Fund Manager Reveals His Top Ten Precious Metals List

Source: Streetwise Reports   05/09/2019

Ralph Aldis, portfolio manager at U.S. Global Investors, in this interview with Streetwise Reports, talks about movements in the gold market, why precious metals producers are doing better than explorers and developers, the funds that he manages and companies on his buy and sell list.

Streetwise Reports: Ralph, gold has been trading within a relatively narrow range around $1,300 over the last several months. What’s your outlook for the metal?

Ralph Aldis: Longer term, I do think we’re going to see a higher gold price. As for the near-term factors that have been a hindrance, many experts have a fairly positive view that this could be the right time for gold given current global geopolitical conditions where you don’t know what could happen, especially with the rise of Populist leaders.

But I think the current overshadowing factor on the gold price has been Venezuela. Recently there was a news story that Venezuela was said to have already sold $400 million in gold in spite of sanctions imposed. When that story hit the wires, there wasn’t really any real news out there on gold, but it would be my opinion that the news caused the gold price to drop around $11/oz. I believe it shows that, to some extent, sanctions are not working. Stories like Venezuela moving 8 tonnes of gold from its central bank around April 9-10, when gold was trading at $1,308, immediately preceded gold price declines over the next five days towards $1,275/oz. I don’t think it’ just a coincidence that gold has seen selling pressure around these headlines.

I believe that longer-term most investors are positive on gold, but it’s very clear we have had a distressed seller in the market. In fact we’ve had a couple in the past year; Turkey also comes to mind as a big seller. Against this backdrop we’ve seen five months of gold buying from China. Opportunistic buyers, when they see distressed sellers like Venezuela, are not going to rush to give sellers top dollar. So, when you see anything related to Venezuela and selling gold, it seems the bids just drop off. Obviously, Venezuela has been able to sell gold even though there have been sanctions. The U.S. has been trying to stop that, but Venezuela has been able to get gold into the market. I think that has been the biggest recent headwind for gold.

It’s instructive to remember that in 2018, Turkey was in a similar position. It had a big currency crisis, and it was selling down its gold reserves. Every week its gold reserves were dropping, using gold sales to defend the Turkish lira. Fast forward to 2019, Prime Minister Erdogan’s AKP party suffered defeats in the March 31 elections in big cities like Ankara and Istanbul, the biggest and richest city in the country. Erdogan is already calling for a new election because he didn’t get the popular support he was seeking. It’s these types of news events that make you nervous since countries like Turkey have been known to sell gold to achieve its political objectives. I think until we get past the current situations in both Turkey and Venezuela the gold price is probably still going to trend sideways. I don’t think it’s going to drop necessarily because there are too many macro factors that are supporting it. But long-term buyers usually offer forced sellers the cheapest price they can.

SR: Let’s go on to precious metals stocks. Do you see any broad trends in this market?

RA: Yes. There are a couple things I would say related to the companies and company management and the way that maybe they’re thinking. And it’s manifesting itself in some of the decisions we’re seeing.

One of the trends that we’re seeing is better capital allocation decisions versus just trying to grow production at thinner margins. For the longest time, analysts seemed to play this tune of companies need to increase their production so they’ll get a higher rating. Companies would do that, but at thinner margins and weren’t making any money doing that.

We’ve seen IAMGOLD Corp. (IMG:TSX; IAG:NYSE) announce the deferral of Côté, and the stock was up 10%. Eldorado Gold Corp. (ELD:TSX; EGO:NYSE) wasn’t going to do the mill at Kisladag, and the stock is up 10%. You had AngloGold Ashanti Ltd. (AU:NYSE; ANG:JSE; AGG:ASX; AGD:LSE) talking about evaluating closing its last mine in South Africa within the next 18 months, and then in South Africa the stock traded up maybe 2%. When that news hit the U.S., the stock traded up 10% and then up another 5% the next day.

It’s like investors are saying, “Okay, you’re going to make a good capital allocation decision that markets like, so we’re going to reward you for that.” I think to some extent the companies are beginning to see that.

Now, the flip side, when you look at what’s happening along with the precious metal companies, I think the Shareholders’ Gold Council that was formed last year has done an excellent job, one on the changes to the board at Detour Gold Corp. (DGC:TSX). But it also did a really good job highlighting actions of the board of Goldcorp Inc. (G:TSX; GG:NYSE) going into the Newmont Mining Corp. (NEM:NYSE) merger. It called them out, and some of these guys are in the Mining Hall of Fame. I think the Shareholders’ Gold Council should have like a Miners’ Hall of Shame and hang these people’s pictures up there. Goldcorp was a great company, but it’s gone. None of us was there in the room to know exactly what transpired, but from the outside, it doesn’t look pretty.

SR: You manage two funds, the U.S. Global Investors Gold and Precious Metals Fund (USERX:MUTF) and the World Precious Minerals Fund (UNWPX:MUTF). How have the funds been performing?

RA: Like night and day. I say that because one of them is just gold producers; that’s the Gold and Precious Metals Fund. And World Precious Minerals Fund is predominantly explorers and developers. There has been a recent divergence in terms of the performance of those stocks.

World Precious Minerals has not done as well because it has exploration and development companies, but Gold and Precious Metals has done much better because it is in the producers. The explorers and developers aren’t getting money allocated to them. The producers are always where the money flows first at the start of a gold bull market.

There’s a crazy phenomenon that I, and most active fund managers, struggle with. If I chart my performance of Gold and Precious Metals against the GDX (Market Vectors Gold Miners ETF [GDX:NYSE.Arca]), which is the senior producers—I’m looking at 10-year numbers ending April 30, 2019—there are at least ten precious metal equity mutual funds, including our Gold and Precious Metals Fund, that have all beat the GDX over the past 10 years, in some cases by substantial double digit margins. Even for the past five years, the Gold and Precious Metals Fund has outperformed the GDX by double digit margins.

Ten Year Charts:

( Companies Mentioned: BME:TSX.V, CDV:ASX, PERU:TSX.V, KNT:TSX.V, MENE:TSX.V; MENEF:OTCMKTS, NNO:TSX.V, NUAG:TSX.V; NUPMF:OTCQX, ROXG:TSX, WDO:TSX, )