(Kitco News) - Gold’s new consolidation phase is creating an opportunity for investors to increase their exposure to the precious metal and the undervalued mining sector, according to one fund manager.
In a recent interview with Kitco News, Ryan McIntyre, Managing Partner at Sprott Inc, said that looking at equity market valuations in the current economic cycle, it’s a “no-brainer” that investors should move away from the S&P 500 and into gold and gold miners.
He added that he expects investors to continue to buy dips in the market, which will continue to support prices in their elevated range.
Investment demand in the gold market has been relatively lackluster for the past year as rising interest rates have raised the precious metal’s opportunity costs. However, McIntyre said that the focus on bond yields vs the cost of holding gold has been misguided.
“The compelling switch for me isn’t between Treasuries and gold; it's between the S&P 500 and gold. If you look at the Shiller Price to Earnings Ratio, it is trading at double the long-term average. To me, the opportunity cost of holding that is kind of crazy. Just think about how much earnings have to grow to burn out these high valuations.”
Although gold continues to struggle as the Federal Reserve maintains its restrictive monetary policy, McIntyre said it is well-positioned to take advantage of any new economic scenario.
McIntyre explained that if inflation rises, the Federal Reserve will be forced to raise interest rates again. While this will increase gold’s opportunity costs, he said it will also impact equity market valuations.
“A rate hike will be bad for gold, but it will be a lot worse for the S&P 500,” he said.
At the same time, it will take weaker economic growth to force the Federal Reserve to cut rates. Weaker economic activity should also weigh on equity markets.
“When I look at the S&P 500, my best-case scenario is neutral, and my worst-case scenario is really bad. But if you look at gold, it's worst-case neutral,” he said.
At the same time, McIntyre said that because of growing government debt, U.S. Treasuries don’t offer the same protection they used to.
“Gold is probably the easiest solution as a safe-haven asset, but it is the one that people resist the most, which tells me that we are in the right place,” he said.
McIntyre said that although gold prices are consolidating, it wouldn’t take much-renewed investment interest to drive prices back to record highs.
Along with holding physical gold, McIntyre said that investors should also look at holding mining equities because valuations are “stupidly cheap.”
McIntyre’s bullish outlook on mining comes after the world’s top gold producers reported solid first-quarter earnings.
“Gold’s rally only really kicked off in March, so mining companies experienced only a third of the gold price move. Their margins will only improve, and traditionally, the first quarter is usually where we see the weakest production,” he said.
McIntyre said that it’s not surprising investors have continued to ignore the mining sector as companies haven’t had a great history of fiscal management in a higher-priced environment. However, he added that it appears companies have learned from their lessons from the past.
“This is a really good place for the miners. There is some excitement, but not so much that they start doing stupid things. Investors can see a level of stability where earnings are good, and cash flow is growing, but there is no excess exuberance in the marketplace,” he said.
Neils Christensen
Neils Christensen has a diploma in journalism from Lethbridge College and has more than a decade of reporting experience working for news organizations throughout Canada. His experiences include covering territorial and federal politics in Nunavut, Canada. He has worked exclusively within the financial sector since 2007, when he started with the Canadian Economic Press. Neils can be contacted at: 1 866 925 4826 ext. 1526 nchristensen at kitco.com @Neils_c