Third Quarter 2021
The Gold and Precious Metals Fund had a total return of negative 17.31% in the third quarter of 2021, underperforming its benchmark, the FTSE Gold Mines Index, which had a return of negative 11.82%. See complete fund performance here.
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 overweighting of Men?. With an average fund weighting of 2.91% for the quarter, the stock gained 23.90% and contributed 96-basis points (bp) to the fund. Men? is not a member of the benchmark, the FTSE Gold Mines Index. Second quarter results were reported in August and with the continued growth in revenue, Men?’s return on invested capital turned positive for the first time. Men? has a disruptive jewelry sales model that offers only pure 24-kt gold and platinum pieces that are sold based on their gram weight plus a flat 20% mark up. Other jewelry retailers sell gold diluted with less valuable metals and the mark up could be in the hundreds of percent.
- Australian Strategic Materials was the fund’s second largest contributor to the fund’s return and is not a member of the fund’s benchmark. Our average weighting for the quarter was 180-bp. Their share price gained 23.36% and contributed 73-bp to the fund’s relative performance. Australian Strategic Metals was the third best performer in the prior quarter. With such significant price appreciation, we have taken some profits from the position.
- The third best contributor to the fund’s performance was DDH1 Ltd., which was 3.17% of the fund and returned 3.72% for the quarter, yielding 53-bp for the fund. DDH1 is not a member of the benchmark, the FTSE Gold Mines Index, as it is a drilling service company for the gold mining industry. Drilling companies benefit early in a mining cycle because they are the direct beneficiary of the capital raises that are used for exploration spending.
- The largest detractor from fund performance was our overweighting of K92 Mining, which averaged 11.47% of the fund and fell 33.56%, detracting 286-bp from our performance. K92 Mining is not a member of the benchmark. K92 was the best contributor to fund performance in the prior quarter, but they experienced 2-week quarantine delays on expatriates entering and leaving Papua New Guinea with Covid-19 travel restrictions in place during the quarter. The market likely anticipates production guidance will be missed but this is not an impairment.
- The second largest detractor was our 88-bp LEAP position in Newmont Mining, which declined 47.39% for the quarter resulting in 38-bp of underperformance. We were also underweight Newmont Mining common which declined 13.51%, netting the fund 30-bp of relative gain.
- The third largest detractor from fund performance was underweighting of Kirkland Lake Gold, which appreciated 8.46%. With our relative weighting at 1.39% to the benchmark weight of 5.26%, the underweighting detracted 74-bp from the fund’s relative performance to the benchmark.
Outlook for Gold and Precious Metals
Sell side sentiment is positive in the gold industry. Early in the quarter, Bloomberg highlighted that gold mining stocks, based on their forward price-to-earnings ratio, are abnormally cheap in comparison with the relative value of global stocks. Credit Suisse is bullish on gold stocks. They feel they 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 6-9 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 12–18-month period from trough are followed by price acceleration. The ratio of the S&P 500 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, Federal Reserve 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 used to curb pollution from vehicles. “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 coronavirus denting the outlook for industrial commodities, the belief that the Federal Reserve 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.
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.
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 3/31/2021: Impala Platinum Holdings Ltd. 3.28%, Aya Gold & Silver Inc. 2.09%, Agnico Eagle Mines Ltd. 0.00%, Newmont Corp. 3.32%, Barrick Gold Corp. 1.78%, Calibre Mining Corp. 0.00%, K92 Mining Inc. 9.88%, Berkshire Hathaway Inc. 0.00%, Tesla Inc. 0.00%.
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.