I hope you are well & not working too hard!

Just completed the ‘corporate action’ required to take the shares for Sibanye. To me all your excellent recommendations are just exotic names & lines on a screen, and whatever spare brain processing power I have these days perhaps best left for other things.

Please may I ask a favour? Do you have any ideas for an ETF or even generalist fund which I could use to provide gold miner ‘sector’ exposure? In broad terms would you suggest something holding larger cos or Junior Miners? If you have any thoughts, I would be grateful. I know you cannot give advice & it would never be construed in that way.

On gold miners shares per se, can you clarify a point? I was talking to the manager of a UK listed investment trust the other day, managed on what used to be called an ‘absolute return’ basis, which actually has delivered a consistent return. They look at things very simply & believe that at some unknown point in the future, there will simply be a tipping point where the discount rate applied (across all asset class valuations) spikes.  They don’t speculate how this will unfold. I think I can guess what this will do to Netflix or Tesla but in broad terms, what happens to gold miners? Do you take the view that in essence the (future) value of their gold in the ground will likely mitigate a higher interest rate assumption? Perhaps what I am really meaning to ask is that if the equity bull market bubble bursts, do you have a view on what might happen to gold miners as a sector in terms of correlation?  

I really don’t like to ask you questions like this as you probably add me to the list of bears to assist with the calculation of your contrarian market indicators,

All the very best

Eoin Treacy's view

Thank you for this question which I believe will be of interest to other subscribers. I think you will agree that it is not hard work when you are doing something you love, though sometimes Mrs. Treacy may beg to differ.

The challenge any decent sized gold fund has is they have no choice but to hold the larger companies. They are the only companies of sufficient size to absorb the quantity of money that needs to be invested.

For example, the Blackrock Gold & General Fund has £1.087 billion under management, charges a 5% front end load and a 1.76% management fee. Over the last five years it has outperformed the VanEck Vectors Gold Miners ETF by 1.21% on an annualized basis. Since the expense ratio for the ETF is 0.53% it is very debatable whether one gets better value from the actively managed large cap fund.

There is a lot more scope for outperformance in the junior mining sector for actively managed portfolios. The Junior Gold Miners’ ETF (GDXJ) has performed pretty much in line with the large cap version (GDX) over the last 12 months so it is not offering the kind of leverage to gold prices one might expect from buying it.

The Red Fort Partnership is an open-ended fund incorporated in Guernsey with $76 million under management. It does not take a management fee but has a 10% performance fee and a 3% early withdrawal fee. While it is no exclusively a gold fund, its portfolio is substantially constituted by gold shares. The price broke out to new highs when it was last updated in December. I think it is safe to say this is one of the riskier ways to play the junior sector.

The Aureus Fund is an Irish listed OIEC with €260 million under management. They charge a 5% front end load, 3% back end load and 0.7% management fee. Bloomberg does not report constituent data but the performance is very impressive and suggests a high weighting in platinum miners.

The promise of juniors is they will eventually become majors. The risk is they go bust before that happens. Therefore, the most important aspects of any speculative play in juniors has to concentrate on drill results, the cost of building the mine and the pedigree of the management team. For companies that are producers, an all-in sustaining cost below $1000 is the gold standard and is readily achievable with mid-tier miners at today’s prices.

Any business with 50% margins is worth a second look from investors, particularly if they have the potential to extend mine life. That is true irrespective of any doomsday scenario. 

I would never wish to deter any subscriber from writing in. It was always David’s opinion that we learn as much from our subscribers as they do from us and I firmly believe that.

The simple fact of the matter is that the quantity of debt outstanding is extraordinary, but bubbles go on for much longer than anyone ever thinks possible. I see no evidence to contradict the view that the world’s major governments will eventually have to default on their debts. Whether that is through classic defaults, monetary debasement, the adoption of digital currencies or war, the limited supply argument of gold will only be bolstered. Between now and then gold remains a cheap hedge.