An alarming divide exists between core eurozone countries – Germany, Austria, Netherlands and France – showing modest growth of 0 to 1.5 per cent and the periphery – Greece, Spain and Italy – suffering from prolonged contraction and economic hardship.
This is likely to cause further deterioration in political co-operation and provoke civil unrest, making bailout programmes difficult to implement.
Under these circumstances, gold would be expected to attract investors as a safe-haven asset. However, this has been overshadowed by a continuation of a recent trend, gold’s negative correlation to the US dollar remaining significantly stronger than its long-term average.
This was partly caused by investors flocking to US Treasuries and selling other portfolio holdings, including gold.
Countering investors’ actions, central banks, mostly from developing economies such as Russia, Korea, Ukraine and Mexico, bought bullion as they continued to diversify their reserves away from devaluing currencies. We do not expect it to be long before other investors follow suit and the gold price resumes its long-term upward trend.
Gold shares, especially those of smaller companies, appear to have found some support recently, albeit remaining at oversold levels.
We believe that once the gold price resumes its uptrend, the re-rating of gold-mining equities should be quick and substantial. Companies with solid balance sheets, growing production, a manageable cost base and development potential are likely to benefit the most.
We also expect acquisition activity to intensify as medium-sized cash-rich companies take advantage of market anomalies and snap up distressed situations.
For example, we have added a significant new holding in Integra Mining, which operates the Randalls gold project in Kargoorlie, Australia.
It is currently reporting 2.1 million ounces of resources and targeting 100,000 ounce per annum production at a marginal cost of A$850 per ounce.
Subsequent to our investment, Silver Lake Resources, another Australian gold producer, announced an all-share offer for Integra at a 46 per cent premium to our cost.
Another takeover stock in our portfolio is Avion Gold. We had acquired a stake in Avion before the military coup in Mali erupted, as we believed in the company’s resource potential.
Political risk can emerge unexpectedly and our holding was materially devalued subsequent to the uprising. We maintained our position, believing that the market reaction was exaggerated and this month our position was vindicated when the takeover of Avion in an all-share deal by Endeavour Mining was announced.
This bodes well for Junior Gold as the merged company will be a more diversified group with assets in various stages of production in addition to significant development potential.
Performance of fund since launch
Source: FE Analytics
Damaskos’ MFM Junior Gold fund has had a torrid time of late, down 36.39 per cent over one year, and 5.32 per cent over three years in spite of its massive gains in 2010. The manager also heads up the MFM Junior Oils Trust.
The views expressed here are his own.