Relative Performance of Gold Stocks
The quarterly meeting of the Incrementum Fund’s Advisory Board took place earlier this month (April 12), and as usual, a special guest was invited to participate. This time we were joined by well-known fund manager John Hathaway (Toqueville Gold Fund). It was a very wide-ranging discussion of the financial markets and the economy, and we hope you will agree with us that it was quite interesting (as always, a PDF containing the transcript is available for download below).
Fund manager John Hathaway, special guest at the Incrementum Advisory Board Meeting this quarter.
One of the issues discussed by John we personally found particularly interesting was his idea as to why gold stocks have exhibited such dismal performance relative to gold this year. This has happened despite the fact that nearly all intermediate and senior producers are run by new managers who seem to be doing a great many things right. One would think that with the new-found focus on cost control and capital discipline, the sector should actually outperform rather than underperform precious metals.
Undoubtedly there are a number of factors playing into this, but John believes that particularly flows into and out of leveraged and unleveraged sector ETFs are exercising an outsized influence. This does certainly ring true to us. Consider for instance the major rebalancing of GDXJ that was implemented in 2017.
The ETF had become unable to properly fulfill its tracking function as many of its component stocks simply didn’t have sufficient trading volume. Moreover, the ETF had become so large, it held more than 10% of the issued share capital in some companies. The rebalancing was terrible news for the share prices of companies about to be removed from the ETF – their shares underperformed the sector quite a bit until the exercise was finally bedded down (this happened during a period of sector-wide weakness to boot).
What we were not aware of is that the leveraged ETFs may be an even more important driver in this context. Of course the same thing that exacerbates underperformance in times when interest in the sector wanes also exacerbates outperformance when the sector is back in fashion, such as in the first half of 2016. In the long run it should all balance out, but it is still important to be aware of this, as it inter alia means that one has to be cautious about the “signaling function” of the HUI/gold ratio. We will have more on this in our next gold update.
Leveraged and unleveraged gold junior ETFs – the tails wagging the dog
John inter alia also shared a few of his picks with us, and we think he has the right idea: senior producers are likely to look for acquisitions sooner or later, as reserve replacement is becoming quite an issue for many of them. At the moment there is a strong focus on brownfield exploration and expansion, but eventually the desire to buy out companies that have made …read more
Source:: Acting Man
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