Gold and Silver: An outperforming sector for 2016?
· January 2016: In just 5 days, investors bought 26.8 metric tons of bullion through exchange-traded products backed by the metal, the most since 2015 (source: Bloomberg).
· Gold and silver demand is off the charts; the U.S. Mint sold nearly as much gold on the first day of 2016 as in all of January 2015. American Eagle silver coin sales jumped after the U.S. Mint said it set the first weekly allocation of 2016 at 4 million ounces, roughly four times the amount rationed in the last five months of 2015 (source: Reuters).
· Gold has risen 3.1 percent so far this year.
- HSBC believes that gold has “shrugged off” two bearish developments, a strong dollar and weaker commodity prices, announcing that they remain bullish on the precious metal. The group sees good emerging market demand, eventual dollar declines and central bank accumulation helping gold this year.
- The FTSE/JSE Africa Gold Mining Index, which rallied 20 percent this year, has had the best start since 1995 (source: Bloomberg).
· Global economic landscape for 2016 is looking ripe for further deterioration, increases in credit defaults and a “beggar-thy-neighbor” policy of rampant currency devaluations.
· Equities look like they are rolling over into a secular bear versus gold which has bottomed and is likely resuming its bull market run.
· Gold will resume its safe-haven status as global investors seek insurance and a potential hedge against the frailties of the monetary system.
· Gold’s run will strengthen from a currency play stance and not from traditional commodity supply & demand movements.
While the financial media’s “talking heads” are busy trying to assure investors that corrections in the market are normal and to “stay the course”, we are advising investors to include an allocation to gold within the portfolio. We are not going to pretend that we can predict market movements; however we are steadfast in our belief that the volatility we are seeing is not going to stop anytime soon. From our macro perspective, investors need to act as defensively as possible, thus if you are not selling your long equity positions you are employing strategies into the portfolio to mitigate potential losses – gold exposure can do that. We recommend buying the physical and top-tier gold mining shares. Mining shares are leveraged to the gold bullion price and due to a massive correction in the precious metals equities sector over the past four years; the opportunity for tremendous upside is present. We recommend a gold portfolio weighting which is large enough that it can mitigate losses from the other asset classes. We have created a list of gold mining companies which we think are representing above average opportunities in the sector. Our key criterion for recommendation looks at: share price depreciation from former highs, previous financing levels, successful project advancement and development and most importantly, all in sustaining costs (AISC). AISC essentially refers to the overall cost of mining an ounce of gold and selling it; an important metric in today’s volatile markets. The valuation shows the company has the ability to demonstrate strong free cash flow and has a buffer for profitability as the spot price of gold ebbs and flows. Should you wish to review or discuss our list of gold mining companies to watch, please contact us and we will be happy to forward this information to you.
We would like to bring your attention (see below) to an investment commentary published by the World Gold Council, which outlines the fundamentals which should drive gold investment demand in 2016.
World Gold council 2016 outlook:
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