Occasionally, an opportunity arises in financial markets that is utterly compelling while also exposing the complete dichotomy between the science of financial trading and the art of being human. The idea of buying something when it is least in favour, when sentiment is totally washed out, goes against our every instinct.
Nevertheless, when it comes to selecting promising investment opportunities, we must learn to manage these instincts alongside our portfolios. I see such an opportunity in gold and silver mining equities as we head into the third quarter of 2022.
Gold and silver are monetary hedges, or so goes the theory. In some currencies this is self-evident. Take, for example, the Turkish Lira or the Brazilian Real gold prices. When it comes to the ‘reserve currency’, though, this is less obvious, and one of the obvious investor questions is: if inflation is rising and interest rates are low, surely gold price should be soaring?
The reality, however, is that these two metals live in the forward, rather than front-end, FX market, as measured in all currencies. In the forward market, investors still presume that current inflation will dissolve and all the promised rate hikes will duly arrive. You could call it a kind of perverse anti-gold Goldilocks scenario.
Investors steer well away
As such, the two monetary metals have taken a beating in the past two months as the Fed promised more and more hikes while simultaneously insisting that inflation will come down due to such policy moves. The associated gold and silver miners have capitulated and longer-term investors have fled.
They are now back at career-low sentiment levels, with even the highest quality gold and silver miners and development assets trading on bargain basement-low NAV multiples. Gold and silver miners are now trading down 50 per cent from their peak of August 2020 and are at levels last seen when gold was trading below $1,400/oz.
We have seen one of the worst quarters in recent memory for this volatile asset class, but a major policy error and subsequent pivot do look close to hand. When the Fed does pivot from hawkish to dovish, these unloved equities should be a primary beneficiary of such a change. What is more, the dollar gold price still lies within shooting distance of all-time highs, something that would surely kick into gear a genuine wider generalist move towards, rather than away from, this sub-sector.
Prone to volatility
The current extreme negative sentiment readings towards gold miners are matched by their extreme sensitivity to moves in the underlying spot prices of gold and silver measured in dollars. With that in mind, let’s consider where spot prices are right now.
Two observations leap out at me: Firstly, gold prices measured in GBP/EUR/JPY have already broken out into a new higher trading range, and only $-gold continues to lag and is waiting for confirmation. This, of course, is a function of dollar strength in global FX markets. Secondly, and of course more importantly for the wider sector, in April of this year, this crucial $-gold price fell below that key technical level of $2,100 for the third time since 1980.
Because the $-gold price has remained below its inflation-adjusted high of $2,100 for 40+ years, since 1980, gold investors are the only ones who can realistically say that they have never seen a genuine bull market in their investing careers. This is truer for gold and silver mining equities, which are flow sensitive and need new participants to move with force.
The first time the $-gold price attempted to breach the true high of 1980 was in 2011. It tried it once again in 2020 and for a third time this year before the still-looming avalanche of rate hikes were promised by the Fed. The good news is that neither this dollar strength, nor this apparent inability to break above $2,100/oz, can last forever.
Every asset class has its moment, its time in the sun, even gold and silver mining equities. When the Fed does recognise that steam-rollering the consumer and credit markets with endless rate hikes is creating a hard landing, we think that these gold (and silver) mining equities represent a best-in-class opportunity.