Structure Matters: Factors That Drive Gold Miners

July 14, 2015

Weiskopf: Should investors look at the gold miners as beta to gold price?

Foster: Gold stocks have a high correlation to gold, and they normally provide leverage or “beta” to the metal. The beta typically comes from their earnings power, in-ground resources, potential discoveries and operating improvements.

Over the past decade, the beta has been higher on downside than upside moves in the gold price. As a result, many companies have underperformed gold. This was caused by tremendous cost inflation that put a squeeze on profits and disappointed investors.

Many of these factors have changed as managements have implemented cost controls and engineering improvements that should help to preserve margins going forward. As a result, we believe the companies will carry higher betas going forward, especially on the upside.

Weiskopf: A key factor with balancing the supply/demand equilibrium in the gold mining sector has been central bank transactions. What countries should we be focused on in the near term as a catalyst?

Foster: Central banks have been strong buyers recently, with 2014 as the second-strongest year on record. Russia has been the biggest purchaser. China doesn’t report official gold holdings, but it is widely believed it has been accumulating gold. It last reported in 2009, and many expect China to become more open as it seeks to establish the yuan as a reserve currency. This could become a catalyst for gold.

Weiskopf: Is the price of oil a factor to watch for profitability in the mining area and as a factor that is correlated to gold price?

Foster: Like many other sectors, oil sometimes correlates with gold, but it is an indirect link that is highly dependent on other factors that are going on in the economy and financial system. So it has generally limited value as a predictor. Gold mines, especially open pits, are significant energy consumers. Fuel can be up to 10 percent of a mine’s cost, so low oil prices have had a positive impact on costs in 2015 to-date.

Another area of cost savings are weak currencies globally, especially in Latin America, Australia and Canada. Gold is a dollar-based commodity, so weak currencies reduce the cost of locally derived labor and materials in U.S. dollar terms.

At the time of the interview, the interviewer’s firm didn’t own any of the securities mentioned. Dan Weiskopf is a portfolio manager of Access ETF Solutions LLC, whose third-party ETF strategies are offered through IPI Wealth Management, Inc. (IPI). IPI is an SEC-registered investment advisor, with its principal office located at 226 W. Eldorado St., Decatur, IL 62522, 217-425-6340. Access ETF Solutions LLC was established in 2013 with a focus that structure matters in selecting ETFs. Access ETF Solutions LLC is not affiliated with IPI. Readers are advised to read the full transcript of the interview, including disclosures at, or contact Dan Weiskopf at 212 628-4882.

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