Fixing Fixed Income Through GoldVanEckNovember 10, 2020
On Tuesday, October 26, VanEck held its first ever, virtual Gold Insights Afternoon with VanEck & Friends. The idea behind the afternoon was to create a combination of timely insights, actionable ideas and solutions to challenges we have heard from investors. We believe the event was a success and we certainly enjoyed hosting it. By our reckoning, those attending represented over $5.5 trillion in assets under management/advisement.
To complement what investors already knew, and for them to benefit from the sophistication and knowledge of institutional professionals, we wanted to combine, in one place and in one conversation, the perspectives on gold of leading investors, allocators and investment consultants.
The afternoon kicked off with two introductory presentations, the first by Joe Foster, Portfolio Manager of VanEck’s Gold Strategy, on The Investment Case for Gold (see “VanEck Reasserts Case for Gold Investing as Price Hits All-Time Highs”) and the second by Roland Morris, the firm’s Chief Commodities Strategist, with his Gold Markets Macro Update.
Both addressed the outlook for gold and, not least, VanEck’s price target of $3,400 per ounce. In addition, Joe noted in his presentation not only just how healthy gold mining companies’ balance sheets are currently, but also how, as they generate significant free cash flow, the emphasis now is on returns and value for shareholders and not on growth for growth’s sake.
These presentations were followed by contributions from the “& Friends” on Use Cases: Allocation Ideas & Challenges from: Marcus Frampton, CIO of the Alaska Permanent Fund; Bob Lang, Managing Director in the Real Asset Group with Cambridge Associates; and Tom Fletcher, Managing Director of Russell Investments’ Overlay Services business.
Lessons from Our Friends
While the discussion was both wide ranging and always lively, some topics in particular stood out. The key theme that emerged was that the historical benefits of fixed income appear to be changing in the current environment and therefore, the role of gold bullion in a portfolio is expanding, particularly as a fixed income complement.
U.S. Treasuries No Longer as Good a Shock Absorber
On top of the more general question as to whether they should be reducing their allocations to fixed income because it is not returning anything, one specific question investors are now asking themselves is what they are going to do in the event that U.S. Treasuries rise. With an expectation that Treasuries are going to be able to provide considerably less of a role as a “shock absorber”, then how is an investor going to better hedge an over-reliance on equity exposure? And this is quite apart from the fact that returns, looking forward, are much worse than they used to be. Something is needed to help bonds out.
One answer could be to use gold (bullion or ETFs) as a fixed income “offset”, a “risk-reducing” offset to Treasury exposure. Moreover, at the same time that yields across many fixed income areas are declining, along with an environment where the U.S. Federal Reserve (Fed) has indicated that low rates should persist for some time, gold miners are generating free cash flow and distributing that back to shareholders. Not only has the income hurdle to holding gold bullion diminished, but also the incentive to invest in gold miners has never looked more attractive.
Beginning- And End-Point Sensitivities
When considering an investment in gold mining equities, investors really should look to the long term. Not least, for one important reason: when compared to the opportunity cost of investing in bullion, measuring the performance of gold equities is very beginning- and end-point sensitive because they are quite volatile. For investors who are going to hold gold equities, one strategy to mitigate this sensitivity is to dollar cost average their exposure during the down years, albeit that, according to one Friend, this can be both “really difficult and really painful.”
More Than a Hedge
If held as a hedge against currency debasement or inflation, investors should consider gold bullion and/or gold ETFs, but if the gold holding’s primary purpose is to enhance overall portfolio return then actively managed gold mining equities may be the answer—albeit with the emphasis on their being a long-term holding.
As one of our Friends noted, over the last 50 years, gold “has not impeded returns.” In his case, with the need to achieve a return of CPI plus a percentage, he is particularly vulnerable in periods of high inflation and lower than expected economic growth. And, for him, it is in just these periods that gold has done very well.
Gold equities could, of course, be held as a “tactical” investment for, say, just a few years, but once again, investors would need to remain mindful that such an investment remains very beginning- and end-point sensitive.
When looking at how big an allocation to gold should be, one of our friends told that us that, in his experience, generally, it is 2%. Or as he described it, “large enough, to have an impact, but … not too large to have a high opportunity cost.”
His clients in Europe, however, generally have a higher allocation, even up to 5%. And while it may be beginning to change, such an allocation has been much more popular amongst high net worth families as opposed to institutions.
When asked whether the tenor/volume of questions from clients around gold equities and gold equities exposure had decreased or diminished, the answer was that it has. However, he also said that he didn’t want to “overplay it”. There was much more interest in the early-2000s, but that is probably because those who already own gold equities are happy with their allocation and are continuing to hold them. However, the volume of questions is beginning to increase.
We believe the afternoon was a success and will certainly be seeking to repeat it. We were all very lucky to be able to benefit not only from the exceptional caliber of our Friends, but also, because of this, the depth, breadth and range of their viewpoints. Our thanks to them for making this event possible, and we look forward, we trust, to inviting them again to another “Gold Insights Afternoon with VanEck & Friends.”
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