Investors are seeking diversification amid ongoing market uncertainty, and allocating equities to the gold, precious metals, and minerals sector may offer this and other benefits. In this CEF Insights Podcast episode, Merk Investments President & Chief Investment Officer Axel Merk and Portfolio Manager Jamie Holman explore opportunities in the sector and share views on the U.S. and global economies heading into 2023. 


Merk Investments focuses on gold, precious metals, and minerals, and is the Advisor to ASA Gold and Precious Metals Limited (ticker: “ASA”), a closed-end precious metals fund.  

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CEFA:

Welcome to CEF Insights, your source for closed-end fund information and education, brought to you by the Closed-End Fund Association. Today we are joined by Axel Merk, President and Chief Investment Officer, and Jamie Holman, Portfolio Manager for Merk Investments. Merk Investments is the investment advisor of ASA Gold and Precious Metals Limited, ticker “ASA”.

We're so glad you both can be with us.

Axel Merk:

Good to be with you.

Jamie Holman:

Yeah, it's great to be here. Thank you so much.

CEFA:

Axel, since we last spoke in February, inflation has continued to be a significant issue. The Federal Reserve has raised interest rates in five consecutive meetings, and economic growth has slowed. Your firm regularly publishes economic and market research. What is your view on the US and global economies, as well as your expectations for the fourth quarter of 2022 and into 2023?

Axel Merk:

Yes. Well, for anybody who has paid attention, I think they would agree that the Federal Reserve is trying to substantially slow the economy, most notably, presumably, get it into recession. Inflation is too high, in the words of the Federal Reserve. Now they have been late to the table and now they promise to be higher for longer, which means even as the economy is slowing down, they'll keep rates high and act with a significant lag.

And if you put this in the context of the markets, historically, the markets tend to bottom out about two thirds through a recession, obviously with variation and every recession is different. But if that is any guidance, and based on how the US government at least, looks at recession, we may not yet be in a recession. And that unfortunately means that we may have some downside in the markets. And yes, a recession is ahead and further interest rate hikes are ahead, as well.

CEFA:

Merk Investments focuses on gold, precious metals, and minerals. Can you discuss your outlook for the sector, given your thoughts on the broader economies?

Axel Merk:

Well, sure. I mean, my broader outlook is quite negative, as you may have heard. Precious metals companies and gold, historically, do well late cycle. And part of that is though, because there's an anticipation that the Federal Reserve will react to that. Now, I just told you that this time around the Fed will be higher for longer. And so those buying precious metals buy it because it's very difficult, of course, to anticipate it, when the Fed will pivot. At some point the Fed will pivot. Usually, this may be the best forecast recession ever, but usually something extraordinary happens that gets them to pivot.

And so at this stage, it's kind of a diversification play. And the question is what is priced in? We do have the recession reasonably well priced in. We have several more rate hikes priced in, as well. And so it's in this context that gold is historically diversified. Precious metals companies, especially the more junior ones that we'll touch on, tend to have also, exposure to credit risk because they are in need of funding periodically. So, many of them have been hit quite hard. And then, so it's an anticipation of when will the Fed pivot? And my assumption is that the market will, especially for the gold and precious metal sector, will turn around before that pivot.

CEFA:

Jamie, you manage ASA Gold and Precious Metals Limited, symbol “ASA”, which invests in a portfolio of companies in the precious metals and mineral sector. For investors looking for exposure to this sector, what type of companies and characteristics do you focus on for your portfolio?

Jamie Holman:

Yeah, so we are focused on fundamental analysis. So we're really looking at the details of what these companies do and what assets they own. So there's an acronym, GRAM, which is Governance, Region, Assets and Management. And that is certainly four areas that we focus on.

So governance is just making sure that there's a proper oversight of the company and that the management team is properly aligned with you. And then region is looking at where the assets are located and whether it's in a favorable jurisdiction where you actually have ownership of the asset. And then the asset itself is really a geologic focus to look at the endowment of that asset and what potential that asset has to grow in the future. And then the management team is looking at the history of the management team and their ability to execute on the plan that they have in front of them with what they plan to do with the assets that they own. So that's kind of a general overview of how we look at the fundamental side of it.

CEFA:

Jamie, we have seen increased volatility in the equity markets, and gold is back at levels we saw in June of 2020. Are valuations in the precious metal space at attractive levels?

Jamie Holman:

Well, valuation is really in the eyes of the beholder, and I mean in what lens you're choosing to look through to do a valuation. And oftentimes with resource companies, you want to buy them when they look expensive on a EV/EBITDA or something because commodity prices have crashed and their margins have shrunk, which precipitates oftentimes the next bull market in commodities is when the commodity companies aren't making any money.

So we have seen a contraction in margins within the companies, and we've seen the cost base rise with inflation, which we've seen in the rest of the economy. But the longer-term trajectory of these companies at an elevated gold price looks very attractive. And when you kind of look at them through the lens of a $1,900 gold price, they look very well priced.

And then within the sector there's variation as well. So, I really divide it between the royalty companies, the senior producers, the mid-tier producers, and then the explorers. And the royalty companies, because they haven't been affected by cost accelerations in their cost base because they receive the top level of cash flows, they've held up much better and have gotten relatively much more expensive relative to the other portions of the sector. But as you go down and you look at the large caps and mid-tiers, they have historically gotten very inexpensive now, and then the juniors have gotten very depressed as there's a lack of funds in the market willing to fund these projects, and they're responding to that.

So we think that there's some good opportunities in the junior space and areas where companies are well cashed up and have great assets that will be desired throughout the cycle. So we do see some opportunity there.

CEFA:

Where do you see the best opportunities among precious metals companies?

Jamie Holman:

Well, I'll refer back to what I was just saying, and I think that in some of these really tier one deposits that are within junior mining companies that have sold off aggressively, I think that there's a good opportunity to step into some of those.

And then also looking within the mid-caps and the large caps for companies that can still grow their resource base and manage their costs, I think look attractive.

CEFA:

With a degree of economic uncertainty, are you finding that investor interest in commodities is expanding?

Jamie Holman:

Yeah, I mean, we are seeing investor interest for sure, but I think that most of the time capital and money are like sheep and they follow the herd. And as the selloff is underway, there's less interest. And as soon as the price starts to rebound there, there's more interest. So it seems like there's a lot of momentum out there following the price. But I would say structurally we have seen an increase in the metals complex, and it's really driven by the geopolitical issues around the world and the fact that people are becoming aware that a lot of the raw materials that we require to fuel our economy are mined and refined in areas that are not favorable to Western economies.

And it seems like there's a great initiative among Western economies to bring back the mining and refining of those minerals to more favorable jurisdictions. So we see a strong trend there. And also, there's been a strong trend with the electrification of the economy. So, going from a hydrocarbon-based economy to an electron-based economy, and that transition has a much different driver of demands for metals, and we're seeing a lot of interest in that switch in demand.

CEFA:

Axel, many investors are seeking diversification as markets have become more volatile. Do you believe an allocation to equities of companies in the precious metal sector provides diversification benefits? And how do you see this best positioned in an investor's diversified portfolio?

Axel Merk:

Yeah, so the precious metal space or the metal space more broadly, especially as we focus on the more junior space, is on the speculative side for many investors. And it does provide potential diversification benefits that can be very attractive, as Jamie has pointed out. A lot of the prices are very depressed. And what we can do in ASA, because we are a closed-end fund and don't have daily inflows and outflows, we can be a partner to many of these junior companies and together with other providers of capital, help fund them through periods where capital is not easy to come by. And obviously resources are limited. What we can do and similarly what others can do, and so the better ones will be getting capital more easily.

But it does provide, through ASA, investors have access to the space at a discount where prices are depressed. Now, is that an attractive opportunity right now? That's obviously in the eye of the beholder. One of the things we might want to mention that hasn't come out yet is that a lot of these exploration companies, they can throttle down their expenditures when times are a little rougher, because they're literally drilling holes looking for gold. It's different than when you're in production and you have many more fixed costs that you have to adhere to. And so this is a sector that when times are a little rougher, some things are put on ice or throttled down, and then they come back. And for the long term investor looking for value, this is certainly something to look at. And obviously the broader context is that precious metals prices have a low correlation to equities.

And then also the new interest, as Jamie has pointed out, in the shift in the economy, may well push pushup demand over the medium term of all the medals and gold may well be included in that. And so we think it's an exciting space, but by all means, it's a very volatile space though as well.

CEFA:

Axel and Jamie, thank you so much for taking the time to join us today.

Axel Merk:

Our pleasure.

Jamie Holman:

Yeah, that was great. Thanks so much.

CEFA:

We want to thank you for tuning into another CEF Insights podcast. For more educational content, please visit our website@www.cefa.com.

This material is not and is not intended as investment advice and indication of trading intent or holdings or the prediction of investment performance. All fund specific information is the latest publicly available information. All other information is current as of the date of this presentation. All opinions and forward-looking statements are subject to change at any time.

Merk Investments disclaims any responsibility to update such views and or information. This information is deemed to be from reliable sources. However, Merk Investments does not warrant its completeness or accuracy. This presentation is not intended to and does not constitute an offer or solicitation to sell or solicitation of an offer to buy any security, product, investment advice or service. Nor shall any security, product, investment advice or service be offered or sold in any jurisdiction in which Merk Investments is not licensed to conduct business and or an offer, solicitation, purchase, or sale would be unavailable or unlawful.