Natural Resources
5 July 2022
Comment
All the world’s gold for a pint and a telephone call.
A couple of months ago the gold price was nudging $2000/oz but has slid pretty dramatically since then.
LME Gold Price (US$/oz)
It’s an odd time for gold bugs. It feels as if the list of reasons for a higher gold price just needs the arrival of a fourth horseman to make it complete.
A global pandemic that hasn’t quite gone away, inflation on the rampage, war in Europe, a market crash in just about all asset classes, global recession fast becoming the consensus, the possibility of famine across large swaths of the world, and the seeming existential crisis in the liberal democracies, - you would think all of this would be sufficient to propel the “ultimate safe haven” to all-time highs.
The Fed isn’t helping, with rising US rates, and the threat of surprises on the upside, and concomitant Dollar strength, providing strong head winds.
But since the sky began to fall in with the onset of the pandemic, over the period gold has performed its safe haven role reasonably well, outperforming MSCI World equities, most other commodities (until oil & gas took off) and even the S&P 500.
Gold Bullion performance relative to S&P500, MSCI World Equity, Bitcoin and Bloomberg Commodity Index
Bitcoin has been a notable exception, but the jury is still out on the long-term value proposition that crypto currencies really represent. Their volatility is pretty hair-raising even for mining company investors and perhaps as the great Bill Shankly said, “Form is temporary but class is permanent”.
The performance of gold equities is of course another, often painful, story for investors. Over the last decade relative to bullion and to other equities, performance has been lacklustre and since the start of the recent turmoil has been significantly worse than that.
FTSE Gold Mines Index relative to MSCI Metals & Mining Equity Index, World Equity Index and Gold Bullion
Alternative investment options for gold exposure provided by ETF’s and streaming and royalty companies that come without the messy mining risks, and indeed crypto currencies, have impacted investor’s appetite for gold equities. The theoretical option value gold equities offer on bullion itself has been dashed by poor company performance and execution. The current inflation driven margin squeeze for many gold miners isn’t improving the outlook.
A discussion in the pub in 1993 about the performance of gold equities led me to produce a chart for legendary gold investor Julian Baring who ran the Mercury Gold and General Fund at the time, now owned by Blackrock. Mr Baring liked to illustrate the value of gold equities by comparison to other assets.
The chart, “All the world’s gold for a pint and a telephone call”, showed the total market cap of the then newly started FTSE gold mines index, which includes all producers of at least 300,000 oz’s pa (~ US$73bn total revenue at today’s prices), to be the same as the aggregate market capitalisation of Guinness and Vodafone, and, intuitively at least, seemed to underline the cheapness of gold equities.
All the World’s Gold for a Pint and a Telephone Call - 2022 Market Capitalisations of FT Gold Mines Index, Diageo and Vodafone (US$)
The constituent names may have changed somewhat in the interim but the result, and the point, looks remarkably similar today.
Gold’s role in the 21st century continues to be an emotive subject. For full disclosure, I am more in the Keynesian “barbarous relic” school when it comes to bullion, but you don’t have to be a gold bug to believe the current myriad of economic and geopolitical uncertainties should be generally supportive for gold prices and its producers. The question remains - if not now, then when?
Charlie Cryer
Head RFC Ambrian London
+44 (0)20 3440 6834
charlie.cryer@rfcambrian.com