Ninepoint Gold & Precious Minerals Fund Market Update

Feb 19, 2021

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HOLD Gold and Silver

Gold and Silver’s performance over the past six months has been frustrating and agonizing. It has been frustrating because the seasonal strength we typically see in January and February failed to materialize. It has been agonizing because as precious metal equities have languished, broader equities have managed to attain new highs.

Recent data points from China and India (the largest consumers of physical gold) reveal the supply-demand factor behind the contemporaneous weakness in gold and silver.

While COVID-19 slowed the mining industry modestly, the manufacturing and sale of gold and silver jewelry ground to a halt.

Jewelry consumption in China dropped by almost 2/3rd in the early part of 2020 and has been recovering slowly since. India, which was more badly impacted by the pandemic saw a similarly protracted drop in demand, which has only recently started to recover. It is heartening to see demand from both countries recovering strongly. As consumption of jewelry has rebounded, we expect imports of raw gold and silver for manufacturing to follow suit in the coming months, as jewelers sell through their existing stocks. Jewelry demand from China and India represents almost 25% of the annual mined gold supply.

Concurrent with a rebound in jewelry consumption and gold destocking from retail store shelves, we have seen gold premiums in India rebound from negative into their normally positive territory. This is also a positive read through for silver and platinum jewelry.

The slowdown in demand negatively affected gold and silver’s normally strong start to the year. Gold posted its first negative January return since 2013. While the return on silver was positive for January, it was almost 50% below the 10 year average for the month. With gold no longer trading at a discount in India and China, the two largest consumers of physical gold look set to reassert their dominance of the market.

2021 has the potential to be special. In 2020, we saw a surge in investment demand from Western economies for both gold and silver. In North America and Europe, ETF holdings for both metals continue to rise as do coin and small bar premiums. We don’t see this trend changing as demand from out East normalizes. Remember, in the face of rising demand, the supply of gold and silver is fixed and finite.

We have even heard anecdotes of multiple generalist fund managers jettisoning their precious metal equities in favor of hotter sectors. The sell-down in precious metal equities has not been driven by fundamentals. 2020 was one of the most profitable year on record for the gold mining industry and margins are expected to reach new highs in 2021. The selling has been emotional, driven by FOMO over fundamentals. The GDM Index (which consists of gold and silver miners) has posted a 425%+ increase in EPS growth since 2019, while the SPX’s earnings have grown by a mere 3.5% over the same period. 2021 is expected to be another bumper year of profit growth for the precious metal sector, but you wouldn’t know it by looking at the share prices. The opportunity here is in plain sight. The precious metals sector has the potential to be one of the highest growth sectors of any this year. It is also trading at a ~60% discount to the S&P 500 and 74% discount to the Nasdaq on a multiple basis.

Here is a useful example:

In 2020, Kinross generated almost $1B in free cash flow while Tesla’s FCF was $2.8B → 2.8x higher than Kinross.
Kinross has a market cap of $8.2B. Tesla’s market cap is $752B → 92x higher than Kinross.

Gold’s long term trend is determined by real yields, food price inflation and the strength of the USD. Real years are firmly negative and are likely to remain so for years to come. Food prices are rising rapidly. The USD looks set to continue it’s bearish trend, as investors grapple with ballooning budget deficits and a difficult recovery ahead.

Gold and Silver’s struggles are short term in nature. In 2020, gold broke out of an epic decade long consolidation patterns and is resting before it resumes its rally higher. Similarly, silver is catching its breath after running up to $30/oz. As we have seen and experienced before, these periods of consolidation have resolved higher – in a sudden, violent manner. It is frustrating and agonizing trying to get the timing right. But remember that fundamentals are on our side. Valuations have never been cheaper. If history is a guide, the fruits of patience will be sweet and worth the wait.

Maria Smirnova, Shree Kargutkar & Jason Mayer
Sprott Asset Management
Sub- Advisor to the Ninepoint Gold & Precious Minerals Fund

NINEPOINT GOLD & PRECIOUS MINERALS FUND - COMPOUNDED RETURNS¹ AS OF JANUARY 31, 2020 (SERIES F NPP300)

1M YTD 3M 6M 1YR 3YR 5YR 10YR 15YR INCEPTION
Fund -7.1% -7.1% -4.0% -15.5% 40.9% 18.6% 19.7% -2.1% 2.6% 4.4%
Index -3.8% -3.8% -13.0% -23.2% 15.2% 17.2% 17.7% -1.0% 1.2% 3.1%

1 All returns and fund details are a) based on Series F units; b) net of fees; c) annualized if period is greater than one year; d) as at January 31, 2021; e) 2001 annual returns are from 11/15/01 to 12/31/01. The index is 100% S&P/TSX Global Gold Total Return Index and is computed by Ninepoint Partners LP based on publicly available index information.

The Fund is generally exposed to the following risks. See the prospectus of the Fund for a description of these risks: commodity risk; concentration risk; currency risk; cybersecurity risk; derivatives risk; exchange traded funds risk; foreign investment risk; inflation risk; liquidity risk; market risk; securities lending, repurchase and reverse repurchase transactions risk; series risk; short selling risk; small capitalization natural resource company risk; sub-advisor risk; substantial unitholder risk; tax risk; uninsured losses risk.

Ninepoint Partners LP is the investment manager to the Ninepoint Funds (collectively, the “Funds”). Commissions, trailing commissions, management fees, performance fees (if any), other charges and expenses all may be associated with mutual fund investments. Please read the prospectus carefully before investing. The indicated rate of return for series F units of the Fund for the period ended January 31, 2021 is based on the historical annual compounded total return including changes in unit value and reinvestment of all distributions and does not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The information contained herein does not constitute an offer or solicitation by anyone in the United States or in any other jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation. Prospective investors who are not resident in Canada should contact their financial advisor to determine whether securities of the Fund may be lawfully sold in their jurisdiction.

The opinions, estimates and projections (“information”) contained within this report are solely those of Ninepoint Partners LP and are subject to change without notice. Ninepoint Partners makes every effort to ensure that the information has been derived from sources believed to be reliable and accurate. However, Ninepoint Partners assumes no responsibility for any losses or damages, whether direct or indirect, which arise out of the use of this information. Ninepoint Partners is not under any obligation to update or keep current the information contained herein. The information should not be regarded by recipients as a substitute for the exercise of their own judgment. Please contact your own personal advisor on your particular circumstances. Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any investment funds managed by Ninepoint Partners. Any reference to a particular company is for illustrative purposes only and should not to be considered as investment advice or a recommendation to buy or sell nor should it be considered as an indication of how the portfolio of any investment fund managed by Ninepoint Partners is or will be invested. Ninepoint Partners LP and/or its affiliates may collectively beneficially own/control 1% or more of any class of the equity securities of the issuers mentioned in this report. Ninepoint Partners LP and/or its affiliates may hold short position in any class of the equity securities of the issuers mentioned in this report. During the preceding 12 months, Ninepoint Partners LP and/or its affiliates may have received remuneration other than normal course investment advisory or trade execution services from the issuers mentioned in this report.

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