Frank Holmes, Sam Zell and the Case for Gold

02/15/2019 5:00 am EST

Focus: COMMODITIES

Frank Holmes

CEO and CIO, U.S. Global Investors, Inc.

Billionaire Sam Zell just bought gold for the first time, reports Frank Holmes, CEO of US Global Investors and editor of Frank Talk.

Zell just announced that he bought gold for the very first time in his life because, as he puts it, “it is a good hedge.” In a recent Bloomberg interview, the Equity International founder and creator of the real estate investment trust (REIT) admitted to seeing an opportunity in gold’s increasing supply shortage.

I believe Zell’s reasons for investing in gold are sound, and I’ve discussed them in detail a number of times before. Supply is indeed shrinking. The “low-hanging fruit” has likely already been mined, and it’s become prohibitively expensive for many companies to look for large-scale deposits, to say nothing of developing them.

As you can see below, the number of ounces in major discoveries has been falling for years, and exploration budgets are still far below the 2012 peak.

chart 1

As if to confirm Zell’s reasoning, the Canadian Imperial Bank of Commerce (CIBC) forecast that a gold deficit will emerge in 2019 “on the back of stronger demand over the next two years, primarily  from bar hoarding, net central bank buying and exchange-traded products (ETFs).”

Peak production, according to the bank, will occur in 2021 at close to 34 million ounces, but then decline to under 16 million ounces by 2030.

chart 2

Demand isn’t abating, though. We’re seeing appetite grow for the precious metal, not just from investors but also central banks, which have been net buyers since 2010. According to CIBC, several central banks stepped back into the market last year, most notably the Reserve Bank of India (RBI), which until recently “has expressed negative sentiment around gold purchases.”

CIBC raised its gold price forecast this year to $1,350 an ounce, up from $1,300. The bank is also looking for $1,400 an ounce in 2020.

As attractive as I think gold bullion looks right now, there could be some incredible opportunities in gold equities, which are extremely discounted compared to the S&P 500 Index.

Among CIBC’s favorite gold equities are Agnico Eagle (AEM), Wheaton Precious Metals (WPM), B2Gold (BTG) and SSR Mining (SSRM) — all of which we own in either our Gold and Precious Metals Fund (USERX) or World Precious Minerals Fund (UNWPX).

Sam Zell’s other point — about miners allocating their capital not to projects right now but to acquisitions—is also well-made. Indeed, industry consolidation is beginning to happen, which could possibly signal that the industry has found a bottom.

Back in September, mining giants Barrick Gold and Randgold Resources announced a deal worth $6.5 billion, making the world’s largest gold producer by annual output. That record will stand for only four months, as Newmont Mining just made public its own plan to buy rival Goldcorp for $10 billion.

The next deal to surface could be nearly as large. It’s now rumored that South African producers Gold Fields Ltd. (GFI) and AngloGold Ashanti (AU) are interested in merging. Although the rumor has not yet been confirmed, Gold Fields CEO Nick Holland said in an interview this month that, “If you are going to survive in the long term, you are going to have to look at consolidation.”

With combined output of 6 million ounces in 2017, a Gold Fields-AngloGold merger would create the world’s third largest producer. The South African company, which we own in the Gold and Precious Metals Fund, has now risen a remarkable 78 percent from its 52-week low in September.

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