The gold price rose by 70%, silver by 200% and copper by 50%; all over the past twelve months. If we look at the miners of these metals, a company like AngloGold Ashanti had a total return of 280% for the past twelve months. When you see these returns, it is very tempting to start buying these metals and companies, but should you?
Before you can answer that question, you have to consider the following:
- Industrial metals like silver and copper are commodities, and commodities have cycles. In periods of enhanced economic activity, the supply constraints cause the prices to go up and mining companies start producing more until there is an oversupply and prices stabilize. When the economic activity takes a turn for the worse, the demand will fall away, mining companies will downscale operations and the price of the commodity will come down. Where are we in this cycle?
- If the spike in the price of these metals is due to stockpiling, it will not go on forever and with these high prices, will the companies/countries buying the metals lose interest?
- Are any potential future threats causing the spike already priced in?
There are many reasons given for the sudden spike in the prices of these metals. One of them is the decoupling of economic cohesion between the East and the West. With the tensions between the USA and China, it seems like both countries are racing to secure these metals for strategic reasons. Silver and copper are used in many crucial industries from tech to electric vehicles. Gold is not so much used as an industrial metal, but with the fight for reserve currency status as we have discussed in previous blogs, as well as the geopolitical tensions in Venezuela and Iran, stockpiling of this precious metal has caused an explosion in the price not seen for many decades.
Another reason for the increased interest in especially industrial metals, is the expectation that lower interest rates will increase economic activity, which will boost the demand. There are signs that China is reviving its industrial production and we have seen their exports booming. Then you can add the tariffs and pure retail investor speculation to the list of reasons.
If you are confident that the demand for these metals will continue for the foreseeable future, then there is no harm in investing in them. If you listen to the experts, they are predicting the price of gold to go to $5000 (8.7% upside) and silver to go to $100 (11% upside). The companies mining these metals will of course be much more volatile, depending on their ability to leverage off these higher prices. At JWR we follow a philosophy where we do a lot of planning around the exposure to asset classes for our clients, based on their financial needs. We do pay attention to things like the relative risk of investing in local equity versus international equity and the provision of liquidity via cash for times when things go wrong for a while, but we leave the decision of which company and region to invest in, in the hands of the fund managers we choose. Being a South African citizen, you had the benefit over the past year of having been invested in gold, platinum, copper and silver already, owing to our share index being overweight in Resources.
At JWR we follow a philosophy where we do a lot of planning around the exposure to asset classes for our clients, based on their financial needs.
As things stand now, there is a good chance that precious and industrial metals will be supported by all the current reasons mentioned. Having an increased exposure to them is not necessarily a bad thing but selling high-quality international companies, not tied to the cyclical nature of these metals, is perhaps not the best idea.