Gold Miners Monthly Report | October

Learn more about our gold mining ETF

• In the past decade, corporate debt has soared to historically high levels. The first significant victim of this indebtedness has been Evergrande and its investors. Will this be a wake-up call for the banks? [1]
• From a very favourable positioning structure for precious metals on the US Commodity Exchange (COMEX), we now have an even more extreme situation with technical funds and retail investors holding large short positions. [2]
• The M&A activities within the sector continue with this month’s announcement of the mega-merger of equals between Agnico Eagle Mines and Kirkland Lake Gold. [3 and 4]

Why AuAg ESG Gold Mining ETF | ESGO

Return potential: The equal-weighted design gives more exposure towards mid-cap and an underweighting of dominant mega-companies. This provides a beneficial return profile potentially for the ETF in a bull market for gold and gold miners. 

Potential Lower risk: No concentration risk in comparison to liquid/market-weighted ETFs. The probability of having, for example, two or three companies with a combined weighting of 25-35% is relatively high in a market/liquid-weighted index for a single sector. 

Active ESG screening: Tracks 25 best-in-class ESG Risk companies in the sector. A unique opportunity to access the theme via an ESG conscious mandate. The ESG Risk data is provided by Sustainalytics.

When you trade ETFs, your capital is at risk. For professional investors only.

Megatrend - Transformation to a Green World

Microgrids: Energy costs are a large part of a mining company’s expenses and are usually between 15–40 per cent. Energy consumption for the mining sector is estimated to increase by 36 per cent by 2035 due to increased demand for raw materials and because they are becoming more expensive to extract. The mining companies face the challenge that they need to achieve both their financial goals and their sustainability goals. To solve this, they need to review which energy sources they use and ensure they use them efficiently. One solution to this is Microgrids, which means that they have a self-sufficient system for energy. This includes both the generation of energy, for example, through solar cells, and the storage of energy in batteries. Such a system entails several advantages for the mining companies, e.g. reduced energy loss during transportation, more resistance to interruptions, and better control over their consumption. [5]

AuAg ESG Gold Mining UCITS ETF Performance Table (As of 30.09.21) 

Performance before inception is based on back-tested data. Backtesting is the process of evaluating an investment strategy by applying it to historical data to simulate what the performance of such a strategy would have been. Back-tested data does not represent actual performance and should not be interpreted as an indication of actual or future performance. Past performance for the index is in USD. Past performance is not an indicator for future results and should not be the sole factor of consideration when selecting a product. Investors should read the prospectus of the Issuer (“Prospectus”) before investing and should refer to the section of the Prospectus entitled ‘Risk Factors’ for further details of risks associated with an investment in this product. Source: Bloomberg / HANetf. Data as of 30/09/2021. Please note that all performance figures show net data.

Gold, Silver and Fiat Currencies

At AuAg, we like to see gold/silver as the standard measure of value and that the fiat currencies are either appreciating or depreciating against gold/silver. In the market, the price of gold and silver is in USD. This makes the price of these metals cheaper or more expensive in other currencies depending on the movements between, for example, USD and EUR.

Past performance is no guarantee of future performance. Source of all data: AuAg Funds. Please note that all performance figures show net data.

Megatrend – Monetary Inflation

Central Banks: On the 22nd of September, an FOMC statement was issued by the Federal Reserve Chairman Jerome Powell saying that they will hold off on the tapering and that it “may soon be warranted”. One reason they cannot be more specific may be that there are too many uncertainties (such as the debt ceiling situation) in the economy at the moment. [6]

Global Debt: Since the 2008 global financial crisis, which was a debt crisis, it was broadly agreed upon that debt levels should be decreased. Since then, quite the opposite has happened. All debt is not necessarily bad, but when the price of money goes down, the money tends to be invested in more risky areas. In the past decade, corporate debt has soared to historically high levels. The first significant victim of this indebtedness has been Evergrande and its investors. The development on how China handles the situation and how banks will start to act on other companies with similar business as Evergrande will decide how this situation ripples down through the system. [7] [8]

Producers – A Golden Opportunity 

In AuAg’s opinion, gold miners are well-positioned to profit from higher gold prices as many have cleaned their balance sheets during gold’s last bear market. We see a “lean & mean” sector with a growing number of M&As as it is hard to find new deposits. We also see more buybacks as well as a trend of higher and higher dividends. [9]

The price of gold may, over time, reflect the megatrend of unabated money printing and growing debt. When the price of gold rises in a bull market, it can have a dramatic impact on the profitability of a gold mining company.

Precious Metals are a part of the solution in the transformation to a green world. However, as the mining sector is a part of the global greenhouse gas emissions, it is important to be conscious of ESG aspects when investing. Modern Gold Miners now go on the grid, use solar energy, and use fuel-cell mining trucks. This is needed to be in line with the Paris Agreement.

Outlook

Here are some important factors that will impact the investment environment for precious metals going forward:

• In 13 years (since the financial crisis in 2008), the Fed’s balance sheet has gone from 1 trillion USD to over 8 trillion USD, which has supported the global equity market during all these years [10]
• The Fed is currently purchasing bonds at a rate of 120 billion USD a month [11]. It is noteworthy that the communicated upcoming “tapering” that makes the market so anxious does not even mean that you want to reduce and normalise the balance sheet, but just stop increasing it [12]
• The Fed also needs to be ready with additional support as there is a high risk that negotiations on a higher debt ceiling in the US are not solved easily. It is estimated that the Treasury is likely to exhaust its extraordinary measures if Congress has not acted to raise or suspend the debt limit by the 18th of October [13]
• From a very favourable positioning structure for precious metals on the US Commodity Exchange (COMEX), we now have an even more extreme situation with technical funds and retail investors holding short positions as never before [14]
• The trend for precious metals miners, with strong results at the current prices, rising dividends, more buybacks, and high M&A activities, continue. The latest example is this month’s announcement of the mega-merger of equals between Agnico Eagle Mines and Kirkland Lake Gold. [15] [16]

Constituent News

In the ordinary rebalance, the following composition will be implemented over a period starting on 27.09.2021 (cob) and ending on 29.09.2021 (cob).

• The new composition and target weights will be fully reflected in the index open 01.10.2021:
• New constitutes (green and bold)• Deletions (red and drawn out)
• Constitutes with over 85% participation from all 27 quarterly rebalances since the start of the index (dark)
• ESGO, ESG Risk Score – average: 26,48 / highest: 33,97 (Barrick)
• Universe, ESG Risk Score – average: 36,07 / highest: 61,49
• Index value as of 2021.09.30: 1970.60, +97,06% (index start date 2015.03.27, at 1000.00) 

Source of all data: AuAg Funds / Bloomberg / Sustainalytics / Solactive. Data as of 30.09.2021

Visit our gold mining ETF fund page here.