A Money Manager's View on Gold

Bruce Campbell shares his insights...

BRUCE CAMPBELL, a money manager with more than 35 years of experience, began his career as an investment analyst with CIBC and Ontario Hydro, after which he joined Royal Trust Capital Management. As senior vice president at Royal Trust, he managed more than $10 billion of Canadian and US equity money for pension plans and mutual funds. He subsequently served several years as chief investment officer and partner with Nisker Associates. 

For the past 11 years, Bruce has been president and portfolio manager for Campbell & Lee Investment Management Inc., which he and Joe Lee cofounded. He earned his bachelor degree from McMaster University in 1976 and a masters in economics from York University in 1981.

Here he gives The Gold Report his views on the gold and silver markets.

The Gold Report: Tell us a little bit about Campbell & Lee Investment Management.

Bruce Campbell: We provide investment management for individuals. We have continued the same positive, long-term track records we had at larger places but because we are smaller, we can have more fun and be a little bit more nimble.

TGR: So, you give your clients at least some exposure to gold in their investment portfolios?

Bruce Campbell: Yes; in fact, we have the highest percentage of gold and silver in our equity model portfolios that I've had in my 35 years — approaching 15% at the moment. It's primarily gold with some silver spread out among five or six holdings at any one time.

TGR: Until the last few years, gold served mostly as an insurance policy in investment portfolios. It didn't appreciate much, nor did it depreciate greatly. But with gold's 30% or so rise in 2010, investors are now increasing their exposure and expecting large returns from their gold holdings. What do you tell your clients when it comes to investing in gold and silver?

Bruce Campbell: That's a great question and one that all investors should ask themselves. There are a few components to consider. One, the aspect of portfolio insurance remains valid—particularly post-crash; late 2008 and early 2009 is the first time we raised our gold weight. Two, we're now starting to see inflation creep back in, at least as a possibility; so, gold is a nice hedge that way.

With the rise in the Gold Price, I'm also searching for companies that can raise their production substantially so that I'm not depending solely on the price of gold for the higher stock price. A high Gold Price becomes a great bonus and produces some really, really high returns; but, given the run we've had, what if we go sideways for a while? You want good operators who've figured out how to grow a business or are discounted in the market due to some previous problem or whatever the combination might be. Growing can make money in a flat gold environment or make a ton of money in an up gold environment.

TGR: On April 6, the Gold Price popped above $1,460/oz., hitting a new all-time high of $1,476.20/oz. Two days later when silver hit a 31-year high of $40.63/oz. These levels bring a lot of media attention and buying interest from large funds. Will that "hot money" and renewed retail interest add volatility to the precious metals markets?

Bruce Campbell: I think the answer is yes. In that same period, when gold and silver went up a little bit more each day, the stocks were all down; so, you see this volatility even inside the equities market versus bullion. 

In other words, the stocks aren't necessarily tracking the price of the metals closely—and haven't been for awhile. Once the market recognized that the stocks were lagging, a number of the stocks went up 5%–7%. First it was the larger caps, and then the juniors as investors got around to them.

The direction is up here. There will be some momentum and fast money players saying, "Gold goes through $1,500/oz.," but it probably won't be without huge volatility.

TGR: One reason for the $30 spike that drove gold up to $1,460/oz. within a span of 24 hours, apparently, was the Euro's strength against the US Dollar (USD). That seems odd, given that Ireland is being bailed out with Portugal next in line, and we're hearing more about sovereign debt problems in Spain and Italy. What does all of this tell us about the USD?

Bruce Campbell: I think it was a weak-Dollar story as opposed to a strong-Euro story that triggered that price spike. It's the same with oil. It's been around $105 per barrel lately, but the Canadian Dollar got through CAD$1.05 today. That's more a weak USD story than the Canadian Dollar being dragged up—and it's not just the Canadian Dollar, but also the Australian and New Zealand Dollars and the Brazilian real. 

The Euro happens to be caught up in it, as well. All the nice alternatives to the USD are strong. If you looked at the price of gold in Euro or Yen, you'd see the chart's not nearly as compelling as it is in US Dollars.

TGR: With political instability in the Middle East, inflation creeping into developed world economies, a $1.4 trillion US deficit and monetary debasement, is this the "perfect storm" for gold?

Bruce Campbell: To have all of those things going, yes, I believe it is. But just in case that perfect storm reverses somewhat, I think investors should be Buying Gold producers that will be growth companies. It wouldn't deter a long-term story but gold going down $100–$200 would be a normal pullback. Were it do that and stay down, you'd want companies that can grow their way through it by producing.

TGR: You've said that, typically, equities rise 4% for every 1% increase in the Gold Price. Is the opposite true?

Bruce Campbell: That has been the historical case, but it's not been working quite to that extent lately. In the last year or two as prices have gone up to the stratosphere, that relationship has broken down. Some days it's something like 1.5%, not 4%. It's just that they're not going up as much. And one of the primary reasons for that is because costs are rising more significantly than normal. The price of oil is up, which is the highest single cost for a gold producer, followed by labor costs. With oil up, the gold producers aren't benefiting to the extent they would normally benefit.

When Dollar-related strength causes gold to pull back along with oil, the gold producers tend to go down more than the Gold Price. It's an instance where they probably shouldn't, but the initial reaction would be as we saw with the recent $100 pullback. The stocks went down more than they should have just on the basis of the historic relationship.

TGR: Beyond the factors you've already mentioned, how do you determine which equities you pick and which you leave on the shelf?

Bruce Campbell: In contrast to non-mining/non-PM companies, where price-to-earnings (P/E) and price-to-book (P/B) are things to consider, in gold companies we look for price-to-net-asset-value (P/NAV), which encompasses the current value of all of the production coming out of mines, minus the cost. 

That gives us a feel for a company's potential growth and upside. Gold stocks tend to trade on anticipated higher Gold Prices, increased production growth, increased reserves or a combination of all three.

TGR: Any other metrics you watch?

Bruce Campbell: We also consider price-to-cash-flow (P/CF), which is more of a look at the value of current production. This removes non-cash items (depreciation, etc.) and simply measures the cash being generated relative to the stock price. Generally, companies with a low P/CF are discounted for either geopolitical risks or lack of growth potential.

We look at the balance sheet, too. Depending on their size, it's easier for companies to raise money right now. Juniors, certainly, have been doing a lot of that. As far as senior companies, they don't have to raise new equity that way if they're doing a takeover. 

TGR: Could you quickly map what you see as gold's path between now and the end of the year, if not year-end 2012?

Bruce Campbell: My crystal ball gets hazier the further out you go, but I believe that the perfect storm we were talking about earlier will allow a $1,500/oz. price tag on gold at some point this year. We have a bit of momentum here, so I think we might see that—it's only a couple of percentage points away. 

After that, what's next? Unless there's some further disaster, I don't see why it wouldn't just keep going. Of course, nothing goes in a straight line; so, it would make a lot of sense for both gold and silver to pause—maybe go sideways—and have gold end the year at $1,550/oz. or something like that.

TGR: And if you go further out?

Bruce Campbell: If you go into next year, I think the key will be the US economic recovery. If it's strong enough to take higher interest rates, Canada raises rates and rates start to go up generally, it makes gold less attractive because the Dollar will be stronger. But it's also because the costs of holding gold will become higher. That's when you could see a pullback. To me, that's more likely than a doomsday scenario; so, currently, I don't think gold will see $2,000/oz.

TGR: Ever?

Bruce Campbell: No, just in the relatively near term. We'll have inflation over the next few years because we've just postponed it with all this liquidity in the system. With inflation, gold will climb its way upward over the long term, but I don't see a 20%–25% lift right away.

TGR: Thanks so much for your time and insights, Bruce.

Buying Gold? You can buy and sell instantly on live markets with the World No.1 BullionVault...