A U.S. dollar chart is also worth looking at. Obviously, gold has historically had a strong negative correlation with the U.S. dollar. If you look at a 12-month chart, you can see a well-defined trend or a channel in which the dollar has traded since May of this year. We are currently near the bottom of that trend, so the dollar is a bit vulnerable in our view. If something happens to cause the dollar to fall out of that trend on the downside that would be positive for gold in our view, and would definitely get our attention. In the longer term, as I’ve said before, I believe that the U.S. has mismanaged fiscal and monetary policies for years now. I think it may end badly, and eventually we’ll see financial risks come back into the system. If not now, then likely as we enter the next recession.
Dollar Rangebound Since May 2015
Source: Bloomberg
Gold Companies: Low Valuations and Efficiency
Moving on to gold stocks, we recently spent time in Colorado at the Denver Gold Show and the Precious Metals Summit. In our view, gold companies are continuing to become increasingly efficient. They’re not able to reduce costs as significantly as they were a year or two ago, but they appear to be still finding ways to economize and spend capital more wisely. We believe valuations are still quite favorable. We’re at cycle lows in terms of the valuations of many of these gold stocks right now. Given the low valuations and the efficiency of the companies, gold mining stocks looks attractive right now. The one thing we are missing is a higher gold price.
Another theme that was discussed at Denver, and that been playing out for a while now is the likely impact of currency on cost savings. For gold companies that have operations around the world, for example Brazil or Canada or Australia, over the last couple of years, they have enjoyed probably about 20% in cost savings. A mine cost of $1,000 an ounce in Australia a couple of years ago is now costing around $800 an ounce today in U.S. dollar terms. The mine’s revenues are in U.S. dollars, but its costs are in local currencies. Recent weakness in currencies around the world has enabled many mines to reduce costs. And then when you get the additional savings from efficient mining methods or lower costs from suppliers or EPCM [Engineering, Procurement and Construction Management] contracts, we’re seeing significant cost savings across the industry. Right now, we are looking at under $1,000 an ounce as the all-in cost on average for the industry.
Small- and Micro-Cap Activity Seems Promising
Lastly, I will talk about our gold strategy. In terms of portfolio holdings, we have not made many changes over the past quarter; we still have about a third of our holdings in juniors, and we remain underweight in the large-caps.
We have had a couple of our small-cap companies taken over in the last quarter; two of our juniors: Romarco (RTRAF) and Gold Canyon (GDCRF). Romarco Minerals was taken out by OceanaGold (OCANF). OceanaGold is an Australian-based company, and this was a share deal, so we’ll keep the OceanaGold when our Romarco changes into OceanaGold. Gold Canyon Resources is a development project, representing a significant gold deposit in Ontario. It was purchased by a company called First Mining Finance (XTSX:FF). Gold Canyon is not likely to get developed until we see higher gold prices, but if gold prices rise, it should become an attractive project, and that’s why we continue to hold it in the portfolio. This is the kind of activity we are beginning to see: smaller companies like Gold Canyon that were out of money, out of luck, and with management that is willing to give up control. First Mining is really a land bank and it has adept management. They have been accumulating gold properties and other metals properties in this market, and they’re willing to sit on these properties and wait for higher metals prices. This type of activity in these smaller companies is very encouraging to me, and is something that we want to be involved in. [As of 9/30/15, the above-mentioned holdings were represented in the Van Eck International Investors Gold Fund as follows: Romarco Minerals 1.12% of the Fund’s total net assets; OceanaGold, 0.0%; Gold Canyon Resources, 0.17%; and First Mining Finance, 0.0%. See more details on Fund holdings.]
by Joe Foster, Portfolio Manager and Senior Gold Analyst
With more than 30 years of gold industry experience, Foster began his gold career as a boots on the ground geologist, evaluating mining exploration and development projects. Foster offers a unique perspective on gold and the precious metals asset class.