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-- Posted Tuesday, 25 May 2010 | | Source: GoldSeek.com
"We're seeing gold actually rise in all currencies. That seems to be a reflection of the concern and distrust for central bank authorities, political authorities and what's going in the world that we're living in," says Doug Groh, senior research analyst with the Tocqueville Gold Fund in this exclusive interview with The Gold Report. The fund is almost 10% bullion, which Groh says dampens the volatility of the fund's other holdings. He holds gold and thinks you should, too.
The Gold Report: Gold is trading above $1,200 as financial markets across the world retreat. In several currencies, gold is trading at historic highs. Gold investors are declaring that gold is the only safe haven. What's your view of the current situation?
Doug Groh: What we're seeing in the world is really quite dramatic, isn't it? I think people are beginning to recognize that there's a lot of uncertainty in the future for financial markets. The attraction that gold presents is that it is a hard asset. It's valued on the minute and on the second. There's been a lot of distrust in the marketplace regarding the paper that's been issued, whether that's equity paper or bonds or currency. I think investors are looking to something that really sustains and exhibits value on a moment-to-moment basis.
TGR: What do you think the near-term effect of the sovereign bailout of Greece is going to have on gold?
DG: From day to day, there is a lot of uncertainty as to what's going on with Greece and in Europe. We're seeing the euro correct. We're seeing the dollar strengthen, but I think what's really noteworthy is that gold is holding its own. In prior markets, you would typically see that when the dollar strengthens gold comes off. Now we're seeing gold actually rise in all currencies. That is a reflection of the concern and distrust for central bank and political authorities, and what's going in the world that we're living in. The markets are reflecting their concern about inflation. To resolve the Greece problem, its debt probably needs to be restructured if not go into default. That probably means a greater issuance of credit, which in the end is inflationary. Debasing the currency is what you're going to see. In that regard people are concerned and focused on maintaining and holding on to whatever value they can, and gold is becoming that much more attractive.
TGR: There is talk that Greece will no longer be allowed to use the euro. Is this crisis coming to the U.S. in a big way?
DG: We're learning and understanding that all global markets are very interconnected; contagion will probably affect us somehow, but to what degree and in what capacity? I really don't know. However, one has to think that international banks operating around the world are going to be affected.
TGR: How are investors getting exposure to gold?
DG: What we've seen over the last several years is investors seeking gold through ETFs. The gold ETF has done a fantastic thing for the gold market. It's made gold more accessible, not only to institutional investors, but also to the individual investor. As a result, more people are embracing and adding gold to their portfolio. It's been a good diversification position for investors. Gold's success over the past ten years has basically reinforced the notion that gold is a legitimate investment vehicle. In the past, I think investors thought of gold as something you go to only during times of distress or inflation or geopolitical concerns. And while that is likely to continue, gold has also demonstrated that it is a good diversifier among other portfolio holdings. The performance of gold over the last 10 years has really demonstrated that it should be an important component in portfolios.
TGR: About 9% of your $1.3-billion fund is physical gold. That's the largest holding in your fund. By comparison, the Sprott Gold and Precious Metals Fund doesn't list any physical gold among its top-10 holdings. Please expand on your strategy in holding so much actual bullion.
DG: We have about $11 million of gold, which makes up about 8%–9% of the fund. That's a position we've had for some time. Our average cost is about $450 an ounce for the gold we hold. We built up that position some time ago. As we were getting cash in-flows, we were deploying cash to bullion as we felt some of the equities were overpriced. That has worked out well. The position acts as a balance. The majority of our fund, 80%–85%, is gold mining equities. There is almost twice as much volatility in gold mining equities as in gold. The fact that we have bullion in the fund somewhat dampens that volatility. Bullion acts as a ballast, of sorts, which reduces the risk in terms of investing in the fund.
TGR: Have you noticed that happening over the last month or so?
DG: That was the case this past year. We've seen days when the gold price is up and sometimes the equities are down. We've actually had nice relative performance from that type of activity where sometimes we'll see the equities down but bullion up . There are days when gold seems to be the attraction and people are really looking for that direct exposure to gold bullion. It's been a nice balance to the fund, and has really added a lot of value in terms of relative performance.
TGR: What sets your fund apart?
DG: I think it's the smaller names that may not have as much public information out there. That's really where we focus. You could say that we have a small cap value bias concentrated in global gold mining equities. We focus on precious metal companies that are making discoveries and growing that way or that are expanding either their assets or production. Typically, those companies require a little bit more due diligence and fuller understanding. They are quite dynamic. It's really something that I think is not easily understood unless it's something you do on a regular basis. The gold mining sector is very information-intensive and it becomes imperative that, as an investor, one stays in the flow of information. That’s a full-time job for the all the companies we own and track.
TGR: In terms of your asset mix, you have roughly 10% bullion and the rest is gold equities. Investors may look at your fund and think they should employ a similar strategy. Is that a mix that regular investors should be looking at?
DG: I think that's a good approach. If you're looking at exposure to the gold market, I think it's appropriate and wise to have direct exposure to gold. In owning a gold mining equity you get optionality on the gold price. You get a higher level of risk return. As we discussed, direct exposure to gold bullion will allow one to have direct exposure to the gold price and yet owning gold mining equities, which are more volatile, allows one to gain exposure to pricing and asset leverage. A bullion position will dampen down volatility a little bit. Then, if you are exposing yourself to gold mining equities, I think it's appropriate to spread your risk across a number of names—in particular to different segments of the gold mining industry—those being explorers, developers and producers.
The explorers tend to be a little bit riskier but can offer some good upside as they add value through discovery. The developing companies that are growing tend to appreciate in value as they realize their growth objectives, but they do present some risk, since their growth is uncertain. Then, of course, there are the big producers who, to a large extent, really offer price optionality on gold.
TGR: It seems that gold companies are looking more frequently at copper-gold porphyry projects because of the boost they get from the copper. Are majors more likely to acquire projects that are copper-gold porphyry deposits now than straight gold deposits?
DG: I think there's been developing interest over the last year or so toward what's called copper-gold porphyries. The reason for that is that having a byproduct metal can help reduce the cost or generate greater revenues, which helps justify a project’s economics. That's certainly an important element. I think the other aspect is that clearly the copper price has been quite strong at over $3 a pound, and copper is not to be ignored. There's a lot of demand for copper. That's likely to continue. I also think—and this might be the key element that's not that well discussed—but typically and generally speaking, copper-gold porphyry deposits are large in scale and there's a lot of metal in them. As these major companies need to replace their resources, they're looking for a project that will provide them a long-life of output. Generally, it seems as though you're finding that in copper-gold porphyry style deposits; epithermal deposits can also have high volumes but maybe not quite as large and the same could be said about volcanic massive sulphide deposits or sediment hosted deposits.
TGR: Great. This has been very informative, Doug. Thanks so much for talking with us today.
Doug Groh has 25 years' investment experience. Before joining Tocqueville in 2003, he was Director of Investment Research at Grove Capital from 2001–2003. Between 1992–2001, as a senior sell-side analyst for JP Morgan and Merrill Lynch, he was recognized as a ranked analyst by Institutional Investor Magazine and The Wall Street Journal for his coverage of basic material stocks in the non-ferrous metals, chemicals and paper and packaging industries. He began his career as a mining analyst and worked as a precious metals portfolio manager at U.S. Global Investors and American Express Financial Advisors in the 1980s and early 1990s. He holds an MA in Energy & Mineral Resources from the University of Texas at Austin and a BS in Geology/Geophysics from the University of Wisconsin—Madison.
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-- Posted Tuesday, 25 May 2010 | Digg This Article | Source: GoldSeek.com
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