After years of being a strong asset during turbulence from other asset classes, the gold bull market seems to be coming to an end. The Dalton Nicol Reid investment team predicts two main consequences from the gold sell off:
A gold sell-off could mean that money can begin to come out of other safe havens over the next few years and into investments with a better risk/return trade off. “We have seen a near bubble in perceived safety in recent years. Gold rallied, bonds rallied, and safe stocks have rallied (eg Telstra)…We remain cautious of bonds but would not expect a savage sell off given Fed buying support.”
The team remains doubtful that money will transfer out of gold and into bonds, so it is likely to find its way into equities, property or infrastructure.
The team says the main issue for gold is that there is a need to find more buyers to drive the price up and after a decade of moves this has been more difficult. Furthermore, as it starts to fall, investors become more conscious of the fact it does not produce any income and this is creating selling pressure in a market searching for yield.
Gold isn’t seen as providing much of a road map to the performance of other commodities, which Dalton Nicol Reid says should run on traditional supply / demand dynamics. “We have been seeing some softness in this regard and are cautious on mining service players and small miners.”
They remain positioned in the larger miners for the following reasons:
Larger miners are taking steps to reduce capex and cut costs, and as they free up free cash flow they will increase returns to shareholders. “We note we have seen Woodside cut their proposed capex on their Browse project and we expect a significant capital return from them as a result.”
They have world class assets, low on the cost curve which means they can ride out cycles.
They are already priced at a discount to valuation reflecting the market cautiousness towards commodities at present. “While it is difficult to identify a catalyst at present, we could envisage a turnaround on the back of further Chinese stimulus.”
The recent Boston bombings also has an effect on the market, but Dalton Nicol Reid say the impact will be short-lived.