As central banks congregate about monetary easing policies, analysts have looked at the bullish trend of gold as a sign that investors are looking for a safety net amid ongoing economic turbulence.
Jean-Marie Eveillard, one of the Gurus actively trading the most gold mining, proves this notion true. In his third quarter commentary, he brings up the Federal Reserve’s quantitative easing initiative, and the reasons his firm looks to gold to predict upcoming prospects. He says:
“We have managed our funds with what could be described as aggressive reflection and selective action… We continue to own gold as a potential hedge against extreme outcomes. Gold is a perpetual asset; it will likely last forever. Because of this, the price of gold embodies expectations about the future. As of this writing, the elevated gold price contains an element of expectation already of how weak the sovereign financial architecture is. At the margin we have added to gold mining stocks over the bullion given they embody less expectation.
“In a world where the monetary base is increasing in its abundance, we are steadfast in our commitment to investing in scarcity—scarcity need not only be embodied in our potential hedge gold but also companies that control hard to replicate market positions or reserves of supply constrained commodities and real assets. When we cannot find such scarcity in the business model or assets, we need the scarcity to be in the price with an unusually wide margin of safety.”
The Royce Funds, headed by Guru Chuck Royce, another active gold-mining stock trader and whose portfolio sector weightings is dominated by the industrials and basic materials sectors, shares the same outlook about maintaining a margin of safety during financial distress. Principal and portfolio manager, Francis Gannon, in a commentary titled Quantitative Easing Distorting Asset Prices? said:
“At Royce, we seek companies with solid, low-debt balance sheets and the ability to generate free cash.
We place a great deal of emphasis on managing risk…This is an important part of our ongoing analysis of a company's ‘margin of safety.’ If a company is carrying too much debt, it is likely to struggle (or fail) to meet the challenge of out-of-left-field occurrences, such as lawsuits and overseas currency crises."
Both investors own gold mining stocks such as Randgold Resources Ltd. (GOLD) which gained 0.53 percent year-to-date and Franco-Nevada Corp. (FNV) which gained 48.99 percent year-to-date.
GOLD data by GuruFocus.com
FNV data by GuruFocus.com
Exchange-traded funds especially share these positive year-end average annualized returns. iShares Gold Trust (IAU) has provided a 9.32 percent return year-to-date and Physical Swiss Gold Trust (SGOL) has delivered 9 percent year-to-date.
Despite a one-year surge, Reuters reports that bullion actually experienced losses in more recent months, such as October and November. U.S. gold dropped 0.4 percent at $1,707.80 per ounce since then. Spot gold prices fell 0.25 percent at $1,709.30 an ounce.
MSCI Global Gold Miners Fund (RING) has gone down 8.56 percent in the last three months. Similarly, SPDR Gold Shares (GLD) has delivered -3.25 percent in returns in its quarter-to-date data.
Gold prices have additionally dipped at market close today as the Federal Open Market Committee convened its two-day meeting about the Federal Reserve’s monetary policy.
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