The Gold Report: Ralph, let's start with precious metals. Prices have been range-bound for quite a while. Would you give us a review of the year and any predictions going forward?
Ralph Aldis: The gold price was stronger earlier in the year, above $1,300, but by the end of April gold began to roll over and by the middle of August we briefly went below $1,200. But now it seems the sentiment has changed back to the positive; we have had two positive months in a row after six consecutive months of negative monthly returns.
I think that relates to the Federal Reserve meetings as they've gone on throughout this year, each quarter, and pretty broad anticipation that it would raise rates by a quarter-basis point. With the jawboning that the Fed seems to have gotten from President Trump, while it seemed like we were a long way away from the neutral rate, now it appears we're just below it, according to the last Fed-speak. I've been looking at a few news stories where some traders are speculating there won't be any more Fed hikes next year, but Bank of America was still expecting some.
Part of the reason gold got held down earlier, for that six-month stretch, was Turkey and its currency getting hit so hard. We were seeing every week in the news that Turkey's gold reserves were down. I think they're down about 15% year-over-year. But in the last three to four weeks, its reserves have been climbing; hence, I don't think the country is selling gold right now. It seems like its currency's been a little bit on an uptick. We still have the issue with Venezuela perhaps getting a hold of some of its gold from the Bank of England to sell. But Turkey's gold selling has been an overhang that also has helped keep gold down in this window where the Fed's been hiking rates. I don't think the market's been really looking at Turkey and thinking about that marginal player being a seller during that window. Hopefully, that's the end of it. We'll just have to see how that rides forward.
TGR: Numerous analysts have been predicting the rise of commodities next year. Do you see some sectors doing better than others?
RA: Yes, and it's funny. For a lot of the analysts, sometimes they want the oil price to go up because it's good for those companies and it seems like it triggers a lot of economic activity. Oil prices going down can have the reverse effect on certain businesses, but it can be good for the consumer. Regarding energy prices for next year, I don't see any immediate catalyst to get that moving yet.
Copper has been a strategic metal for the electrification of cars. I know copper is not moving in leaps and bounds, but I think over the next couple of years there's still going to be good copper demand. Plus, the supply has been somewhat troubling with strikes and water shortages in Chile, and so on. So I think copper's still reasonably set up.
Zinc got pretty far ahead of itself but it has settled back some. I think the opportunity for next year is gold and silver based on a pause in rates and, consequently, unwinding of long dollar positions. Palladium has been getting some attention. The market conditions seem to be really tight. The only caveat there, I would say, is if auto production slows. We've seen General Motors already put out an announcement—maybe that takes some of the air out of palladium. But there has been a pretty big consumer shift in Europe from diesel to gasoline, which means a switch from platinum to palladium if you're talking gasoline engines.
Cars powered by gasoline are more palladium-centric. In Germany, when you had the diesel scandal with Volkswagen, people have been buying more gasoline-powered versus diesel-powered cars. The diesel share in Europe has fallen something like 10 percentage points in the last year and a half. It's been a big shift in Europe, but not so much in the U.S.
TGR: U.S. Global Funds runs the U.S. Global GO GOLD and Precious Metal Miners Exchange-Traded Fund (GOAU:NYSE Arca). How has it been holding up and what companies are among your best and worst performers?
RA: GOAU is based on a screening model that every three months picks a group of stocks based on their criteria. What's different about GOAU is it's not buying stocks based on liquidity, like many of the other ETFs. Instead, it is trying to buy gold stocks based on quality and value.
Quarter to date (12/13/18), Saracen Mineral Holdings Ltd. (SAR:ASX) is up 46%, Acacia Mining Plc (ACA:LSE) is up 45% and Gold Fields Ltd. (GFI:NYSE; GFI:JSE) is up 35%, while Eldorado Gold Corp. (ELD:TSX; EGO:NYSE) has fallen 33%, Alamos Gold Inc. (AGI:TSX; AGI:NYSE) down 32% and Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE) has given up 23%.
But what really doesn't show on this list, which I missed in our actively managed funds and the same thing for GOAU, we didn't have any Barrick Gold Corp. (ABX:TSX; ABX:NYSE), and we didn't have any Randgold Resources Ltd. (GOLD:NASDAQ; RRS:LSE) in my funds or in the ETF. The reason: Randgold has some serious jurisdictional risk in the Congo, and Barrick has been missing on guidance. When the two companies announced their merger, the market really rewarded that combination. Our models, from a risk standpoint and value standpoint, were telling us not to be in those names.
We're still up in the top half of the gold funds out there performing. It hasn't been a bad year, but earlier in the year, we were No. 1, and that's tapered off a little bit with the Randgold-Barrick merger.
TGR: They say that mergers come in series, but since the Barrick-Randgold combination, there haven't been major mergers along the same line, have there?
RA: No. There have been a few transactions here and there, like Pan American Silver Corp. (PAAS:TSX; PAAS:NASDAQ) opportunistically buying Tahoe Resources Inc. (TAHO:NYSE; THO:TSX). Again, that's another one where Tahoe maybe didn't have its social license, and Pan American, which has worked in Latin America for pretty much its entire existence, could right the ship in Guatemala with Tahoe's operation. So that's an interesting transaction. I think it made a lot of sense for Pan American to do that.
The other transaction that we saw here just recently was SSR Mining Inc.'s (SSRM:NASDAQ) purchase of just under a 10% stake in SilverCrest Metals Inc. (SIL:TSX.V). SilverCrest has a great discovery in Mexico. I think that's a very smart transaction for SSR Mining. There are probably other buyers that still want to buy it. SSR Mining has a chance to own it, if it wants to step up, but someone else may decide it wants it more.
So there is a little bit of merger activity, but we haven't seen any other big ones like a Barrick-Randgold. There are some people saying that Goldcorp Inc. (G:TSX; GG:NYSE) might be merging with somebody. But people have to ask themselves, do you want to merge to get bigger and try to compete that way, or do you want to maybe stay a little tighter and maybe be able to execute a little bit easier? It's a very difficult decision because a lot of times mergers take six months to iron out the back office stuff to where everything is working as it should.
TGR: Ralph, would you talk about a couple of companies that you think investors should take a look at?
RA: Right now, probably the most likely company to get taken out in the gold space in 2019 is Wesdome Gold Mines Ltd. (WDO:TSX). It has a couple of mines that are running. It has the Kiena operation where it is basically redeveloping, and it's had some great holes found there that have hit, in some cases, multiounce per ton. That mine is starting to shape up to look like a real gem.
The gentleman running it, Duncan Middlemiss, the CEO—people I know were throwing term sheets at him all in this past year if he wanted to raise some money, and he didn't need to raise any money. He's put money in the bank account and continued to execute and put out good drill results.
I think this is one of these ones like where Alamos Gold went and bought Richmont Mines Inc. or when you had SSR Mining buy Claude Resources. Wesdome is one of those companies that's geographically situated in a very safe jurisdiction. It has a lot of prospectivity. Investors probably could do well to buy and hold on that one for a while. The management team there and the board of directors are very much involved in trying to make that story a success.
One other company that I would like to mention is a gold company, but it is a gold jewelry manufacturer of investment-grade gold, Menē Inc. (MENE:TSX.V; MENEF:OTCMKTS). The only jewelry it sells is 24 karat gold or platinum. It sells it by the gram plus a 10% mark-up for the design, shipping and back office to get it to you. If you decide you don't want that piece of jewelry at some point in the future, it guarantees it will buy it back from you at spot less 10%. One of the designers for the jewelry is the granddaughter of Pablo Picasso.
I was looking at its website earlier. A number of the jewelry designs are even out of stock at the moment, and that's why Menē raised $30 million recently. Twenty million of it was a note to be able to buy gold and have inventory going through. Of course, that inventory is hedged, so it doesn't have any price risk from the gold during the manufacturing phase because again, it's dealing with a 10% mark-up on the margin.
It's so much more competitive than going to a Tiffany & Co. or a typical American jeweler because Menē is bringing the Eastern jewelry model of investment-grade jewelry to the West, where you buy your gold and it's pure gold, not cut down 50%. You're going to be buying pure gold with a guarantee that you can sell it back. When you buy something on the website, your account is up there. You can see at all times what your investment in the jewelry is worth. It's an interesting way to—I don't want to say necessarily, wear your wealth—but you can actually get some use out of it. Plus, should you want to sell it back and get an upgrade to a different piece or a different design, you have that option, and you're not getting taken to the cleaners like you would at a normal jewelry shop in the Western world. So it's an interesting concept. It seems to be doing pretty good on the growth. I think it's something that's very well timed.
TGR: Any parting thoughts?
RA: Don't get greedy in this market. Stick to your asset allocation plan, no more than 5–10% of your portfolio exposed to gold and precious metals. Just try to be diversified in your risk and in your asset distribution because we're all trying to get to the same place, retirement, but don't take crazy risk.
TGR: Thanks, Ralph, for your insights.
Ralph Aldis, CFA, portfolio manager of U.S. Global Investors, is responsible for analyzing gold and precious metals stocks for the World Precious Minerals Fund (UNWPX) and the Gold and Precious Metals Fund (USERX). In addition, Aldis serves as co-portfolio manager for the Global Resources Fund (PSPFX), Holmes Macro Trends Fund (MEGAX), All American Equity Fund (GBTFX), Emerging Europe Fund (EUROX), Near-Term Tax Free Fund (NEARX), U.S. Government Securities Ultra-Short Bond Fund (UGSDX), the China Region Fund (USCOX), and the U.S. Global Jets ETF (JETS). In 2011, and again in 2015, Aldis was named a U.S. Metals and Mining "TopGun" by Brendan Wood International. In 2016, he and Frank Holmes were named Best Americas-Based Fund Manager by the Mining Journal. Aldis received a master's degree in energy and mineral resources from the University of Texas at Austin in 1988 and a Bachelor of Science in Geology, cum laude, in 1981, from Stephen F. Austin University. Aldis is a member of the CFA Society of San Antonio.
Disclosure:
1) Patrice Fusillo conducted this interview for Streetwise Reports LLC and provides services to Streetwise Reports as an employee. She owns, or members of her immediate household or family own, shares of the following companies mentioned in this article: None. She is, or members of her immediate household or family are, paid by the following companies mentioned in this article: None.
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3) Ralph Aldis: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: None. I, or members of my immediate household or family, are paid by the following companies mentioned in this article: N/A. My company has a financial relationship with the following companies mentioned in this interview: N/A. Funds controlled by U.S. Global Investors hold securities of the following companies mentioned in this article: Mene Inc., Alamos Gold Inc., Wesdome Gold Mines Ltd., SSR Mining Inc., SilverCrest Metals Inc., Pan American Silver Corp., Saracen Mineral Holdings Ltd., Acacia Mining PLC, Gold Fields Ltd., Eldorado Gold Corp. and Fortuna Silver Mines. I determined which companies would be included in this article based on my research and understanding of the sector. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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