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
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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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