he outperformance is thanks to successful stock selection, i.e. the underweight of Newmont Goldcorp, Northern Star and Saracen. In addition Yamana, Pan American Silver, Eldorado, Perseus and Kinross contributed positively, while Golden Star, Semafo, Dundee Precious and Eastmain Resources had a negative impact. In addition, after lagging in H1, 2019 the junior gold miners started to contribute positively in the quarter.
Gold increased thanks to weak economic data, which led as expected to a turnaround in FED policy. The geopolitical tensions, as well as the fact that investors realized that a normalization of interest rates isn’t possible given the structural issues (very high indebtedness, over-aging). Gold miners’ Q2 results were generally in line with expectations. Given the low valuation, operating and financial leverage, as well as continued industry discipline, we continue to consider gold equities to be in the sweet spot of the industry cycle and therefore they are expected to outperform physical gold significantly in a rising gold price environment.
Start of a multi-year bull market
We consider the following the most important reasons why the rise of gold since autumn 2018 is the start of a multi-year bull market:
- The start of the monetary easing cycles (like late autumn 2000 and 2008) by the FED. During the last two easing cycles our funds increased by 1’450% resp. about 500% (USD).
- Acceleration of the currency war. The US will now likely go into the lead again (in the “race to the bottom”). The FED is, among the major central banks, the one which has the biggest room to weaken the overvalued US Dollar with further FED Fund interest rate cuts.
- High probability that the confidence crisis (seen so far at the political establishment) has started to spill over to central banks, which historically has been the biggest gold price driver. The fact that gold didn’t react negatively on the two “disappointing” interest rate decisions in Q3 by the FED indicates that investors have started to realize that the FED is cornered by the market and remaining policy tools (fixing of the 10-year interest rates, negative short-term rates, helicopter money) will lead to a confidence crisis in the leading global central banks.
- The fact that a normalization of interest rates is not possible has come to investors’ minds, but not yet into the tactical/strategic asset allocations. This process has now started and will be supportive for gold and other real assets in the next few years.
Why should positions in the NESTOR Gold Fund be increased or bought now?
- Gold equities are now in the sweet spot of the industry cycle. Especially in the first few years of a gold bull market, gold miners exhibit very attractive return/risk characteristics. Thanks to low valuation, operating and financial leverage, as well as continued industry discipline, gold miners tend to outperform physical gold by a factor of 5 to 10.
- Despite the positive return of gold miners, gold mining ETFs suffered YTD redemptions close to 20%! As a result, gold miners are far away from a “crowded” trade and most Canadian gold equities discount a gold price significantly below spot. Due to foreseeable convergence of the investor flows, gold equities currently present a very attractive opportunity for investors.
- Gold equities will profit in the near future from strongly positive earnings revisions, rising ROA/ROI and higher FCFs. Within the equity market, it is the industry with the most positive changes. As the above-mentioned financial metrics are among the major driving forces behind the popular “quantitative investment approach”, gold equities will likely benefit further into year end.
- Due to the small cap tilt, the NESTOR Gold Fund underperformed by 20-30% in the first few months of gold bull markets (Nov. 2000 – May 2001; Oct. 2008 – Dec. 2008; Sept. 2018 – June 2019). However, as soon as investors started to realize that the increase in the gold price was sustainable, our products outperformed the benchmark by a factor of about 3 (!). There is more and more evidence that this phase of significant outperformance has started in July 2019. estors.
Conclusion
Contrary to 2016, when gold miners started - after the sharp six-month rise in H1, 2016 - a two-year consolidation, a multi-year bull market has likely started in autumn 2018. The different set-up versus 2016 as mentioned below points to that (macro, monetary, technical analysis and Behavioural Finance):
- Start of interest easing cycle (2018) vs. interest hiking cycle (2015/16).
- Acceleration of the currency war. The US will now likely go into the lead again (in the “race to the bottom”), due to coming interest rate cuts.
- Confidence crisis (seen so far at the political establishment) has started to spill over to central banks.
- The fact that a normalization of interest rates isn’t possible has come to investors’ minds, but not yet into the tactical/strategic asset allocations. This process has now started and will be supportive for gold in the next few years.
Besides the macro and monetary environment, the bull case is further strengthened by the technical analysis (clear breakout of six-year bullish wedge formation) and Behavioural Finance. Unlike 2016, when gold mining ETFs had major inflows (contrarian bearish), gold mining ETFs did have substantial outflows this year!
We suggest that investors - who would like to benefit the most from the new gold bull market - should follow a classical “buy and hold strategy”. While today, the short-term performance pressure of the wealth management industry tends to lead to quick “profit taking”, the fact that our products returned 1’450% resp. about 500% (USD) in the last two gold bull markets does show how risky the “profit-taking-strategy” is likely to be.
The NESTOR Gold Fund has provided investors in previous bull markets with significant added value vs. active and passive peer products.
Especially after the initial under-performance at the start of major gold bull markets, our products offered a multiple of the index return. There is more and more evidence that the “sweet spot” of our investment style has started in July 2019 and should last at least one to two years.
We would like to thank you for your interest and are always happy to answer any specific questions or to provide more information on request.