You're listening to Strictly Business Podcast with Lindsay Williams. With me is George Cheveley, Portfolio Manager, Global Gold 91 in London. And George, you've just been to a conference. Before we get on to the case for gold or the case against gold, depending on how the conversation goes, I'd like to know about how the Denver Gold Gathering ranks when it comes to commodity conferences, because it's a single commodity conference, whereas you've got the mining endowment in Cape Town.
which covers all commodities, then you've got diggers and dealers in Australia. How influential is the one that you've just been to? No, this is a very long-running conference. I think we're over 30 years or near to that now. And it's always been run in Denver or Colorado Springs. And there's always been focused on gold. So it's and absolutely you get all the major gold companies attend. So it's always been an important annual gathering and it's well-timed. being sort of in September.
Okay, now the introduction to the piece that you kindly sent me says the following. Gold is at record highs, yet attendance at the biggest annual gold industry conference was well below average, and the mood was subdued, you say. This says something useful about the mindset in the gold sector, and what investors can expect from here. Very strange, isn't it? The gold being at record highs, and yet the attendance goes down from 1500 last year, I think it was, to 900 this year. Why is that?
Well, I think it's because gold equities particularly have been disappointing since they peaked in 2020. And investors, particularly generalist investors, have taken a view that either they're going to hold gold or they're not going to look at equities because actually their market caps are quite small and they don't figure really much in any indices anymore.
So... You know, as I sort of joked with some people there, the US generalists are probably stuck behind their desk trying to work out what Nvidia is going to do today. They haven't got time to look at the gold sector because it doesn't make much difference to the benchmark. Does this mean, George, that gold equities are underinvested?
In other words, people are saying, as you quite rightly say, you know, the AI boom is focusing people's attentions to other sectors and therefore gold is underinvested where the equities are. and therefore that may present an opportunity. I think it is, and I think it's one that they're focusing on other sectors, clearly. I think too, though, is the equities have underperformed or had underperformed from the peak in 2020 through to sort of early this year. And that was for very rational reasons.
They'd faced a big cost and margin squeeze, particularly fuel prices have gone up, particularly diesel prices. We'd seen labor very tight in many markets and input costs, explosive spares also rising rapidly. So, whilst gold prices are way higher than they were at their peak in 2020, the gold equities have only recently got back to that peak because of that cost squeeze. And so, I think people who did look at the sector said, well, why would I invest in the equities?
I can just hold gold and I get a better return. I think what's really interesting, though, and this conference summed it up, is I think we're seeing that change right now. And we're actually seeing the cost squeeze dissipate, in fact, go the other way. And I think that's what makes it very exciting. Yes, and it also means the margins for the gold companies are, I don't know if they're at record highs, but they're certainly elevated, George.
No, I mean, we've had a massive move in gold prices, basically from 2,000 to 2,700 or more today. And clearly, equities are leveraged that has a bigger effect on their margins because obviously, they have a cost base they have to overcome first. What is very interesting is actually if you look at the equities today, they're now slightly ahead of the gold price. They're up over 40% I think today as an average.
Actually, what's happened is they went down the first two months of this year, annual results came out, showed a continued cost squeeze last year, people were very disappointed. Since the end of February, which is when gold started moving, gold's up over 30%. The equities are up over 60%, which is what you would more normally expect in a rising gold price environment. So I think the equities are reconnecting to gold. And the reason that is, is the cost squeeze has finished.
And in fact, their largest cost is diesel. And guess what? Oil price is down and diesel refining margins have halved this year. So your cost of a litre of diesel is back to where it was in 21, if not earlier. Who's buying gold, George? Central banks are the biggest buyers of gold and have been since, well, 22, 23 and again this year. And you can pretty much put the start of that rise in central bank buying to the day the U.S. sanctioned Russia's dollar holdings after the invasion of Ukraine.
And at that point, you know, government said, do I want to add to my U.S. treasury holdings? Central banks, you know, kept a lot of assets in treasuries. They said, do I want to do that? at the risk that if I upset America, they could sanction me. Maybe I need to find another asset I can hold, which is dollar linked. Gold is not the only one, but it's one of those assets.
And that's when we've seen, you know, record central bank buying in 22, pretty much the same again in 23, first offer this year, similar rate as well. So, you know, that has been Why people's models which said, oh, you know, gold follows tipsy yields and, you know, they were rising and therefore gold should be going down didn't work for the last two years because it's been overridden by that central bank buying. Traditionally, do central banks hold on to it for quite a long time?
They're holding of gold, that is. So they're buying it at, say, 2200, 2300, which wasn't that long ago. And suddenly they see this return and suddenly they see they need to. bolster their reserves in other areas. Is it easy for them to sell it or do they not have the propensity to do so? It depends on the central bank. You see some that do trade and do sell and buy and are more active, but a lot of them tend to buy and hold.
And you've got to remember, I mean, China's been one of the large buyers. They publicly stopped buying again in May this year after the price had risen, having been a big buyer for 18 months. But You know, if you look at China's reserves in gold as a proportion of their total reserves, it's sort of five, maybe slightly higher now, five to 10%. That contrasts with the US, Germany, a lot of developed world countries who typically have around 70 to 80% of their reserves in gold.
So, you know, if China wants to back the renminbi, back its currency, it probably wants to hold and increase its gold holdings over time. The problem for China is they can't.
do it too fast they drive their price way too high they certainly they are not unlikely to be sellers though they they want to increase that percentage what about the gold companies themselves now let's talk to the supply side of the equation it must be very very tempting for the treasury department of a major gold producer to say come on now 2700 if i'd have told you it was going to be 2700 uh two years ago you would have bitten my arm off and uh started hedging are they
hedging We're seeing some activity in that space. Most people now aren't sort of just selling forward, which was typically what happened 20 years ago and led to the massive blowouts we saw in sort of mid-early 2000s where people had to issue equity to buy back their hedges because they're underwater. What now you typically see companies doing is selling calls above the gold price to buy puts below. So they call it zero cost or zero premium.
You don't pay out any money, but you essentially... you hedge yourself into a range. So if gold's 2,700, you might sell a call at 29 and buy a put at 25 or whatever matches it. And that means then obviously if gold goes below 2,500, you're protected. But if it goes to 2,900, you give up any more upside. But some will do that on proportion of their production just to remove some volatility going forward. You know, generally, that's people with higher cost production.
If you've got very low cost production, if you're operating, you know, $1,500 an ounce, and we're trading $2,700, you're not really worried if we drop $500. You're still making money. So it seems, you know, that insurance would arguably be rather expensive at this stage. Finally, in your piece, you say the following. Rumor has it that the Gold Forum will broaden its scope to mining generally. But don't... Don't take that as a sign, you say, that the gold sector is losing its shine.
As I say, I left Denver more optimistic than when I arrived. And you talk about upside surprises. So this thing, as far as I can tell from your tone, has still some legs, George. Yeah, I think so. And I particularly think from the equity side, because I think people underestimate their leverage to the gold price, particularly after the last few years where they haven't shown it because of cost squeezes. But, you know... Diesel, which I say is a major cost for most of the miners, has come down.
It's not flat. It's come down. Labor, particularly in Australia and North America, were very tight. And it wasn't just cost. It was actually availability. Particularly in Australia with the demise, shall we say, of the lithium industry short term and the nickel industry there. We've had a massive free up of skilled labor in Western Australia. And the gold miners will tell you they actually now can fully fill their positions because they've had. people moving from those other industries.
So, we've seen after three or four years of really tough conditions, we're seeing that easing just as price moves higher. And we're seeing it now in quarterly results. And I think we'll see it very much in annual results early next year or half yearly results is we're seeing that impact on cash flows, on profitability. And the most exciting thing out of the conference was you sat down with the major miners and they said, We've learned our lesson. We need to improve returns.
We're generating cash. We're generating good returns. We're not going to do anything to mess that up. We're just going to return cash to shareholders if need be. And we're going to be very conservative and just show that we can perform. And that to me is music to my ears. These are companies who are just like, we're just going to show you how profitable we are. We're not going to do anything silly in the meantime. And finally, how is 91 positioned?
to take advantage of what you've just described over the last few minutes? Well, so in the gold fund, obviously, we're fully invested in gold equities, well, gold and silver. And we've, if anything, added a bit more leverage to that and a bit more beta, which has worked over recent months as we've seen prices move. And obviously, those more leveraged stocks move. We're not going crazy. We're not filling it with juniors. That's not our way.
We like producing assets and we like companies that have good cash flow. And that's what we've been doing and tilting towards that. And then in our broader resources funds, we've been overweight gold equities and remain so for about 12 months and continue to see that as a positive. And there has been a positive contributor to that fund. Great chat. Thank you very much, George. George Cheveley is a portfolio manager, Global Gold at 91 in London.
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