Over his career, Chris Beer has watched the price of gold soar—albeit in fits and starts. When he worked as a field geologist searching for gold in Newfoundland in the late 1980s, bullion fluctuated around US$400 an ounce. In 2003, he became portfolio manager of the RBC Global Precious Metals Fund, which he now co-runs with Brahm Spilfogel and Jeffrey Schok, and has $1.16 billion in assets. Gold took off and peaked near US$1,920 an ounce in 2011, but then plunged and only surpassed that record this past August. The equity fund has outpaced the S&P 500 Total Return Index in Canadian dollars over the past 15 years. We asked Beer, 55, if investors should consider gold stocks for dividend income and why he likes Barrick Gold Corp.
Why has gold been on a winning streak?
A weakening U.S. dollar, lower interest rates and inflation fears are fuelling the price of gold. Massive amounts of fiscal and monetary stimulus to combat the COVID-19 pandemic and support the global economy may lead to inflation pressures in the future. Inflation-adjusted interest rates on the 10-year U.S. Treasury bond are negative. Gold has become attractive to investors because there is basically no income for investors in many fixed-income assets. It has become an alternative currency and a safe haven.
What is your outlook for the metal?
We don’t have a price forecast, but we look at bear, base-case and bull scenarios. We currently see a 75% probability that gold will trend higher over the next couple of years. Even if a COVID-19 vaccine is developed near term, the world is still awash in debt and future growth will likely be slow. Central banks will be reluctant to raise interest rates too quickly as that would kill any recovery. This is potentially bullish for gold. The inflation-adjusted price of gold at its 1980 high of US$850 an ounce is about US$2,700 today. I can’t see any reason we couldn’t achieve that down the road.
Investors don’t typically buy gold stocks for dividends. Should they?
A lot of mining companies are increasing dividends gingerly. In 2011, when gold stocks traded at high valuations, the industry spent a lot of money on mergers and acquisitions. Every cent miners made went to growth. Today, their balance sheets are stronger, they are not buying assets that don’t make sense, and they are making commitments in environmental, social and governance practices. Using spot gold prices, senior producers, including Barrick Gold, Newmont, Newcrest Mining and Agnico Eagle Mines, now have free cash flow yields in the 5% to 8% range. For mid-tier producers, it’s higher. And dividend yields will probably approach 2% in 2021. If gold goes higher, investors will get their dividend plus capital appreciation. Share buybacks are a relatively new phenomenon, but miners such as Kirkland Lake Gold are increasing dividends and buying back shares.
Legendary investor Warren Buffett has not been a fan of gold in the past, but his Berkshire Hathaway conglomerate bought shares of Barrick this year. Why is this miner attractive?
In the gold bear market of 2011 to 2015, Barrick was the poster child for an industry suffering from poor capital-allocation decisions. It made ill-timed and expensive acquisitions, including a copper mine in Zambia. Coupled with cost overruns and failure to deliver projects on time and on budget, Barrick’s share price suffered. Under its new chief executive officer, Mark Bristow [formerly CEO of Rangold Resources, acquired by Barrick in 2018], it has been getting rid of inferior assets, paying down debt and cutting costs, and hires locally at mines. It now has strong investment discipline.
Silver tends to follow gold’s rise but is nowhere near its 2011 peak of nearly US$50 per ounce. How are you playing silver?
We don’t have a strong view on silver. There are few silver mines, and a lot of silver is a byproduct of gold mining. We have owned MAG Silver since it was a junior in 2003, but it only recently began production at its Mexican silver mine. We also hold SilverCrest Metals, which is developing a mine in Mexico; Pan American Silver; and Wheaton Precious Metals, a royalty company that gets about half of its revenue from silver.
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