Market Overview
For gold, the second quarter of 2021 was a tale of two markets. April and May saw weaker-than-expected economic growth, rising geopolitical tensions between the United States and both Russia and China, and mounting concerns about inflation. Real interest rates declined significantly, which prompted a sharp rally in the gold price, lifting it from $1685 an ounce on March 30 to $1908 on June 2.1
In June, the Fed released its latest “dot plot” of federal funds rate projections for the years ahead. Pointing to hikes in 2023, the projections were more hawkish than previous iterations or the market’s expectations, prompting a strong rally in the dollar. Historically, both higher interest rates and a stronger dollar have been associated with declines in the price of gold; true to form, the price of gold in June fell about 7% to $1770 an ounce—one of the steepest monthly declines in recent memory.2
All told, in the wake of both the rising and falling markets, the gold price was up 3.7% in the second quarter. The price of silver gained nearly twice as much in this period—7.0%— having gained a decided head start in April and May before also declining in June.3 The discrepancy between the two precious metals is not unusual, as silver historically has been more sensi-tive to inflationary pressures, such as those that emerged in the first two months of the quarter. Unlike gold, silver has major industrial uses (in computers and solar panels, for example), and its price tends to fluctuate with overall economic trends alongside base metals like copper and aluminum. The ongoing reopening of the economy following the Covid-induced recession has been strongly positive for the prices of silver and other industrial metals.
In the short-to-medium term, conflicting trends make this a tricky period for investors, many of whom expect a period of high economic growth bolstered by supportive fiscal policies. While the coronavirus has been subdued to a degree in some developed countries, it is still raging in poorer parts of the world, and it continues to mutate into new variants with the potential to be more deadly, more contagious or less susceptible to existing vaccines. Over a longer time-horizon, the global economy faces serious challenges: massive levels of sovereign debt, the ongoing debasement of fiat currencies, the threat of inflation, geopolitical tensions, and local, political and environmental crises that may drive populations across international borders in search of refuge. Given all these unknowable unknowns, the road ahead may well be bumpy.
Despite its short-term volatility, gold has had a long-term record as a potential hedge against a wide variety of adverse macroeco-nomic and market developments. For balance during turbu-lent times, many diversified portfolios at First Eagle maintain strategic allocations to gold—both bullion and in our view the resilient equities of high-quality miners, streamers and royalty companies.
Portfolio Review
Gold Fund A Shares (without sales charge*) posted a return of 4.33% in second quarter 2021. Both gold bullion and gold-related equities contributed to performance during the quarter. The Gold Fund outperformed the FTSE Gold Mines Index in the period.
Leading contributors in the First Eagle Gold Fund this quarter included gold bullion, Wheaton Precious Metals Corp, MAG Silver Corp, Newmont Corporation and Kirkland Lake Gold Ltd..
As discussed in the Market Overview, gold bullion posted impressive price gains in April and May. While the metal sold off in June, the magnitude of the early-quarter advance was enough to keep the price change well into positive territory for the period.
Wheaton Precious Metals (WPM, Financial), a Canadian precious metals streaming and royalty company, reported record sales for its most recent quarter, allowing it to increase its dividend for the third consecu-tive quarter. The surge also enabled the company to pay back its revolving credit facility, and, for the first time since 2012, it had net cash on its balance sheet.
Canadian silver development company MAG Silver (MAG, Financial) is one of only three development-stage miners we own in the portfolio. MAG is working in partnership with Fresnillo on developing the Juanicipio project in Mexico’s Zacatecas state, a rich source of global silver production. The project is expected to be commis-sioned in the fourth quarter. In the meantime, MAG is sending the ore extracted at Juanicipio to a neighboring mill operated by Fresnillo for processing, the proceeds from which have improved its financial position.
The leading detractors in the quarter were NovaGold Resources Inc., AngloGold Ashanti Limited, Fresnillo plc, Alamos Gold Inc. and Kinross Gold Corporation.
The stock of Novagold (NG, Financial)—one of only three development-stage miners we own—came under pressure from the downdraft in the price of gold during the quarter. In a joint venture with Barrick Gold, the company is developing a very large open-pit mine in Alaska with an estimated 39 million ounces of above-average-grade gold resources according to company reports. Though the mine is still several years away from producing, we remain upbeat on Novagold’s prospects given the size and grade of the Donlin mine, its long projected mine -life and favorable Alaskan jurisdiction, and its partnership with an experienced operator like Barrick.
The world’s third-largest gold producer, South Africa-based AngloGold (AU, Financial) maintains a diverse portfolio of projects in nine countries. After reporting disappointing earnings earlier in the second quarter, the company in May suffered a fatal accident at its Obuasi mine in Ghana due to a geotechnical event. Per company reports, underground mining activities remain volun-tarily suspended at Obuasi as AngloGold conducts an in-depth assessment of mine design, mine schedule and ground management plans. On a positive note, the company named a new permanent CEO, who will begin in September and may bring greater strategic clarity to the organization.
It reiterated its full-year guidance for both metals, however, suggesting weaker gold production and stronger silver production in the second half of the year, which disappointed markets.
We appreciate your confidence and thank you for your support.
Sincerely,
First Eagle Investment (Trades, Portfolio) Management
- Source: Bloomberg, data as of July 14, 2021.
- Source: Bloomberg; data as of July 14, 2021.
- Source: Bloomberg; data as of July 14, 2021.
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 princi-pal 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%.
Investors should consider investment objectives, risks, charges and expenses carefully before investing. The prospectus and summary prospectus contain this and other information about the Funds and may be obtained by visiting our website at www.feim.com or calling us at 800.334.2143. Please read our prospectus carefully before investing. Investments are not FDIC insured or bank guaranteed, and may lose value.
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