Dynamic Funds Portfolio Manager Robert Cohen offers up his outlook for both gold and silver during the next one to two years and provides some insight into the gold/silver ratio. He also explains the relationship between gold stocks and the gold price and mentions some companies he likes as well as one he bought in the past that climbed from $0.30 to more than $8.00 a share.
Video Transcript:
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Interviewer: Welcome, Robert. Can you please tell us about your firm and your role there?
Robert Cohen: I work at 1832 Asset Management, L.P. 1832 Asset Management is the advisor for both the Dynamic Funds and Scotia Funds. We are wholly owned by Bank of Nova Scotia. My role there is the mining specialist. So I have a background in mining and mineral process engineering. I have an MBA, CFA, and I’ve actually been working at the company now for 16 years.
Interviewer: Can you tell us your outlook for gold and silver during the next one to two years?
Robert Cohen: Over the next one to two years, we’re fairly constructive on gold and silver. So, you know, we’ll talk about gold first. We have really a perfect storm for gold. Basically, gold will do well when people are fearful of the expansion of global liquidity. That’s probably going to be necessary in both Europe and the U.S. to sustain the economy. I think what we are seeing is: while we are seeing some monetary policy easing, it’s kind of… Simplistically, it’s like taking training wheels off of a bicycle for a young child, but the child is still not ready to go off the training wheels.
So I think we’re experimenting with taking them off, but I don’t think it holds for very long. I think therefore under that scenario, it is constructive for a monetary asset such as gold, because basically what people are always programmed into thinking is, “hat is the gold price in dollars per ounce.” The proper way to think about the gold price is actually the reciprocal, ounces per dollar. So in a way, gold doesn’t do anything. It’s what currency is going to do.
So, if you think about what the purchasing power of a currency is, either gaining power or losing power. We have probably more reasons to see it, over the next few years, lose power, but just modestly. You’ll have more purchasing power protection in a hard asset, such as gold. Silver is a little bit of a different story, but still somewhat the same story. Silver is also a quasi monetary asset, insofar that it has been used in coinage, but it’s not accepted as a reserve asset by central banks around the world.
Nonetheless, in a normalized economic environment, we will see the gold to silver ratio emerge at around, above or below its 40-year average, of about 55 ounces of silver per ounce of gold. If it’s a little higher than that, then it means that things are not on as solid of footing as one would hope. If it’s lower than 55, then things are probably a bit more on the euphoric side of things.
So right now, with gold to silver ratio at 65:1, it’s telling you that we’re on a fairly solid footing, but there’s still room for the footing to improve until we classify it as a normal situation.
Interviewer: Do you think the gold equities will outperform the gold price this year?
Robert Cohen: Well, in an upward gold price environment, gold equities will outperform. And the corollary is true. If gold price drops, you’re more defensive in the physical metal than the equities. The simplistic way of looking at that is you’re looking at…most gold companies have roughly a 20%, maybe a 30% profit margin.
If gold price goes up… Let’s say gold price were to move up suddenly $100 an ounce. Typically, you’re going to see other things move up in tandem with that. You might see the oil price move up, eventually within two or three quarters, chemical prices. A big component for the industry is labor. So, labor prices can be sticky on the upside…insofar the time lag in which they’re sticky. It works out to being profit margin.
So, when the excess profit margin in an absolute term grows on a relative term, on the percentage, that obviously grows too. Over time, that percent margin will start to shrink, but nonetheless, the absolute margin will be obviously greater. Obviously your profit margin…if you’re making…say, if you made a constant 20% margin, it’s twice as much money at $2000 gold as it is at $1000 gold. Yet, it’s a 20% margin.
The corollary is also true on the downside. If gold prices fall, like we saw them last year, you’ll see other things eventually working through the system. You will see mining equipment prices fall, chemical prices fall, steel prices fall, because the factors that move up the gold price are the same factors that would push up, say, the oil price or other commodities.
So all in all, you got to look at the industry as fairly stable. People think that gold price is a very spurious thing, and it really isn’t. It’s really tied into the entire world and foreign currency as well. So when you’re looking at what’s going on with… You know, I always say if you can understand global currencies, you can understand the world. So that ties into gold, because gold is basically a cornerstone monetary asset.
Interviewer: Can you tell our viewers which resource stocks you like at this time?
Robert Cohen: In a fairly stable environment that we’re in, I like to typically barbell the portfolio. While I don’t have huge aspirations for the gold prices, I say it might constructively move up about $100 an ounce over the next year, part of me wants to be conservative. I want to offer our unit holders a very optimal risk to reward ratio.
So we will own some big cap companies, like one highlight one would be Randgold Resources. This is one of the premier gold producers in the world. It’s a both London and U.S. listed, dual listed stock, maybe not necessarily a household name, but certainly one which has had an impressive growth profile and very good management track record.
Goldcorp would be another one, as a cornerstone holding. We also own other senior companies, such as Franco Nevada, which is the premier gold royalty company, Fresnillo, which is the largest primary silver producer in the world. The single assets are commodity-focused company. But then on the other hand, in a rising environment, we also prefer to look out for our best development companies that we can find.
So, while I won’t own a huge dearth of development companies, I’ll be extremely focused and pick, say, my five or six favorite in the world, and own those in size. Things that we’ve done in the past, where we are the first movers into names that later become household names, for example, like Osisko Mining. We’re the first institutional shareholder there. I think we bought shares at the beginning, when it was 30 cents a share. We were the largest shareholder of that company. Today, it’s under a variety of takeover bid war, I guess, between Goldcorp and then recently Yamana trumping it.
Probably by the time people watch this, there’ll probably be another chapter that may have opened up in terms of that bid. But it was certainly not anything near a household name. So what I like to do is pick the, you know, my top development stories in the world. I straddle looking at the Australian markets, the London market, the Toronto market for the best opportunities in the world.
So things that we’ve uncovered are things like Pantheon Resources out of Australia, which has a multimillion ounce discovery, high grade, very robust economics in southwestern Mali. Another one is, on the Canadian exchange, is Roxgold. It’s about a $125 million market company, but they have a significant high-grade discovery in Burkina Faso. It’s about a million ounces of gold, around half an ounce per ton, so not the largest of mines. It will produce about 100,000 ounces a year.
But the internal rate of return on these projects is north of 35%, 40%. So, it doesn’t really matter what you’re doing in this world. If you’re able to find a project that can generate those kinds of yields, certainly worth owning.
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