"Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
It’s a quote often attributed to legendary investor Warren Buffett. Whether he said it or not is open to conjecture, but the Berkshire Hathaway boss is definitely not a fan of the precious metal.
One of Buffett's investing principles is that one should only invest in things that are useful and that serve some purpose. When it comes to gold, he says it “doesn't do anything but sit there and look at you”.
However, those Martians looking through their telescopes would have been even more perplexed recently. That is because Buffett has changed tack, acquiring a US$500m stake in mining company Barrick Gold in August 2020.
Is this the proof that gold is just too good ignore in these uncertain times?
Having risen 24 per cent in the first nine months of the year – gold is one of the very few success stories of 2020. In the third quarter the gold price briefly touched $2,000 per ounce, almost double its value five years earlier.
With the US dollar weakening until recently, and a drop in real yields - meaning investors could lose money on government bonds – the asset class has never been so popular.
The question is: how far can the rally go? This week’s Best in Class manager believes the adverse relationship between gold and real yields is well-established and recent central bank interventions have reinforced the case for holding gold and gold equities as long-term portfolio diversifiers.
Ninety One Global Gold fund manager George Cheveley is a metals and mining specialist.
He joined the firm in 2007 having started his career at British Steel Strip products in 1990. He started co-managing this fund in 2015, becoming sole manager two years ago.
Mr Cheveley says gold equities clearly provide positive leverage to the rising gold price; adding that gold companies are enjoying very high margins and cashflow.
Company management is also improving, while technology is reducing costs.
He also believes the pandemic will be beneficial for the commodity in the long-term, adding that investors will “look harder at exposure to sovereign debt and the solvency of indebted governments” further increasing the value of gold.
The fund’s philosophy is that investing in gold equities is better than investing in gold itself. In addition to positive leverage to the gold price, Mr Cheveley says many gold miners also pay a dividend and these pay-outs have been rising in recent years.
The process begins with a commodity scorecard, based on six fundamental elements: supply and demand; quarterly trade flow; cost curves; the shape of the forward curve; financial flows; and near term catalysts.
Stock ideas are then generated through a company screen, looking for those businesses earning a high return on capital with strong cash generation trading on a reasonable valuation.
Once an idea is identified, the team will undertake a full income statement, cashflow statement and balance sheet analysis.
A third of the fund can be invested in other metals, such as platinum, palladium, nickel or silver.
The final portfolio consists of around 25 holdings, around two-thirds of which are large-caps. In the past five years, the fund has returned an astounding 212.7 per cent to investors with an ongoing charge of 0.84 per cent.
The fund has a strong process emphasising the importance of high returns on capital – something which is supported by excellent returns. We also like the emphasis on sustainability built into all company models.
Naturally there will be volatility with commodities - but for those who want exposure to the precious metal via mining equities this truly is an excellent option.
Darius McDermott is managing director of FundCalibre
