Golden Prospect Precious Metals is the best performing investment trust year-to-date with a gain of almost 64%, but there could be more upside to come.
Golden Prospect Precious Metals (LON:GPM) is a tiny £22.5m investment trust that holds a concentrated portfolio of companies involved in the precious metals sector. It offers a different kind of exposure to its larger more diversified peers, although they have all profited from the increase in the price of gold this year.
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The precious metal has benefited from the recent cuts in interest rates with the central banks stepping in to counter the threat of a global slowdown due to trade war concerns. This has reduced the opportunity cost of holding gold and has helped the price to recover back above $1,500/oz giving it a gain of approaching 20% year-to-date.
Record buying by central banks
There have obviously been price surges before, but this time it is different because of the record buying by central banks, who tend to be long-term holders. President Trump’s willingness to enforce sanctions and tariffs on certain countries has increased the risk of relying on the US dollar as a settlement mechanism. Central banks have reacted to this by dumping some their currency reserves in favour of gold. Between them they added 374 tonnes in the first half of 2019, the largest addition in the 19 years that the World Gold Council has collected the data.
Gold mining companies are operationally geared to the price of gold, with even a relatively small change in the price of the precious metal having a disproportionally larger influence on earnings. This is especially true of some of the smaller stocks that GPM invests in, yet many of them are trading at a significant discount to their larger peers.
The closed-ended nature of the investment trust makes it ideal for investing in these less liquid stocks and the managers are certainly not afraid to back their views. At the end of September the ten largest holdings accounted for 59% of the assets, with the top three – West African Resources, Westgold Resources and Americas Gold and Silver – making up a significant 28%.
Not reliant on a higher gold price
The fund managers use extensive bottom-up analysis and look for companies that do not need additional capital raisings to remain in production and that are not reliant on a higher gold price to generate sustainable, positive free cash flow. They are also willing to invest in companies that operate in less stable jurisdictions with the largest holding, West African Resources, being in Burkina Faso.
Most actively managed gold mining funds and the indices tracked by the passive ETFs all tend to avoid the junior miners, which makes for a very cheap portfolio. In theory this could eventually result in more M&A activity, although the timing is anyone’s guess. It is also worth noting that the fund is trading on a 23% discount to NAV, which is in line with its average discount over the last 12 months.
GPM is about as high risk a fund as you can get and is regularly near the top or bottom of the annual performance league tables. Its small cap gold mining stocks are cheap, but they have been out-of-favour for years as reflected in the poor long-term performance with the share price falling just over 70% since the fund’s inception in December 2006. If you can withstand this sort of extreme volatility it might turn out to be a lucrative option and offer some decent portfolio insurance if the markets take a turn for the worse.
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