February 24, 2020 | (7 mins 45 secs)
Ed Coyne, Sprott Senior Managing Director, joins financial journalist Liz Claman to review gold's bold move in 2019. Coyne shares Sprott's 2020 outlook for gold bullion and gold equities, and explains that attitudes are shifting: Investors have traditionally invested in gold as a complement equity portfolios, but now view the yellow metal as an alternative to cash and bonds.
Liz Claman: We hope you feel that what you're learning here at Asset TV is worth its weight in gold. Speaking of gold, how about the growth we've seen in the yellow metal over the past six months? Will it continue? Here to put a little sparkle into the precious metals 2020 outlook is Ed Coyne, Senior Managing Director of Global Sales at Sprott Asset Management. I'm speechless about gold's run. What do you say about it? What's been the driver?
Ed Coyne: I think it is about uncertainty, and people don't believe in what's happening in the market. I just read that the last decade was the first since the pre-Civil War era that we have had in the U.S. without a recession. I think investors know why it is important to invest in stocks that pay dividends, but for new capital going into the market today, investors are more cautious than they were maybe two or three years ago.
We believe that interest rates will stay lower for longer and that the U.S. dollar is likely to continue bouncing around, and both of these are indicative of a strong gold market. For the last four years since we've been doing yearly outlook with you, gold has averaged over 10% a year [average annual total return for four year period of 12/31/15 to 12/31/19] and it's been pretty exciting. Even last year with the S&P up approximately 31%, gold was up over 18%. I think more investors are looking at ways to participate in the equity market, but are being more cautious than in the past.
LC: That is a shift that we've seen. Usually, they move inversely. Stocks go up, and gold goes down; gold goes up, stocks go down. Does it worry you? I know you love it, but is this just a new way of behavior for investors or is something squirrely happening in the market?
EC: Investors are not fully confident in the market. The U.S. economy is moving forward, but it is a bit of a tortoise right now. And the equity markets are acting like a hare, moving fast, and people don't believe this is sustainable. That's why we are seeing gold and equities move in tandem.
Traditionally, investors have looked to gold as a way to complement their equity portfolio. But with interest rates so low and returns on cash virtually nothing, more investors are looking at gold as a replacement for cash and bonds. People see gold differently than they did two decades ago. It's no longer viewed as just a commodity, but more as an alternative asset. More investors are looking at it as a very liquid, low-cost solution to diversify their portfolio.
LC: How would you advise people to invest in gold? Do you like physical gold? Do you like gold ETFs, gold miners? The miners have lagged, have they not?
EC: Yes, miners have lagged, and they haven't. The gold equities were up close to 40% last year, depending on if they were large-cap or small-cap. The miners are interesting right now because if we get a continued move in the gold price, gold's all-in sustaining costs are about $1,100 an ounce depending on where you are in the world and what kind of mine you have. Many analysts have gold priced at about $1,200 an ounce. Many of these gold mining companies are very profitable right now.
If the gold price continues to move forward, that margin expansion is going to continue to get very exciting. A 25% move in the price of gold equals about a 75% to 80% move in the margin expansion of the gold mining equities because their costs are relatively fixed. I think the gold equity story looks very interesting right now, particularly the junior mining or small-cap space, which we predominantly focus on.
There are many different ways to allocate to the space. If you're allocating to gold for the first time, look at physical bullion first. We offer several trusts that allow you to allocate directly to the physical metal, own it in a securitized way that trades on the exchange. Look at owning a physical allocation to gold as your core allocation.
Whether the gold price is going from $1,500 to $1,600, or $1,500 to $1,400, owning physical gold is an important component in your portfolio because it allows you to continue to invest in traditional stocks and bonds knowing you have a part of your portfolio that's in an asset that has performed differently over multiple market cycles. Once you get comfortable with that, the gold equity allocation becomes more of a tactical trade. If the gold price is improving, or the economy looks attractive for the price of gold, then gold equities could be a tactical trade that you want to think about.
LC: I want to ask this question because platinum used to be more expensive than gold. It is not. It's in the nine hundreds while gold is in the $1,500s. Is another metal, an opportunity there? Would it be platinum? Silver is around $18. Do you look at the other precious metals?
EC: Yes, we do. Silver, of course. We have some trusts that give you pure silver, pure gold. We have a trust that gives you a combination of both. We have a platinum and palladium trust. Palladium has been interesting and has gone through the moon.
Platinum and palladium are really true commodities. They are predominantly used for catalytic converters. People forget that at one time platinum was the primary metal for catalytic converters, but it got so expensive that the industry converted to palladium. The question is, will we see a conversion back to platinum? Is there a trade there? I think that's something people need to think about, but that's much more of a trade. That's much more of a commodity story than it is a true monetary story like you see with gold, where you have central banks allocating given that it is much more of a monetary asset.
LC: Indeed. Dare I even bring up the industrial metal copper. Copper is cheap. It had multiple days of declines already in 2020.
EC: That's right. We don't typically invest in copper because it moves too much in tune with the commodity market. We're really focused on assets, particularly gold and to some degree silver, that are serving as a counterbalance to your stocks and bonds. We look at precious metals as an alternative asset class.
LC: Lovely to have you again, Ed. Ed Coyne is the Senior Managing Director of Global Sales at Sprott Asset Management. Thank you so much for joining us. We know you learn something from every one of our very, very accomplished guests. We'll see you next time.
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