The gold price increased during the second quarter of 2019 against the backdrop of a weakening US dollar, more dovish communication from the Federal Reserve and increased geopo-litical tensions. What was interesting in this period—particu-larly in June—was the fact that many asset classes generally rose together: gold, equities, bonds and many commodities.
In our view, this was a strong sign of increased liquidity in the marketplace as a result of expectations that the Fed would ease monetary policy.
The price of gold bullion exceeded the $1,400/oz level and traded as high as $1,423.45/oz in June 2019,1 which is the highest level in the last six years. The gold price continued to be influenced by the same factors that have affected it for the last few years. The Fed did not raise rates in 2019, as was initially expected, but instead flagged the possibility of rate cuts due to weaker global growth prospects. This change in expectations for US monetary policy was the dominant factor that supported the price of gold and most other assets in June 2019. At the same time, increased tensions in the Persian Gulf and the ongoing trade dispute between the United States and China also affected the price of gold.
While investors in gold may find it gratifying to see the price of bullion rise after moving sideways for six years, we make no prediction about whether the recent uptrend will continue. Around the globe, there are many unresolved issues—including financial, monetary and political developments in Europe—that could create significant volatility in financial markets and in the short-term price of gold. As we saw in the 2008 crisis, even crit-ical events that could be favorable for gold over the medium- to long-term can lead to short-term volatility in its price. We would also emphasize that an environment where most asset classes go up together may not be sustainable and may reverse. This is especially true if the Federal Reserve decides for any reason to change its stance about easing monetary policy.
We invest in gold for a specific purpose: Rather than speculating on its price, we hold gold for its potential to enhance the resilience of an investment portfolio and defend against capital impairment in times of instability that can affect the returns from other assets. In addition to holding bullion, we seek to invest in resilient and long-duration gold stocks that can maintain their value even during adverse gold price reactions. We believe that, despite potential volatility in the price of gold, the strategic case for owning gold continues to improve as global debts and global growth concerns continue to rise.
Portfolio Review
First Eagle Gold Fund Class A Shares (without sales charge)* returned 11.75% in the second quarter of 2019. On a regional basis, the strongest contributions came from North America and emerging markets, but developed Europe detracted. In this period the price of gold rose 9.07% and the FTSE Gold Mines Index returned 17.03%.
The largest contributions to quarterly performance came from gold bullion, Detour Gold Corporation, Newmont Gold-corp Corporation, Barrick Gold Corporation and Novagold Resources, Inc.
The rise in the price of bullion was the strongest since the first quarter of 2016. Although many gold mining stocks outper-formed bullion in this period, bullion made the greatest contri-bution because it was the largest position in the portfolio.
Detour Gold (DGC, Financial) is a Canadian company that operates a single asset, the Detour Lake Gold Mine in Ontario. Under its new CEO the company reiterated its focus on operational consistency in the execution of its mine plan. The stock advanced because of the rise in the gold price.
Newmont’s acquisition of Goldcorp closed in April. The merged entity is the world’s largest gold producer with estimated attrib-utable gold production in 2019 of 7 million ounces (plus or minus 5%) at competitive all-in sustaining costs.
The largest detractors in the second quarter were Fresnillo PLC, Goldcorp Inc., Eldorado Gold Corporation, OceanaGold Corporation and Pan American Silver Corp Right.
Shares of Fresnillo (LSE:FRES, Financial), a Mexican precious metals company that operates one of the world’s oldest mining districts, came under pressure because of disappointing production results in the first quarter. Weakness in the price of silver also weighed on the stock. Despite the production challenges and perceived risk in Mexico, Fresnillo remains one of the highest-quality precious metals producers from an asset-quality and balance-sheet perspective.
Goldcorp, a global mining company headquartered in Canada, was acquired by Newmont on April 17, and its reported second quarter performance reflects just 17 days during which the gold price declined. By the time the gold price rebounded in May, Goldcorp shares were no longer trading.
Eldorado Gold (EGO, Financial) is a Canadian mid-tier gold mining company with assets and projects in Turkey, Canada, Greece, Brazil, Romania, and Serbia. Eldorado had good operational results from several of its mines, but unexpected delays in concentrates shipments from one of its mines depressed its quarterly earnings. The shares rallied towards the end of the quarter.
We appreciate your confidence and thank you for your support.
Sincerely,
First Eagle Investment (Trades, Portfolio) Management, LLC
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 commentary represents the opinion of the investment team as of June 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 purpose 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 views expressed herein may change at any time subsequent to the date of issue hereof. 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.
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