RING - RING: Gold Has Decent Fundamentals

2023-06-20 09:55:20 ET

Summary

• Gold S/D fundamentals are really quite alright at the moment between emerging de-dollarisation and shrinking gold reserves.
• While the dollar is still very much in use, there is data showing that gold reserves held by central banks are going up while dollar reserves are going down.
• While there isn't an aggressive bear case to be made against the dollar, in our opinion, there is a positive case to be made around gold.
• RING gets decent exposures to gold miners, with Newmont and Agnico being decently priced considering current or imminent cash flows.

The iShares MSCI Global Gold Miners ETF (RING) gets investors exposed to a basket of relevant gold miners whose prices are mostly correlated with the spot price of gold and whose reserves and projects promise incremental cash flow growth. Key to RING are the S/D dynamics surrounding gold, and we think growing gold reserves and risks to the dollar, as well as the slowing down of rate hikes, all help contribute to the favourable picture for gold miners. However, we still think there are better ways to play gold than this basket of relatively high profile names. Nonetheless, we like the gold thesis and playing the commodity.

RING Breakdown

Let's do a quick breakdown of what's in RING .

It's all gold mine exposures, where some of the gold miners also sell silver or have copper developments including Barrick ( GOLD ) and Newmont ( NEM ) among others. The skew of the portfolio is aggressive towards the top 3 holdings. In the case of Newmont, PEs are pretty high around 22x, but they have projects in the pipeline related to mine expansions that should grow production by 50% quite soon , over the next year or so. Then after than they have entirely greenfield projects that could add considerable production of copper as well. Copper remains a structurally favoured asset by the unstoppable renewable and electrification trends, so that plays into why the overall RING multiple is above 20x in PE. Agnico Eagle ( AEM ) is cheaper, more in line with what you'd expect from a typical miner at around 10x. Overall, from a PE perspective the 20x multiple implying for the moment a low earnings yield for RING appears reasonable considering capacity expansions and other initiatives that could grow the companies cash flows, on top of the fact that incremental cash flow could be driven by the incremental rally in gold, in which we are quite confident. Ultimately, correlation to gold is a primary consideration for this ETF considering correlation between gold commodity indices and the stock prices of RING's major holdings.

Bottom Line

The S/D dynamics favour gold prices. While higher rates on fiat currencies have been a vector against the price of gold, which is for the most part a non-productive asset, general uncertainty and also de-dollarisation trends have helped. Firstly, we think that pressure from higher rates should start subsiding soon, beginning with the Fed's rate hiking pause. While we believe rates will inch higher, there is already clear signs that disposable income is falling and inventories rising, which means inflation should sputter out soon. On the de-dollarisation front, the matter is less bearish for the dollar than it is bullish for gold. Dollar is still a primary currency in terms of business activity, but central banks are beginning to position away from the dollar and into gold in terms of holding reserves. On top of that, reserves of gold were beginning to fall as projects slowed down around 2020. While there is quite a lot of investment going on now into developing new capacity, supply is still lagging as demand valves are releasing.

At 0.39%, the expense ratios are pretty low for RING considering the relatively smaller assets that the ETF contains. In addition to correlation to spot prices of gold which we think can progress further, the companies within RING are production entities that are investing in operational growth, so the yields should rise as their reserves come to productive fruition. However, we think there are more efficient ways to play gold exposure than with these pretty high profile companies that dominate the movements of RING. As such, we aren't interested in RING specifically since it's beaten out by alternatives.

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