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(Runtime: 3 min, 50 sec; size: 3.40 MB)
Daniel Greenspan, I’m with CIBC Asset Management, and I’m the senior commodities, and metals and mining analyst.
Gold has been on quite the hot streak lately. It’s appreciated by around 25% over the past eight months. The move over the past year was driven by a bunch of different things, specifically falling interest rates, which has driven the gold price higher on a weaker U.S. dollar. We’ve also seen increased fears around trade wars between China and the U.S., Middle East tensions between the U.S. and Iran, and then certainly most recently, the coronavirus outbreak in China.
Gold does tend to do well in times of uncertainty. And if we look at the past as a guide, we can see that going back to 2008, gold started the year at around $800 an ounce and by the end of 2009 had moved to $1,100 an ounce. And that was driven by the onset and the follow-through of the global financial crisis. Gold hit an all-time high, almost $1,900 an ounce, in late 2011. That was when interest rates bottomed, quantitative easing expanded, and the U.S. dollar weakened.
In the period between 2011 and now, the price did drift lower for a few years and it was sort of range-bound between 2016 and 2018. In that time period, we saw that investors became complacent. They were comfortable with relatively steady global growth. Then last year and into 2020, as we’ve started this year, volatility is higher, uncertainty in lower interest rates have come back, and gold has found it’s footing again. The price took off in the second half of 2019 and is further strengthened into January. We’d also note the seasonality, December and January are usually quite good months for gold, and that has continued into this year.
In terms of our expectations on whether we think the gold price rally can continue in 2020, we do believe there is a compelling case to be made to stay long gold in the medium term. We think increased uncertainty over global economic outlook remains high. We see higher risk of further interest rate cuts to help support global growth, and we’re seeing negative real interest rates around the world, which we think is supportive for gold in the coming quarters.
In the very near term, we do think there is potential for some downside risks to the commodity price, and we think that could come if and when fears around the coronavirus slow down. We do think there is a premium baked into the gold price right now on the virus fears that are not fundamentally justified by the market. So if we do see a market calming-type scenario, we could see a bit of a check-back in the gold price in the very near term. That said, we think that with real interest rates where they are, that fundamentally the gold price is supported this year. So, with that in mind, we’re comfortable staying overweight gold in a number of our funds. We generally view exposure to gold as a good hedge against global macro risks and a good diversifier in the portfolio. We think that gold tends to react counter-cyclically, and therefore it has a good place in our portfolios.
In terms of the equities, given some of the operational challenges and political risks we tend to see from time to time in the sector, we generally favor higher-quality companies and lower-risk jurisdictions. In large cap, we like Newmont Mining and Kirkland Lake Gold. We think Newmont has the potential to deliver value on the acquired Goldcorp assets that the market’s not yet giving the company credit for. We like the Newmont management team. We think they’re very strong. The balance sheet is strong, and we think that 2020 could be a re-rate year for the stock to close the valuation gap with some of the senior peers as they deliver on their new assets.
At Kirkland Lake, we’re watching for the vote on the proposed Detour acquisition, which is scheduled to be held on January the 28th. We think there’s value in the Detour Lake asset, and we think that if Kirkland can acquire that asset that they will be able to deliver on that value over time. Again, Kirkland’s a company with a strong balance sheet, a strong management team, operating in safe jurisdictions in Canada and Australia. So those are our two top picks in the gold equity sector.