“In the coming months and years, gold is likely to attract more attention from investors as an asset class.”, Georges Lequime says. Photo: Nikola Milikjovic Source: iStock

Gold: safe haven and inflation hedge

Author: Georges Lequime und Yvonne Raßbach

What some people drink in Champagne or wear around their décolleté, others own in stock deposits – it’s all about the precious metal gold. Investors keep asking themselves whether physical gold or gold stocks are worth more – or if it is currently profitable at all? And what factors are driving the price of gold and where are the best values to be found? What does the future of this precious metal look like? ChampionsNews checked with Georges Lequime, Earth Resource Investment Group (ERIG), who is investment advisor of the Earth Gold Fund UI

Georges Lequime, Investments Advisor, Earth Resource Investment Group (ERIG) Source: ERIG

ChampionsNews: Mr. Lequime, as a fund advisor, you are dealing with the topic of gold every day. How do you assess the current market situation in regard to the precious metal gold?

Georges Lequime: Analysts are currently satisfied with the financial world and deem it as stable. There is basically no inflation, and for many parts of the stock markets, they are now expecting annual returns in the double-digit range. Therefore, the argument of diversification into gold in the securities portfolio is challenging to convey to investors. However, the headwinds that hit the price of gold in 2018 are now gradually fading. In the coming months and years, gold is likely to attract more attention from investors as an asset class.

ChampionsNews: What, in your opinion, will drive the gold price higher from here?

Georges Lequime: There are essentially two factors that will drive gold prices higher from here; a flagging US dollar/flagging US stock markets and inflation fears. Institutional investors will use gold to diversify their portfolios if they believe that the US dollar and US stock markets cannot maintain their record levels. Inflation fears will make investors look to use gold as a hedge against price inflation for their assets. The first variant is to be more likely in the short to medium term.

ChampionsNews:  What performance do you expect in the case of precious metal silver compared to gold?

Georges Lequime: Silver is gold’s more volatile and less expensive relative. The white precious metal tends to outperform gold as markets rise. The ratio of the gold price to the silver price is currently above 89:1. A ratio of over 80 has only been witnessed five times over the past 30 years. The long-term ratio tends to be closer to 60:1. Investors should, therefore, prefer silver to gold, as long as they expect rising gold prices. However, more volatile silver prices are also associated with higher risks for investors.

ChampionsNews: Should investors consider gold equities or physical gold?

A rising gold price could be the perfect scenario for gold stocks.

Georges Lequime

Georges Lequime: Short answer, most certainly both! Since the beginning of the gold price decline in 2011, investing in physical gold has undoubtedly been the right strategy for investors. Profitability and the valuation of gold stocks react sensitively to the gold price development. Since 2011, gold producers were avoided by investors due to high debt and value-destroying mergers and acquisitions. However, the industry is currently in a much better shape and the balance sheets have been largely repaired over the past four years. Gold equity valuation metrics are currently very low by historical standards. A rising gold price could be the perfect scenario for gold stocks.

ChampionsNews: Why did the gold industry see the mega-mergers of Barrick Gold/Randgold and Newmont/Goldcorp at the end of 2018?

Georges Lequime: The four companies lack projects and exploration personnel in their portfolios. Currently, a decline in the production profile is the biggest problem for gold producers. They believe that they can only attract potential investors through the size and trading liquidity of their stock. To a certain extent, this worked, but whether this strategy will succeed in the long term cannot be foreseen. Common to these mergers is that no value has been created. When demand for gold stocks returns, the more liquid stocks usually top first, followed by the mid-tier companies.

ChampionsNews: Where do you currently see the best values in this sector?

Georges Lequime: In recent months, a significant gap has developed between the eight or nine very liquid, larger capitalization gold stocks, which are typically held in trading baskets, and the other gold stocks, primarily mid-sized, growth companies. The discount to fair value is now apparently 45 to 60 percent. Should gold prices remain at their current level or continue to rise, the performance of mid-tier companies is likely to pick up in short to medium term and outperform larger producers. Project developers and exploration companies currently offer the best performance, but also carry higher risks. On a risk-adjusted basis, mid-sized gold mining companies and attractively-valued silver stocks should, therefore, provide the best value and attractice entry opportunities. 

Author: Georges Lequime und Yvonne Raßbach
Date of issue: 6/19/2019