Market Overview
Range bound for much of the fourth quarter, the price of gold rose marginally higher in a late -December rally. Though the gold price finished 2019 below its September 4 peak of $1,552/ oz.,1 the near +18% increase during the year represented the largest annual gain since 2010,2 as geopolitical and macro-economic uncertainty continued to drive demand for certain perceived “safe havens” like gold even as risk assets climbed sharply higher.
Evidence of geopolitical influence on the gold price was ample in the fourth quarter. Weakness in the price of gold emerged in October as the rudiments of “phase one” of a tension-reducing trade deal between the United States and China were released. Investors returned to the metal in late December, however, as the US embassy in Baghdad was attacked by Iranian-backed militiamen, and the price of gold reached a new cyclical high above $1,574/oz.3 in early January as tensions between the US and Iran continued to escalate into the new year. We have seen many such geopolitical-driven spikes in the recent past—trig-gered, for example, by events in Syria, Ukraine and North Korea—though they did dissipate quickly when relative calm was restored.
Far more important to the price of gold is the direction of real interest rates, and the two assets demonstrated their traditional inverse relationship throughout 2019. The renewal of dovish policy by the US Federal Reserve in January pushed rates lower throughout the year, helping to support the gold price. The fourth quarter alone saw the Fed reintroduce Treasury purchases, at a rate of $60 billion per month, in an effort to provide extra liquidity to the repo market. The Fed also cut its benchmark rate by an additional 25 basis points in late October after two 25 basis point cuts in the third quarter; with economic data mixed of late, central bank rhetoric suggests a return to tightening is unlikely unless long- dormant inflation emerges. The European Central Bank, too, continued to expand its balance sheet in the fourth quarter and continued to implement the measures announced in September 2019 to boost its weak economy with lower benchmark interest rates and more quanti-tative easing.
We believe we are living in a period of heightened and mounting uncertainty. We see significant risks around the world on many levels— growth concerns, monetary volatility, political and geopolitical tensions. Investors may appear insouciant, but they have worries, and under these conditions we think more and more of them will discover the distinctive role gold may play as a potential counterweight to disruptions in the equity market.
At First Eagle, we are agnostic about the price of gold because we use it as a potential hedge rather than a vehicle for specula-tion. We believe we are prepared for both upward and down-ward movements in the gold price. We know that our posi-tions in gold bullion and what we view as high- quality gold stocks have enabled us to benefit in periods like 2019 when gold appreciated in value. We also know that the liquidity we maintain in our portfolio has enabled us to buy bullion and gold stocks when the gold price and/or gold stocks’ valuations have suggested an attractive opportunity. Because of the way we use gold, we believe in maintaining a resilient, long-term allocation to it, however volatile it may be on the upside or the downside in the short-term.
Portfolio Review
First Eagle Gold Fund A Shares (without sales charge)* returned 9.74% in the fourth quarter of 2019. In this period the price of gold rose 3.04% and the FTSE Gold Mines Index returned 8.59%.
Stocks that contributed most to fourth quarter performance were NovaGold Resources Inc., Newmont Goldcorp Corpo-ration, Detour Gold Corporation, B2Gold Corporation and Wheaton Precious Metals Corporation.
Shares of Canada-based NovaGold (NG, Financial) rose during the fourth quarter, as the company made good progress on its Donlin Gold project in Alaska. The project, in which NovaGold is a 50/50 partner in a joint venture with Barrick Gold, is a very large open-pit mine with an estimated 39 million ounces of high-grade gold resources and a mine life of 27-plus years.4 As part of the US, Alaska is a favorable jurisdiction for mining; Donlin’s location in a remote area of southwest Alaska, however, means that development will require significant investments in infra-structure. Construction has not begun, but the company is in the final stages of an updated development plan for this signifi-cant deposit.
Newmont (NEM, Financial), which is headquartered in Colorado, released encouraging outlooks for both 2020 and the longer term during the fourth quarter. In addition, Newmont announced three asset sales and a meaningful $1 billion share-buyback program to be completed over the next 12 months. The market viewed these news items positively. It’s worth noting that in early 2020, the company announced that it was dropping “Goldcorp” from its name and significantly increasing its quarterly dividend.
Detour Gold (TSX:DGC, Financial) shares rose during the quarter, helped along by the late November announcement that it would be acquired by fellow Canadian miner Kirkland Lake Gold in an all-stock transaction. Notably, the stock price of Kirkland dropped sharply on news of the acquisition, while Detour rose only modestly, suggesting initial limited market enthusiasm for the deal. Though still pending shareholder approval, the acquisition is expected to close in January 2020.
Stocks that detracted most from fourth quarter results were Newcrest Mining Limited, Industrias Peñoles SAB de CV, OceanaGold Corporation, Royal Gold, Inc. and Fresnillo PLC.
Newcrest (ASX:NCM, Financial) is a senior Australian producer that announced weaker-than-expected quarterly production at two of its mines due to planned (and preannounced) maintenance shutdowns. Future guidance from the company was unchanged, however.
Mexican mining group Peñoles (MEX:PE&OLES) reported third quarter earnings that fell short of analysts’ consensus, as profits were dragged down by weaker production of precious metals and higher production of base metals at Fresnillo, its most important subsidiary. Peñoles owns 75% of Fresnillo.5
Oceana Gold (ASX:OGC, Financial) is an intermediate-size international gold producer headquartered in Australia. In mid-October, the company reported soft third quarter production and the temporary suspension of mining operations at its Didipio mine in the Phil-ippines following action by the local government to block access to the mine site. It was in 19946 that Oceana received its license for the Didipio mine from the Philippine national government, and this 25-year license is now up for renewal. While Oceana remains confident that this renewal will occur soon, we do not presently know how the local government’s opposition to the mine will be resolved. Furthermore, Oceana Gold put its Waihi mine on care and maintenance as the mine transitions to the Martha Underground deposit.
We appreciate your confidence and thank you for your support.
Sincerely,
First Eagle Investment (Trades, Portfolio) Management, LLC
- Source: Bloomberg Spot Price.
- Source: Bloomberg.
- Source: Bloomberg
- Source: Company Report.
Source: Fresnillo 2018 Annual Report.
- Source: Company Report.
The performance data quoted herein represents past performance and does not guarantee future results. Market volatility can dramatically impact the fund’s short term performance. Current performance may be lower or higher than figures shown. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed may be worth more or less than their original cost. Past performance data through the most recent month end is available at www.feim.com or by calling 800.334.2143. The average annual returns for Class A Shares “with sales charge” of First Eagle Gold Fund give effect to the deduction of the maximum sales charge of 5.00%.
* The annual expense ratio is based on expenses incurred by the fund, as stated in the most recent prospectus.
S&P 500 Index is a widely recognized unmanaged index including a representative sample of 500 leading companies in leading sectors of the US economy and is not available for purchase.
The commentary represents the opinion of the First Eagle Gold Fund portfolio managers as of December 31, 2019, and is subject to change based on market and other conditions. The opinions expressed are not necessarily those of the entire firm. These materials are provided for informational purposes only. These opinions are not intended to be a forecast of future events, a guarantee of future results, or investment advice. Any statistics contained herein have been obtained from sources believed to be reliable, but the accuracy of this information cannot be guaranteed. The information provided is not to be construed as a recommendation or an offer to buy or sell or the solicitation of an offer to buy or sell any fund or security.
