(Kitco News) – Unprecedented central bank action to pump stimulus into financial markets to support the global economy devastated by the COVID-19 pandemic pushed prices to all-time highs in August. Now one fund manager is expecting a new factor to drive prices back above $2,000 an ounce.
Steve Land, vice president and portfolio manager of Franklin Gold and Precious Metals Fund within the Franklin Equity Group, said that despite gold nearly 30% rally this year, the precious metal still has room to run higher. He added that he sees gold prices pushing back above $2,000 as market volatility starts to pick up.
“Gold may benefit from bouts of elevated market volatility and mounting concerns over the coronavirus’s economic impact as investors seek perceived safe-haven assets,” he said in a report published last week. “A classic feature of gold is its very low correlation with other asset classes, supporting increased interest in owning it as a portfolio diversification tool in uncertain markets.”
The comments come as U.S. equity markets saw their worst weekly performance since early-June. The Dow Jones Industrial Average lost 3% in a two-day selloff last week. The blue-chip index hit significant resistance at 29,000 points.
With gold prices expected to push higher, Land said that he recommends investors paying more attention to the equity mining space. He sees three factors to drive mining equities higher.
“In our view, peak gold prices present gold producers with opportunities to redefine themselves as a vital part of a diversified investment portfolio,” he said.
The first factor making the mining sector attractive is low costs compared to rising prices. Land noted that mining production costs have been relatively stable between 2013 and 2019. He added that he doesn’t expect costs to exceed $1,200 an ounce for most mining companies anytime soon, especially as energy costs remain subdued.
“Higher gold prices can flow straight to the bottom line,” he said. “In our view, the recent rally in gold prices should provide a significant lift in cash flow across the industry. Management teams look increasingly focused on turning higher gold prices into free cash flow that can be returned to shareholders via dividends or reinvested in high-return projects.”
The second factor to drive value for investors is increased merger and acquisition activity in the mining sector. Land said that with more cash on hand, mining companies will look to expand their production and market capitalization, which would make them more attractive to larger investment funds.
“Companies with multiple mining assets also help to diversify portfolio risk for generalist investors,” he said. “Additionally, in a world dominated by index funds, we believe there are tangible advantages to having a larger market capitalization and better trading liquidity.”
The third factor Land said he sees driving the gold prices is a further evolution in the physical market. More than a decade ago, the investment market was transformed as exchange-traded products gave investors direct access to gold. Land said he sees the potential for physical gold.
“Most of the gold items sold today are almost identical to those made 100 years ago. We believe more should be done to support the physical ownership of gold; new product introductions could represent a solid source of demand growth looking forward,” he said.
