The Gold and Precious Metals Fund had a total return of 8.64% in the first quarter of 2022, underperforming its benchmark, the FTSE Gold Mines Index, which had a return of 18.56%. See complete fund performance here.
Performance data quoted represents past performance. Past performance does not guarantee future results. Current performance may be higher or lower than the performance data quoted. The principal value and investment return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost.
- The biggest contributor to fund performance was our zero weighting of Polymetal International. With an average index weighting of 1.86% for the quarter, the stock fell 77.22% with the Russian invasion of Ukraine and contributed 297 basis points (bp) to the fund’s relative performance. Polymetal International is a member of the benchmark, but we passed on its ownership.
- Our two long-term equity anticipation securities (LEAP) positions on Newmont and Barrick Gold were the second largest contributor to the fund’s return. Our average weighting for the quarter was 215bp. The option prices gained 138.37% and 145.4%, respectively, and contributed a total of 233bp to the fund’s relative performance.
- The third best contributor to the fund’s performance was K92 Mining, which returned 28.56% for the quarter, yielding 107bp for the fund. K92 Mining is currently not a member of the benchmark but will likely qualify for index inclusion in the future as its growth plans are expected to achieve the necessary hurdles.
- The largest detractor from fund performance was our underweighting of Newmont, which averaged 1.20% of the fund and gained 29.03%. Newmont is the largest member of the benchmark. Our LEAP position offset 125bp of the fall in the common shares.
- The second largest detractor from fund performance was our underweighting of Barrick Gold, which we cut to zero and yet gained 29.50% during the quarter ended March 31. This detracted 177bp from the fund’s performance. Barrick Gold is the second largest member of the benchmark. Our LEAP position offset 56bp of the fall in the common shares.
- The third largest detractor from fund performance was the overweighting of Aya Gold & Silver, which fell 5.54%. With our average weighting at 5.34%, the position detracted 134bp from the fund relative to its benchmark. There was no major news driving the loss.
Outlook for Gold and Precious Metals
Sell side sentiment is positive on the gold industry. Early in the quarter, Bloomberg highlighted that gold mining stocks, based on their forward price/earnings ratio, are abnormally cheap compared to the relative value of global stocks. Credit Suisse is bullish on gold stocks. The bank believes gold stocks are 25-30% undervalued on a price/earnings metric. It is 20% below its prior peak and cheap compared to other commodities. Metal and mining equities could have a 40% upside from current levels over the next six to nine months, Citi says, assuming the duration and magnitude of the current rally is like past cycles. The history of mining cycles shows that pullbacks in commodities and equities in the 12-to-18-month period from trough are followed by price acceleration. The ratio of the S&P 500 relative to gold is nearing a 15-year high, implying that gold is cheap. Veteran investor Mark Mobius says investors should have 10% of a portfolio in gold as currencies will be devalued following the unprecedented stimulus rolled out to fight the coronavirus pandemic.
Despite this, two countries, Kazakhstan and Turkey, have reduced their gold reserves. Reserves in Kazakhstan fell to 12.4 million ounces from 31.1 million ounces. Reserves in Turkey fell from 23.2 million ounces to 22.9 million ounces. The post-pandemic recovery, Federal Reserve tapering and a stronger dollar will all weigh on the metal. Additionally, Fed policymakers could soon scale back support for the economy, which will hurt gold. Furthermore, miners are facing headwinds. Higher costs are being cited by miners. Fuel was the most cited area of inflation on operating costs, with upward pressure noted by two thirds of companies. On labor costs, moderate upward pressure has been encountered in the range of 2-5%, marginally above company budgeted inflation expectations with labor tightness commonly noted in Brazil, the U.S. and Canada.
A similar debate is occurring in palladium. Citi sees palladium demand surging in 2022 through 2023 as its analysts expect the automobile industry to enter a strong restocking phase. The bank notes that car inventories are at their lowest level in over 50 years of data. However, Sibanye Stillwater CEO Neal Froneman said palladium could decline to about $1,000 an ounce after 2025, as automakers switch to using more platinum in auto catalysts. “Palladium is somewhat at risk post-2025 and in addition, as the demand drops off, there are a number of new palladium-rich projects coming into production,” he said. “If demand falls and supply increases, the prices will drop, they will probably drop down to levels of around $1,000 an ounce.” A shortage of automotive chips weighed on demand from carmakers. The metal has 85% of its demand going into catalytic converters.
Platinum was higher during the quarter despite the coronavirus denting the outlook for industrial commodities, the belief that the Fed is on course to taper stimulus and 85% of the metal being used in catalytic converters, where a computer-chip shortage curbed auto production.
Crypto assets such as Bitcoin continue to present a challenge to gold. “Definitely there has been some distraction and tarnish taken as a result of the interest in cryptocurrencies,” Evolution Mining co-founder and CEO Jake Klein said in a Bloomberg TV interview, when asked if the surge in interest in the new asset class had impacted the gold market. “Cryptocurrencies do have a lot of energy — we need Elon Musk tweeting about gold rather than cryptocurrencies,” said Klein, while questioning whether they would ever replace gold as a store of value. “Maybe I’m old school, but I’m not sure how you wake up every morning and create an asset that is going up by 5% or 10% each day and you’re not sure why, and that’s cryptocurrencies.”
The FTSE Gold Mines Index encompasses all gold mining companies that have a sustainable and attributable gold production of at least 300,000 ounces a year, and that derive 75% or more of their revenue from mined gold. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.
The term long-term equity anticipation securities (LEAPS) refers to publicly traded options contracts with expiration dates that are longer than one year, and typically up to three years from issue. A basis point, or bp, is a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01% (0.0001). A warrant is a derivative that gives the right, but not the obligation, to buy or sell a security—most commonly an equity—at a certain price before expiration.
The price-earnings ratio, also known as P/E ratio, is the ratio of a company’s share price to the company’s earnings per share.
Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the Gold and Precious Metals Fund as a percentage of net assets as of 3/31/2022: Polymetal International PLC 0.00%, Newmont Corp. 3.54%, Barrick Gold Corp. 0.97%, K92 Mining Inc. 13.08%, Aya Gold & Silver Inc. 4.64%, Sibanye Stillwater Ltd. 0.00%, Evolution Mining Ltd.
Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Foreside Fund Services, LLC, Distributor. U.S. Global Investors is the investment adviser.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
Gold, precious metals, and precious minerals funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The prices of gold, precious metals, and precious minerals are subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5% to 10% of your portfolio in these sectors.