For those investors spooked by fears of an escalating trade war between the US and China, unrest in Hong Kong, a burgeoning global debt mountain and the prospect of economic downturn, one of the very few choices is gold. Gold appears to have plenty of scope for further rises but what options do you have to invest in this glittering metal?
The one bright spot in a world suddenly full of increased political and economic tensions – and laden with investment risk – is gold, with the yellow metal fulfilling its centuries-old role as a “safe haven” investment that holds its value while financial assets fall.
Investors spooked by fears of an escalating trade war between the US and China, unrest in Hong Kong, a burgeoning global debt mountain and the prospect of economic downturn have very little in the way of options – with US$17 trillion worth of bonds around the world now offering “negative yield” (in other words, a guaranteed loss if held to maturity), the bond market is not a great option, so the choice is between the US dollar and gold.
These factors – added to increasing central bank buying – have helped to drive the price of gold 20% higher this year, to a six-year high of US$1,531 an ounce. And with none of these macro factors expected to be solved anytime soon, gold appears to have plenty of scope for further rises: last month, investment bank Citigroup posted a case for a rally that pushes gold prices 25% higher, which would push gold prices close to US$2,000 an ounce. That would be new territory: gold’s record high is US$1,917.90 an ounce, reached in August 2011.
For Australian investors, however, the US$ gold price is only half the story – there is the US$/A$ exchange rate to consider. In A$, the gold price is already at record levels: currently A$2,270 an ounce, gold has appreciated 26% so far this year.
Investors wanting to invest in gold have several options. The first is simply buying gold bullion, in the form of ingots (bars) or in coins. This is very easily done: the Perth Mint, for example, offers a service through which you can buy gold bars or coins, and either take delivery of your gold yourself, or have it stored securely at the Mint (which is backed by the WA government) under a custodial arrangement, for a storage fee. You can trade bullion through the Mint, using the gold specifically allocated to you, or “unallocated” gold. If you choose to take physical delivery, you will need to pay the freight and insurance costs, and be responsible for storing your gold somewhere secure. Many gold dealers will offer a storage service.
Gold has also been very effectively “securitised” on the Australian Securities Exchange (ASX). The ASX hosts three vehicles that let retail investors buy gold in its own right, and trade in gold as if they owned physical bullion.
The first of these exchange-traded fund products, Gold Bullion Securities (ASX code: GOLD) was launched in March 2003. Each GOLD security gives the investor ownership of one-tenth of an ounce of gold bullion, held in the London vaults of custodian bank HSBC Bank USA. GOLD securities can be sold at any time on the ASX, or (subject to certain conditions and fees) holders may redeem them at any time for cash or in exchange for gold bars. The price of a GOLD security is one-tenth of the Australian-dollar gold price. GOLD charges a management fee of 0.40% a year for storage and other costs.
The Perth Mint Gold Quoted Product, or PMG (ASX code: PMGOLD) was listed in 2003: it is a security (technically a warrant) that gives you the right to own one-hundredth of an ounce of gold. That right may be bought and sold on the stock exchange. The gold is held in Perth as bar or coin, and guaranteed by the West Australian government. PMGOLD’s management fee is 0.15% a year.
The third vehicle, the BetaShares Gold Bullion ETF Currency Hedged (ASX code: QAU), was launched in May 2011: this ETF is also backed by physical gold stored in London (in the vault owned by JPMorgan), but its difference is that it removes the currency risk by hedging the US$/A$ exchange rate to give a purer exposure to the gold price. The hedging costs lift the QAU management fee to 0.59% a year.
These stocks simply track the gold price closely, and may be bought or sold at any time on the ASX. There is normal brokerage on the purchase or sale.
The attraction of this type of investing is that the stocks are a clean and efficient way of “playing” the gold price: instead of buying into company-specific factors such as mine life, operating costs, resource security or gold-hedging activity – which can certainly complicate matters, in terms of corporate risk – the investor in GOLD, PMGOLD or QAU is only buying the gold price.
(There are also exchange-traded commodities (ETCs) listed on the ASX by ETF Securities, issuer of the GOLDs: in 2009, it launched ETCs over physical silver, platinum, palladium and a basket of the three, plus gold. The silver, platinum and palladium and basket ETCs have an MER of 50 basis points, reflecting the higher cost of storing the other metals, and no entry or exit fee. As with gold, the platinum and palladium ETCs give the right to own one-tenth of an ounce; the silver ETC covers an ounce.)
Two other ETFs on the ASX cover gold, but through investment in actual gold miners listed on global stock exchanges: the BetaShares Global Gold Miners ETF – Currency Hedged (ASX code: MNRS) and the VanEck Vectors Gold Miners ETF (ASX code: GDX)
The VanEck ETF tracks the price and yield performance of the New York Stock Exchange’s Arca Gold Miners Index: it has holdings in 44 major global gold mining companies, including major Australian miners such as Newcrest Mining and Evolution Mining. Its management fee is 0.53% a year. The BetaShares MNRS stock tracks the performance of the Nasdaq’s Global Gold Miners Index – excluding companies listed in Australia – on a currency-hedged basis: its management fee is 0.47% a year.
The other alternative is investing in gold through the gold miners and explorers listed on the ASX – of which there are plenty. Here, an investor definitely has the company risk mentioned above – but there are times when this can work to the investor’s favour.
At present, with the Australian gold price at record highs, many of the Australian-based miners are making very good money.
Here, the crucial metric is the average all-in-sustaining cost (AISC), which is a broad definition of a miner’s total cost of staying in business – not just the cash costs of the mining operation, but all of the add-ons, such as financing costs, royalty expenses and general corporate and administration costs. It is measured in dollars per ounce, and when subtracted from the average realised selling cost per ounce achieved in a given period, gives you the AISC margin per ounce – the crucial source of profitability.
These numbers are a moveable feast over reporting periods, as companies deal with changing ore-grades (the proportion of gold in the ore they mine) and volumes and mine conditions and all of the things that affect their mining operations. Some miners produce other commodities as well as gold – for example, Newcrest’s copper production – and this income can be “credited” to the cost of gold production.
Many of the ASX’s gold producers have enjoyed the gold price rally, and value is increasingly hard to find in the sector, but here is a summary of the main players, using the most recent reported AISC. Not surprisingly, most appear fairly fully valued, but stocks such as West African miners Resolute (RSG) and Perseus Mining (PRU) could have further room to rise – with Resolute, which could be poised to acquire another mine in Senegal, appearing the standout.
Evolution Mining (EVN, $5.18)
FY20 estimated yield: 2.1%, fully franked
Most recent reported AISC: A$924 an ounce, FY19
12-month total return: 98.8%
Analysts’ consensus price target: $4.20 (Thomson Reuters), $4.02 (FN Arena)
Newcrest Mining (NCM, $37.00)
FY20 estimated yield: 0.9%, fully franked
Most recent reported AISC: US$738 an ounce, FY19
12-month total return: 93.2%
Analysts’ consensus price target: $30.19 (Thomson Reuters), $26.84 (FN Arena)
Resolute Mining (RSG, $1.67)
FY20 estimated yield: 1.3%, unfranked
Most recent reported AISC: A$1,173 an ounce, half-year to June 2019
12-month total return: 32.9%
Analysts’ consensus price target: $2.00 (Thomson Reuters), $2.17 (FN Arena)
St Barbara (SBM, $3.22)
FY20 estimated yield: 3.1%, fully franked
Most recent reported AISC: A$1,080 an ounce, FY19
12-month total return: –15%
Analysts’ consensus price target: $3.25 (Thomson Reuters), $3.365 (FN Arena)
Regis Resources (RRL, $5.14)
FY20 estimated yield: 3.3%, fully franked
Most recent reported AISC: A$1,029 an ounce, FY19
12-month total return: 29.6%
Analysts’ consensus price target: $4.85 (Thomson Reuters), $4.75 (FN Arena)
Silver Lake Resources (SLR, $1.065)
FY20 estimated yield: nil
Most recent reported AISC: A$1,367 an ounce, FY19
12-month total return: 124.2%
Analysts’ consensus price target: 95 cents (Thomson Reuters)
Saracen Mineral Holdings (SAR, $3.64)
FY20 estimated yield: 1.1%, unfranked
Most recent reported AISC: A$1,030 an ounce, FY19
12-month total return: 96.3%
Analysts’ consensus price target: $3.53 (Thomson Reuters), $3.425 (FN Arena)
Northern Star (NST, $11.90)
FY20 estimated yield: 1.3%, fully franked
Most recent reported AISC: A$1,296 an ounce, FY19
12-month total return: 75.5%
Analysts’ consensus price target: $10.60 (Thomson Reuters), $9.883 (FN Arena)
Perseus Mining (PRU, 75 cents)
FY20 estimated yield: nil
Most recent reported AISC: US$960 an ounce, FY19
12-month total return: 125%
Analysts’ consensus price target: 85 cents (Thomson Reuters), 77.3 cents (FN Arena)
Dacian Gold (DCN, $1.115)
FY20 estimated yield: nil
Most recent reported AISC: company guidance is A$1,340–1,440 an ounce over FY2020-2024
12-month total return: –53.5%
Analysts’ consensus price target: $1.00 cents (Thomson Reuters), 85 cents (FN Arena)
Kirkland Lake Gold (KLA, $72.50)
FY19 (December) estimated yield: 0.2%, unfranked
Most recent reported AISC: US$638 an ounce, June 2019 quarter
12-month total return: 162.1%
Analysts’ consensus price target: $63.90 (Thomson Reuters), $64.00 (FN Arena)
Gold Road Resources (GOR, $1.31)
FY19 (December) estimated yield: nil
FY19 (December) AISC guidance: US$1,150-plus an ounce
12-month total return: 111%
Analysts’ consensus price target: $1.20 (Thomson Reuters), $1.40 (FN Arena)