At a time when about $8.1tn of global government bonds imply investors are paying borrowers for the privilege of holding the debt, it’s easy to understand why gold and the companies that mine the metal are back in favour.
Investors poured $8.9bn into SPDR Gold Shares this year, the most of all the exchange-traded funds tracked by Bloomberg. In the first quarter, about 1,100 fund managers including billionaire George Soros bought more than 78mn shares of Barrick Gold Corp, the world’s biggest producer, company filings show. Gold prices are off to their best start to a year in a decade, while the value of about a dozen major mining companies doubled.
Driving the rally is a search for safer assets as global growth flags, along with bullion’s appeal as an alternative currency should inflation accelerate. Billionaire investor Stan Druckenmiller said he wagered on gold after unprecedented stimulus by central bankers led to “the absurd notion of negative interest rates.” Hedge-fund manager David Einhorn says “counterproductive monetary policies” mean prices are headed higher.
“When you have to pay to have your money stored, all of a sudden it makes sense to own gold, because even though the metal doesn’t pay you anything, at least you don’t have to pay,” said Alan Gayle, a senior strategist for Atlanta-based RidgeWorth Investments, which manages $38bn. The move by Soros and others to own Barrick, which has the added benefit of a dividend, “could be a signal that there’s some strong hands in the sector now,” he said.
After three straight annual declines, gold touched a 15-month high of $1,303.82 an ounce this month. Even after a recent slide, prices are up 15% since the end of December, the biggest gain to start a year since 2006. ETFs backed by precious metals saw a net inflow of $18bn this year, compared with $758mn for equity-backed funds, data tracked by Bloomberg show.
Lending rates in Japan and the eurozone are below zero, and the Fed has raised US interest rates from near zero more slowly than expected, which led to a drop in the value of the dollar against other currencies from January 31 through April. Gold also got a boost from concerns about rising debt and slowing growth in China, the world’s second-largest economy, said Chad Morganlander, a Florham Park, New Jersey-based money manager at Stifel, Nicolaus & Co, which oversees about $180bn. The fund began adding gold to its allocation recommendation in January, after shunning the metal for several years.
Higher gold prices also mean increased earnings for mining companies, which had been cutting production costs during the slump. The gross profit margin for big producers in the first quarter was the highest on average since 2013, according to Bloomberg Intelligence. Sales growth turned positive for the first time since 2014.
Toronto-based Barrick saw its cash costs drop 24% to $706 per ounce produced in the quarter, boosting gross margins by 31%, data compiled by Bloomberg Intelligence show. The company plans to reduce its total debt by at least $2bn this year, after $3.1bn in cuts last year brought the total down to $10bn.
The Philadelphia Stock Exchange Gold & Silver Index is up more than 80% this year, with 11 of the 30 companies more than doubling, including Harmony Gold Co and Barrick. Only one company in the index, Primerio Mining Corp, has declined in 2016.
While Goldman Sachs Group remains bearish on gold, its equity research team recommends buying Newmont and Barrick, saying it expects the two miners to benefit from margin expansion. “We expect gold miners to transition into an upward earnings revision cycle over the next 12 months,” analysts including Andrew Quail, wrote in a report May 10.
Investors have been putting their money where their mouths are. Duquesne Family Office, chaired by Druckenmiller, bought 1.8mn shares in Barrick for $24.9mn in the first quarter, according to a regulatory filing on May 16. Gold holdings at Einhorn’s Greenlight Capital Re climbed to $172.7mn in the first quarter, up from $98mn in the previous three months, a separate filing showed. California State Teachers’ Retirement System added to its holdings of Newmont Mining Corp shares, while Tudor Investment Corp bought Rangold Resources Ltd and Royal Gold.
After gold rallied to the highest since January 2015, and miners doubling this year, investors who are moving into the sector just now may be coming to the party too late. For Kristoffer Inton, a Chicago-based analyst at Morningstar Investment Services, Barrick is beginning to look overpriced, even though the company’s leadership has done well in turning it around.
Gold prices are off to their best start to a year in a decade, while the value of about a dozen major mining companies doubled
