8 Factors That Are Driving Gold Equities

1. Over the last 10 years, gold bullion has performed well in absolute terms…

Source: Bloomberg

2. …and in relative terms

Source: Oppenheimer &Co., Inc. Investment Strategy, Bloomberg’s total returns calculator, Standard and Poor’s, Credit Suisse, Barclays, MSCI, Bloomberg, and NAREIT.

3. Adding gold to a portfolio improves risk adjusted returns

Source: Bloomberg, World Gold Council, Time frame: 12/31/1974 – 12/31/2015. BAML = Bank Of America Merrill Lynch. For Illustrative purposes only.

4. The opportunity cost of gold vs government bonds is now near zero, and likely to fall

Source: Bloomberg.

5. The recent rally has the hallmarks of a trend…

Chart represents S&P/TSX Global Gold Index in $USD. Source: Bloomberg. As at May 29, 2016.

Current bear market has matched historical bear market precedents in both duration and magnitude and is bouncing off bottom of +35 year channel.

6. …supported by the historical recovery patterns of precious metal equities

Source: Bloomberg.

7. Senior producer valuations are very attractive…

Source: BMO Capital Markets, Bloomberg, as at April 8, 2016.

Producers have “right-sized” their businesses, but investor caution has resulted in Price-to-Cash Flow ratios that are at multi-year lows.

8. …and gold equities, which have historically outperformed gold bullion in gold bull markets, are at less than half their average, historical equity-to-bullion ratio

Source: Bloomberg, as at May 29, 2016.

Summary

From where we sit, at this point in the rally, gold equities are worth considering because:

  • Over the last 10 years gold bullion has performed well in absolute and relative terms.
  • The opportunity cost of investing in a non-income producing asset class has fallen to below zero.
  • The current gold bull market – driven by a global push to a negative interest rate policy, currency volatility, and a high level of cross-asset class correlation – has all the hallmarks of being in the early stages.
  • Senior producer valuations are very attractive because gold companies have reduced their operating costs and capital expenditures, while gold equity valuations are low relative to the price of gold – not typical in a gold bull market.
  • Gold remains a strong, non-correlated diversifier for traditional asset classes.

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