Some Gold Mining stocks are trading at their lowest price of the decade...
SENIOR PORTFOLIO MANAGER at Sprott Asset Management, Charles Oliver reckons now's a good time to stock up on Gold Mining stocks.
With 21 years experience in the business, here he tells readers in this Gold Report interview that, "Gold has gone up 20%. The stocks have gone down. They are very cheap. These companies are increasing their earnings, they're increasing their cash flow, they're increasing their dividends – what a great opportunity."
The Gold Report: What kinds of moves are you making in your funds during this market upheaval, and what philosophies or strategies are governing your decisions?
Charles Oliver: I'm generally continuing to follow a long-term strategy. I believe we're in a bull market in gold, so basically I'm pretty much staying long for the course in the Sprott Gold & Precious Minerals Fund. I'm trying to upgrade and improve the portfolio on a continuing basis. One of my themes for the last six to nine months has been increasing my large-cap component due to concerns about the overall economy and fear about pullbacks such as those we've been seeing, and improving liquidity prior to this occurring.
Today, I'm looking at all the names in the portfolio. Some of those I absolutely love have come under great pressure, presenting an excellent opportunity to add to these positions. I'll probably take some profits also, or reduce the size of some of our other positions. It's an ongoing process that occurs every day, whether it's an up market or a down market.
TGR: Mutual funds have been hit pretty hard, equities pummeled and many commodities hammered too, albeit neither gold nor silver so far. Considering the status of these precious metals, should selling your fund to institutional investors be easier through the remainder of 2011 and into 2012? Or does the growing lack of faith in markets and mutual funds, in particular, make the pitch ever more difficult?
Charles Oliver: The way you framed it almost answers those questions. The volatility in the marketplace absolutely does make people fearful of being fully invested, which certainly has a negative impact on any sales even if it's an outperforming asset class such as gold.
I think the market is slowly growing to recognize that gold is an asset class that can't be ignored forever and, for most of this decade, I'd say the populace has ignored it. For example, about a decade ago, gold represented about 2.5% of the S&P/TSX index. A lot of portfolio managers said, "Oh, I don't have to bother with gold because it's not going to make or break my performance."
Today, gold and platinum constitute about 14% of the overall index and one of its best-performing sectors. So I think institutional investors are becoming very aware that gold can have a significant impact on their performance. Often, these institutional groups have an indexing bias, so by that nature these people are forced to look at investments in the gold market.
TGR: One might not think so looking at it over a 10-year stretch, but the haven motive certainly unleashed the flood of money into gold over the first couple of weeks in August. Will that sort of defensive posture continue to drive gold? And what other defensive positions do you expect people to stake out in this kind of climate?
Charles Oliver: I think people are looking to gold for its defensive qualities, especially in a weak market. One of the themes that has occurred this year is a massive outperformance of gold bullion relative to gold stocks. In fact, if you look at the bullion, I think year-to-date (YTD) it is up more than 20%, whereas the index is down about 10%. Actually, that answers your question about how investors will look at gold and gold stocks. For the last year, a lot of money has been going into bullion without significant inflows into the gold stocks themselves. When you look at the valuations, you will see that these Gold Mining companies are trading at historic lows of the decade in many cases.
TGR: Will investing in Gold Bullion be something your fund may undertake?
Charles Oliver: Yes. Back in 2008, in the peak of the crisis, we had about 20% of the fund in bullion. That was a time when stocks started to trade below their cash holdings. I took the weighting of Gold Bullion down to the 3-5% level in a very short period because of the great values in Gold Mining stocks. I haven't actually changed the bullion weighting since around March 2009.
TGR: Are you likely to add to your bullion position now?
Charles Oliver: At this point, I see so much value in the stocks. It hasn't happened yet, but one day the market will wake up and say, "Wow, gold has gone up 20%. The stocks have gone down. They are very cheap. These companies are increasing their earnings, they're increasing their cash flow, they're increasing their dividends–what a great opportunity."
TGR: Now that gold has hit $1,800 per ounce, do you anticipate some producers thinking it's time to lock in and set off another round of hedging, which basically boils down to selling gold in advance at a fixed price?
Charles Oliver: It's possible, but I don't really expect it. I just know investors often punish companies when they hedge. Any big gold company that hedges just for the sake of hedging, as opposed to hedging to secure project financing, will be punished. Over the last decade, a lot of companies that have hedged have performed poorly.
However, the market is very accepting of hedging of any base metals that may be associated with the gold production. But, generally speaking, I'm not expecting to see hedging become prominent in the near future.
TGR: That's good to know. With gold and Silver Prices at or near historic nominal highs, the margins of producing gold and silver companies have rarely been so plush. At the same time, costs have gone up, too – increases in labor, oil and other things–but gold and Silver Prices seem to be appreciating a lot faster.
Charles Oliver: Yes. In terms of input costs, energy is always a material portion for any mining company, but as you suggested, the Gold Price has outpaced those costs fairly significantly. If you go back a decade, the Gold Price bottomed out around $250/oz and cash costs were somewhere around $200/oz. The Gold Price is up about sevenfold, at around the $1800 mark today. The cash costs are up to around $500-600/oz. So they've tripled against gold's sevenfold increase. And again, that's very good for the earnings and cash flow of the gold industry as a whole.
TGR: You mentioned higher capital costs on projects as the recent trend. How do you expect that to affect merger and acquisition activity?
Charles Oliver: We haven't seen much M&A in the first six months this year, but it could pick up with these rising costs.
TGR: Before we let you go, Charles, how long do you expect this incredible market volatility that we're experiencing to last? What sage advice can you give readers looking to invest in this environment?
Charles Oliver: If you look at the macro-picture, I continue to believe the next decade will be a period of deleveraging, which will mean bear market pullbacks will cause some pain periodically. I also believe the market is going to be weak going into the fall, with a risk of a pullback of 20% or more from current levels. The Federal Reserve may come out and announce Quantitative Easing 3 (QE3) this fall in order to curtail weakness in the market. Much like QE1 and QE2 did in the past, it will create lots of easy money, probably help support the stock market and get it back on track.
TGR: Are you expecting lows below those of 2008-2009?
Charles Oliver: I am not expecting the same type of pullback as we saw in 2008. The main reason I say that is because I believe the Fed is very fearful of having a repeat of 2008. It will do anything to prevent that from happening, so it will embark upon another money-printing episode.
TGR: That would bode well for gold.
Charles Oliver: It would be very good for the Gold Price. And I think the Fed will act more quickly than it did in 2008 to prevent the same types of results that we saw back then.
TGR: After all, there's an election in 2012.
Charles Oliver: Which means that politicians are going to be making all sorts of promises to their constituents for which we'll need to pay. It continues to look as if the debasement of currencies is going to persist for quite some time.
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