Golden Prospect Precious Metal sees fall in mining stocks – Although precious metals had a good year in 2017, the NAV of Golden Prospect Precious Metals Limited (GPM) fell by 9.5% and the share price by 14.5%.
The share price performances of mining companies, particularly small caps, lagged precious metals. Gold and silver prices rose by 13% and 6% respectively. One of the biggest factors behind this performance is a lack of liquidity in small cap mining stocks where the investment managers find value, has been the rise in popularity of Exchange Traded Funds or ETFs. larger companies fared better. The investment manager pointed out that the rebalance of the Van Eck Junior Gold Miners ETF weighed heavily on the small cap end of the precious metal sector over the year. The shift in fund flows into passive strategies over the last few years has resulted in a greater influence from investment vehicles such as ETFs.
This has led to a growing valuation differential between smaller and large capitalised producers. The valuations of smaller cap miners continue to look relatively attractive, especially given their improved earnings.
The moves in the funds NAV were also exacerbated by volatile currency fluctuations. Following the Brexit announcement in June 2016 sterling declined 16% versus the USD over the year which significantly benefited the Fund NAV. However, this reversed in 2017 with sterling gaining 9% against the dollar, weighed on Fund returns and the headwind of sterling’s strengthening trend has continued in 2018. The investment manager believes underlying stock liquidity remains the key factor behind this relative valuation gap, as fund flows have increasingly rotated into passive strategies such as ETFs, which prioritise liquidity over valuation
Investment manager’s commentary
Gold remains an important portfolio diversifier and in this context geopolitical risks continue to exert an important influence on gold prices. Latterly these have been dominated by Trump trade tariffs, a shift from North Korea’s sabre rattling during 2017. This has caused some reversal in investor risk appetite in 2018 with funds flowing back from cyclical assets preferred in 2017 into safe haven gold and at the time of writing gold has gained approximately 3% versus a 7% decline for copper during 2018. Holdings of gold by physically backed ETFs showed healthy 7.4Moz additions over 2017 with recent trade risks providing further support in the current year. Tellingly, physical gold held by ETF’s have continued to climb and now exceed the level reached prior to Trump’s election testament to wider caution to his pro-US policy making which has seen considerable turnover in White House advisory staff. Another, less favoured outcome of Trump policy may be an increase in tax rates, most recently mooted in the technology sector which has been a significant driver of equity market performance. This may act as a drag to broader US equity market earnings growth and cause some rotation into safer assets given relatively extended equity market valuations.
GPM : Golden Prospect Precious Metals sees fall in mining stocks