FINDING A GOLD BULL IN THE ERA OF TRUMP
Prospects for the metal not as bad as some think, expert says
Not only was Donald Trump’s victory in the U.S. Presidential election a surprise, but so too was the reaction in financial markets, and gold is a perfect example.
The precious metal has fallen approximately four per cent since the polls closed last Tuesday, and the NYSE Arca Gold Bugs Index is down about 10 per cent.
Uncertainty about Trump’s policy outlook had been expected to provide support for gold, but that hasn’t been the case. Instead, rising yields (and the resulting dramatic sell-off in bonds) reflects the expectation that many now seem to believe the president-elect will create growth through his fiscal policies: spending on infrastructure and tax cuts.
But how do you finance Trump’s spending proposals, while cutting taxes at the same time?
“We believe this will create more debt,” said Maria Smirnova, portfolio manager at Sprott Asset Management. “Spending will create inflationary pressures, which should mean real rates are either low or declining.”
It’s great to propose billions or trillions of dollars of spending and tax cuts, but Smirnova noted that a plan is needed to implement it all.
“We don’t know what plan will actually be implemented, but there has been a complete sea change of perception,” she said.
Despite the postelection weakness for gold, Smirnova, who manages the Sprott Gold & Precious Minerals Fund with Paul Wong and Jason Mayer, pointed out that nothing has changed in terms of very accommodative policy from global central banks.
“We maintain that we’re going to be in this slow to tepid growth environment, and the central banks around the world will have to still maintain their accommodative stances, notwithstanding the short-term fluctuations,” Smirnova said. “I do believe that the Fed will raise in December, and potentially do so again next year, but that doesn’t mean the gold bull market is over.”
Looking back to the most recent Fed rate cycle, during the two years between June 18, 2004 and June 30, 2006, the central bank hiked 17 times from one per cent to 5.25 per cent.
During that period, gold rose 56 per cent and the Gold Miners Index climbed 73 per cent.
“The fact that the Fed raises rates doesn’t mean gold will go down,” Smirnova said.
While the team at Sprott is bottom up in terms of their stock picks, they also play themes.
That was the case last year, when they bought Australian gold miners.
“The Aussies seem to lead North America. They get bombed out first, but then they recover first too,” Smirnova said.
These days, the portfolio is heavily positioned in mid-tier producers and developers that have company-specific catalysts and re-rating potential through growth and exploration.
One top holding is Endeavour Mining Corp. (EDV/TSX), which has undergone a major transformation from being over-levered and having a very undervalued stock price.
“We think there is still more to come on the re-rating,” Smirnova said, noting that Endeavour’s management team has been successful at reducing costs at the company’s five mines in West Africa.
She also likes its growth prospects as production is expected to rise 50 per cent by 2018.
Asanko Gold Inc. (AKG/TSX) is another top holding, whose experienced management team has brought Phase I of the company’s gold mine in Ghana into production ahead of schedule and on budget.
A third fund holding, Richmont Mines Inc. (RIC/TSX), has been an exciting Canadian-based exploration play, as finding new highergrade mineralization at the Island gold mine in Ontario has allowed the company to expand its mill to grow production.