Gold – A Portfolio Diversifier Counter-Cyclical Attributes Frank E. Holmes, Chief Investment...
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Transcript of Gold – A Portfolio Diversifier Counter-Cyclical Attributes Frank E. Holmes, Chief Investment...
Gold – A Portfolio DiversifierCounter-Cyclical Attributes
Frank E. Holmes, Chief Investment OfficerU.S. Global Investors, Inc.
2
PageWhy invest in Gold?
3Critical Drivers
4Reversion to the Mean
5Compare Change Since 9/11
6Seasonal Demand for Gold
7Seasonal Response of Gold Stocks
8Cash Flow Valuation
9Counter-Cyclical Investment
10“Currency Without a Country”
11Unhedged North Americans Have Generated Superior
Performance
12Exploration Expenditure for Gold has Fallen Sharply
13Mine Supply to Contract Rapidly from 2002
14Less Hedging Reduces Supply Pressure
15Aggregate Producer Hedge Book to Fall
16Aggregate Central Bank Holdings 1950-2001
17Opportunity vs. Risk
18Mergers and Acquisitions
19Important Reason for Diversification XAU Index vs. S&P 500 Index
20XAU Index vs. Nasdaq Index
21Philadelphia Gold and Silver Index (XAU) and its Components
22
www.usfunds.com1-800-US-FUNDS
Table of Contents
3
Important factors helping gold prices are:
1. Under-performing equity markets‒gold is negatively correlated with the S&P 500.
2. Deficit spending and zero real rates of return on T-Bills trigger a weaker dollar.
3. Gold mining companies have announced a continued reduction of hedge programs.
4. Continued presence of physical demand despite real price rises.
5. Renewed fund interest has seen hedge fund position on COMEX rise to levels seen in 1996.
6. Investment demand in Japan has risen five fold over the past year.
7. Changes in the supply side due to falling new gold mine production are bullish for bullion prices. www.usfunds.com1-800-US-FUNDS
Why invest in Gold?
4
War on Terrorism
Deficit Spending $450B
Weaker U.S. Currency
Higher Gold Prices
Possible RamificationsEffectCause
Weak Economy
Low Interest Rates
Low Gold Prices
Cuts in Exploration
Higher Gold Prices
Weaker U.S. Currency
40-year Low in Interest Rates
Falling Production
Hedging Curtailed Less Supply Higher Gold
Prices
Higher Gold Prices
Mergers RationalizationDecreasing Production
Higher Gold Prices
We have a unique situation where all the critical drivers for gold are pointing in the same direction.
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Critical Drivers
5
Reversion to the Mean
Will Equities Move Down to Their Mean . .
Will Gold Move Up?
January 1970 – January 1999Source: World Gold Council
1
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6
*Data as of 9/5/02
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Price on9/10/01
Price on9/10/02 $
Change
%Chan
ge
Gold Bullion $271.75 $317.75 $46.00 16.93%
XAU Gold & Silver Index3 55.50 72.00
16.50 29.73%
Gold Shares Fund5 $ 2.69 $ 4.79 $ 2.10 78.07%
World Precious Minerals Fund5
$ 5.07 $ 8.93 $ 3.86 76.13%
DXY Trade Weighted Dollar Index
114.66 107.52
-7.14 -6.23%
3-Month T-bill 3.26 1.68
-1.59 -48.62%
Dow Jones Industrial Average Index9
9,605.51 8,602.61 -1,002.9
0
-10.44%
S&P 500 Stock Index1 1,092.54 909.58 -182.96 -16.75%
Nasdaq Composite Index4 1,695.38 1,320.09 -375.29 -22.14%
M3 Supply* 7.90%
Data as of 9/13/02
Compare ChangeSince 9/11
7
Seasonal Demand for Gold
Source: RBC Capital Markets through Martin Murenbeeld & Associates Inc.; from US Bureau of Census Program
The first three months of the year tend to be the best period for the year for gold demand.
Key demand factors are post-holiday jewelry restocking, post-Ramadan demand, the Chinese New Year and the wedding season after the harvest period in the Indian sub-continent.
After weak seasonal demand for gold in Q2 and Q3, October was the strongest month as pre-holiday season inventory buildups usually helps gold demand.
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8
Seasonal Response of Gold Stocks
Gold equities tend to lag the movement of gold in January and show seasonal strength in February and March.
A mixed response from gold stocks in the summer months is often followed by a rally in September in anticipation of stronger pre-holiday demand for the commodity.
Gold stocks are often the victims of tax-loss selling in the fourth quarter of the year.
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Source: RBC Capital Markets through Martin Murenbeeld & Associates Inc.; from US Bureau of Census Program
9
Cash Flow Valuation
Source: RBC Capital Markets
At a sub-$300 gold price, the Tier I producers tend to trade up to a 13x cash flow multiple.
As gold trades above $300, cash flow multiples should expand to 16x.
As the Tier I companies dwindle, the high quality Tier II companies are trading in line or ahead of the Tier I companies due to internal growth prospects.
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FORWARD CASH FLOW MULIPLE PEAKS
40
19
17
23
2728
34
2725
16
1213 14
10
Counter-Cyclical Investment
Source: BNP Paribas
1 2
Gold and gold stocks have traditionally offered counter-cyclical investment opportunities relative to the general stock market.
In the early 1990’s, gold stocks tripled in value over a three-year period.
Over the past year*, gold indices are up 50% against an S&P 5001 loss of 30%
*May 2001 – May 2002
Gold vs. S&P 5001
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11
Not dependent on any corporation or government’s “promise to pay”.
Hedges against: bank failures foreign-exchange controls currency devaluation
Particularly relevant to emerging markets.
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“Currency Without a Country”
12
Unhedged North Americans Have Generated Superior Performance
Source: BNP Paribas
Investment bias to unhedged producers has resulted in significant stock outperformance.
Hedged vs. Unhedged
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13
Exploration Expenditure for Gold has Fallen Sharply
Source: UBS Warburg
Exploration Expenditure and Average Gold Price Declining gold prices
combined with low rates of return and an increasing cost of equity discouraged gold producers from spending on exploration and new project development—this tightens future supply.
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14
Mine Supply to Contract Rapidly from 2002
Source: UBS Warburg
Year-on-year Percentage Change in New Mine Supply
The concentration of ownership and convergence of larger companies make tighter investment spending hurdles.
Limited exploration reduces the potential of new discoveries.
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15
Less Hedging Reduces Supply Pressure
Source: BNP Paribas
As the gold price fell, gold hedging increased.
The trend is now reversing.
Newmont acquires Normandy and Franco Nevada to become the world’s largest gold producer, and gold rises.8
A growing trend for producers to curtail or trim hedging.
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16
Aggregate Producer Hedge Book to Fall
Source: UBS Warburg
Aggregate Industry Hedge Book Positive for the gold
price. The trend is now reversing.
Growing trend for producers to curtail or trim gold hedging practices.
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17
Aggregate Central Bank Holdings 1950-2001
Source: UBS Warburg
Almost Back Where We Started in 1950
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18
Opportunity vs. Risk
Opportunities Consolidation Low Real Interest Rates Japanese Buyers Unwinding Hedge Positions Cash Flow Multiples
Remain Low Purchasing Parity Implies
US$330/oz. to US $360/oz. Gold Stocks Offer 3 to 1
Leverage Over Bullion Price
Risks Central Bank Sales Rising U.S. Dollar Economy Fails to
Rebound U.S. Government Stops
Deficit Spending Real Interest Rates Rise
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19
Mergers and Acquisitions8
Franco Nevada / Normandy / NewmontLargest Gold Producer in the World
Barrick / Homestake
Delta Gold / Gold Fields Australia
Harmony / Hill 50 Gold
Kinross / TVX / Echo Bay Mines
Placer Dome / OrionWaiting shareholder approval
Anglogold / GoldfieldsYet to Find a Bride
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20
Source: Bloomberg
Compare the 43% difference . . .
XAU Gold Index
+23%
S&P 500 Index
-20%
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Important Reason for Diversification
XAU Index3 vs. S&P 500 Index1
September 28, 2001 — September 30, 2002
21
XAU Index3 vs. Nasdaq Index4
Source: Bloomberg
Compare the 45% difference . . .
XAU Gold Index
+23%
Nasdaq Index
-22%
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September 28, 2001 — September 30, 2002
22
Philadelphia Gold and
Silver Index (XAU)3
Source: Bloomberg
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Newmont Mining
25.12%Barrick Gold
19.65%Gold Fields Ltd.
13.18%Anglogold Ltd.
12.99%Placer Dome
7.19% Harmony Gold
5.77%Goldcorp Inc.
4.41%Freeport McMoran
4.28%Meridian Gold
3.89%Agnico-Eagle Mines
2.44%Apex Silver Mines Ltd.
1.09%
Data as of 9/30/02
XAU Index3,8 Components
40
50
60
70
80
90
100
110
120
23
For more information on the Gold Shares Fund5 and World Precious Minerals Fund,5
Please call 1-800-US-FUNDS
Or visit our website: www.usfunds.com1. The S&P 500 Stock Index is a widely recognized index of common stock prices in U.S. companies. 2. The Toronto Stock Exchange Gold and Precious Minerals Index is a capitalization-weighted index designed to measure the performance of the gold and precious
minerals sector of the TSX 300 Index. 3. The Philadelphia Gold and Silver Index (XAU) is a capitalization-weighted index that includes the leading companies involved in the mining of gold and silver. 4. The Nasdaq Composite Index is a market value-weighted index that measures all domestic and non-U.S.-based securities listed on the Nasdaq Stock
Market.5. The fund may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The price of gold is subject to
substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 3% to 5% of your portfolio in gold or gold stocks
6. Performance data quoted represent past performance and investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost.
7. For more complete information about any U.S. Global fund, including charges and expenses, obtain a prospectus by visiting us at www.usfunds.com or call 1-800-US-FUNDS. Read it carefully before you invest or send money. Distributed by U.S. Global Brokerage, Inc.
8. This article should not be considered a recommendation for the securities of any company mentioned.9. The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry.