Authored by Shree Kargutkar, Portfolio Manager, Sprott Asset Management LP
The month of November has traditionally been relatively uneventful for the gold complex (as shown in the chart below). For this reason, we entered the month with a slightly defensive bias in our active gold strategies. November witnessed several bullish developments for both traditional and contemporary assets, including progress on the U.S. tax bill, continued buoyancy of the U.S. equity markets and speculative bitcoin surpassing US$10,000. It is encouraging to us that gold equities remained stable in November amid such exuberant sentiment extremes.
Despite the strength in broad equity averages, spot gold has remained resilient throughout 2017, trading largely in a $100 range (between $1,200 and $1,300), and logging a year-to-date gain of 8.95% through 12/15/17. By contrast, gold equities have lagged the metal as demonstrated by the 5.11% gain for gold mining equities1 and an actual decline of 0.29% for a junior gold mining equities.2 This presents an opportunity for investors, as Trey Reik discussed last month (see Bridging the Performance Gap Between Gold and Miners).
The chart below also shows that the 2017 performance of spot gold (the gold line) has bucked the relatively recent trend favoring mid-December lows for the gold complex (red line represents past-five-year average). Should gold benefit in early 2018 from its traditional first quarter strength, we believe that high-quality gold miners are positioned for strong earnings performances.
2017 Cumulative Average Daily Change in Spot Gold versus Historical Time Frames from 1972-Present
Source: Nick Laird; Sharelynx. Data as of 12/13/2017. This chart uses the London PM Fix to calculate gold price returns.
As we have communicated in the past, we believe volatility among traditional asset classes is likely to increase in the coming months.To us, valuations seem stretched for most U.S. financial assets. For example, U.S. equities have roughly tripled from their Q1 2009 lows. Between 3/31/09 and 11/30/2017, the S&P 500 Index (including reinvestment of dividends) generated a total return of 298.44%, with the Index rising from 797.87 to 2,647.58. During roughly the same span, the "free-cash-flow" of S&P 500 companies has only increased 27.68%, from $89.46 in calendar 2008 to an estimate of $114.22 in calendar 2017. More instructively, the free-cash-flow yield of the S&P 500 has plummeted from 11.21% at the end of Q1 2009 to 4.31% on 11/30/17. On the fixed-income side, credit spreads across the quality spectrum trade today near historically thin levels despite well-documented highs for every conceivable global debt measure.
Against this backdrop of stretched valuations for traditional financial assets, we are bullish about precious metal miners, among which 10% free-cash-flow yields and P/E multiples around 10x are increasingly common. In essence, gold shares resemble today the attractive valuations for high-quality companies available in the S&P 500 during the lows of 2009.
Among gold miners, we are especially optimistic about several companies in Australia, namely Kirkland Lake Gold, Dacian Resources and Northern Star Resources, which all posted strong results in November. Kirkland Lake Gold’s exploration at the Fosterville operations continues to generate exceptionally high grades. Dacian Gold continues to execute well in the construction of its Mount Morgan project. Dacian Gold’s pending emergence as Australia’s newest mid-tier producer promises to continue its ongoing rerating. Northern Star Resources reported strong operating numbers at the end of October. Both Kirkland Resources and Northern Star Resources, remain inexpensive in our view, with roughly 10% (2018) free cash flow yields at current prices.
Despite their inherent volatility, we remain especially optimistic about the risk-reward proposition of precious metal miners.
|1||VanEck Vectors Gold Miners ETF (GDX) seeks to replicate the NYSE Arca Gold Miners Index (GDMNTR), which is intended to track the overall performance of companies involved in the gold mining industry.|
|2||VanEck Vectors Junior Gold Miners ETF (GDXJ) seeks to replicate the MVIS Global Junior Gold Miners Index (MVGDXJTR), which is intended to track the overall performance of small-capitalization companies that are involved primarily in the mining for gold and/or silver.|
This article may not be reproduced in any form, or referred to in any other publication, without acknowledgment that it was produced by Sprott Asset Management LP and a reference to www.sprott.com. The opinions, estimates and projections (“information”) contained within this report are solely those of Sprott Asset Management LP (“SAM LP”) and are subject to change without notice. SAM LP makes every effort to ensure that the information has been derived from sources believed to be reliable and accurate. However, SAM LP assumes no responsibility for any losses or damages, whether direct or indirect, which arise out of the use of this information. SAM LP is not under any obligation to update or keep current the information contained herein. The information should not be regarded by recipients as a substitute for the exercise of their own judgment. Please contact your own personal advisor on your particular circumstances. Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any investment funds managed by Sprott Asset Management LP. These views are not to be considered as investment advice nor should they be considered a recommendation to buy or sell. SAM LP and/or its affiliates may collectively beneficially own/control 1% or more of any class of the equity securities of the issuers mentioned in this report. SAM LP and/or its affiliates may hold short position in any class of the equity securities of the issuers mentioned in this report. During the preceding 12 months, SAM LP and/or its affiliates may have received remuneration other than normal course investment advisory or trade execution services from the issuers mentioned in this report.
SAM LP is the investment manager to the Sprott Physical Bullion Trusts (the “Trusts”). Important information about the Trusts, including the investment objectives and strategies, purchase options, applicable management fees, and expenses, is contained in the prospectus. Please read the document carefully before investing. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated. This communication does not constitute an offer to sell or solicitation to purchase securities of the Trusts.
The risks associated with investing in a Trust depend on the securities and assets in which the Trust invests, based upon the Trust’s particular objectives. There is no assurance that any Trust will achieve its investment objective, and its net asset value, yield and investment return will fluctuate from time to time with market conditions. There is no guarantee that the full amount of your original investment in a Trust will be returned to you. The Trusts are not insured by the Canada Deposit Insurance Corporation or any other government deposit insurer. Please read a Trust’s prospectus before investing.
The information contained herein does not constitute an offer or solicitation to anyone in the United States or in any other jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation. Prospective investors who are not resident in Canada should contact their financial advisor to determine whether securities of the Funds may be lawfully sold in their jurisdiction.
The information provided is general in nature and is provided with the understanding that it may not be relied upon as, nor considered to be, the rendering or tax, legal, accounting or professional advice. Readers should consult with their own accountants and/or lawyers for advice on the specific circumstances before taking any action.
You are now leaving Sprott.com and entering a linked website. Sprott has partnered with ALPS in offering Sprott ETFs. For fact sheets, marketing materials, prospectuses, performance, expense information and other details about the ETFs, you will be directed to the ALPS/Sprott website at SprottETFs.com.Continue to Sprott Exchange Traded Funds
You are now leaving Sprott.com and entering a linked website. Sprott Asset Management is a sub-advisor for several mutual funds on behalf of Ninepoint Partners. For details on these funds, you will be directed to the Ninepoint Partners website at ninepoint.com.Continue to Ninepoint Partners