Gold and gold equities are viewed as a safe haven. As a result, they typically exhibit a low correlation to global equities, which is particularly true during drawdowns.
However, this is not what happened in 2022, which saw the correlation between gold and global equities become higher than normal and even rise throughout the year.
Gold has faced two major headwinds. Firstly, the strength of the US dollar. The dollar has been strong because the US Federal Reserve has been running much more hawkish policy compared to other central banks.
And given gold is priced in dollars, a strong dollar relative to other currencies increased the cost of gold.
The second headwind has been the rising real yields in the US. We get paid nothing to hold gold, so if real interest rates rise – that is, the risk-free return above inflation – the opportunity of cost of holding gold goes up.
However, with the market becoming concerned about the US government hitting its debt ceiling and on reports central banks around the world have stepped up purchases of gold, the gold price has been on the move since late last year.
At Antipodes, our house view is that the case for owning gold is indeed strengthening. As is often the case in investment cycles, what were once headwinds for gold now look to becoming tailwinds.
The big question for investors is: how to play the gold trade?
In the early 2000s, the inability of investors to access liquid exposure to gold resulted in a substantial premium for gold producers.
The advent of gold exchange-traded funds in the late 2000s saw a sizeable de-rating of gold equities, with producers previously trading on 6.5 times EV/sales de-rating to as low as two times.
With the collapse in valuations, management teams and boards reconsidered their approach to capital allocation, focusing on traditional drivers of equity value.
Commissioning mega-projects took a back seat to raising returns on existing projects, and more recently a pivot to higher payouts via dividends and buybacks.
M&A prospects
While owning gold equities introduces risk – geographical, operational asset, management, financial and ESG – beyond that of physical gold, there are idiosyncratic reasons to consider gold equities.
For example an Australian gold mining giant which recently received a bid from a US gold mining company has taken positive steps to maximise it portfolio my investing in projects, on track to becoming a 1mn ounce per year mine, with world class grades and lower costs.
It also has longer-dated projects, which in total, should see the company’s production grow 30 per cent over the next five years in volume terms.
The Australian's company's all-in sustaining costs could fall to around $600-800 per ounce by the middle of the decade, versus an industry average of $1200 per ounce.
