• Gold

    Gold Shareholders Wield Their Voices

    Joe Foster, Portfolio Manager and Strategist
    10 June 2019
     

    Market review

    Opposing market forces caused the gold price to consolidate for a third month in May. Stock market weakness stemming from a breakdown in tariff negotiations between China and the US was supportive. Gold also gained from falling real rates as five-year US treasury yields dropped below 2%. However, a stronger US dollar and weaker commodities pared gains. The US dollar index stood firm, near the top of its recent trading range, while commodities fell sharply on tariff and broader economic concerns. WTI crude oil fell 15.9% in May while copper declined 9.5%. Gold edged higher, gaining US$21.90 (1.7%) over the month to end at US$1,305.45 per ounce. Gold stocks also rose with the NYSE Arca Gold Miners Index up 3.0% and the MVIS Global Junior Gold Miners Index advancing 0.2%.

    Central bank demand remained strong in the first quarter, as the World Gold Council reported a 145.5 tonne increase. This was the highest in six years and a 68% increase from a year earlier. Serbia became the latest country to announce intentions of increasing its official gold reserves.

    Outlook

    May saw a slew of poor manufacturing results. The ISM Index, industrial production, Markit flash purchasing managers, and durable goods all trended lower. Shipping and freight demand dipped and poor auto purchases caused retail sales to fall. The latest Duke University/CFO Global Business Outlook survey found nearly half of  the CFOs in the US expect a recession by the end of the year, and two-thirds see a recession in the next 18 months. All these stand in sharp contrast to consumer sentiment, which jumped sharply.  We think the Fed’s policies would lose their efficacy if manufacturing trends towards a new recession. Returns from gold may remain lumpy until the market sees the Fed losing control of a weakening economy.

    Shareholder engagement and governance in gold mining

    As the 2019 proxy season comes to a close, we have shareholder engagement on our minds. One of the positive crisis-era financial regulations coming from the 2010 Dodd-Frank Act is the proxy vote on executive compensation or “say on pay”. This provision effectively enables shareholders to decide whether CEO’s are overpaid. While the vote is non-binding, companies take it very seriously and we’ve seen gold companies make changes to their compensation policies if say-on-pay approval falls below 80%. The emergence of ESG (Environmental-Social-Governance) investing has further focused investors on corporate governance.

    Shareholder engagement is on the rise with the objective of aligning company incentives and goals with those of their shareholders. According to Activist Insight, as reported in the Wall Street Journal, in 2018 a record 284 companies globally were publicly subjected to demands from activist investors, with 194 board seats changing hands, also a record. Meanwhile, mutual fund investor Neuberger Berman stated their opposing views publicly 60 times in 2018, up from 40 in 2014.

    When it comes to shareholder engagement, funds fall into one of three categories:

    • Activist – private equity and hedge funds who take an activist approach by changing board seats and top management. Activists often engage in proxy battles.
    • Active – mutual funds with specialists who actively pick stocks and have deep knowledge of company fundamentals. Actively managed funds express their views through proxy voting and pushing quietly for change, while occasionally expressing their views publicly.
    • Passive – Exchange-traded and other index-tracking funds that typically employ governance committees that guide proxy voting.

    VanEck is in a somewhat unique position of managing both active and passive gold funds. We have seen shareholder returns suffer earlier in this decade due to misguided acquisitions, indebtedness, and poor operating performance. While low gold prices have enforced financial and operating discipline on the gold industry, we would not want to return to the poor business practices that characterised the boom years. We have become more engaged with boards and managements with the goal of maintaining discipline throughout the gold cycle, and have seen similar increases in engagement from other gold investors.

    Through proxy season we believe our engagement and votes help companies keep the interest of shareholders front and center. We sometimes find it necessary to vote against management. As specialists who know the gold industry well, we also sometimes disagree with the recommendations of proxy advisors. The combined efforts of shareholders seeking to maximize returns using proxy votes, private discussions, and public opinions helps insure that the gold industry acts responsibly and remains prosperous.


    IMPORTANT DISCLOSURE

    All company, sector, and sub-industry weightings as of 30 June, 2019 unless otherwise noted.

    References: Wall Street Journal, “Activist Investors Gain Clout as Stocks Tumble” (2018, December 26). Retrieved May 31, 2019.

    Issued by VanEck Investments Limited ABN 22 146 596 116 AFSL 416755 (‘VanEck’). VanEck is a wholly owned subsidiary of Van Eck Associates Corporation based in New York, United States. VanEck Vectors ETF Trust ARBN 604 339 808 (the ‘Trust’) is the issuer of shares in the VanEck Vectors Gold Minders index ETF (‘US Fund’). The Trust and the US Fund are regulated by US laws which differ from Australian laws. Trading in the US Fund’s shares on ASX will be settled by CHESS Depositary Interests (‘CDIs’) which are also issued by the Trust. The Trust is organised in the State of Delaware, US. Liability of investors is limited. VanEck Associates serves as the investment adviser to the US Fund. VanEck, on behalf of the Trust, is the authorised intermediary for the offering of CDIs over the US Fund’s shares and issuer in respect of the CDIs and corresponding Fund’s shares traded on ASX.

    This information contains general advice only about financial products and is not personal advice. It does not take into account any person’s individual objectives, financial situation or needs. Investing in international markets has specific risks that are in addition to the typical risks associated with investing in the Australian market. These include currency/foreign exchange fluctuations, ASX trading time differences and changes in foreign laws and tax regulations.  Before making an investment decision in relation to a fund, you should read the PDS and with the assistance of a financial adviser consider if it is appropriate for your circumstances. The PDS is available at www.vaneck.com.au or by calling 1300 68 38 37.

    Past performance is not a reliable indicator of future performance. No member of the VanEck group of companies or the Trust gives any guarantee or assurance as to the repayment of capital, the payment of income, the performance or any particular rate of return from the US Fund.

    An investment in the US Fund may be subject to risks that include, among others, competitive pressures, dependency on the price of gold and silver bullion that may fluctuate substantially over short periods of time, periods of outperformance and underperformance of traditional investments such as bonds and stocks, and natural disasters, all of which may adversely affect the US Fund. Foreign investments are subject to risks, which include changes in economic and political conditions, foreign currency fluctuations, changes in foreign regulations, and changes in currency exchange rates that may negatively impact the US Fund’s return. Small- and medium- capitalisation companies may be subject to elevated risks. The US Fund’s assets may be concentrated in a particular sector and may be subject to more risk than investments in a diverse group of sectors.

    NYSE Arca Gold Miners Index is a trademark of ICE Data Indices, LLC or its affiliates (“ICE Data”) and has been licensed for use by VanEck in connection with the US Fund.  Neither the Trust nor the Fund is sponsored, endorsed, sold or promoted by ICE Data.  ICE Data makes no representations or warranties regarding the Trust or the Fund or the ability of the NYSE Arca Gold Miners Index to track general stock market performance.

    ICE DATA MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE NYSE ARCA GOLD MINERS INDEX OR ANY DATA INCLUDED THEREIN.  IN NO EVENT SHALL ICE DATA HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.

    Please note that the information herein represents the opinion of the author, but not necessarily those of VanEck, and this opinion may change at any time and from time to time. Non-VanEck proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Historical performance is not indicative of future results. Current data may differ from data quoted. Any graphs shown herein are for illustrative purposes only. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.