-- Published: Thursday, 10 July 2014 | Print | Disqus
Source: Brian Sylvester of The Gold Report
Chris Mancini, an analyst with the Gabelli Gold Fund, spends his days finding value in gold equities—and he thinks he's found a recipe for success. Take a long-term outlook, add excellent management, fold in a great project in a quality jurisdiction with low-cost minable ounces in the ground at a huge discount to the spot price—et voila! Mancini calls this "optionality" and in this interview with The Gold Report he says that equities with optionality will not only survive the downturn but also provide excellent leverage to an inevitable upward move in the gold price.
The Gold Report: Cash has flown out of gold funds and into non-gold equities during this bear run in gold. What's the current Gabelli Gold Fund pitch to investors?
Chris Mancini: Gold should be a long-term allocation to everyone's portfolio. Owning gold is an insurance policy against the malfunctioning of the world's monetary system. The current actions of the world's central banks are unprecedented. Any investor who is unsure of the ultimate outcome of these actions should have a larger percentage of his or her portfolio in gold.
We recommend that investors have a certain portion of that gold allocation in gold stocks. Gold stocks provide income, accretive growth and "optionality." That optionality is gold in the ground at a discount. Right now investors can buy gold in the ground, in some cases, at less than $100 per ounce ($100/oz) and if gold goes to $2,000/oz then they could see that optionality manifest itself in a big increase in the price of the stock.
TGR: So it's possible to have security and performance in the same fund?
CM: If you pick the right stocks and have that optionality and gold goes up, the performance of the fund will be really good. By the same token, if gold goes down and you own some of these stocks, the price of the fund will most likely go down. In owning a gold fund like ours investors are getting exposure to gold and leverage to a move in the gold price.
TGR: Gold witnessed modest safe-haven and inflation-hedge demand in June after U.S. Federal Reserve Chairman Janet Yellen said that low interest rates are here to stay. Should gold investors expect anything more than a temporary upward trend in gold prices?
CM: That depends on the expectation in the markets of where real interest rates are going. Yellen stated that interest rates would be lower for longer but that was coupled with data that showed that inflation in the United States could be accelerating. That shows that real interest rates might become more negative than they are now. And that means that holding cash is a money-losing proposition because cash is losing purchasing power. If interest rates become more negative, that will be positive for gold and it won't be a temporary phenomenon.
TGR: What's your price target for gold through the end of 2014?
CM: We don't have one. Our view is that the price of gold is going to be higher at the end of 2014 than it is now. And it's going to be higher in 2015 than it will be in 2014 and we're positioning the portfolio to take advantage of that.
TGR: What impact have redemptions from gold exchange-traded funds (ETFs) had on the gold price?
CM: Last year 900 tons came out of gold ETFs and it was a huge contributing factor to the price of gold declining by 27%. Total annual gold demand is roughly 4,200 tons so if the supply from ETFs goes to neutral then the supply/demand balance this year should shift in the other direction. This year we've seen a tiny negative outflow from ETFs, but they've been pretty flat. Inflows into ETFs would be a big positive for the price of gold.
TGR: How do the inflows and outflows in your fund compare with 2013?
CM: At the beginning of 2014 we had inflows into the fund, and then they flattened out. When we had the big one-day pop in the gold price in June when gold went up $44/oz, we actually had outflows from the fund. That might be telling us that we have some people who are playing gold for a quick bounce and aren't looking at gold from a long-term perspective.
TGR: A recent Gabelli Gold Fund report suggests that Russia may want to diversify its foreign exchange holdings and could look to gold.
CM: Russia has around $500 billion ($500B) of foreign exchange reserves in the form of U.S. dollar treasuries and euro denominated bonds, largely German, French and some other smaller European country bonds. If there is further geopolitical unrest in or around Russia and increased rhetoric from countries like the United States, Germany, and France meant to impede Russia from taking action in places like Ukraine, Russia might get the sense that the United States and other countries in NATO might impose financial sanctions on Russia.
If broad financial sanctions are placed on Russia, then there could be a question as to whether Russia would be repaid by the countries that they've lent money to. In a new Cold War scenario, you would think that Russia would want to diversify out of the bonds of those countries and into something else. What else is there? Gold is an answer. Gold is no one's liability.
TGR: Where is China in the gold demand picture?
CM: Chinese consumers are the largest buyers of gold in the world. That's related to their fear of holding their currency in the bank or holding it in their mattress. There's a significant amount of inflation in China, so real interest rates are negative. It behooves the Chinese to diversify out of cash, which is losing its purchasing power. Holding gold is a way to insure against inflation or some kind of issue with the Chinese banking system.
China has around $3.7 trillion of foreign currency reserves. The People's Bank of China also might want to diversify. If China were to diversify 10% of its foreign currency reserves, $370B, that would be a huge amount of gold to buy, or roughly 3.5 years of the world's total mined supply of gold.
TGR: A significantly higher gold price would float all boats. But until that happens, what's your method for picking gold stocks?
CM: We try to own the companies that can survive and even benefit from this downturn and then prosper in the upturn. We look for companies that have good assets, good management and a good valuation. Good assets alone should allow the companies to survive; their management teams should help them prosper. We're looking to buy these companies at reasonable prices.
TGR: What's one thing a gold investor should know about the current market?
CM: The best thing to keep in mind is that even though this market is extremely volatile, you're in it for the long term. It was very volatile to the downside last year; so far this year it's been volatile to the upside. Don't lose hope or exit on a quick run up. You're getting insurance at a relatively cheap price by owning gold and gold mining companies.
TGR: Buy and hold still works?
CM: Yes, if you have the stomach for it.
TGR: Thanks, Chris.
Chris Mancini is a research analyst for the Gabelli Gold Fund, specializing in precious metals mining companies. He has over 15 years of investment management experience, including research analyst positions at Satellite Asset Management and R6 Capital Management. Mancini earned a bachelor's degree in economics with honors from Boston College and is a holder of the CFA designation.
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-- Published: Thursday, 10 July 2014 | E-Mail | Print | Source: GoldSeek.com
