(Kitco News, Thurs. July 20th. 2023) – The gold market is once again starting to shine as the Federal Reserve looks to enter the end game of its current tightening cycle; however, according to one portfolio manager, if investors want to value, they need to look at the mining sector.
In an interview with Kitco News, Ryan McIntyre, managing partner at Sprott Inc., said that while there is a lot of focus on the precious metal, the equity side of the market has been forgotten about, which has created a massive imbalance in valuations.
“I always think of physical gold as an important strategic allocation that will never change in your portfolio,” he said. “From a gold equity perspective, that is where investors can become a lot more tactical.”
McIntyre noted that sentiment in the mining sector is pretty dismal, and it has been a challenging environment for companies trying to raise money. He said that these two factors highlight a significant low point in the market and it won’t take much to push sentiment higher.
McIntyre also pointed out that companies have significantly improved their balance sheets and are better positioned to take advantage of higher gold prices.
“It won’t take much for sentiment to improve in the mining space.
“There is a lot of scare tissue amongst investors from the precious bull market, but I definitely think there a value element to gold equities that wasn’t there a couple of years ago,” he said.
As to what investors should be looking at, McIntyre said that for generalist investors, senior producers with solid production and consistent cash flow are reasonably safe investments; however, he added that valuations in this sector are fairly balanced.
He noted that another sector investors can look at is streaming and royalty companies as they continue to have upside exposure to the precious metals without having significant production costs of a miner. He added that investors should look at royalty companies with well-diversified pipeline production.
As for smaller companies, McIntyre said the lower down the spectrum you go, the more value there is in the marketplace but also more risk.
“There are a lot of great opportunities as you move down the market, but you need to have a better understanding of what you’re getting into versus the likes of a Barrick or a Newmont.”
 |
Qatar buys 1.6 tonnes of gold in June; Kazakhstan sells 3.2 tonnes – WGC’s Gopaul |
As to what it will take to bring investors back into the sector, McIntyre said that higher gold prices should eventually create positive sentiment in the marketplace.
The bullish outlook comes as gold prices test critical resistance at $1,980 an ounce and could make a new push back to $2,000 an ounce if the Federal Reserve signals that it is done raising interest rates next week.
However, McIntyre said that investors shouldn’t be paying much attention to the near-term volatility and more on the long-term trends.
“It’s hard to say what will happen to gold in the next six months, but unquestionably prices will be higher in the long term. Without a doubt,” he said.
Looking at the broader landscape, McIntyre said that investors appear to be underpricing sovereign risks as Western nations continue to add to their growing deficits. McIntyr’s warning comes as data from the U.S. Treasury Department shows that the deficit has grown by $1 trillion in the last five weeks since Congress passed legislation to increase the debt ceiling.
“We’ve long taken for granted governments’ ability to pave over economic problems with more debt, but at some point, we are going to reach an end. It’s not sustainable,” he said.
McIntyre noted that central bank gold demand is a sign that governments are taking steps to reduce their exposure to a potential global sovereign debt crisis. He added that owning some gold in this environment makes sense, which has no geopolitical or third-party risk.
“Gold is an island unto itself,” he said. “It’s completely independent from everything else in your portfolio and that is why you need to have a strategic position.”
As for the Federal Reserve’s monetary policy, McIntyre said that even if July is not the last time the central bank raises rates, the tightening cycle is close enough to terminal rates. He added that because of massive debt levels and falling money supply, the Federal Reserve can’t afford to raise interest rates much higher.
“The biggest problem is you don’t really know when sovereign debt will become an issue until it becomes an issue,” he said. “The worst thing that could happen is if things get out of control and the borrowing costs shoot up. That’s the last thing you want when you have a high debt load.”
Posted by:
Jack Dempsey, President
401 Gold Consultants LLC
jdemp2003@gmail.com