Gold in 2013: Fund Managers Reveal Reasons for Optimism


The Gold Report's first-ever survey of fund managers who invest heavily in junior gold mining stocks reveals cautious optimism on the sector's performance in 2013. The historical performance of gold in the year following a U.S. presidential election, the devaluing of the U.S. dollar and current low valuations for gold miners all bode well for an upturn this year, but some doubts remain. Learn how professional investors decide which companies are worth investing millions of dollars in this year.

Five fund managers participated in the survey: Frank Holmes of U.S. Global Investors, Brian Ostroff of Windermere Capital, Steve Palmer of AlphaNorth Asset Management, Peter Vermeulen of Plethora Precious Metals Fund and Adrian Day of Adrian Day Asset Management.

One reason for optimism is the historical performance of gold and gold equities during and after a U.S. presidential election. Gold and gold mining stocks both fell significantly last year during the contest between President Barack Obama and former Massachusetts Gov. Mitt Romney. One fund managers believes that bodes well for a rebound for gold and gold stocks this year because historically the precious metal and gold equities have performed well in the year after an election. Others expressed the opinion that further devaluation of the U.S. dollar, which could result from the Federal Reserve's asset purchases and/or the failure of the president and Congress to reach a deal on spending cuts, will boost the prospects for gold generally and gold stocks in particular. In addition, the fund managers asserted that gold producers are very close to their historic valuation lows again. That, too, may signal the possibility of a rebound.

The Gold Report: On a scale of 1 to 10 with 10 being the best, how would you rate junior gold companies as an investment in 2013?

Frank Holmes: For producers increasing production, the relative rating is 10. For juniors with high grade (+8 grams per ton) plus a million ounces of resources, a 10 rating if assets are in a mining-friendly country or jurisdiction.

"Going back to 1985, the XAU historically has increased substantially in post-federal-election years, rising 23.4%, on average." –Frank Holmes

Gold miners tend to perform poorly in the year of a U.S. presidential election. Regardless of which party is in the White House and which party wants to take it back, going back to 1984, the Philadelphia Stock Exchange Gold and Silver Index (XAU) has declined an average of 18.4% in the year Americans are busy thinking about voting for a leader.

It's not the end of the world for gold and gold stocks. Take a look at what happens the year following a U.S. presidential election. Going back to 1985, the XAU historically has increased substantially in post-federal-election years, rising 23.4%, on average.

Brian Ostroff: As is always the case, selectivity is key when it comes to investing in junior gold companies. I believe 2013 will continue to be a tough year for the juniors as investors continue to realize that this is a tough space and not for the timid. The same head winds that were present in 2012 will persist in 2013 such as continued scrutiny, limited funding for the sector and moderate (at best) investor interest. This having been said, I believe the investment climate to be a 10 for investors who are knowledgeable about the space as every company's stock has suffered regardless of its own specific attributes. Many good companies have seen their stocks cut in half (or worse) as investors have dumped everything. With that, you have good companies trading well below where they should be and thus I believe that the opportunities to buy them cheap has never been better. . .again, selection is key!

Steve Palmer: 7.

Peter Vermeulen: I would say an 8, but stock selection is crucial. There are simply too many companies out there, with just a limited number of viable projects.

Adrian Day: It will be an increasingly selective market, so for some—and I do not mean just one or two that happen to have a discovery—it will be a 7 or 8, a very good year. For many, however, particularly those without cash, it will be a 1 or 2.

TGR: What makes gold producers such a good or bad investment this year compared with years past?

Frank Holmes: Focus on gold producers where management is large shareholders and are growing products and reserves on a per-share basis. Also, focus on companies with projects that have 1 million ounces with a high grade.

"Selectivity is key when it comes to investing in junior gold companies." –Brian Ostroff

Brian Ostroff: I continue to favor investment in the gold stocks over gold bullion; the stocks are trading at enormous discounts relative to the metal (not seen since 2008) when looking at the XAU index divided by spot gold. As companies, on average they trade at cheap multiples relative to the S&P 500, the prospects for their product—gold—still look favorable, they pay a decent dividend and, although there is cost inflation, at $1,700/ounce (oz) gold, these companies will continue to do well. I think we will see a relative outperformance in the stocks versus the metal in 2013. For those who like to own the metal because of the end-of-the-world scenario. . .bullets and canned tuna would be higher on my list.

Steve Palmer: Junior gold companies have declined substantially over the past two years. There are several reasons for this. Gold has underperformed most other commodities over this period. There has also been a general risk aversion to junior resource equities. I believe that given the current low valuations and negative sentiment toward the sector, the stage is set for a significant rally in 2013. Mergers and acquisitions, gold price appreciation and investors returning to the junior resource space will be the main drivers of the strong performance.

Peter Vermeulen: Gold producers have become very cheap over the past two years. We are looking at historic lows. At the same time a lot of smart people, like value-investor Seth Klarman of Boston-based private investment partnership Baupost Group, are pouring money into gold equities. Furthermore, companies went through a rationalization phase, as the markets punished them for costly acquisitions, less stringent project criteria and poor operational performance. The current valuations and poor sentiment will at some point provoke an upward response.

Adrian Day: The producers are very close to their historic valuation lows again, close to the lows of last spring and late 2008. Increasingly, the major miners have learned their lessons about the impact of bad capital allocation and overpaying for acquisitions.

TGR: How are you positioning your portfolio of small-cap gold exploration company stocks for next year and how is that different from last year at this time?

Frank Holmes: We are focusing on quality management with a proven track record in exploration and operations.

Brian Ostroff: As I mentioned before, the fact that every company/stock has been crushed certainly provides great opportunities for those who can tell fact from fiction. I would say that we have been more aggressive at the end of 2012 in looking at beaten up stories. We have also looked beyond gold. When I was interviewed by The Gold Report in November, I mentioned that I believed that China was turning and therefore some of the beaten-up industrial commodities (iron ore, coal, zinc, etc.) might be good for a bounce. As for allocation, because we are more hands-on with our investments than most funds, we generally carry fewer names and have large concentrations.

Steve Palmer: We typically invest less than 5% of the portfolio in any one company. Junior gold stocks are a small component of the portfolio, less than 10%. We have been focusing more on gold producing companies in recent months compared to a year ago where the portfolio had a higher weighting of gold explorers. We maintain a balanced portfolio where the resource component is typically not much more than 50%. Gold stocks are a component of the resource allocation.

Peter Vermeulen: Small-cap exploration companies need to have something special to be worth our money. The management team should have a proven track-record and skin in the game. The project should be a valid, fully funded exploration target with size potential. Basically they have to tick all of the boxes. This hasn't changed from 2012. Currently we have a long position in seven exploration companies in our gold equity fund that we feel are worth the risk, with a maximum of 4% in any one exploration stock.

Adrian Day: We favor exploration companies that have a business model to preserve cash and minimize dilution. We own 23 exploration companies, but we prefer to emphasize the handful we think have the best potential as well as the lowest risk, and are perfectly willing to put as much as 7–8% into one stock, and hold on even if it grows to 10–15%.

TGR: How high do you see gold prices going in 2013? We've read forecasts as high as $2,400/oz or even $2,700/oz? Do you think gold could flirt with $3,000/oz?

Frank Holmes: Gold's annual volatility is +/- 15%. Because gold is down one standard deviation over the rolling 12 months, we can expect a bounce of 15% to 20% this year.

Brian Ostroff: I am not big on fixating on a target per se but I do see gold going considerably higher. I think technically, the big test is $1,800/oz, where gold has been stopped dead three times. If we get above that, I don't think it will take much for it to move toward $2,000/oz. Beyond that will depend on investor sentiment, which, as we have seen historically, can get pretty jubilant and can take prices beyond any reasonable level. I continue to believe that this cycle won't end until we get some type of meteoric rise and blow off; think dot-com, only bigger.

"Given the current low valuations and negative sentiment toward the sector, the stage is set for a significant rally in 2013." –Steve Palmer

Steve Palmer: The goldbugs have been forecasting these types of prices for years. Gold has failed to break $2,000/oz despite all the major macro issues. Gold will likely continue to disappoint these forecasters. We have a positive outlook for gold at this point. We expect that gold will likely rally to $2,000/oz in 2013 but it is unlikely to sustain that level. Gold exchange-traded funds (ETFs) have attracted substantial investments in recent years under the belief that it is a hedge against negative macro events. The illusion that gold is some sort of store of value is often cited. The reality is that gold has been a poor investment over the long term. The retail investors who have bought into this theory will ultimately face disappointment as other asset classes will generate superior returns. At some point, these investors will realize that they are earning inferior returns holding gold ETFs. They will reallocate their capital and gold could go to $800–1,000/oz.

Peter Vermeulen: We think in scenarios. If a shock occurs and gold is reintroduced into the monetary system, we might see it go to $5,000/oz or even higher. The most probable scenario is further gold price consolidation. So gold will be investors' insurance and money can be made in gold equities. Watch for $1,500/oz on the downside. If that level doesn't hold, gold could drop to $1,200/oz in a matter of weeks with everyone bailing out of the sector. If that happens for whatever reason, it will probably provide the best entry point in history.

Adrian Day: We could flirt with $2,000/oz this coming year, so I'll say $2,015/oz as a high. As for the low, I think we saw the low of this move back in the summer, at $1,550/oz; I'd be surprised to see anything much lower than $1,600/oz in 2013.

TGR: What other indicators or catalysts for change will you be paying attention to in 2013?

Frank Holmes: Further government policies to devalue the purchasing power of the dollar (fear trade) and demand from Asian consumers (love trade) should create support for gold. Rising GDP growth in Asia is bullish for gold.

Brian Ostroff: PRINT BABY PRINT!! As long as governments believe that our global economic problems can be solved by printing and devaluing their currencies, there will continue to be an upward bias in gold, which can't be printed. Uncertainty around the ability of governments to govern—the fiscal cliff debacle, for example—will also lead investors to the comfort of gold. Negative real rates should also persist and be bullish for gold as well. I think the sleeper will be China reemerging, which we have already begun to see, as well as some other emerging economies like Brazil and Russia.

Steve Palmer: The U.S. dollar exchange rate is a major driver for the price of gold. Strength in the U.S. dollar is negatively correlated with the gold price. This correlation is very strong, so we will be monitoring the outlook for the U.S. dollar.

Peter Vermeulen: This global economic crisis demands exceptional measures. Decision makers, politicians and central bankers are trying to work toward a solution, but are also leading us into uncharted territory. And that, in turn, provides a lot of reasons to hold gold.

Adrian Day: For gold, other indicators include signs of continued buying by the smaller central banks (or otherwise), as well as signs of a recovery in Indian buying and a resumption of acquisitions by seniors of juniors or specific projects. After the flurry of write downs in 2012, there may be some caution for a while. For junior gold stocks, indicators include difficulties or inability to finance and forced bargain sales, or even, for those without an asset worth buying, going out of business.

Frank Holmes is CEO and chief investment officer at U.S. Global Investors Inc., which manages a diversified family of mutual funds and hedge funds specializing in natural resources, emerging markets and infrastructure. The company's funds have earned many awards and honors during Holmes' tenure, including more than two dozen Lipper Fund Awards and certificates. He is also an adviser to the International Crisis Group, which works to resolve global conflict, and the William J. Clinton Foundation on sustainable development in nations with resource-based economies. Holmes co-authored The Goldwatcher: Demystifying Gold Investing (2008). Holmes is a former president and chairman of the Toronto Society of the Investment Dealers Association, and he served on the Toronto Stock Exchange's Listing Committee. A regular contributor to investor-education websites and a much-sought-after keynote speaker at national and international investment conferences, he is also a regular commentator on the financial television networks and has been profiled by Fortune, Barron's, The Financial Times and other publications.

Brian Ostroff is a managing director at Windermere Capital, where he focuses on the junior and mid-tier mining sectors. He brings over 25 years of small-cap mining expertise to the table, having served at RBC Dominion Securities and as a managing partner at Goodrich Capital, an M&A advisory firm. Prior to joining Windermere Capital in 2009, Ostroff spent four years as an independent proprietary trader.

Steve Palmer is a founding partner, president and chief investment officer of AlphaNorth Asset Management and currently manages the AlphaNorth Partners Fund, AlphaNorth Growth Fund and AlphaNorth Flow-Through LPs. Prior to founding AlphaNorth in 2007, Palmer was employed as vice president at one of the world's largest financial institutions, where he managed equity assets of approximately CA$350M. Palmer managed a pooled fund, which focused on Canadian small-capitalization companies, from its inception to August 2007, achieving returns that were ranked No. 1 in performance by a major fund ranking service in its small-cap, pooled-fund category. He also managed a large-cap fund, which ranked in the first quartile of performance among other Canadian equity pooled funds. Palmer earned a bachelor's degree in economics from the University of Western Ontario and is a Chartered Financial Analyst.

Peter Vermeulen is a managing partner at Plethora Precious Metals Fund Management. The fund focuses on emerging gold and silver producers. Prior to founding the fund in August 2012, Vermeulen was the editor of The Gold Capitalist, a successful newsletter on gold and silver companies. From 2009 to 2012, Vermeulen was an analyst with a private closed-end investment company where he was responsible for investments in natural resources companies. He holds a Master of Economics degree from the University of Groningen in The Netherlands.

Adrian Day, London born and a graduate of the London School of Economics, heads the eponymous money management firm Adrian Day Asset Management (; 410-224-2037), where he manages discretionary accounts in both global and resource areas. His latest book is Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks.

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