2020 was a great year for gold prices. How was it for Craton Capital and your Precious Metal Fund?
It was a year of two tales. During the first quarter, in February and March, when we were heading into that liquidity crash, that was quite a horrid experience for everyone participating in the market. But we recovered quite nicely from the low on 19 March and were able to build upon that momentum. When I look at the year, it was about 55/56% up for the Precious Metal Fund.
What do you look for when you invest in gold mining companies at the exploration stage?
We are not benchmark huggers. We look at interesting opportunities in the entire precious metal space, whether that’s gold, silver, and also along the platinum group metals, too. We try to find a balanced mix in the portfolio where we look at large gaps which are of great interest. We also consider development companies that we think will be able to bring the next interesting deposit into production. And exploration is also interesting to us, because the world has been starved of exploration for the last 10 to 12 years. There is now a huge drive towards finding new economic and sizeable deposits.
So, we try to find a good balance and diversify it across all continents. We don’t have a focus on a particular domicile, and that gives us a healthy mix to explore all possibilities and opportunities.
Exploration is also interesting to us, because the world has been starved of exploration for the last 10 to 12 years. There is now a huge drive towards finding new economic and sizeable deposits.
When you look at an exploration company, what aspects do you and your fund look for specifically?
Exploration is always a tricky one. As you know, there are far more failures than successes. To us at Craton Capital, the team behind the project is very important. You must have experienced people. Secondly, the location, is also very important because if you’re in a prospective camp that already has a few sizeable deposits, and there is a new possibility, obviously that will increase the probability of success. So, all things considered, team and location are probably the two key components that we look at.
Where are the more common locations you look to invest in?
There are interesting opportunities in South America, but the majority are probably in the U.S., Canada, Mexico, and Australia. There is interesting exploration in Africa as well, although it flies a bit under the radar, compared to the retail interest in North America and Australia.
In the past you’ve spoken about the distinction that needs to be made between investing in physical gold and investing in a gold mining company. Do you think investors always make this important distinction?
Some do, but most don’t. It’s very important to make a clear distinction between the two. Gold is not gold equities, and vice versa. Gold has very specific and unique attributes. First and foremost, it’s money. Gold is an alternative currency to any other currencies like the U.S. dollar, the euro, the yen, etc. And that has to be considered in any well diversified strategy. On the other hand, gold equities are normal equities, and they have to be compared with other sub-sectors in the equity space.
One then has to decide if the environment is right to either invest in gold or gold equities, or potentially both. Gold should be an anchor tenant in a diversified investment strategy at any point in time. With gold equities, it depends on the criteria used: if they are cheaply valued against the intrinsic value, cheaply valued against other sectors, or cheaply valued against the gold, silver, or platinum price. You can then mix that with other kinds of equities, like U.S. equities, NASDAQ, and European equities.
Gold as a key pillar in a diversified strategy has a low correlation, compared with other sectors, other equities, and other investment categories. If you add gold into the mix, it’s typically positive for your analysed returns. The higher the gold component is, let’s say between zero and 10%, if you’re at 10%, it adds at least half a percent on your analysed return. It also improves the sharp ratio. And in general, it reduces your general draw down. So, gold is a very healthy component.
Gold equities, on the other hand, are also very interesting because compared with other equities, they are very lowly correlated. This means if the general market is not doing too well, also gold being very lowly correlated, gold equities as well, they tend to do much better. So, it’s a very healthy diversification, and it also helps you to improve your returns.
The trend, in our view, is that gold, silver, and platinum, will do much better in 2021
Can you tell me a bit more about some of the key attributes for gold that you look for?
In our view and amongst most gold investors, gold has several key attributes. First and foremost, it is a store of value. It’s also a medium of exchange. You can literally exchange gold anywhere in the world, at any point in time. And it’s a source of liquidity. And I think that source of liquidity is very important to understand, because investors need to be aware that when there’s a crash in the market, there’s also going to be a sharp correction.
There’s a very simple reason for that. If you need to liquidate something quickly, 24/7, then you can access gold and sell it immediately. That’s often far more difficult with bonds, or certain equities where you might have to sell into a crash situation.
Looking at gold as a commodity, what’s on the horizon for 2021?
The trend, in our view, is that gold, silver, and platinum, will do much better in 2021. We have a very interesting setup, but on the other hand, we have unknowns such as how COVID-19 will impact the economy, and also the impact of investment behaviour by market participants.
We’re going to go into a scenario where we have lockdown after lockdown. We have central banks that expand their balance sheets to accommodate struggling economies, and also supply the market with liquidity. Then, on the other hand, we have fiscal policy that also comes into the mix, because central bankers have learned that the approach they had, with low interest rates and expanding balance sheets, hasn’t worked over the past 15 years, and it can be easily measured by the velocity of money, which is rock bottom, in the U.S., as well as in Europe and elsewhere.
And the trick is actually, how do we get the economy going? If we are able to get the pandemic under control, the process of restarting the economy can begin. And then the banks also have to come in and play their part by aggressively lending into the real economy. Plus, the U.S. will probably decide to have a $1.9 trillion stimulus, then more will probably follow.
So, all of a sudden, you have a situation where there is an enormous amount of potential stimulus in the system, potential bank lending in the system, and that could be quite an interesting mix once we go back to normality, meaning, you potentially have inflation in the system. It’s too early to tell if there’s already inflation there, because a lot of it might be also COVID-19-related with the supply chain not working properly. But it will be very interesting to see if there are first signs of inflation in the system. Real inflation will probably arrive in 2022.
I think gold has been in in a sideways correction since August of last year and it appears that a lot of investors have given up on gold and silver. We’ve had so much uncertainty in the system, and all that money on the side-lines from central banks or governments, is yet to arrive. When that actually comes, gold will do much better in an environment where we have economic growth and maybe inflation.
Recently, we saw a squeeze on silver. Do you think silver prices are going to follow the gold trend?
I think they will. I don’t know when silver is going to restart its upwards cycle again. Overall, we are in a sustainable, long-lasting upward cycle for precious metals, and commodities as well. But silver has the potential to outperform gold. Gold is different to silver. Silver has many attributes of an industrial metal. And gold as mentioned before, it’s a storage of value and a monetary asset. So, the real torque could be in silver.
