Funds prepare for the next bull market in the gold and commodities sector

The mixed fund R-co Valor from Rothschild & Co Asset Management currently has 4.7 billion euros under management. Yoann Ignatiew has headed the team that manages this fund, which is allowed invest in both equities and bonds, since 2008. In a recent interview with the Neue Zürcher Zeitung, he revealed that the fund is very active in the gold and copper sector.

Copper producer Ivanhoe Mines is the fund’s largest equity position, accounting for 3.3% of fund assets. The fund’s largest single position is its high cash position, which accounts for around one third. The fund’s ten largest equity positions include two other mining companies, Newmont and Agnico Eagle Mines. Although they also produce a small amount of copper, they are primarily part of the gold sector. It is currently rather unusual for a mixed fund to be so heavily invested in gold and mining stocks, as unlike pure equity funds, the fund is also allowed to invest in fixed-interest bonds.

The fact that Yoann Ignatiew still favors buying gold shares is due to recent history: Although the price of gold has been rising for several years, gold miners are only now able to benefit from its rise. As a result, the prices of gold mines have lagged behind the gold price by around 35%.

Rising cash flow makes gold miners more attractive

In gold mining, wages account for 50% and energy costs for 25% of all costs incurred. The remaining quarter is made up of other raw materials and administrative costs. High inflation initially caused raw material and energy costs to rise significantly, followed by wages.

As a result, most mining companies have not been able to generate increasing cash flows despite the rising gold price. Only now are growing cash flows slowly being reported. This is also making mining shares attractive to investors again.

If this leads to further money gradually flowing into the sector, the point will soon be reached at which the bull market will begin to feed itself. Attracted by the price gains, more and more speculative capital will then flow into the commodities sector. Initially, it will also concentrate on the major producers.

But sooner or later, the focus will also shift to medium-sized and smaller producers and then to mine developers and explorers. This point has not yet been reached. But with every day that the gold price continues to rise and then does not fall back to its starting levels, this point comes a step closer.

The early bird catches the worm

Those who position themselves early on the stock market for such a development could reap high profits as soon as the market takes the expected direction. The gold mining sector is currently heading in this direction, as the price of the yellow metal continues to rise. At the same time, inflationary pressure in the sector is easing. This puts gold producers in a position to report higher cash flows.

Now all that remains is for investors to become aware of this development on a large scale. As soon as there is a desire to participate in these successes, the corresponding capital flows will be triggered, which will set the industry in motion.

On the surface, not much has happened yet. Under the surface, however, the gold mining sector is increasingly resembling a spring that is being compressed more and more, because the sector has not been as unattractive or as poor in terms of profits as the prices still suggest for a long time.