A growing global economy, low inflation and a rising U.S. dollar (US$) are not factors that push up gold prices, so the price of bullion should remain in the US$1,100-US$1,300 an ounce range. Thus, there is little interest in investing in or increasing holdings in gold or gold equities.
But there are exceptions to this school of thought, particularly among portfolio managers who don’t think global growth will continue. In this camp are Ross Healy, chairman of Strategic Analysis Corp. in Toronto; and Nandu Narayanan, chief investment officer (CIO) with Trident Investment Management LLC in New York and portfolio manager of several funds sponsored by Toronto-based CI Investments Inc.
Both Healy and Narayanan expect the U.S. economy to collapse in the next few years under the weight of its huge public-sector debt. As a result, they anticipate that the price of gold will take off and thus recommend clients load up on bullion.
Narayanan suggests gold prices could reach US$3,000-US$5,000 an ounce – levels at which he expects that governments will forbid trading it.
Healy doesn’t foresee a trading ban but agrees that it’s a possibility. He recommends buying gold stocks rather than bullion because there’s more leverage available with stocks, which are likely to increase five to 10 times as much as the price of bullion. Put another way, he says, if a client has 10% of his or her net wealth in gold, that will fully hedge the rest of the portfolio as non-gold stocks drop.
On the other hand, Clément Gignac, senior vice president and chief economist with Quebec City-based Industrial Alliance Insurance and Financial Services Inc., thinks gold bullion prices could drop more – possibly to US$1,000 an ounce – because of the continued strength in the US$.
Scott Vali, vice president, equities, and resources portfolio manager with CIBC Asset Management Inc. in Toronto, also doesn’t expect a big return from gold this year. However, he suggests, some gold holdings are appropriate as an insurance policy in the event the U.S. economy stalls. This may happen if interest rates increase too quickly or if inflationary pressures develop.
Healy is in the minority in recommending gold stocks. Gold companies generally are considered among the worst managed firms. But he has some company. For example, Benoît Gervais, senior vice president, investments, with Mackenzie Financial Corp. in Toronto, likes Agnico-Eagle Mines Ltd. and Randgold Resources Ltd., which are “relatively clean companies.” However, in general, he prefers bullion.
Darren Lekkerkerker, portfolio manager with Pyramis Global Advisors, a unit of Boston-based FMR LLC (a.k.a. Fidelity Investments), recommends a silver company instead – Tahoe Resources Inc. Its Guatemala mine is one of the lowest-cost producers. Tahoe, Lekkerkerker says, is generating free cash flow and has “one of the best management teams [in mining].”
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