THE BOTTOM – Are we there yet?
In our market comment last September, we made a reference to Chekhov’s Gun: “If you say in the first chapter that there is a rifle hanging on the wall, it must absolutely go off in the last act. If it is not going to be fired, it should not be hanging there.”
The shot has been fired, the US interest rate cycle has started. Contrary to market expectations, gold has strengthened since the lift-off and the Dollar index has drifted sideways. While oil’s collapse pushes markets, commodities and currencies into turmoil, gold appears to be in a bottoming out process from its 4 ½ year correction. It is a possibility that the bottom has been reached in December last year the day after the US rate increase announcement. Regardless of the possibility of a bottom in gold, miners continue to clean up shop. After four years of restructuring and cost cutting, miners deliver visible, tangible and impressive results. The miners are in a much healthier state than in 2011 when gold peaked, yet the sector trades at levels when the metal was priced around USD 260 per ounce! In contrast to 2001, a new and cost inflating investment cycle appears highly unlikely. Consequently miners will enter a new gold price period no longer as “concept stocks”. A lot of the producers are fit for purpose as free cash flow generating entities.
In the Craton Capital Precious Metals Fund, 23 companies are now in production, representing 84% of the Fund’s volume (including cash). The average All-In Sustaining Costs amount to USD 796 per ounce (vs. industry average of USD 900 per ounce). 11 of the holdings had net cash on their balance sheets at the end of September 2015. For 2016 we expect 18 companies to produce a positive Free Cash Flow at the current spot gold price.
To critics of gold saying it pays no interest, we reply: government bonds with negative yields currently amount to around 5.5 trillion US dollar or an estimated 23% of global GDP area! And it cannot be excluded that more central banks will introduce negative interest rates.