividends. That's an important element to get investors refocused on companies' profitability, I believe. Additionally, in the latter part of the year, we expect to see more acquisitions. 

TGR: Before you go, please leave our readers with a few words of advice on how to play the current market.

Doug Groh: One point to keep in mind is averaging costs over time. I think that's the best way to get exposure. Secondly, it's important to assess a company's prospects and to think about a price target before investing. If it reaches that price target, reassess the investment. 

Third, assess each investment within a certain timeframe. Explorers and developers can take a long time before they realize the value of their assets, whereas producers are not on as extended of a timeline to realize the value of their assets. One has to match one's expectations with the nature of a company's operations. 

TGR: Doug, thank you for your time and insights. 

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