SIMON BROWN: I’m chatting now with Jithen Pillay, from Allan Gray. We are talking gold. If you remember, a couple of weeks ago I was bemoaning gold and saying, oh, it’s not doing anything. I made the point at the time [that] it was flat and it remains kind of flat for the year to date so far. You might say flat’s not exciting but, hey, look at equities – flat is the new exciting. Jithen, I appreciate the early morning time.
One of the core sort of theories behind gold is that during periods of high inflation and economic turbulence, gold is a safe haven.
JITHEN PILLAY: Morning, Simon. If you look back to the early 1970s, effectively when gold lost its peg to the US dollar, gold has been highly correlated with negative real interest rates. What I mean by that – by ‘real’ I mean effectively nominal interest rates after inflation. Why is that?
Effectively, if you think of financial assets, they were just a sum of their future cash flows. With higher inflation, today those cash flows are worth less. And so historically what you’ve seen is people generally rotate in such times to real assets, something like gold, or commodities more broadly, rather than financial assets.
Your early guest was talking about inflation. If you look at the situation today, you know, the US 10-year treasury is at 3%, but US inflation is running at 9%. So that that negative 6% gap effectively is the highest it’s been since the eighties. Generally in such an environment gold tends to outperform something like equities and inflation linker bonds.
SIMON BROWN: We are talking gold here, but as an investor we can get gold. There are exchange-traded funds (ETFs), we could go and buy a shiny Krugerrand. But of course we could own the gold miners. Is there a ‘one or the other’ [case]?
JITHEN PILLAY: I think there’s a case for both, and certainly in our portfolios we think about both of them. As you mentioned, the metals are one avenue to get exposure to gold. For us we own the metal for a slightly different reason. Again, talking about times of turbulence, gold tends to have a very low correlation to equities – gold metal. So what we try to do when holding gold as the metal is generally we’re trying to reduce portfolio volatility … try to add a bit of diversification to the portfolio. There is a good case to be made to hold the metal and that can be, as you mentioned, ETFs, [or] gold locked in a vault somewhere.
The second avenue, as you talk about it, are the miners.
The thing with the miners, though, is we’re very cognisant of when to sell them because unfortunately in good times they tend not to be able to help themselves. By that I mean costs tend to follow prices on the way up.
And, secondly, they can’t help themselves by often buying assets at times when they shouldn’t be buying assets.
SIMON BROWN: I like that – they can’t help themselves. I think that that’s probably the best description I’ve heard of mining bosses so far.
In the mining space are there clear sort of preferences, particularly? We still have a fair number of miners. We’ve got the juniors such as Pan African [Resources], and of course then the large and in fact the global players such as AngloGold Ashanti and Gold Fields.
JITHEN PILLAY: That’s right. We take a fairly broad approach when we’re looking for miners. We hold the more traditional larger miners, something like Gold Fields and AngloGold. Also Sibanye, but I guess you can argue Sibanye is no longer a gold company, really; it’s more a PGM company.
But then we also in our portfolios have exposure to the more niche players. Something that we quite like is a company like DRDGold, which effectively treats all mine dumps in Johannesburg. It’s a fairly well-run business. It’s got net cash on the balance sheet and it’s a very small company, but we think one that can be useful to add to a portfolio.
SIMON BROWN: Yeah. DRDGold is certainly a long-time favourite. And coincidentally, of course, just a random factor for the folks out there, DRD is the longest-listed company on the JSE and 50% held by Sibanye-Stillwater.
We’ll leave it there. Jithen Pillay from Allan Gray, I appreciate your early morning insights.
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