The gems in the gold sector on the ASX are up 250%+ over the last three months. Some professional fund managers have been riding this wave successfully, especially those invested in Troy Resources (TRY).
As you can see from the chart above, TRY went from a low of $0.19 in January to a high last week of $0.695 (+256%). One Listed Investment Company (LIC) that identified this movement early was Katana Asset Management (KAT) who shares some insights behind successfully picking gold-movements like this recent wave on the ASX.
8 Gold Price Influences
“The gold price is perhaps the hardest commodity to call.” Says Romano Sala Tenna.
Portfolio Manager with Katana Asset Management (KAT). When looking to invest in gold-related companies Sala Tenna sees that “There are a large number of intertwining factors, any of which can come to the fore and be the primary driver of price at a given time.”
Sala Tenna reviews a list of factors that impact the gold price over time:
- The Price of gold in US$; in simple terms if the $US declines, the price of gold rises.
- Hedge against currency wars/devaluation – i.e. Quantitative Easing (QE) / printing money
- Central Bank buying/selling of gold reserves
- Hedge against inflation and the risk of inflation
- Hedge against uncertainty such as political instability, wars etc.
- Speculative buying/selling (through gold exchange traded funds (ETFs))
- Physical demand – predominantly driven by emerging markets (EM) especially the India markets
- Supply side cost curve – the amount of gold being produced and scheduled to produce in the foreseeable future.
This is a great starting point for investors considering investments in gold-related shares on the ASX. However, Sala Tenna adds that” Recently, I would add another factor, being: 9. Hedge against Deflation and negative interest rates.” Which has been a strong force on international markets in recent years.
The February 2016 Gold Rally
The strongest forces Sala Tenna sees impacting the gold market right now are Speculative buying (6), a hedge against uncertainty (5), a hedged against currency wars /currency devaluation (2), and the price of Gold in US$ (1).
Alex Shevelev, Portfolio Manager at Glennon Capital (GC1) notes that “The Australian dollar gold prices rose close to their 10-year peaks in February this year and US dollar gold rose to one-year highs.” While this was the second quick wave of gold buying on the Australian market in the last 12 months, with the first wave being in September 2015.
Shevelev says “In 2015 mines with Australian dollar costs benefited substantially as the Australian dollar fell while the price of gold in US dollars stayed relatively flat. This was quickly reflected in stocks with domestic mines, though those with offshore assets remained depressed.”
In these recent rallies the importance of the US$ and AU$ (#1 in the list above) has been clear, however the hedge against currency wars (#2 in the list above) has also been a dominant force. Shevelev also notes that “Since January the US dollar gold price has started to move higher as well. Investors sought safety as US interest rate rise expectation came down and equity markets wobbled. Gold stocks with US dollar cost bases then began to rise as well.”
Researching an ASX listed Gold Company
After understanding the external factors influencing the price of gold itself, most managers agree that there is a strong importance on assessing the company on its own merits. As Shevelev says “when deciding when to invest in gold shares we tend to look at gold stocks individually, just as we would other businesses”.
More specifically for gold companies Shevelev says “we consider where the projects are located, how many ounces they produce (or will produce), what the all in sustaining cost is and how much needs to be spent on exploration and on corporate costs, among other factors.”
When taking the research one step further Shevelev looks at “more strategic elements: is a developer fully funded through to production and when will we see first cash flow from the project, or is new management likely to do a better job at running the business than previous management?”
Gold or ASX listed Gold Shares?
ASX listed shares can provide a lot of leverage to the gold price, much more that the rise in the underlying commodity itself.
For example, if a company is producing golf at $950 an ounce and the market price of gold is $1,000, then the profit is $100 per ounce. This $100 profit per ounce is reflected on the company’s balance sheet / bottom line and in turn the share price.
Now consider a 10% rise in the gold price from $1,000 an ounce to $1,100 an ounce. The same company producing gold at $950 per ounce has just increased their profit per ounce from $50 to $150. Suddenly the 10% rise in market price of gold has tripled the company’s profits.
“It is important to note that we (GC1) have our gold exposure through producing companies, not gold itself. A small increase in gold prices may actually be very significant for gold equities.” says Shevelev.
The Outlook for Gold in the next 3-6months
ASX listed gold equities have provided investors with some of the best returns available, however the question of whether this can continue is always asked.
Shevelev says “US dollar gold remains almost 35% off its 2011 high and if the global growth environment continues to weaken we may see US dollar gold prices move higher.”
