CLOSE

We permit the publication of our auditors’ report, provided the report is published in full only and is accompanied by the full financial statements to which our auditors’ report relates, and is only published on an access-controlled page on your website https://www.hermes-investment.com, to enable users to verify that an auditors’ report by independent accountants has been commissioned by the directors and issued. Such permission to publish is given by us without accepting or assuming any responsibility or liability to any third party users save where we have agreed terms with them in writing.

Our consent is given on condition that before any third party accesses our auditors’ report via the webpage they first document their agreement to the following terms of access to our report via a click-through webpage with an 'I accept' button. The terms to be included on your website are as follows:

I accept and agree for and on behalf of myself and the Trust I represent (each a "recipient") that:

  1. PricewaterhouseCoopers LLP (“PwC”) accepts no liability (including liability for negligence) to each recipient in relation to PwC’s report. The report is provided to each recipient for information purposes only. If a recipient relies on PwC’s report, it does so entirely at its own risk;
  2. No recipient will bring a claim against PwC which relates to the access to the report by a recipient;
  3. Neither PwC’s report, nor information obtained from it, may be made available to anyone else without PwC’s prior written consent, except where required by law or regulation; and
  4. PwC’s report was prepared with Hermes Property Unit Trust's interests in mind. It was not prepared with any recipient's interests in mind or for its use. PwC’s report is not a substitute for any enquiries that a recipient should make. The financial statements are as at 25 March 2016, and thus PwC’s auditors’ report is based on historical information. Any projection of such information or PwC’s opinion thereon to future periods is subject to the risk that changes may occur after the reports are issued and the description of controls may no longer accurately portray the system of internal control. For these reasons, such projection of information to future periods would be inappropriate.
  5. PwC will be entitled to the benefit of and to enforce these terms.
I accept
CLOSE

1. Select your country

  • United Kingdom
  • Austria
  • Australia
  • Belgium
  • Denmark
  • Finland
  • France
  • Germany
  • Iceland
  • Ireland
  • Italy
  • Luxembourg
  • Netherlands
  • Norway
  • Singapore
  • Spain
  • Sweden
  • Switzerland
  • USA
  • Other

2. Select your investor type

  • Financial Advisor
  • Discretionary Investment Manager
  • Wealth Manager
  • Family Office
  • Institutional Investor
  • Investment Consultant
  • Charity, Foundation & Endowment Investor
  • Retail Investor
  • Press
  • None of the above

3. Accept our terms and conditions

Proceed

The Hermes Investment Management website uses cookies to remember your preferences and help us improve the site.
By proceeding, you agree to cookies being placed on your computer.
Read our privacy and cookie policy.

Gold: lustre all around

Home / Spectrum / Gold: lustre all around

Andrey Kuznetsov, CFA, Hermes Senior Analyst
26 August 2015
Credit

Facing a resurgent dollar and the prospect of increasing US interest rates, gold producers have been under a lot of pressure in the past few years. However we believe that gold companies play a vital role in optimising the commodities exposure within a credit portfolio. 

Demand: a different beast

The two largest markets for the gold are China and India, which have 28% and 24% market shares respectively. Given the ongoing industrial slowdown in China, we view this favourably versus many other commodity markets in which the world’s second-largest economy is far more dominant – 80% in seaborne iron ore, 60% in coal, 50% in aluminium and 45% in copper, to name a few. The major end markets for gold are jewellery and investments, enabling the precious metal to provide investors with diversification from many other commodities, which depend on industrial and construction demand.

Figure 1. Global gold demand split by country in 2014

chart1V3
Source: World Gold Council, Hermes Credit

Figure 2. Global gold demand split by end market, 1995-2014

chart2
Source: World Gold Council, Hermes Credit

Supply: peak production in 2015

The three-year running average for gold discoveries peaked in 1995, according to miner Goldcorp, and the average 20-year development window means that production is expected to peak in 2015. To quote CEO Charles Jeannes in the company’s most recent quarterly call: “On the supply side, we see lower mine supplies of gold next year and continuing indefinitely.” Our analysis of the all-in-sustaining-cost for major listed gold producers show that the average cost of production of $914 per ounce. However, this metric excludes the interest and cash taxes, which each add another $55 per ounce. Average total cost of $1024 per ounce is not far from the recent lows of $1090 per ounce. As a result, most miners are expected to maintain or reduce production this year and are cutting capital expenditure budgets.

Figure 3. Gold miners: 2015 AISC guidance 

chart3
Source: Hermes Credit, company reports.

Still a safe haven

Based on our reading of the minutes from the Federal Open Market Committee meeting in July, the likelihood of a rate hike in September and the pace of policy tightening is still not clear given that almost all members need to see more signs of economic growth and strength in the labour market to feel reasonably confident that inflation is moving towards the central bank’s long-term target. Gold has been a safe haven amid volatility, and China’s decision to make the fixing of the renminbi more representative of market-driven pricing has resulted in a sudden devaluation that surprised the market. The popularity of gold since this move indicates that investors still seek the precious metal in periods of uncertainty as a stable store of value.

Nuggets of performance

The global metals and mining sector has corrected significantly in the year to date period, and investors need to be selective when allocating to the sector. In this environment, we prefer commodities with better supply-demand outlooks and different end markets. We acknowledge that gold has  exhibited correlations with gold exchange-traded fund flows, real US interest rates and the dollar, and has been impacted by weaker year-over-year demand in H1 from both China and India. However, within the global metals and mining sector, we favour gold producers given their different end markets and the safe-haven status of the commodity. We prefer issuers that are positioned lower on the cost curve, are exposed to less geopolitical risk and have demonstrated a strong track record amid lower gold prices – because volatility is likely to continue, particularly when US monetary policy tightens. Credit investors with flexible mandates who do no want to increase their overall exposure to metals and mining could consider CDS pair trades, investing long in stronger issuers and short in names that are more exposed to China’s industrial slowdown.

 

Share this post:
Andrey Kuznetsov CFA, Hermes Senior Analyst Andrey joined Hermes in 2013 as a credit analyst. Prior to this he was a credit analyst for a multi-strategy credit fund at BCM & Partners LLP, a London-based boutique asset manager. Previously, he worked in various roles in Russia and China. Andrey graduated with a master’s degree in Management from London Business School and holds a degree in Economics from State University – Higher School of Economics in Moscow, where he majored in Financial Engineering and Mandarin Chinese. Andrey is a CFA charterholder.
Read all articles by Andrey Kuznetsov

Find posts by author

  • Andrey Kuznetsov
  • Audra Stundziaite
  • Filippo Alloatti
  • Fraser Lundie
  • Jonathan Lee
  • Louise Dudley
  • Mark Sherlock, CFA
  • Michael Russell, CFA
  • Mitch Reznick
  • Tatiana Bosteels

Find posts by category

  • Select category
  • credit