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