Gold is trading at a six-year high as the global economic outlook and trade tensions weigh on investor sentiment.
Central banks have indicated that a new round of interest rate cuts are on the way to help stimulate growth which has pushed down the yield on bonds. Some sovereign issues are now in negative territory. That, in turn, is helping push the gold price higher.
For the past six years, bullion has faced resistance at about US. $1,350 an ounce. But the spot price broke through the US $1,400 an ounce level in mid-July 2019 and in mid-August 2019 was hovering at US $1,500 an ounce.
Harvest Portfolios Group launched a global gold ETF in January 2019 to help investors take advantage of the trends. The Harvest Global Gold Giants Index ETF (TSX: HGGG) holds the 20 biggest gold producers by market cap in an equally weighted portfolio. The ETF has a management fee of 40 basis points.
In a Q&A, Harvest Portfolio Manager Mike Dragosits talks about the strategy behind the ETF and how it aligns with the Harvest value strategy. He also talks about the difference between investing in gold stocks and bullion.
Tell us about the Harvest Global Gold Giants Index ETF?
We launched in January 2019 and decided the best way to go about it was get involved with the large cap mining companies. Our ETF holds the top 20 global gold producers by market cap. We are looking at developed market exchanges, so all the big names you would think of in North America, Western Europe and Australia. Names like Barrick Gold, Newmont, Agnico Eagle. Also, Australia’s Newcrest Mining. All the big household names are there and some maybe not as well known.
Harvest works with Solactive AG, a German company to help build the gold ETF index. There is no dividend policy, though at the end of year, if there is net income, it will be distributed to unit-holders of record.
Why the equal weighting of the 20 biggest producers?
These are mining operations and things can happen. So, the equal weighting means you avoid some of the risk of too much concentration in any one company. The companies are all cash flow positive at these prices. So, if gold rises there is a lot of upside potential.
How does the ETF grow?
Well, for the gold producers, the rise in the gold price makes them more profitable. We’re in a Goldilocks environment right now for investors when it comes to gold, not too hot and not too cold. There’s enough nervousness to get involved in the gold space without getting too crazy.
But we have also gone through a 10-year bear market. Now with the trade and economic uncertainties and weakening interest rates, conditions are looking better. That should renew interest. And we still see the valuations on the cheaper side.
Wouldn’t a bullion ETF be a more direct way to invest?
We think the environment is more interesting for equities. In addition to a rising price for gold, the companies are coming out of a bear market. That process has meant they have become more investor friendly. They are thinking about share buybacks and increasing dividends and that’s positive.
They have also become more efficient and have lowered their costs. And again, the valuations are cheap and that gives you a higher upside to gold prices.
What would happen if you didn’t like the management of a company? Would you drop it?
No, we stick to the mandate, which is the top 20 companies by market cap. We rebalance on the quarterly basis. Otherwise you are tempted to actively manage which is not what you are trying to do with this fund. We are trying to give investors a pure play on gold equities.
Gold and the U.S. dollar tend to go in opposite directions, but both have been strong.
It’s an interesting development. A low price for the U.S. dollar is usually very good for gold, but in this case, it seems to be the safe haven demand. There’s enough nervousness that people still want to hold the U.S. dollar but also like the safe haven aspect of gold.
Is the Harvest Global Gold Giants Fund unique?
There are other gold ETFs, but none are as focused. Many have a cross section of different types of miners in them – gold as well as other metals. Some include firms with small market capitalization along with the larger firms. Some are market cap weighted, which can lead to extreme concentration in the top two names, nearly 35-40% of the group.
Our ETF is very simple to understand. It is an equal weighting of only the top 20 and only true gold mining leaders.
Who is this fund suitable for?
Our clients are advisors, but the HGGG ETF might be suitable for people who are concerned that we are in the late stage of an economic cycle and are looking to be a bit more defensive with their portfolio. Or, it may be somebody who sees value in the gold sector and wants to capture the top 20 in one product.
For more on Harvest Portfolios click here.
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The views and/or opinions expressed in the blog are of a general nature and are for informational purposes only. Blog contents should not be considered as advice and/or a recommendation to purchase or sell the mentioned securities or used to engage in personal investment strategies. Investors should consult their investment advisor before making any investment decision.