The price movements of gold bullion and miner stocks aren’t always in sync. For starters, gold mining stocks are more correlated to the public market, which can either hurt or help their valuations. Moreover, the management teams, cost structures and mine quality can differ greatly among mining companies, as can the logistical challenges of mining in different areas.
“No two mines are alike in terms of the geological setting, plus the management teams and the balance sheet of the business and so forth,” says Max Belmont. “With miners there’s a huge dispersion in terms of quality, asset base and potential returns from their investments.”
Belmont and Kertsos evaluate a mining company’s assets by gauging its proven and probable reserves, and they invest more in companies already in production. They seek a margin of safety by looking at a company’s operation, capital and geopolitical risks.
“You want to find gold mining companies that are able to grow gold production and gold reserves per share,” Kertsos explains. “If the management team can do that through the cycle it should be able to grow free cash flow per share. So we need to have good judgment about which management teams can grow their company through operational execution, exploration success and countercyclical capital allocation.
“We don’t mimic any index. We take a very bottom-up approach,” he adds.
According to First Eagle, $10,000 invested in the gold fund’s Class A shares at its inception in 1993 would’ve been worth nearly $46,000 as of last year’s third quarter, whereas the same investment in the FTSE Gold Mines Index would have seen a loss and been sitting around $8,400. The fund tops the index over the 10-, five- and three-year periods as well, though the disparity was much less within those various periods (both the First Eagle fund and the index returned less than the hypothetical $10,000 during the most recent three-year period).
Old And New
Besides gold, the most investable precious metals include silver, palladium and platinum. Palladium and platinum have various industrial uses, but they’re known mainly for their role in catalytic converters that reduce automobile pollution. As a result, their prices are typically tied to swings in the automotive industry.
Silver is used both in jewelry and in industrial applications such as electronics and solar power. The First Eagle fund recently had a roughly 5% allocation to silver bullion.
“Silver, along with oil, have the most industrial uses among commodities,” Kertsos says, adding that it’s important to understand economic cycles and how they affect the relationship of gold and silver valuations. He notes the price of gold bullion dropped initially during the global financial crisis but ultimately rose 5.8% in 2008, while silver ended that deflationary year down 28%.
“Silver does worse than gold during deflationary environments, but does better than gold in inflationary environments,” he explains. “It’s one of the few commodities that usually does better than gold during periods of inflation.”
Precious metals are as old as Earth itself, but a newfangled item has emerged to rival gold as an alternative asset. Bitcoin, which arrived as a cryptocurrency in 2009, was touted last October by asset management firm AllianceBernstein as a safe-haven asset whose performance had topped gold during the previous five years. (Neither asset pays a dividend, which is a negative for some investors.)
Naturally, the folks at First Eagle are quick to defend their turf. One big problem with bitcoin, they say, is that it’s much more volatile than gold. “But more importantly, given that it’s driven by technology and is a man-made construct, it can’t compare to gold’s long-term track record,” Belmont says. “Bitcoin is an asset class that trades more like a growth stock rather than driven by the influence of real interest rates.”
Never Static
The World Gold Council’s 2024 investment outlook points out a number of factors that could either help or hurt the price of gold. A soft landing for the U.S. economy, for instance, could mean flat or slightly negative returns, whereas U.S. Treasurys and U.S. equities might benefit. The organization based that projection on the past two soft-landing environments—one from the mid-’80s; the other from the mid-’90s.
But gold could get a boost from geopolitical tension as key elections take place in certain major economies. The price of gold could also stand to benefit if central banks continue buying the metal as a way to diversify their reserves (and thus reduce their reliance on U.S. dollars). Any widening of the Israel-Hamas conflict—its outbreak in October gave gold a boost to close out last year—is a wild card.
Gold has been around forever, but it’s never static. Evidence suggests it was first used in jewelry and other decorative objects as early as 6,000 years ago. Today, a microscopically thin layer of gold covers the mirrors on the James Webb Space Telescope, helping it gather and measure infrared light coming from the deepest reaches of space and capture amazing images of objects located billions of light years from Earth. And through it all, gold manages to maintain its value, hammering home the point made by Kertsos and other gold proponents that it can be an effective insurance policy for portfolios.
“We have very loyal clients who believe in our philosophy where we say there are many known unknowns and unknown unknowns, and it is important to own gold and be agnostic about the short and medium terms of where gold prices will be,” he says.