As gold hits record highs, top performing fund manager Collins St Asset Management says a valuation gap with gold miners is likely to be resolved in favour of their share prices.
The fund manager expects this valuation gap to close rapidly, potentially within months, as investors increasingly realise that gold miners are set to become vastly more profitable.
Collins St Value Fund was the best performing long-only fund manager surveyed by Mercer in its latest investment league tables, scoring an annualised return of 24.1 per cent per annum over the past five years. The fund has delivered a 13 per cent return net of fees on average since inception in 2016.
The price of gold has soared 80 per cent in the past decade while the Philadelphia Stock Exchange Gold and Silver Index has risen 49 per cent. Spot gold hit a record high of $US2,365.35 ($A3,574.64) per ounce on Wednesday.
“I have never seen such a disconnect between the underlying commodity and equity prices,” said Vasilios Piperolgou, Collins St Asset Management’s co-founder and chief investment officer.
Despite a 30 per cent rise in the US dollar index over the past decade the gold price has soared on central bank buying and more recently high inflation, heightened geopolitical risks from wars in Ukraine and Gaza, and expectations of central bank interest rate cuts.
Inflation has fallen sharply from pandemic era highs, but there are concerns that structural forces like decarbonisation and deglobalisation are set to underpin inflation in the medium term.
Collins St is focussing on well capitalised small-to-mid sized gold producers with solid resource inventory and production profiles trading on under 10 times their forecast next 12 months earnings.
Geopolitical tensions have been behind record central bank buying of gold in recent years, mainly by non-Western central banks led by China and Turkey.
Central banks continued to buy gold in February but at a slower pace, according to the World Gold Council. Reported global central bank gold reserves rose by 19 tonnes, the ninth consecutive month of growth. But February’s buying was 58 per cent below January’s total of 45 tonnes.
On a year-to-date basis, central banks reported the addition of 64 tonnes over January and February, which was 43 per cent below the same period in 2023 but a fourfold increase over 2022.
“This is the first time since Nixon took the US off the gold standard where US financial institutions have potentially lost the ability to effectively dictate the gold price,” Mr Piperolgou said.
“The biggest driving force of the increasing gold price is physical buying by non-Western central banks. Another point is inflation is in our opinion becoming a little bit ingrained. It seems the last mile is becoming harder than central banks would like.”
He also notes a strong inverse correlation between gold and interest rates – on account of the fact that gold doesn’t pay interest – and the Fed seems determined to cut interest rates this year.
An acceleration of central bank buying of gold in the past two years is eventually likely to be matched by an equivalent upturn in gold exchange traded fund buying.
“Normally when a particular commodity is on an upward trajectory you do see financial ETFs starting to increase and invest further in that sector,” Mr Piperoglou said in an investor webinar.
“So it’s a bit of a disconnect…this is what gets us excited.
“This in our opinion is why the gold stocks have not yet fully appreciated.
“If the gold price is doing what it’s doing yet the ETFs are reducing…imagine when that reverses.”
In his latest report, the World Gold Council said gold-backed ETF investment remained low after an unprecedented divergence between global gold ETF flows and the gold price.
“An unprecedented disconnect has appeared between gold prices and global gold ETF flows, driving a wedge between comparisons of the current all-time-highs to that of the 2011 spike,” the trade association said. But North American inflows and less European outflows hinted at a “turning point”.
“We view outflows from gold ETFs as speculative rather than structural and inflows into Bitcoin ETFs as speculative rather than structural, supported by findings from our survey work.
“We view recent North American inflows and softening European outflows as hinting at a turning point. Our analysis suggests that gold is currently well supported by fundamentals, and the low participation from US investors augurs well for the rally to continue, in contrast to 2011.”
Mr Piperoglou said outflows from gold ETFs fell from about $US2bn to $US800m in March.
“What I think we’ll see in the short-term is a switch as the ETF’s perhaps start to increase their exposure as the commodity keeps going up, and we think that window of opportunity to take advantage of the asymmetry in some of the better quality gold stocks is quite narrow.
“We believe there is serious catch up to take place but only for those investors with the insight to be genuinely selective and the fortitude to back insight with action.”
But whereas any significant buying of small-to-mid cap gold miners would have a major impact on their share prices, Mr Piperoglou said his fund was already set in names like Equinox Gold and Barton Gold in anticipation of increased cashflows and potential takeovers.
The Collins St Special Situation Fund No.2 will reopen for a limited time in April for qualifying wholesale and sophisticated investors.
