Both products of Commodity Capital invest in precious metals and mines. A good reason to ask the fund manager and author Tobias Tretter, why the time for commodities has come and why investors should start buying mining and precious metals shares.
What makes an investment in gold mines that attractive?
Besides a direct investment into physical gold, which every investor should have to diversify and secure their assets, gold mines also provide an excellent opportunity to take advantage of the current market situation.
First of all, gold and gold mines have a negative correlation to equities and bonds. In a theoretical portfolio, there should be at least 10% of the assets in the gold market for better diversification. The investor would gain greater independence from the turbulence in the financial markets, protecting his assets against a crash or inflation. Beside the fact that the ownership of gold mines has never been prohibited, contrary to physical gold itself, gold mines are the real winners in a gold bull market. Historically the mines have a leverage of 3:1 to the gold price. The result is that the gold mines achieve disproportionately high gains to the gold price. For example: The cost of production of one ounce of gold for a gold mine is 600USD, and the market price for gold rises from 900USD to 1200USD per ounce. An increase of one third in the price of gold has resulted in a doubling of profit for the gold mine from 300USD per ounce (900USD - 600USD) to 600USD per ounce.
Which gold mines should be invested in?
The majority of gold is produced by a few large companies, which are all struggling with the same problem: To replace mined gold with new sources. These companies are having to resort to overpaying the market value for small exploratory or junior companies, just to maintain the level of their reserves. Bearing in mind that 70 to 80 percent of new discoveries are made by such junior and exploratory companies, it seems most promising to invest in the junior companies sector. There is also high likelihood of an acquisition by one of the major companies.
Is the mine life cycle an indication for an investment decision?
There are two points of interest for investors during the life-cycle of a mining company. The first is during the exploration phase, but this period carries with it high risk as well as reward. The second promising period is just before the beginning of production. With the financing completed and the mine built, the risk of failure is low and the confidence in gaining a positive cash flow is high. During this period the major companies will be showing an interest and the mining company may become a takeover target.
Where does the Commodity Capital Global Mining Fund primarily invest?
The Commodity Capital Global Mining Fund invests primarily during the two time frames mentioned before, with the main focus on the second, less risky time frames. The stock selection is based on quantitative as well as qualitative analysis.In particular, qualitative research such as the skills of the management and access to financing will particularly be taken into consideration. It is the intention of the Fund to make site visits to all core holdings. My personal experiences with mining companies over the past 8 years is that nothing gives a better picture of a company than a site visit. A site visit offers the opportunity to speak with the workers and locals, and the impressions gathered can be much more valuable than any research done behind a desk.
How do you personally see the future for gold and gold mines?
In summary we can assume that there are great opportunities within the coming years in the commodities sector, in particular in the precious metals gold and silver. Demand will be driven by the instability in the financial markets as well as a fear of extreme inflation. Meanwhile this strong demand is being met by a dwindling supply, which is unable to be expanded in the short-term. Alongside physical gold, gold mine equities offer considerable potentional.
Why should investors go into the mining sector right now?
Today investors have the chance to invest at similar prices to those in 2000 and 2001 - the beginning of the current commodity bull market. Despite strong fundamentals, the mining sector has been under pressure through the financial crisis, possibly due to sales as a result of margin calls. Thus many junior companies are trading at similar levels to those in 2001, when gold was at 300USD/oz(currently 900USD/oz). Yet not only has the price of gold set historic highs in various currencies during the past 12 months, but the costs for these companies have fallen with the lower costs of steel and oil. Whilst in 2007 and 2008, despite the rising gold price, mining companies were making less profit due to the rising costs steel, oil and labour, their margins have positively exploded in the past 12 months. The mining equities have not reflected this at all, and so offer short-, medium- and long term investment opportunities.