Gold stocks a golden opportunity, says top fund manager

11th October 2018
Resources Rising Stars

Gold stocks are a golden investment opportunity, well-regarded fund manager Simon Mawhinney from Allan Gray said this week, citing several fundamental reasons why now was the time to get set.

The Allan Gray group is a self-confessed “contrarian investor”, meaning it prides itself on doing the opposite to the market mob in the belief that this is where the best opportunities lie.

And this is exactly what Mawhinney is advocating in respect to gold stocks.

Writing on Livewire, he says three factors are needed for him to buy a resource stock: low commodity prices,  declining supply and poor sentiment.

“On this basis, we think that gold could be a great opportunity,” Mawhinney says.

He cites statistics which show that the world’s leading gold producers collectively account for one-third of world gold production.

“In a number of cases, some very respected gold companies are losing money,” Mawhinney says. “Goldcorp, Yamana, Kinross, Iamgold and AngloGold Ashanti all have costs in excess of US$1200 an ounce.

“For those that have costs lower than that, the difference between the current gold price and their costs is not sufficient to generate an economic return.

“So commodity prices are low. We feel quite confident of that.”

Mawhinney says the gold reserves of most companies fell significantly from 2008 to 2017.

This is a direct result of the low gold prices of the past 10 years relative to the cost needed to “incentivise” production, the businesses running themselves for cash and not spending money on exploration, and ongoing mining and depletion.

“So it's the combination of those things, basically underinvestment and depletion of orebodies,” he says. “And this is a sure path to a result that sees mine production falling in future years.

“If you look at Barrick and Newmont, Goldcorp, all of those three companies have guided to production in 2019 being lower than in 2018, and 2020 being even lower than 2019’s numbers. So supply is definitely falling.”

Mawhinney repeats Allan Gray’s mantra that “the most likely time to be able to buy companies very cheaply is when they are vilified in the press or have gone through some deep cyclical trough”.

And right now, there are no bullish bets being placed by hedge funds, as shown by the derivative and futures positions on the Commodity Futures Trading Commission.

“This is almost as bad as it gets,”Mawhinney says. “In 2000 and 2001, it was a bit worse than this, but you can see if you look at the gold price, what happened since then, and it did spectacularly well.

“This is a good indication of what the level of sentiment is out there.”

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