With ongoing volatility expected in the gold space, mostly owing to global economic weakness, investors should focus on quality gold names with three key attributes to weather the current metal price environment, explains Joseph Fazzini, vice president and senior analyst with Toronto-based Dundee Capital Markets. Fazzini says those attributes are low-cost, long-life assets; defensive balance sheets; and responsible management teams. In this interview with The Gold Report, Fazzini lists six Buy-rated names with those key attributes and more.
The Gold Report: Many of the people we interview have a theory about why gold is performing poorly this summer despite so much global uncertainty, especially in China and Greece. What's your theory?
Joseph Fazzini: Gold typically plays numerous roles, including being a hedge against inflation, devaluation and economic turmoil, but it's still a commodity. Most commodities typically come under pressure in a recessionary environment. Right now, the global economic landscape isn't all that promising, inflation remains minimal and investors prefer other safe-haven investments (i.e., U.S. dollar). As a result, we expect gold to continue performing in-line with most other commodities and remain under pressure.
TGR: How low can gold go?
JF: Recent events have shown that the price of gold can move without rhyme or reason. While some have suggested that opportunistic investors have conspired to drive down the price of gold, weakened investor sentiment has also played an important role. Rather than try to hedge inflation or economic uncertainty with gold, investors from around the world have sought refuge in safety assets like the strengthening U.S. dollar, which moves inversely with gold. With Chinese, European and North American equity markets on precarious financial footing, gold remains out of favor and the bottom is tough to call.
TGR: What about sub-$1000/ounce (sub-$1,000/oz) gold?
JF: With the price of gold recently declining to a five-year low of US$1,088/oz, sub-$1,000 is certainly a near-term possibility. While we hope for the best, we continue to advise caution.
TGR: Is it Dundee Capital Markets' view that gold could rebound in 2016 or possibly 2017?
JF: We have a constructive long-term view of gold, but in the near term we still see a lot of risk. We're not ready to call a gold rebound. We would need to see some serious developments in the global economy that would support a rebound in gold.
TGR: What would some supportive measures be?
JF: Further quantitative easing would be probably the most encouraging thing we could see for the gold price. As this scenario would entail more money being pumped into the global economy, we expect this could drive investors out of fiat currencies and into hard assets, including gold, which can't be printed. With indications of U.S. interest rates rising in the coming quarters, it's clear that the U.S. is unlikely to pursue that route, but we could see it happen in Europe and China. In addition, a weakening of the U.S. dollar would inherently be positive for gold as it would become more affordable for foreign nations, most notably China and India, which have been major buyers of bullion.
TGR: We have the situation in Europe with Greece and stock market weakness in China. Which is more likely to affect the gold price?
JF: In our opinion we consider the recent events in China to be of greater significance. Apart from China having one of the largest global economies, the Chinese also represented roughly 25% of global gold demand in Q1/15. If things were to materially worsen in China, we think that would have a far more pronounced effect on the price of gold than anything happening with Greece.
TGR: With such uncertainty surrounding the marketplace, what are three things that become more important in gold equities, especially the micro- and small-cap stocks?
JF: With continued volatility expected in the gold space, we consider the three prerequisites for investment to be ownership of quality low-cost assets, defensive balance sheets and responsible management teams.
You want to look for low-cost operations that continue to generate cash despite gold price fluctuations. Next, you want companies with defensive balance sheets. For the most part higher leverage will result in significantly higher risk, and so you want companies with good cash balances and limited debt. Those names are going to be better positioned to weather prolonged market weakness. Lastly, having a responsible, experienced management team is key. You really want to be in a position where the company is being responsibly managed in tough market conditions. Whether that means laying people off, shutting down an operation or selling the company you need to have the people willing to make the best decisions for shareholders.