On the Money


Protect your purchasing power with gold

September 1, 2020

Rob Cohen, Vice President and Portfolio Manager discusses the conversation around gold as an investment, and asset class is attracting the attention.


Mark Brisley
Managing Director and Head of Dynamic Funds

Robert Cohen
Vice President and Portfolio Manager


Mark Brisley: You are tuning into On The Money with Dynamic Funds

Mark Brisley: You are tuning into On The Money with Dynamic Funds, a podcast series that delivers access to some of the industry's most experienced active managers and thought leaders. We're sitting down to ask them the pertinent questions to find out their insights on the market environment, and navigating the investment landscape. Hello, and welcome to another edition of On The Money.

I'm Mark Brisley, Managing Director of Dynamic Funds. In the current environment of uncertainty globally, with respect to human health, the economies and markets. It's really no surprise that the conversation around gold as an investment, and asset class is attracting the attention it is. As a commodity often described as a safe haven for investors. 2020 has witnessed gold pass the highest price on record of the $2,000 announced barrier this August, and it's bounced around that level ever since.

Which is occurring as a record amount of stimulus has been pumped into the global economy. Today, I'm joined by Rob Cohen, Vice President and Portfolio Manager here at Dynamic Funds. Who specializes in the mining industry, and in particular gold. Rob, who is a mineral process engineer by trade, has been on the investment side of the industry since 1998 when he first joined our firm. Previous to that, he cultivated his extensive experience working as an engineer at Canadian, Chilean, and Australian copper and gold mines.

His combination of industrial experience and in the field of expertise gives him a unique perspective in analyzing financial and geological viability of projects. He comes by his interest in fascination in the sector honestly, haling from a family of mining engineers. His followed in their footsteps, and during his career has set foot in hundreds of mine sites, spanning six continents. As an investor, he manages concentrated precious metals and resource portfolios that invest in high-quality companies with management teams that have strong technical experience, and a history of effective capital allocation.

His portfolios include three mutual fund mandates, the Dynamic Precious Metals Fund, the Dynamic Strategic Gold Class, and the Dynamic Strategic Resource Class. Rob, it's a pleasure to have you join us today. Thanks for being here.

Rob Cohen: Thanks so much, Mark.

Mark Brisley: Let's go over the concept of gold as an asset class, the word safe haven and hedge against inflation, they get thrown around a lot. Could you start us off by going over the thesis for holding gold in a portfolio?

Robert Cohen: I think gold is the quintessential monetary asset in the world. It is the only metal that is used by central banks around the world to back their foreign exchange reserves. It's been revered as a monetary asset for thousands of years. It is most importantly used as a way to protect the purchasing power of a dollar. A lot of people are always measuring everything in terms of what is something costs, whether it be in dollars or euros or what have you.

They get very fixated on those prices except the problem with measuring things with paper money is the purchasing power of paper money deteriorates over time. When people see the gold price rising, it is probably better to think about it as the value of the dollar falling. We often quote the gold price mostly in US dollars. We're just trading just under $2,000 US announce right now. The proper way to think about it is how many ounces of gold do I get per dollar? As the value of a dollar deteriorates, that number goes down. One way to protect your purchasing power is to own gold.

Mark Brisley: That's a great historical perspective. If I turn the table and look at 2020, primarily for the economy for monetary policy and for fiscal policy, how does the outlook for the COVID recovery and the related measures being taken that we've seen in the form of stimulus, make the case for having a position in gold within a portfolio?

Robert Cohen: That's a really good question, Mark. Basically, what you are seeing going on around the world is governments in response to the COVID crisis in particular, but this was happening even pre-COVID, is very loose monetary policy, quantitative easing. In the US, you can see the massive expansion of the M2 money supply. All those factors combined with the interest rate environment or in negative, real rate environment.

Which means, if you take the 10-year bond and you subtract the inflation rate, you actually come out with a negative number. These are all factors that combined really have been propelling the gold price higher. Certainly, in terms of what's going on with the COVID pandemic, this is expected to continue on for the foreseeable future.

Mark Brisley: Rob, you talked a little bit about the measurement of gold in currencies. I wanted to talk a little bit more about how gold is performing in Canadian dollar terms, as well as for example, US dollar or the Euro, the Japanese yen. If you could spend some time talking about whether gold's performance is correlated with what governments around the world are doing with respect to interest rates and money supply.

Robert Cohen: I think what I can do is just simply answer that question with the broad stroke that gold has gone up in almost any currency that we measure. Whether it be US dollars, Canadian dollars, euros, yen, rubles, you name the currency has gone up in that currency. That is a reflection of the amount of monetary policy and quantitative easing around the world that is occurring. If you look at G7 countries, the amount of debt out there is reaching all-time highs. If you take government debt plus personal debt plus corporate debt, you are getting numbers in most developed countries of 250% of GDP. That's very significant. Governments when they have that amount of debt, the only politically acceptable way to deal with it is to inflate their way out of it.

Mark Brisley: I know when we talk about gold, I think quite often the conversation gravitates towards gold bullion or physical gold. While gold has performed very well, amd we've seen all kinds of news and stories building around bullion. The reality is gold companies or better put gold equities have also done very well over the past year. Could you go over the relationship between the two or perhaps even the difference between investing in the two and what investors need to consider when choosing to invest in bullion versus equities?

Robert Cohen: Effectively, let's start with owning gold. If you own gold whether it be in bullion or in gold certificates, what you own at the end of the day is if you buy an ounce a gold, do you own one ounce of gold. If the gold price goes up 1%, you've increased your wealth by 1%. It's pretty much that simple relationship. When you own a gold equity, you are buying shares in a public company that represent the gold miners.

This is a different concept. You are actually buying the profitability of a gold miner. For example, if a gold miner at current gold price is making a 50% margin, and let's assume the gold price goes up 1% without other costs creep and other things, just all else equal, just the gold price moves up 1%. While if you own physical gold you've earned 1%, If the stock market's acting efficiently, if you're dealing with a 50% margin mathematically, you've increased your margin by 2%. You have an additional leverage to the gold price.

With that said, it doesn't come without its risks. In finance you have risk-reward. If you own a gold miner, the reward is having a higher leverage to the gold price. You also have leverage to, for example, things like expiration success. If you own an ounce a physical gold, it's not going to replicate itself, you're always stuck with one ounce of gold. If you own a gold miner and they find a bunch more gold, you're effectively getting that gold for very, very low costs. That's one source of leverage.

On the other hand with mining operations, you could have something, for example, that goes wrong, whether it be a political situation in a country or a technical problem with the mine where the mine production does not meet its projected guidance. It is all about risk-reward.

Mark Brisley: Rob, based on your comments that you've just made on the different stream bullion and equities and the impact that gold has had on portfolios globally. I want to talk a little bit about the impact of gold investing on the portfolios that you run here at Dynamic. What are some of the main differentiators within your precious metals portfolio compared to, for example, the TSX global gold index and how much overlap would you have and how does the breakdown compare in terms of producers versus exploration, market cap, geography, et cetera?

Robert Cohen: Essentially, at Dynamic Funds, we don't want to give investors something they can do on their own. Investors can go buy, for example, a exchange-traded fund that represents the underlying index at a fairly low fee. We want to do something a lot more sophisticated and different than just merely buying the gold index, which would be an index created by arranging all the miners by market capitalization and obviously truncating it off at a certain lower end and saying, okay, that's a weighted index, and no different than the S&P index is created.

What we at Dynamic do is we have a lot of information flow. We are very plugged into the industry globally that is, so when we're looking at the type of stocks we own, half of the stocks that we own are generally listed on the Toronto Stock Exchange, which is probably the largest stock exchange globally of gold miners but the second largest is the Australian Stock Exchange. We are very active there, and that sets us apart quite different than our competitors, even here in Canada, because about 45% of the portfolio is invested in Australian listed companies.

We also have a little bit more gearing toward development companies. While about half the fund is in companies that are actually producing gold, the other half of the fund is in companies that are advanced development stage level, whether at different levels of exploration where you are ready or almost ready to go into a pre-feasibility level or full feasibility study. These are the type of companies that typically get acquired by the more senior companies, because when senior companies need to you grow their or even maintain their production levels, they often have to do so by acquiring other companies.

The industry just works more efficiently that way. You let the junior companies do the exploring, and then you go and cherry-pick the best opportunities globally. With that said, we also own what we regard as the best miners as well. We're very particular about that. In terms of comparing what we own in the fund to the underlying index, it is quite different. As a matter of fact, out of say 35-40 companies that we may own and fund at any one time, we have only about four or five companies that actually overlap with companies that are part of the index.

Mark Brisley: Of course, that speaks to active management in action. We certainly know that you're an active manager when it comes to those portfolios. One of the questions that we're hearing from investors and often throught their advisors is with the fluctuations that we've seen in gold price, especially on upward trend. I guess, sometimes people feel like they've missed a move once an asset has hit an all-time high, like gold recently has. How do you view the upside, downside risks at this point for someone who is considering adding gold to their portfolio or is fundamentally asking the question, "Did I miss it."?

Robert Cohen: I've been dealing with that type of investor psychology for over 20 years since I've joined Dynamic. We've seen in US dollar terms, gold prices move from $250 an ounce up to $2,000 an ounce over the last 20 years and all along, you're always getting investors, you know, every time it moves up a little bit, a $100 or $200, "Oh, that's it? I think it has to top out." I think the way to look at it is timing any market, it's almost a fluke if investors can successfully time markets.

The idea is to diversify your portfolio, you want to have a little of a few different things that are uncorrelated with each other. If you look at any journal or finance paper or anything of that level, you will find that the conclusion is that the gold sector is the most uncorrelated asset class with all other asset classes. Uncorrelated doesn't mean a negative correlation, that does not mean that if one asset class is going up, the other one's going down, it just means that at certain periods of time, you can have both moving in tandem and other periods of time you can have them moving away from each other.

That's the concept of portfolio construction. That is one central tenement of why you want to own an asset class such as gold. I've already talked about purchasing power of paper money and I think this is one of those ideal hard assets sets, divisible and liquid. It's more of akin to owning, for example, real estate. Real estate is another example of a hard asset that maintains the purchasing power of your investment over time, except, for example, if you own a house and you need to have some liquidity, you can't just sell one room in the house, you have to sell the whole house.

There's a lot of friction costs in owning real estate, for example. Gold is a nice clean alternative hard asset class. It should be part of all investors' portfolios. One should always consult with their financial advisor to determine the appropriate waiting, but I think it is a mistake to have it at zero.

Mark Brisley: That's great advice. You've made some interesting comments in recent written commentaries around your view of gold as a safe haven and what's potentially coming down the pipe for the world. A US election, a comment that the US probably hasn't been so polarized since the civil war. You also said at the same time, there's civil unrest all around the world at any given point in time. You also made the comment around the world that potentially is a little ill-equipped and are living in a state of denial about the virus, which has allowed for the continual spread. Do you continue to see in your views as an investor gold as that safe haven until we're out the other side of this pandemic?

Robert Cohen: As a betting person, I would agree with all the comments you've recap there. I just wouldn't bet against any of those things right now. The S&P, the stock market has had many years of a solid run. We just don't know what will happen with the upcoming US election. If the Democrats get in, you can count on a higher taxes and the higher taxes could cause the stock market to change direction and reverse.

On the other hand, if it's a Republican win, we could see a even more amplified civil unrest. The question is, where are we going? We don't know, but as some form of protection, you should have some gold regardless, but I think this is an interesting time that we live in right now. As I said in my last comment, I probably would not be naked on the gold position in one's portfolio.

Mark Brisley: Rob, this has been a fascinating discussion and I really want to thank you for sharing your insights today and joining us.

Robert Cohen: My pleasure, Mark. Thanks so much.

Mark Brisley: I'd like to thank everyone for listening to this edition On The Money with Dynamic Funds. Until next time, I'm Mark Brisley. We'd like you to remember in times like these, financial advice matters more than ever. You've been listening to another edition of On The Money with Dynamic Funds. For more information on Dynamic and our complete fun lineup, contact your financial advisor or visit our website @dynamic.ca.

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