Ralph Aldis, portfolio manager with U.S. Global Investors, is a well-respected mining analyst. His detailed knowledge of the companies in the U.S. Global Investors Gold and Precious Metals Fund and across the entire precious metals space has taken years of meticulous work and dedication to his craft. Aldis urges investors not to get married to their stocks, but in this interview with The Gold Report, he discusses lots of names that are good for a fling right now.
The Gold Report: U.S. Global Investors recently published a report outlining the two trades that drive gold demand: fear and love. Which one is more powerful right now?
Ralph Aldis: The love trade is the foundation of owning gold stocks and gold because 70–80% of gold goes into jewelry. On the margin, the fear trade is driven more by the headline risks that we’ve seen in the Ukraine and the Middle East, or by inflation spikes. That’s what drives people to take action.
TGR: Do you expect recent events in the Ukraine and Middle East to further spur gold’s fear trade over the course of the summer?
RA: Yes. We have some geopolitical situations where the tension is elevating. It’s unfortunate. There are different brokerage firms saying that investors don’t need to own gold or gold stocks because the S&P 500 is going to be much higher later in the year. That’s assuming we live in a perfect world. Unexpected geopolitical events happen that make gold a reasonable thing to have in a small part of investment portfolios.
The fall season is always a strong demand driver for gold as the jewelry industry returns to replenish its stocks.
TGR: Could we see a better-than-expected late summer gold rally as these two demand drivers converge?
RA: It’s hard to say. We normally see about a 10% seasonal uptick in gold in the fall. But these geopolitical issues are problems that are not going away in a matter of weeks.
TGR: Improved U.S. employment numbers and the expectation of further U.S. economic growth has pundits offering forecasts on the impact of inflation on investments. What’s yours?
RA: The general consensus is that inflation is not going to be a problem, yet wage growth has been very stagnant. People are pushing for a higher minimum wage, while businesses will have to pay more to retain workers as the economy improves. The costs of things have gone up over time, yet wage growth has not. When that wage growth starts, we’ll see some inflation. But I don’t expect it to be extremely strong inflation in the near term.
TGR: The current U.S. rate of inflation is 2.1%; when you combine that with interest rates that are even less, you get negative real returns. That’s typically a positive environment for gold prices, isn’t it?
RA: Historically, low interest rates have been fairly positive for gold because when Treasury bills earn 6%, that’s going to pull money away from gold. Federal Reserve Chairman Janet Yellen is talking about having low rates for a lot longer than we expected. That has set the stage for a positive environment for the gold price. When gold gets down to $1,230 per ounce ($1,230/oz) or even $1,300/oz, half the industry doesn’t make money. That’s another issue where we have good fundamentals on the support side.
TGR: Goldbugs have been predicting hyperinflation for six years or so. Are we any closer?
RA: When you hear hyperinflation that’s not because you have growth—that’s because there is no growth. In places like Zimbabwe, which is operating on a socialist model and people don’t know where their next dollar is going to come from, inflation continues to skyrocket because there isn’t any economic growth. If someone is selling something, he better get as much money as he can. In the U.S. we have some growth and we’ll continue to have reasonable growth. We could still see some inflation from wage growth but certainly not hyperinflation.
TGR: What’s your current pitch to investors given the malaise in the gold space?
RA: Gold stocks really fall into an asset class that’s largely uncorrelated with the S&P 500. That makes it a great asset for portfolio diversification. Our recommendation is that investors should have something around 5–10% of their portfolios in assets that are uncorrelated with the S&P 500. Gold or gold stocks fit that very well.
Investors should also rebalance every quarter or at minimum once a year. When the S&P 500 is soaring they should take a little money off the table and buy some gold stocks and vice versa. The gold stocks had a big rally in H1/14. It probably wouldn’t hurt to take some money off the table and rebalance to an asset mix that’s appropriate for one’s investment horizon.
TGR: Do you recommend raising the percentage of gold and gold equities in an investment portfolio during times of greater global uncertainty?
RA: That would be contrary to what I would normally think if you always have a gold allocation. Gold prices typically rally when the broad market falls. That may be your opportunity to take some money off the table and buy another asset class that’s lagging. If you’re adding to your portfolio during a period of higher global uncertainty, you may be buying when the price has jumped as much as 5%. As soon as that uncertainty goes away, you’ve lost money. It’s better to have that allocation on a consistent basis and then take advantage of the volatility.