On the Money


The Allure of Gold: Insights into Inflation and Finding Glittering Gold Companies

December 17, 2021

Vice President & Portfolio Manager Robert Cohen discusses investing in gold – today and tomorrow.


Mark Brisley
Managing Director and Head of Dynamic Funds

Robert Cohen
Vice President and Portfolio Manager


Mark Brisley: You are tuning in to 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.

Welcome to another edition of On the Money. I'm your host, Mark Brisley. The topics of gold and inflation are so interlinked. Given the current environment, it's really no surprise that the conversation around gold as an investment and asset class is attracting the attention it is, especially during what seems likely to be an extended period of inflationary pressures.

Today, we're here to talk about gold. Gold has been historically viewed as an inflation hedge, and inflation is the hot topic right now. It's a conversation impossible to avoid, whether it's headlines of incoming economic data, or comments direct from CEOs and management teams, but it's also very front and centre for investors as we see and feel real increases in daily life.

Increased prices at the pumps, higher grocery prices, supply shortages, all tangible examples investors are feeling directly in the wallet right now. With all of this talk on inflation and gold's historical application as an age-old inflation protection strategy, I welcome our resident gold and precious metals portfolio manager, Rob Cohen, to the conversation.

Rob, to get started, gold has been a bit perplexing this year, and it seems to be trading back and forth within a range and not making a definitive break in either direction. It's like this push-pull in the market. On one side, you've got the impact of faster tapering, and on the other, the safe haven sentiment at the idea of inflation running hot for longer. What's your view of what's driving the gold price in 2021?

Robert Cohen: I think what we see here is a bit, sometimes we see a delayed response with people's interpretation of economic data, and as they digest it, the gold will work. In short term, we've seen it even recently tumble in response to the US ten-year TIPS yield, but if you look at the big picture, and as you mentioned, a lot of the points in your introduction, so I won't repeat them, but you have a situation where even, especially since the pandemic unraveled, you've already seen a very large increase in US money supply.

It's already grown 33% since the beginning of the pandemic, and right now, as we speak, we got this Omicron variant alive and well, and people digesting what that all means. That in itself may put the brakes on the Fed's tightening plans. That's another thing to keep in mind. Bigger picture medium long-term, we now have US budget deficits running at greater than 13% of GDP. You've got the US debt level bumping up against their debt ceiling limit of $28.5 trillion, which is 120% of GDP, and there's talk that within five years, this will exceed $40 trillion. It's no surprise with all the printing of money that it trickles down into the devaluation of money. It's really monetary policy that's driven inflation, and just the de-valuing of currencies, whether it be the US dollar or Canadian dollar.

Mark Brisley: Yes, and on that point, more recently we saw the US Federal Reserve change their tune in a couple of areas. One, is they seem to be dropping the word transitory when it comes to their description of inflation, and of course, chairman Powell's recent comments on tapering faster. What does the acknowledgment of more persistent inflation mean for gold, and has gold reacted as you would expect since?

Robert Cohen: One of my favorite gold economists is Martin Murenbeeld of Capitalight Research out of Victoria, BC, and his models, which you can crank through a lot of the economic data, and just spit out the gold price where it should be, he's saying it's mildly undervalued at around $50 an ounce, which isn't a lot, but it is significant. Then his one-year forecast on gold is now, offhand, I think it's at least $100 or more an ounce higher. I think we can work with that in the backdrop.

One thing that really affects gold and gold stocks are the sentiments toward gold. Right now, I think investors are very much like passengers on a ship, and they're maybe worried about something, and then they all pile onto the port side of the boat, and the boat rocks over to the left, and then they all run to the starboard, and then it rocks to the right. I think that's what we're seeing, is that this herd mentality and almost every week it's jumping from one area to the next, but I think over the long-term, I'm very comforted that gold is going to perform just fine.

Mark Brisley: As we move into next year then, what are some of the trends you're watching? Especially those that you think would be the closest gauge for the performance of gold.

Robert Cohen: One of the closest gauges is real interest rates. You've got to look at inflation, it's running very high. I agree with you that whole transitory, whoever brought that into the language, I'm not sure what they were thinking. That's just something that we can just really easily ignore. We do have inflation, just lots of inflation coming. Even the headline numbers, I find that they even play with the numbers because they're using averages of which include backward data, as well as forward data. It brings the average down to like 2%, 3%. The reality is, we have the US running at 5.4% inflation.

I lived in Latin America in the 1990s. This is really reminiscent of when I lived in Chile working in the mines there of what was going on with monetary policy in the country at that time. We are seeing beginnings of that reckless financial policy, double-digit, triple-digit, increases in money supply down the pipe perhaps, government finance debt, what have you. I don't have a lot of faith in keeping money in cash. You want to invest that money, whether it be in the stock market, real estate, gold, what have you, you want to be diversified. I think that's the big theme that I'm working with.

Mark Brisley: Rob, there's been a lot of coverage on the massive amount of money supply. You talked about it earlier about what's been created since the onset of this global pandemic. You highlight that the effects on global currencies might be a bit hidden given the broad extent of it. Can you dive a little bit more into that point?

Robert Cohen: I think one thing we see here is when the pandemic hit, a lot of people were saying to the government, do something about this. Their responses were social handouts, if you want to call it that, and you're expanding the money supply. When you do that it, in turn, causes inflation. People are seeing, for example, hard assets going up. Real estate is one of the clearest examples of that.

As real estate prices inflate, people go back to the government say, hey, real estate prices are inflating, do something about it. You get into a vicious cycle of social handout, so to speak, and then dilution of money supply which causes more inflation. I see ourselves going down the same track as many countries in the emerging markets have made in the past. I see it now happening here.

Mark Brisley: Rob, a lot of discussion about supply chain-related issues, and the fact that supply shocks and shipping bottlenecks, that's what's really driving up prices. That's the root of a huge amount of the inflation we're seeing, and that, that will probably dissipate at some point in 2022, or at least improve. Does that change the view of what we're talking about here with respect to gold and just the overall inflationary pressures in the market?

Robert Cohen: Yes. I think supply chain disruptions are part of what's going on in inflation. I think there's a lot more going on with monetary policy, fiscal policy, then into pandemic restrictions that are all happening all at the same time. In terms of monetary and fiscal, we can count on things being pretty bad. With the pandemic, don't forget, two years ago, everyone thought we would be through this within 12 to 18 months. We're now getting on a closer to two years and no end in sight. That was underestimated.

In terms of supply chain disruptions, I think we're also underestimating how long it's going to take to work through them. I think it looks to be a lot longer than what meets the eye.

Mark Brisley: The gold price itself, it's really only part of the picture for you as an investor, and ultimately for the funds that you run where you're investing in gold. It's the long-term value add that really comes from picking companies, exploring for and/or producing gold and precious metals. What are some of the ways that your process is different from other gold funds that exist out there?

Robert Cohen: That's a really good question, Mark, because our investment philosophy doesn't rely on just the mere fact that we're counting on gold price to go out. We are seeking out investments that a lot of people just wouldn't be able to do or find from sitting in their armchair at home, so to speak. I think investors have a capability of buying gold bullion, buying senior gold companies, or royalty companies if they want exposure to the gold price. If you put specialty fund managers in place here, and in our case, I have my associate that works with me, Nawojka Wachowiak, she's a geologist. I studied mining and mineral process engineering. Technically you're covering off the three main boxes on the technical side at looking at companies. Then we both have a financial background, so we're checking off that box as well. We're doing fairly thorough scouring of the world of what are the most interesting investments to us. We will stratify across the market capitalization spectrum. We'll have some big caps, midcaps and a few small caps, and that will give investors a really diversified portfolio.

One thing that we do differently than our competitors, is that we have a significant exposure to the Australian market. While Toronto is the global capital of mining corporate finance, Australia is a secondary market that's not as big as Toronto, but it certainly is an important market. I find a lot of the competitors tend to ignore opportunities in Australia. When we're effectively in the business of scraping the crème de la crème of what we want to be invested in, we have more stocks to pick from, and therefore have a very interesting portfolio which is somewhere around 40% weighted in the Australian market. That's one thing that makes us different.

Another thing that we do with our due diligence, is we will invest in advanced exploration companies which we think are on to the world class discoveries. Sometimes I liken it like this proverbial truffle dog, those dogs that go to look for truffles and then they start digging at something. We're pretty much the same way with that, so we will tag onto something that we recognize as a world class discovery unfolding, and we have no qualms about taking a big position. It's like the go big or go home adage, and we will take significant positions in some of these companies. Like Jack and the beanstalk. We planted our magic beans, and now we just have to watch the beanstalk grow.

Mark Brisley: That's interesting because those comments highlight the fact that when you're looking at how you're building your portfolio, you're talking about both exploration and production. How do you arrive at the mix of exploration versus producers, and is there some range that guides your allocations, or is that more a function of bottom-up opportunities?

Robert Cohen: I would have to classify it as bottom-up opportunities overall. I think in the production companies, we're probably more particular of which production companies we want to own. With that said, we don't own very many, because we only respect a small group of them a lot. Then we get into the development companies which in effect are probably the supermarket for the big companies. When they want to go and add to their production, they're going to be looking for the world class deposits. It's just an extra thing to have in your back pocket. While some of these development companies can emerge into production companies and be really successful in their own right, it doesn't surprise us if somebody comes along and makes a bid for these companies. That's just an extra thing to have in your back pocket. I think that's why it's important to put yourself in the position of not just an investor, but if you were running a senior company, what would you want to acquire next?

Mark Brisley: There's some areas of the market that investors have a temptation to try and actively trade. This conversation, I think I would say gold is definitely one that stands out, and probably for a lot of our listeners. As a seasoned gold manager, portfolio manager, what advice would you give investors about their thoughts towards allocating to gold?

Robert Cohen: I've always been skeptical about timing markets. I think that it's a skill that maybe doesn't even exist. I see always investors, whether they're professional investors or moms and pops, they always feel the need to try to time the market. I think timing the market, if you get it right, it's more luck than skill. That's just there might be the odd person who's truly skilled at it. I think you need to back up and look at the bigger picture, and you've always heard this, be diversified, and owning a component of one's portfolio in gold at all times is the equivalent to owning fire insurance or car insurance. Notwithstanding, gold is the most uncorrelated asset class with respect to other asset classes, and I chose my words really carefully there, I didn't say negatively correlated, I said uncorrelated. There is a difference there, because you can have the broader markets performing well, and gold performing well, at the same time, you can have both performing poorly at the same time, or you can have them doing something differently, so they are truly the most uncorrelated asset classes out there. In terms of portfolio construction, and diversification, it's a great asset class to have exposure to.

Things can turn also very quickly. If you're naked gold in your portfolio, and then you're saying, I'm going to wait for gold price to do something or move up or the sector to become hot again then I'll buy, usually by the time it's happened, it's almost too late. It's always good to have some. If you own some and the market rallies, you have now the prerogative to re-balance your portfolio, and said differently, if the market performs poorly, you can again re-balance and take it up higher. If you're not in the sector at all, you don't have the ability to re-balance, because you don't have any.

Mark Brisley: Those are great points. I was listening to some commentary the other day, and I can't remember which, but it did talk about the importance to still having a long-term view towards an asset allocation in any respect, especially even with gold, that you can't have an inflation hedge week to week. That long view is still incredibly important, correct?

Robert Cohen: Yes, that's correct. Again, I'm very comfortable owning gold. What I also like about gold is the gold price itself is; in a way it's not part of the financial market. It is and it isn't, it's not part of the stock market, per se. We see anomalies right now in the stock market, with companies like the Reddit users are following or what have you, where they're at ridiculous valuations. I think it doesn't hurt to have a sector that to some degree, it's a little bit out of favour, it's not completely out of favour, but it's a little bit out of favour, why not have that diversification?

Mark Brisley: Great points, Rob. As we're seeing inflationary pressures that are multi-decade highs and investors starting to reconsider gold as an inflation hedge, this has been a very useful discussion with you today, and I appreciate you taking the time to be with us.

Robert Cohen: Thanks for having me, Mark.

Mark Brisley: Thank you to all of our listeners for joining us at another edition of On the Money. On behalf of all of us at Dynamic Funds, we wish you continued good health and safety.

You've been listening to another edition of On the Money with Dynamic Funds. For more information on Dynamic and our complete fund lineup, contact your financial advisor or visit our website at dynamic.ca.

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