A prolonged economic shutdown, fears surrounding the spread of coronavirus and unprecedented monetary stimulus have sent investors flocking to the safe haven of gold, causing prices to reach levels not seen since 2012.
Yet despite still being overall bullish on gold, DMS Charteris Gold & Precious Metals manager Ian Williams believes there is more of an upside for silver and mid-cap gold miners than the yellow metal itself.
Williams is most bullish on silver, running a much higher exposure to silver miners relative to the fund’s competitors. He highlighted silver’s price-action after the global financial crisis halfway through the Federal Reserve’s quantitative easing (QE), which saw it go from $10 to $50 in 2011.
Performance of silver and gold over 10yrs
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Source: FE Analytics
He believes if the silver price starts to behave similarly as a result of this round of QE, it will drive his fund to overtake its competitors in the UK. The fund’s largest holding is in Canadian silver miner Mag Silver Corp.
However, Williams is most concerned about the potential inflation risks as a result of the quantitative easing and government spending taking place around the world.
After the global financial crisis, the US Federal Reserve launched $4.5trn in QE over six-and-a-half years. Williams argued that there were two major deflationary headwinds during the financial crisis: a wave of continued globalisation, and a mass retirement of baby boomers, which offset the inflationary pressures.
This time around the Fed has already committed to a $2.5trn QE easing plan and he expects the US will approve at least another $2trn in QE, causing the central bank’s balance sheet to potentially go from $4trn up to $10trn by the end of the year.
“This means the monetary base would have gone up by more than 100 per cent in 12 months,” he said. This time, he believes the scale of QE is unprecedented and deflationary pressures that occurred previously would not prevent inflation this time around.
“Someone has to pay for all this, and if you don't pay the honest way which is to tax people, you pay it by debasing the currency and just letting it manifest itself in inflation further down the road,” he said.
“The Fed printing money did not cause inflation - but it sort of did. It didn't cause consumer price inflation, it caused asset price inflation.
“Trump can’t wait to open up shops again. He wants it all up and running for the election. You’re getting a lot of free money from Uncle Sam or Boris, you’ve got two choices: spend it or save it. If you’re not going to spend it, you’re going to save it and potentially the savings end up back in capital markets.”
Williams added: “When central banks start printing money, you do get a lot more interest in the gold sector.”
But he believes a lot of investors could have missed the boat, saying: “It's already at an all-time high in sterling, yen and euros, but it still could break the $2,000 mark.”
The manager said DMS Charteris Gold & Precious Metals more or less exclusively concentrates on mid-cap mining stocks and does not own many of the popular large gold miners due to their declining production profiles.
Larger blue-chip gold mining stocks have performed better than the mid-caps so far year-to-date, but he expects mid-caps to outperform going forward.
Performance of fund over 2020
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Source: FE Analytics
He pointed to Canadian mid-caps Kirkland Lake Gold and Agnico Eagle Mines, both of which he said have performed well for the fund. The former rising almost 10-fold over the last five years.
“We think the mid-cap space is the sweet spot to own in this sector,” Williams added.
“We don’t own metals because traditionally the physical metal underperforms in a bull market. The minute the market takes off, the miners will always go up more than the metal.
“The gold miners this year have been in a sweet spot because their biggest expense is oil, and the oil price has gone down while the gold price has gone up.
“Some miners have had to shut down due to coronavirus, but it's not like an airline or hotel chain that shutdowns, where that’s three months' revenue they’ll never get back.
“With miners, the gold stays in the ground, and if the shortage of gold coming into the market results in the price going up, they potentially sell it for a higher price then they would’ve done because the price has gone up on a supply squeeze.”
The manager also believes that investment demand is likely enough to outweigh any collapse in jewellery demand from China and India, which are the world’s two largest jewelry buyers and major drivers of gold markets.
Much like after the 2008 financial crisis, global central bank demand could pick up as they seek to shore up their balance sheets and diversify away from assets that are yielding low or negative.
If gold continues to rally, the manager said investors could see the BAANG stocks (Barrick Gold, AngloGold, Agnico Eagle Mines, Franco-Nevada, and Gold) outperforming the tech FAANG stocks this year.