September 20, 2019 By Frank HolmesCEO and Chief Investment OfficerU.S. Global Investors This year marked the 30th anniversary of the Denver Gold Forum (DGF), the world’s most prestigious precious metal equities investment conference. The invitation-only event, held earlier this week, was attended by an incredible seven-eighths of the world’s publicly traded gold and silver companies by production, as well as leading metals and mining executives, money managers, analysts and investors. We were one of the founding members of the DGF back in 1989, when I first bought a controlling interest in U.S. Global Investors. During this year’s forum, I was honored and moved to be recognized for our company’s contribution to the group’s creation and ongoing legacy. U.S. Global gold and precious metal
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September 20, 2019
By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors
This year marked the 30th anniversary of the Denver Gold Forum (DGF), the world’s most prestigious precious metal equities investment conference. The invitation-only event, held earlier this week, was attended by an incredible seven-eighths of the world’s publicly traded gold and silver companies by production, as well as leading metals and mining executives, money managers, analysts and investors.
We were one of the founding members of the DGF back in 1989, when I first bought a controlling interest in U.S. Global Investors. During this year’s forum, I was honored and moved to be recognized for our company’s contribution to the group’s creation and ongoing legacy.
U.S. Global gold and precious metal expert Ralph Aldis and I had the opportunity to meet with a number of companies and analysts while at the DGF. We were surprised to learn that some were still unaware that quantamental factors were being applied more and more to gold equities investing. Here at U.S. Global, for example, we like to combine old-fashioned, bottom-up stock selection with cutting-edge quant strategies such as data mining and machine learning.
30 Years of (Denver) Gold
Indeed, much has changed in the precious metals and mining industry in the past 30 years, as we were all reminded by my longtime friend and mentor Pierre Lassonde. Pierre, as many of you know, is the legendary co-founder, along with Seymour Schulich, of Franco-Nevada, the first publicly-traded gold royalty company. What you may not know is that Pierre is also one of Canada’s most gracious philanthropists and currently serves as the chairman of the Canada Council for the Arts Board of Directors.
According to Pierre, annual global gold demand has exploded in the years since the first DGF was held. Demand grew more than fivefold, from a value of $32 billion in 1989 to $177 billion in 2018.
Loyal readers know that today’s central banks are net buyers of gold as they seek to diversify away from the U.S. dollar. But 30 years ago, they were net sellers. In 1989, banks collectively unwound as much as 432 tonnes from their reserves. Compare that to last year, when they ended up buying some 651.5 tonnes, the largest such purchase since the Nixon administration, with Russia and China leading the way.
Speaking of China… Pierre pointed out to us that we’ve seen a significant shift in gold demand over the past 30 years, from west to east, as incomes in China and India—or “Chindia”—have risen. In 1989, Chindia’s combined share of global demand for the precious metal was only about 10 percent. Fast forward to today, and it’s 53 percent!
“Don’t forget the Golden Rule,” Pierre said. “He who has the gold makes the rules!”
The Gold Price in 2049 Will Be…
One of the highlights of Pierre’s presentation was his forecast for the price of gold in the next 30 years. After analyzing gold’s historical compound annual growth rate (CAGR) over the past 50 years, ever since President Nixon formally took the U.S. off the gold standard, Pierre says he sees an average price target of $12,500 an ounce by 2049. And under the “right” conditions, it could go as high as $25,000!
“I think gold is in a good place,” Pierre told Kitco News’ Daniela Cambone on the sidelines of the DGF. “The financial demand is being driven by negative interest rates. Should the U.S. Treasury 30-year bond yield ever, ever go negative, like in Germany and France, God bless, we’re looking at $5,000 gold.”
I’m sure Pierre will have more to add when he joins me on our upcoming gold opportunities webcast, to be held October 31. Save the date, and stay tuned for more details!
ESG Investing Goes Mainstream
One of my own observations of how the DGF has changed over the last 30 years is the way in which mining companies pitch their stock to investors. Before, they would jump right into financials, production costs, mining feasibility and the like. Today, however, they begin by discussing topics such as sustainability and environmental impact.
You may have heard of ESG investing—which stands for environmental, social and governance. This set of criteria has grown in importance among “socially conscious” investors over the past decade, as you can see in the chart below. In the U.S. alone, assets under management (AUM) in ESG-oriented funds and ETFs have more than doubled from approximately $40 billion in 2013 to $90 billion in 2019, according to Morningstar data. In Europe, where institutional investors and money managers must now comply with certain ESG standards, the figure’s likely even higher.
Please don’t get the wrong idea. If these issues are important to investors, they should be free to allocate their money toward companies whose beliefs are aligned with their own.
My concern is that companies, money managers and institutional investors are increasingly pressured—especially by European governments—to comply with an ever-shifting set of standards, or else face divestment or, in extreme cases, being delisted from a stock exchange.
Take Norway’s government pension fund. Valued at more than $1 trillion, it’s the largest such fund in the world. It got this big largely thanks to the country’s highly profitable North Sea oilfields. But based on a recent recommendation from the Norwegian parliament, the fund is actively dumping all of its fossil fuel stocks.
Then there’s just the general confusion and inconsistency over what constitutes an ESG-compliant company, and who can invest if the company is deemed out of compliance. Every government in Europe, it seems, has its own definitions, disclosures and regulations. To operate in France, for instance, asset managers are now required to disclose how climate change considerations are incorporated in their investment decisions. The same is true for pension funds in the Netherlands.
All of these extra rules and procedures come at a cost for everyone involved, from the companies themselves to asset managers. At the DGF, I heard that one mining company in particular had to pay as much as $40 million just to remain ESG-compliant. I worry too about directors and board members joining companies who care only about sustainability and have little regard for creating value for shareholders.
Gold’s “Green Credentials” May Be Understated: RBC
The good news is that gold and gold mining look very attractive from an ESG perspective. Gold’s “green credentials,” in fact, may be understated, according to a recent report by the Royal Bank of Canada (RBC). For one, owning physical gold—in coins, bars or jewelry—has absolutely no environmental impact and actually increases a portfolio’s ESG rating.
As for gold mining, the process gives off significantly less greenhouse gasses (GHG) on a per dollar basis relative to some other mined products, including aluminum, steel, coal and zinc. What this means is that gold has a much smaller “carbon footprint” than what some people might think.
Many mining companies are also working to meet some investors’ changing attitudes. IAMGOLD, for instance, is investing heavily in solar infrastructure, and its mine in Burkina Faso is the world’s largest hybrid solar/thermal plant, according to RBC. Newmont Goldcorp is moving forward with its “Smart Mine Initiative,” which uses optimizer software to maximize ore recovery and minimize waste. And Torex Gold has developed what it calls the “Muckahi Mining System,” which alleges to limit surface disruption and reduce the use of fossil fuels underground.
In the same report, RBC says it remains “positive on gold,” writing that the metal’s “deep liquidity, near global acceptance and role as a ‘perceived safe haven’ and ‘store of value’ make it very difficult to displace” as an investment.
Want more on the Denver Gold Forum? Find out why investors are cautiously bullish on the yellow metal by watching my latest video!
This week spot gold closed at $1,516.90, up $28.25 per ounce, or 1.90 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week higher by 6.19 percent. The S&P/TSX Venture Index came in up just 0.22 percent. The U.S. Trade-Weighted Dollar rose 0.22 percent.
|Sep-17||Germany ZEW Survey Current Situation||-15.0||-19.9||-13.5|
|Sep-17||Germany Zew Survey Expectations||-38.0||-22.5||-44.14|
|Sep-18||Eurozone CPI Core YoY||0.9%||0.9%||0.9%|
|Sep-18||FOMC Rate Decision (Upper Bound)||2.00%||2.00%||2.00%|
|Sep-19||Initial Jobless Claims||213k||208k||206k|
|Sep-24||Conf. Board Consumer Confidence||133.0||—||135.1|
|Sep-25||New Home Sales||656k||—||635k|
|Sep-26||Hong Kong Exports YoY||-7.3%||—||-5.7%|
|Sep-26||GDP Annualized QoQ||2.0%||—||2.0%|
|Sep-26||Initial Jobless Claims||211k||—||208k|
|Sep-27||Durable Goods Orders||-1.2%||—||-2.0%|
- The best performing metal this week was silver, up 3.16 percent, as gold rebounded this week. As gold was set for a small weekly gain for the first week in four, traders were mostly bullish or neutral on bullion’s trajectory in the weekly Bloomberg survey. Palladium, however, rallied as much as 1.8 percent to a record $1,648.65 an ounce for its best run since 2012 with seven weeks of gains. The precious metal is gaining from tighter supplies. Although car sales are down slightly, stricter environmental standards are creating a need for more palladium loading in auto catalysts, which are used to reduce pollution from vehicles.
- The yellow metal bounced back above $1,500 per ounce, recovering from a fall Wednesday, after the Federal Reserve announced a 25 basis point rate cut. Carsten Menke, head of research at Julius Baer, says he expects gold to move higher to $1,575 an ounce in the next three months due to further rate cuts. Swiss gold exports rose to the highest level since 2016 in August due to increased demand from the U.K. offsetting lower demand in Asia, according to customs data.
- Investors now appear to be shifting money down market to smaller capitalization names as confidence grows in duration of the coming gold cycle. On Tuesday, investors poured $193 million into the VanEck Junior Gold Miners ETF (GDXJ), the largest ETF that invests in junior gold miners. The fund attracted the most money in more than two years on growing optimism that companies will perform strongly alongside higher gold prices, reports Bloomberg.
- The worst performing metal this week was platinum, down 0.27 percent, as hedge funds cut net bullish platinum positions. As mentioned above, gold took a tumble on Wednesday after Fed policymakers were spilt over the need for additional rate cuts after the one announced this week. Bob Haberkorn, senior market strategist at RJ O’Brien & Associates LLC, said in a phone interview with Bloomberg that “if you’re a gold trader right now, you’re a little confused.” Turkey’s central bank gold holdings fell $615 million from the previous week, but reserves are still up 34 percent year-over-year.
- It’s rare for the Department of Justice to bring criminal Racketeer Influenced and Corrupt Organizations Act (RICO) charges, but it just did. Bloomberg reports that two current and one former JPMorgan Chase & Co. metals traders were charged with RICO criminal violations for rigging precious metal futures markets over the course of a decade. The three individuals are accused of engaging in “a massive, multiyear scheme to manipulate the market for precious metals futures contracts and defraud market participants.”
- Negative rates just got more negative for a record group of bank clients in Denmark. Jyske Bank A/S is offering the first 10-year mortgage at negative coupons and said that it has no choice but to drag more retail depositors into its negative-rates after the country’s central bank lowered its policy rate to minus 0.75 percent, writes Bloomberg. CEO Anders Dam said in a statement: “Due to the rate reduction last week, we are losing even more money. And we need to share that bill with some of our clients.”
- At the Denver Gold Forum earlier in the week, China Gold International Resources Corp. said it is on the hunt for M&A deals worth as much as $2 billion. Executive Vice President Jerry Xie said in an interview that they need more pipeline in gold production and are looking for acquisition opportunities “quite aggressively.” And there could be big opportunity for deals as many mining companies could use some lowering of general and administrative (G&A) costs, according to Shareholders’ Gold Council. In a recent report, the group writes that $2.5 billion of profits generated by 47 gold companies goes to pay the salaries and costs of head office management and boards, while financial markets discount the value of these companies by approximately $21 billion. M&A generally helps lower G&A costs for the company that got taken out.
- RBC writes that by 2025 it sees the gold sector in better shape. It forecasts that margins will improve and that output will be broadly flat due to the inability to stop the decline of reserves. “To deliver improved margins and sustain mine life, companies will need to stay active in both M&A deal and exploration, making strategic direction on these fronts critical, in our view.” Output will also continue to fall due to a lack of new technological developments on how to extract the metal from the ground.
- HSBC wrote in a note this week that global mining capex is now two years into a more sustainable and product-driven cycle and is unlikely to return to levels last seen in 2012 during the China commodity boom due to better capital discipline. According to Mike Wilson, chief U.S. equity strategist at Morgan Stanley, the S&P 500’s instability to reach new highs relative to gold “raises questions about the quality of this month’s rally” in stocks, reports Bloomberg. As seen in the chart below, the S&P 500 divided by the price of gold has fallen in 2019, indicating gold is beginning to outpace the broader markets.
- Bloomberg’s Liz Capo McCormick writes that there is not enough cash on hand at major Wall Street firms to meet the funding demands of a market trying to absorb record Treasury bond sales needed to cover U.S. budget deficits. She adds that there isn’t enough liquidity and that there are deep structural problems in the money markets. The big catalyst causing the squeeze in repo liquidity is the big swath of new Treasury debt that settled into the marketplace just as cash left due to quarterly tax payments to the government.
- The liquidity issue as discussed above could get worse. Bloomberg’s Stephen Spratt reports that the dollar-funding squeeze, which rocked short-term interest rate markets this week, may deepen further due to the upcoming quarter end when banks usually start their pattern of cutting back on providing liquidity. Another round of Treasury auctions next week could leave markets short of another $45 billion in cash. Spratt writes that those two factors could explain why stress is showing up in bill sales and currency markets even after the Fed took measures to ease a liquidity shortage.
- The Organization for Economic Cooperation and Development (OECD) cut almost all economic forecasts it made just four months ago as intensifying trade conflicts have sent global growth momentum tumbling. The organization forecasts world growth at 2.9 percent this year, a level not seen since the last financial crisis.
- The major market indices finished down this week. The Dow Jones Industrial Average lost 1.05 percent. The S&P 500 Stock Index fell 0.52 percent, while the Nasdaq Composite fell 0.72 percent. The Russell 2000 small capitalization index lost 1.17 percent this week.
- The Hang Seng Composite lost 2.76 percent this week; while Taiwan was up 0.94 percent and the KOSPI rose 2.07 percent.
- The 10-year Treasury bond yield fell 18 basis points to 1.719 percent.
You can read the rest of the article at http://www.usfunds.com/investor-library/investor-alert/pierre-lassonde-says-gold-could-hit-25-000-in-30-years/