WEBVTT 1 00:00:00.372 --> 00:00:04.536 You're listening to Strictly Business Podcast with Lindsay Williams. 2 00:00:05.516 --> 00:00:10.080 With me is George Cheveley, Portfolio Manager, Global Gold 91 in London. 3 00:00:10.581 --> 00:00:12.883 And George, you've just been to a conference. 4 00:00:12.923 --> 00:00:17.626 Before we get on to the case for gold or the case against gold, depending on how 5 00:00:17.626 --> 00:00:19.626 the conversation goes, 6 00:00:19.626 --> 00:00:25.193 I'd like to know about how the Denver Gold Gathering ranks when it comes to commodity 7 00:00:25.193 --> 00:00:27.193 conferences, 8 00:00:27.193 --> 00:00:29.176 because it's a single commodity conference, whereas you've got the mining 9 00:00:29.176 --> 00:00:31.176 endowment in Cape Town. 10 00:00:31.176 --> 00:00:33.078 which covers all commodities, then you've got diggers and dealers in Australia. 11 00:00:33.458 --> 00:00:35.760 How influential is the one that you've just been to? 12 00:00:36.500 --> 00:00:39.522 No, this is a very long-running conference. 13 00:00:39.542 --> 00:00:42.123 I think we're over 30 years or near to that now. 14 00:00:43.124 --> 00:00:46.725 And it's always been run in Denver or Colorado Springs. 15 00:00:47.066 --> 00:00:48.747 And there's always been focused on gold. 16 00:00:49.807 --> 00:00:54.630 So it's and absolutely you get all the major gold companies attend. 17 00:00:54.770 --> 00:00:58.752 So it's always been an important annual gathering and it's well-timed. 18 00:00:58.892 --> 00:01:00.133 being sort of in September. 19 00:01:00.573 --> 00:01:04.314 Okay, now the introduction to the piece that you kindly sent me says the 20 00:01:04.314 --> 00:01:04.474 following. 21 00:01:04.815 --> 00:01:11.638 Gold is at record highs, yet attendance at the biggest annual gold industry 22 00:01:11.638 --> 00:01:13.638 conference was well below average, and the mood was subdued, 23 00:01:13.638 --> 00:01:15.638 you say. 24 00:01:15.638 --> 00:01:17.760 This says something useful about the mindset in the gold sector, and what 25 00:01:17.760 --> 00:01:19.760 investors can expect from here. 26 00:01:19.760 --> 00:01:21.760 Very strange, isn't it? 27 00:01:21.760 --> 00:01:25.584 The gold being at record highs, and yet the attendance goes down from 1500 last 28 00:01:25.584 --> 00:01:27.584 year, I think it was, to 900 this year. 29 00:01:27.584 --> 00:01:29.584 Why is that? 30 00:01:29.584 --> 00:01:33.831 Well, I think it's because gold equities particularly have been disappointing since 31 00:01:33.871 --> 00:01:35.492 they peaked in 2020. 32 00:01:36.872 --> 00:01:40.394 And investors, particularly generalist investors, 33 00:01:40.974 --> 00:01:47.777 have taken a view that either they're going to hold gold or they're not going to 34 00:01:47.777 --> 00:01:49.777 look at equities because 35 00:01:49.777 --> 00:01:53.580 actually their market caps are quite small and they don't figure really much in any 36 00:01:53.580 --> 00:01:55.580 indices anymore. 37 00:01:55.580 --> 00:01:57.580 So... 38 00:01:57.580 --> 00:02:01.638 You know, as I sort of joked with some people there, the US generalists are 39 00:02:01.638 --> 00:02:03.638 probably stuck behind their desk trying to work out what 40 00:02:03.638 --> 00:02:05.638 Nvidia is going to do today. 41 00:02:05.638 --> 00:02:07.983 They haven't got time to look at the gold sector because it doesn't make much 42 00:02:07.983 --> 00:02:09.983 difference to the benchmark. 43 00:02:09.983 --> 00:02:12.707 Does this mean, George, that gold equities are underinvested? 44 00:02:12.747 --> 00:02:15.909 In other words, people are saying, as you quite rightly say, you know, 45 00:02:16.169 --> 00:02:23.055 the AI boom is focusing people's attentions to other sectors and therefore 46 00:02:23.055 --> 00:02:25.055 gold is underinvested 47 00:02:25.055 --> 00:02:27.055 where the equities are. 48 00:02:27.055 --> 00:02:29.055 and therefore that may present an opportunity. 49 00:02:29.055 --> 00:02:31.625 I think it is, and I think it's one that they're focusing on other sectors, 50 00:02:31.625 --> 00:02:33.625 clearly. 51 00:02:33.625 --> 00:02:35.625 I think too, though, 52 00:02:35.625 --> 00:02:39.651 is the equities have underperformed or had underperformed from the peak in 2020 53 00:02:40.011 --> 00:02:41.932 through to sort of early this year. 54 00:02:42.913 --> 00:02:44.894 And that was for very rational reasons. 55 00:02:44.934 --> 00:02:51.079 They'd faced a big cost and margin squeeze, particularly fuel prices have 56 00:02:51.079 --> 00:02:51.298 gone up, 57 00:02:51.298 --> 00:02:52.700 particularly diesel prices. 58 00:02:53.660 --> 00:03:00.466 We'd seen labor very tight in many markets and input costs, explosive spares also 59 00:03:00.466 --> 00:03:02.466 rising rapidly. 60 00:03:02.466 --> 00:03:05.710 So, whilst gold prices are way higher than they were at their peak in 2020, 61 00:03:06.210 --> 00:03:12.034 the gold equities have only recently got back to that peak because of that cost 62 00:03:12.034 --> 00:03:12.094 squeeze. 63 00:03:12.094 --> 00:03:16.398 And so, I think people who did look at the sector said, well, why would I invest in 64 00:03:16.398 --> 00:03:16.517 the equities? 65 00:03:16.517 --> 00:03:19.280 I can just hold gold and I get a better return. 66 00:03:20.064 --> 00:03:26.227 I think what's really interesting, though, and this conference summed it up, is I 67 00:03:26.227 --> 00:03:28.227 think we're seeing that change right now. 68 00:03:28.227 --> 00:03:30.090 And we're actually seeing the cost squeeze dissipate, in fact, go the other way. 69 00:03:30.750 --> 00:03:32.671 And I think that's what makes it very exciting. 70 00:03:33.151 --> 00:03:38.935 Yes, and it also means the margins for the gold companies are, I don't know if 71 00:03:38.935 --> 00:03:40.935 they're at record highs, but they're certainly elevated, George. 72 00:03:40.935 --> 00:03:44.338 No, I mean, we've had a massive move in gold prices, 73 00:03:44.398 --> 00:03:48.120 basically from 2,000 to 2,700 or more today. 74 00:03:49.116 --> 00:03:49.816 And clearly, 75 00:03:50.957 --> 00:03:56.138 equities are leveraged that has a bigger effect on their margins because obviously, 76 00:03:56.398 --> 00:03:59.739 they have a cost base they have to overcome first. 77 00:04:00.659 --> 00:04:06.061 What is very interesting is actually if you look at the equities today, they're 78 00:04:06.061 --> 00:04:08.061 now slightly ahead of the gold price. 79 00:04:08.061 --> 00:04:10.482 They're up over 40% I think today as an average. 80 00:04:11.702 --> 00:04:17.364 Actually, what's happened is they went down the first two months of this year, 81 00:04:17.364 --> 00:04:19.364 annual results came out, showed a 82 00:04:19.364 --> 00:04:20.666 continued cost squeeze last year, people were very disappointed. 83 00:04:21.187 --> 00:04:25.950 Since the end of February, which is when gold started moving, gold's up over 30%. 84 00:04:25.990 --> 00:04:32.114 The equities are up over 60%, which is what you would more normally expect in a 85 00:04:32.114 --> 00:04:34.114 rising gold price environment. 86 00:04:34.114 --> 00:04:35.877 So I think the equities are reconnecting to gold. 87 00:04:36.117 --> 00:04:39.019 And the reason that is, is the cost squeeze has finished. 88 00:04:39.399 --> 00:04:41.620 And in fact, their largest cost is diesel. 89 00:04:41.781 --> 00:04:42.481 And guess what? 90 00:04:42.781 --> 00:04:46.724 Oil price is down and diesel refining margins have halved this year. 91 00:04:47.148 --> 00:04:51.353 So your cost of a litre of diesel is back to where it was in 21, if not earlier. 92 00:04:51.614 --> 00:04:52.615 Who's buying gold, George? 93 00:04:53.159 --> 00:04:59.403 Central banks are the biggest buyers of gold and have been since, well, 22, 23 and 94 00:04:59.403 --> 00:05:01.403 again this year. 95 00:05:01.403 --> 00:05:05.866 And you can pretty much put the start of that rise in central bank buying to the 96 00:05:05.866 --> 00:05:07.866 day the U.S. 97 00:05:07.866 --> 00:05:09.789 sanctioned Russia's dollar holdings after the invasion of Ukraine. 98 00:05:10.349 --> 00:05:14.852 And at that point, you know, government said, do I want to add to my U.S. 99 00:05:14.912 --> 00:05:15.832 treasury holdings? 100 00:05:15.892 --> 00:05:19.194 Central banks, you know, kept a lot of assets in treasuries. 101 00:05:19.234 --> 00:05:20.575 They said, do I want to do that? 102 00:05:22.084 --> 00:05:25.527 at the risk that if I upset America, they could sanction me. 103 00:05:25.988 --> 00:05:29.652 Maybe I need to find another asset I can hold, which is dollar linked. 104 00:05:30.172 --> 00:05:32.875 Gold is not the only one, but it's one of those assets. 105 00:05:33.676 --> 00:05:40.222 And that's when we've seen, you know, record central bank buying in 22, pretty 106 00:05:40.222 --> 00:05:42.222 much the same again in 23, 107 00:05:42.222 --> 00:05:42.625 first offer this year, similar rate as well. 108 00:05:42.785 --> 00:05:47.872 So, you know, that has been Why people's models which said, oh, you know, 109 00:05:47.992 --> 00:05:50.573 gold follows tipsy yields and, you know, 110 00:05:50.673 --> 00:05:57.455 they were rising and therefore gold should be going down didn't work for the last two 111 00:05:57.455 --> 00:05:59.455 years because it's been overridden by that central 112 00:05:59.455 --> 00:06:01.455 bank buying. 113 00:06:01.455 --> 00:06:01.496 Traditionally, do central banks hold on to it for quite a long time? 114 00:06:01.896 --> 00:06:03.036 They're holding of gold, that is. 115 00:06:03.056 --> 00:06:08.838 So they're buying it at, say, 2200, 2300, which wasn't that long ago. 116 00:06:09.338 --> 00:06:12.899 And suddenly they see this return and suddenly they see they need to. 117 00:06:13.119 --> 00:06:15.080 bolster their reserves in other areas. 118 00:06:15.721 --> 00:06:19.444 Is it easy for them to sell it or do they not have the propensity to do so? 119 00:06:20.164 --> 00:06:21.305 It depends on the central bank. 120 00:06:21.345 --> 00:06:28.050 You see some that do trade and do sell and buy and are more active, but a lot of them 121 00:06:28.050 --> 00:06:30.050 tend to buy and hold. 122 00:06:30.050 --> 00:06:31.132 And you've got to remember, I mean, China's been one of the large buyers. 123 00:06:32.053 --> 00:06:38.518 They publicly stopped buying again in May this year after the price had risen, 124 00:06:38.518 --> 00:06:40.518 having been a big buyer for 18 months. 125 00:06:40.518 --> 00:06:45.420 But You know, if you look at China's reserves in gold as a proportion of their 126 00:06:45.420 --> 00:06:47.420 total reserves, 127 00:06:47.420 --> 00:06:49.303 it's sort of five, maybe slightly higher now, five to 10%. 128 00:06:49.663 --> 00:06:55.849 That contrasts with the US, Germany, a lot of developed world countries who typically 129 00:06:55.849 --> 00:06:57.849 have around 70 to 80% of their 130 00:06:57.849 --> 00:06:59.849 reserves in gold. 131 00:06:59.849 --> 00:07:02.174 So, you know, if China wants to back the renminbi, back its currency, 132 00:07:02.735 --> 00:07:06.098 it probably wants to hold and increase its gold holdings over time. 133 00:07:06.118 --> 00:07:07.459 The problem for China is they can't. 134 00:07:07.479 --> 00:07:14.444 do it too fast they drive their price way too high they certainly they are not 135 00:07:14.444 --> 00:07:16.444 unlikely to be sellers though they 136 00:07:16.444 --> 00:07:21.368 they want to increase that percentage what about the gold companies themselves now 137 00:07:21.368 --> 00:07:23.368 let's talk to the supply side of the equation 138 00:07:23.368 --> 00:07:28.973 it must be very very tempting for the treasury department of a major gold 139 00:07:28.973 --> 00:07:30.973 producer to say come on now 2700 if 140 00:07:30.973 --> 00:07:35.638 i'd have told you it was going to be 2700 uh two years ago you would have bitten my 141 00:07:35.638 --> 00:07:37.638 arm off and uh started hedging are they 142 00:07:37.638 --> 00:07:39.980 hedging We're seeing some activity in that space. 143 00:07:40.140 --> 00:07:43.481 Most people now aren't sort of just selling forward, 144 00:07:43.541 --> 00:07:49.742 which was typically what happened 20 years ago and led to the massive blowouts we saw 145 00:07:49.742 --> 00:07:51.742 in sort of mid-early 146 00:07:51.742 --> 00:07:54.083 2000s where people had to issue equity to buy back their hedges because they're 147 00:07:54.083 --> 00:07:56.083 underwater. 148 00:07:56.083 --> 00:08:01.465 What now you typically see companies doing is selling calls above the gold price to 149 00:08:01.465 --> 00:08:03.465 buy puts below. 150 00:08:03.465 --> 00:08:04.566 So they call it zero cost or zero premium. 151 00:08:04.606 --> 00:08:06.947 You don't pay out any money, but you essentially... 152 00:08:07.547 --> 00:08:09.168 you hedge yourself into a range. 153 00:08:09.228 --> 00:08:11.029 So if gold's 2,700, 154 00:08:11.049 --> 00:08:16.812 you might sell a call at 29 and buy a put at 25 or whatever matches it. 155 00:08:17.332 --> 00:08:21.054 And that means then obviously if gold goes below 2,500, you're protected. 156 00:08:21.414 --> 00:08:24.516 But if it goes to 2,900, you give up any more upside. 157 00:08:24.856 --> 00:08:30.398 But some will do that on proportion of their production just to remove some 158 00:08:30.398 --> 00:08:32.398 volatility going forward. 159 00:08:32.398 --> 00:08:34.437 You know, generally, that's people with higher cost production. 160 00:08:34.457 --> 00:08:39.662 If you've got very low cost production, if you're operating, you know, $1,500 an 161 00:08:39.662 --> 00:08:39.721 ounce, 162 00:08:40.363 --> 00:08:44.206 and we're trading $2,700, you're not really worried if we drop $500. 163 00:08:44.206 --> 00:08:45.067 You're still making money. 164 00:08:45.347 --> 00:08:50.671 So it seems, you know, that insurance would arguably be rather expensive at this 165 00:08:50.671 --> 00:08:50.851 stage. 166 00:08:52.013 --> 00:08:53.654 Finally, in your piece, you say the following. 167 00:08:53.974 --> 00:08:58.598 Rumor has it that the Gold Forum will broaden its scope to mining generally. 168 00:08:59.019 --> 00:08:59.719 But don't... 169 00:08:59.719 --> 00:09:04.023 Don't take that as a sign, you say, that the gold sector is losing its shine. 170 00:09:04.263 --> 00:09:08.707 As I say, I left Denver more optimistic than when I arrived. 171 00:09:09.167 --> 00:09:11.009 And you talk about upside surprises. 172 00:09:11.389 --> 00:09:16.493 So this thing, as far as I can tell from your tone, has still some legs, George. 173 00:09:17.254 --> 00:09:17.954 Yeah, I think so. 174 00:09:17.954 --> 00:09:23.579 And I particularly think from the equity side, because I think people underestimate 175 00:09:23.579 --> 00:09:25.579 their leverage to the gold price, 176 00:09:25.579 --> 00:09:28.223 particularly after the last few years where they haven't shown it because of 177 00:09:28.223 --> 00:09:30.223 cost squeezes. 178 00:09:30.223 --> 00:09:32.223 But, you know... 179 00:09:32.223 --> 00:09:35.019 Diesel, which I say is a major cost for most of the miners, has come down. 180 00:09:35.279 --> 00:09:35.979 It's not flat. 181 00:09:35.999 --> 00:09:36.800 It's come down. 182 00:09:37.461 --> 00:09:41.083 Labor, particularly in Australia and North America, were very tight. 183 00:09:41.144 --> 00:09:42.405 And it wasn't just cost. 184 00:09:42.425 --> 00:09:43.646 It was actually availability. 185 00:09:44.306 --> 00:09:50.271 Particularly in Australia with the demise, shall we say, of the lithium industry 186 00:09:50.271 --> 00:09:52.271 short term and the nickel industry there. 187 00:09:52.271 --> 00:09:53.874 We've had a massive free up of skilled labor in Western Australia. 188 00:09:53.974 --> 00:10:00.259 And the gold miners will tell you they actually now can fully fill their 189 00:10:00.259 --> 00:10:02.259 positions because they've had. 190 00:10:02.259 --> 00:10:02.401 people moving from those other industries. 191 00:10:02.961 --> 00:10:08.125 So, we've seen after three or four years of really tough conditions, 192 00:10:08.186 --> 00:10:10.648 we're seeing that easing just as price moves higher. 193 00:10:11.468 --> 00:10:13.450 And we're seeing it now in quarterly results. 194 00:10:13.510 --> 00:10:20.376 And I think we'll see it very much in annual results early next year or half 195 00:10:20.376 --> 00:10:22.376 yearly results is we're seeing that impact on 196 00:10:22.376 --> 00:10:22.938 cash flows, on profitability. 197 00:10:23.458 --> 00:10:28.963 And the most exciting thing out of the conference was you sat down with the major 198 00:10:28.963 --> 00:10:30.963 miners and they said, 199 00:10:30.963 --> 00:10:32.963 We've learned our lesson. 200 00:10:32.963 --> 00:10:34.963 We need to improve returns. 201 00:10:34.963 --> 00:10:36.963 We're generating cash. 202 00:10:36.963 --> 00:10:38.963 We're generating good returns. 203 00:10:38.963 --> 00:10:40.963 We're not going to do anything to mess that up. 204 00:10:40.963 --> 00:10:42.963 We're just going to return cash to shareholders if need be. 205 00:10:42.963 --> 00:10:44.777 And we're going to be very conservative and just show that we can perform. 206 00:10:45.317 --> 00:10:47.239 And that to me is music to my ears. 207 00:10:47.279 --> 00:10:51.302 These are companies who are just like, we're just going to show you how 208 00:10:51.302 --> 00:10:53.302 profitable we are. 209 00:10:53.302 --> 00:10:53.705 We're not going to do anything silly in the meantime. 210 00:10:54.145 --> 00:10:56.247 And finally, how is 91 positioned? 211 00:10:56.703 --> 00:10:59.685 to take advantage of what you've just described over the last few minutes? 212 00:11:00.485 --> 00:11:06.068 Well, so in the gold fund, obviously, we're fully invested in gold equities, 213 00:11:06.068 --> 00:11:08.068 well, gold and silver. 214 00:11:08.068 --> 00:11:10.651 And we've, if anything, added a bit more leverage to that and a bit more beta, 215 00:11:10.891 --> 00:11:14.333 which has worked over recent months as we've seen prices move. 216 00:11:14.353 --> 00:11:16.434 And obviously, those more leveraged stocks move. 217 00:11:17.275 --> 00:11:18.195 We're not going crazy. 218 00:11:18.296 --> 00:11:19.616 We're not filling it with juniors. 219 00:11:19.676 --> 00:11:20.537 That's not our way. 220 00:11:20.577 --> 00:11:23.939 We like producing assets and we like companies that have good cash flow. 221 00:11:24.495 --> 00:11:27.137 And that's what we've been doing and tilting towards that. 222 00:11:27.497 --> 00:11:29.418 And then in our broader resources funds, 223 00:11:29.498 --> 00:11:36.382 we've been overweight gold equities and remain so for about 12 months and continue 224 00:11:36.382 --> 00:11:38.382 to see that as a positive. 225 00:11:38.382 --> 00:11:38.903 And there has been a positive contributor to that fund. 226 00:11:39.303 --> 00:11:40.003 Great chat. 227 00:11:40.003 --> 00:11:40.764 Thank you very much, George. 228 00:11:40.844 --> 00:11:45.587 George Cheveley is a portfolio manager, Global Gold at 91 in London. 229 00:11:47.168 --> 00:11:52.511 The views and opinions expressed in these podcasts are those of Lindsay Williams and 230 00:11:52.511 --> 00:11:54.511 various contributors. 231 00:11:54.511 --> 00:11:58.636 and do not reflect the policy, position, or opinion of any other agency, 232 00:11:58.636 --> 00:12:00.636 organization, employer, 233 00:12:00.636 --> 00:12:02.819 or company associated with StrictlyBusinessPodcast.com. 234 00:12:03.299 --> 00:12:10.265 Assumptions made on the analyses are not reflective of the position of any other 235 00:12:10.265 --> 00:12:12.265 entity other than the speaker or the author. 236 00:12:12.265 --> 00:12:16.449 And since we are critically thinking human beings, these views are always subject to 237 00:12:16.449 --> 00:12:18.449 change, revision, 238 00:12:18.449 --> 00:12:18.591 and rethinking at any time. 239 00:12:18.891 --> 00:12:21.293 Please do not hold us to them in perpetuity.