November 8, 2024 - CEF Insights Podcast: Gold Sector Review & 2025 Outlook
Transcript below:
CEFA:
Welcome to CEF Insights, your source for closed-end fund information and education, brought to you by the Closed-End Fund Association. Today, we are joined by Axel Merk, President and Chief Investment Officer of Merk Investments. Merk Investments is the investment advisor of ASA Gold and Precious Metals Limited, ticker ASA. We are so glad you can be with us.
Axel Merk:
Great to be with you.
CEFA:
Axel, the Federal Reserve has begun cutting rates, inflation has improved, but the labor market seems to be weakening and federal deficits are challenging. We also have significant geopolitical tensions and US federal elections that potentially impact markets. Where do you see the investment markets currently and what is your outlook for the rest of 2024 and into 2025?
Axel Merk:
Yes, those are of course fascinating questions and we're recording this just before the election and we intentionally kept this in part because we are all, and that includes I suppose me and anybody else, notoriously bad at predicting what exactly is going to happen next year. And so this way we kind of force ourselves to stay on a high level. And you alluded I think to the key drivers: inflation, economy, and deficits. And what that basically means is that regardless of who is going to be in charge of the economy next year, those drivers will continually be affecting the market. Inflation had been high, is slowly coming down. Obviously some people think that maybe in a year from now we may have a resurgence. And the economy, well given the tightness of the Federal Reserve, might be slowing down a tad further.
And then at the other end of the spectrum, it seems pretty clear that fiscal discipline is not top of the agenda. And so all of that has been an environment that's favorable to the gold market where we are active in, it's what I would call the Goldilocks spot. With regard to the overall equity market, it of course depends on a whole bunch of factors. We do have frothiness in some markets. If the economy were to get very weak, that historically wouldn't be good for equities. That's currently not the baseline, what's priced into the market. And since we focus on gold here, I'll probably reserve judgment as to what might happen there.
CEFA:
Merk Investments has particular expertise in the gold, precious metals, and mineral sector. What is your outlook for the sector?
Axel Merk:
Yeah, we are somewhat in a sweet spot here, I would say. If you just look at it from a high level, historically, and we did a study over the last twenty-some years, where we look is where is gold and gold mining when it comes to inflation and economic growth? And historically speaking, when the economy is starting to slow down, the gold market, because it is a discounting market like any other market, tends to do very well, especially gold mining sector. In the area that we are in, and we've seen that in bit of the price action anyway.
And presumably also, and I'm guessing here, that's just my opinion, where the area will be, the area where you don't want to be when to be in gold necessarily, at least historically that's not been so great, is what we call financial repression; when inflation is very high but rates are very low. And so are we going to have super low inflation and interest rate environment in the coming months and very high inflation environment in the coming months, to me that seems unlikely. And so with that said, I'm very comfortable where we position the portfolio and we see that in the action of what investors do dedicating money to the space.
CEFA:
Equity markets have been broadening out and gold is trading at near all-time highs, which is over more than $500 since we last spoke in March. Where are valuations in the precious metal space and do you consider these to be attractive levels?
Axel Merk:
So when it comes to the price of gold, we alluded to the fiscal side of things, and by the way, when I talk about fiscal discipline, I talk about the big entitlement issues and there is just no appetite to tackle those. And as a result, I believe, and obviously everybody has heard about the massive amount of money that's being spent just on interest payments, and so I think the price of gold is reflecting that, those drivers will be there. One thing to keep in mind of course, is given that the historically high level and the price of gold we are in a hundred dollars move percentage wise is much less than what it used to be. That said, at these levels of gold, the gold mining companies are comparatively cheap... Or not just, because they are very, very cheap. There are of course reasons for that and the big reason is that the major companies, the large producers have not shown that they've been able to translate that to earnings.
We think that the high cost environment they've had is somewhat in a rear view mirror for some of them, but we think that the place where the action is going to be is in the junior mining space. Also, the midsize companies we believe are much, much better positioned. And one of the challenges that the large producers have had is aside from cost, partly also to absorb acquisitions, is that it's very, very difficult for them to acquire new ounces. They're focused so much on getting their balance sheet in order that they have under invested, they produce a lot of cash and as such they have much less leverage to the price of gold. We like to be at the much more junior end of the market.
CEFA:
Where do you see the best opportunities among precious metals companies?
Axel Merk:
Well, to just expand on that, one of the things we like to do is focus on the junior sector and junior mining sector, and what we try to do is we try to help institutionalize assets. We're talking about closed-end funds of course in this podcast here. And one of the things that ETFs cannot do, they do not provide funding to the industry, or any other industry for that matter. It is one of the things you can do in a closed-end fund. And as you do that and help institutionalize assets, historically speaking, when these companies raise money rather than being diluted and the market is disappointed, the market is often excited because there is money available for the next phase in their growth.
CEFA:
Axel, you manage ASA Gold and Precious Metals Limited, symbol ASA, which invests in a portfolio of companies in the precious metals and mineral sector. How is the portfolio currently positioned?
Axel Merk:
Yeah, to expand on that, I mentioned the junior space. And so we invest, of course we invest in the mining sector, but what we really invest in is in management. We invest in teams that can execute and develop a mine. And we think that's where some of the greatest value creation can be. As these companies get institutionalized, and what we mean with that is we provide them funding so that the next time they go through the markets to raise money, larger players can participate. Eventually they add it to indices. The precious metals companies we invest in, many of them are incorporated in Canada and Australia. Australia is a market where there are a lot of index investors as well, and so we can help participate in that. It's a bit of a venture capital approach. By having very, very patient money, we've had some very significant successes with that strategy this year in the strategy where companies have been revalued higher as part of these efforts to help them institutionalize.
By the way, one of the things we can do in this fund, we can also invest in private companies. That's not a big factor in the portfolio, but we've seen some revaluations there as part of third-party transactions. Usually what would invest in a private company just before they go public, but we've had situations where we thought the valuation was just so favorable that we participated and those have worked very well.
Now I do have to mention there's of course a very risky and volatile space. Not all these companies will make it. It's part of the reason why we invest in quite a few companies.
CEFA:
Axel, closed-end funds typically trade at a discount or premium to the fund's net asset value. In the case of ASA, while the fund has generally traded at a discount, the market price performance of the fund is quite similar to the net asset value performance over time. So, any modest changes in the discount would seem to have negligible impact on shareholder performance over the longer term. Is this a reasonable way for investors to consider secondary market trading and ASA as they evaluate their long-term expectations for the fund?
Axel Merk:
Well, investors buy closed-end funds and ASA in particular for all kinds of reasons and obviously the discount is but one of the considerations. And one of the things to keep in mind is Merk Investments has taken on the management in April, 2019. Every year since we have managed the fund on a calendar year basis, the discount has come down. And obviously it's ultimately driven by supply and demand. We happen to think that our drive for transparency has had an influence on that, and then for those who are not aware, last April we announced also a 5% share buyback that might have an impact. Our interest is that investors know what we do and publishing our holdings on a monthly basis on our website is one of the drivers. We moved to daily valuations from previously weekly valuations and communicating with folks just as what we're doing right now helps to attract new eyes to the fund that helps the liquidity and at times it may help lower the discount.
Now, there are days, we just recently had one of those days we had a significant gain that was company specific that actually moved our NAV by 2% higher than it would've otherwise. Obviously, the market cannot know that ahead of time and the result is of course that on those days the discount was higher. So in the short term there are always other drivers that do that. The one thing I like to caution for folks who “trade the discount”, the volatility of ASA is so high, it's about twice as high as a typical equity fund is, that we can have a 5% move in a day, we can have a 10% move in a week. And so if you are interested in capturing a minor discount, you may want to be aware of somewhat more overwhelming risks that you have in the remainder of the portfolio. Now, obviously those “risks” sells opportunities, but it is something to take into account if one is focused on the discount.
CEFA:
Axel, we have spoken before about the positioning of your investment strategy in an investor's portfolio. ASA provides investors with somewhat unique exposure to junior mining companies. Just to revisit this point, what benefits do you believe an allocation to equities of these types of companies provides in an investor's diversified portfolio?
Axel Merk:
Personal talk, personally, I am on record for being an significant insider buying in late 2023, early 2024, and I bought that because of course I believe in the strategy. For outsiders, what mining provides is significant diversification. ASA being focused on the junior mining space is a unique ability to get exposure to these junior mining space, we're not aware of any other public vehicle to which one can access that exposure. We happen to believe that the junior mining space has not yet reflected the price appreciation, the price of gold. Some of that has historic precedent. The money tends to flow first to the larger companies, then to the smaller companies, and the other part is of course is diversification versus the rest of the market. If investors are concerned about equity valuations more broadly, adding diversification to something that's not correlated, if you choose something like ASA, which is quite volatile, you may need less diversification to a less allocation to achieve a very significant amount of diversification. Then again, investors choose to invest in ASA for all kinds of reasons. I've mentioned some here and other investors might have other reasons.
CEFA:
Axel, thank you so much for taking the time to join us today.
Axel Merk:
My pleasure.
CEFA:
We want to thank you for tuning in to another CEF Insights Podcast. For more educational content, please visit our website at www.cefa.com.
Podcast recorded November 2024.
Certain Tax Information: ASA is a “passive foreign investment company” for United States federal income tax purposes. As a result, United States shareholders holding shares in taxable accounts are encouraged to consult their tax advisors regarding the tax consequences of their investment in the Company’s common shares.