23 Apr 2020 | By Ned Naylor-Leyland

The irresistible glow of the gold miners

Gold miners have long been that awkward, unwelcome cousin at a family party, placed on the children’s table as far from the action as possible.

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And like that socially inept cousin, gold miners have found themselves firmly side-lined by active investors. Over the past 20 years, gold miners’ profit margins have been under pressure, and sustainable earnings growth AWOL. The sector has had brief moments in the sun but investors have been happy to shun the eccentric and convoluted valuation metrics and narrative that accompanies this area of the market.

Yet it is primed to become the next big story in financial markets. Gold miners are in the eye of a perfect storm. The operating environment looks far better than it has done in decades; margins are now set to increase in sustainable fashion as, along with collapsing energy (oil) inputs, gold/silver producer currencies such as the Australian dollar have fallen by 25-30% versus the US dollar.

Meanwhile, the long-only active equity investors who have ignored the sector for the past two decades have a clear lack of healthy alternatives over the coming year. For those who are mandated to maintain their long equity positions as the real economy craters and earnings sag; a string of rising quarterly earnings numbers (placed against consistently falling quarterly earnings in the broader economy) should become an irresistible, welcome and surprising shiny prize.


Greasing the wheels

The gold/oil ratio (the cost of an ounce of gold relative to a barrel or, rather, barrels of oil) has hit unprecedented levels of over 100:1, a whopping boon for energy-intensive gold miners. For decades this metric has chopped between 20 and 30:1. This shift, along with currency weakness, makes the case all the more compelling.

Yes, the underlying narrative of monetary debasement and structural risk makes the sector more attractive than before, but gold miners are also becoming attractive on their own merit. And for investors like us who are already invested in the sector, the potential for a major rotation in active equity portfolios, towards what has historically been an ignored component of equity indices, is a genuinely exciting development.

Gold miners are back at the party, back at the main table, and jostling for a seat next to the host. With a firm sector tailwind, genuine and sustainable earnings growth prospects, and a dearth of opportunity elsewhere, the sector is fully dolled-up as the belle of the 2020 ball.

And with around 80% of the Merian Gold & Silver Fund invested in gold and silver miners, that’s only good news for us.


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