Baker Steel’s David Baker discusses why investors can remain optimistic on the outlook for gold-mining equities – and arguably be even more so about their overlooked counterparts in the silver sector
“When the market runs hard like this, normally you have to have some kind of consolidation,” says David Baker, managing partner at Baker Steel and manager of the Baker Steel Gold & Precious Metals fund. “You have to shake the tree a bit and basically get rid of some of the ‘loose holders’, as it were. And it’s got to test you – you know, you have to think, Why did I buy that?
“As we speak, gold is up 26% so far this year and gold shares are up about 42% so I think we’re going to have a bit of a consolidation – that is how we have structured our portfolio and we have taken some profits from some of the really strong performers. “Having said that, the long-term outlook for gold is fantastic – for example, I think central banks are going to carry on growing their reserves. You have to remember that, in the 1970s, gold was 40% or 45% of central bank reserves, now it is 22%, so there is still a long way to go there.”
Speaking in the latest episode – the second of three – of a Baker Steel ‘Special’ on investing in gold, silver and other precious metals, Baker points to the new reporting season as another positive. “If you look at the number of shares on issue in the ‘GDX’ – an ETF of all the mining companies – it has been falling,” he notes. “Despite gold shares going up, then, the money flowing into ETFs is falling, which implies a bit of scepticism by some players as to whether the mining companies are going to perform.
‘Holy Grail’
“That said, we have just started the reporting season on the gold side – and I have to say it looks very positive. The results have been good, the mining companies are buying back more shares and they are paying good dividends. The companies we really want to find are those that are basically able to fund share buybacks and dividends and so are returning cash to shareholders and, at the same time, are growing their companies as well. As investors, that is the ‘Holy Grail’ – where you can get the cash return as well as a bit of growth.”
"Anytime you see that gold-silver ratio over 100x, I would argue silver is an interesting play.””
Turning to silver and silver miners, Baker describes the current market as “complicated”. “You can basically buy 100 ounces of silver with one ounce of gold,” he explains. “It is very rare that you see the gold-silver ratio over 100x – in 2011, for example, the ratio was 30x – and any time it has been over 100, typically, six months later, silver has outperformed and done rather well. The confusion you have in the market now, however, is how deep the recession is going to be, and how deep the slowdown is with the tariffs. It is going to resolve, I think, but for now there are still question marks.”
Nevertheless, Baker continues, the outlook for silver is underpinned by industrial demand in high-growth areas – led by solar-panel production. “Our view is that demand is going to carry on growing,” he concludes. “We might have a bit of a hiccup this year but most of the demand is in areas where there is still a lot of growth – whether that is solar, the green economy, data-centres, electronics, EV cars and so on. So I don’t think industrial demand for silver is going to collapse. At the margin, you might see a bit of weakness and the market will play that weakness – but, anytime you see that gold-silver ratio over 100x, I would argue silver is an interesting play.”
