Rising precious metals prices offers unique HF trade

Precious metals traders are coming off a spectacular year as prices in both gold and silver have risen steadily. Over the past year, gold’s value has been rising due to the continued prospect of negative or falling U.S. interest rates and depreciating U.S. dollar. For investors looking to seize on the safe harbor investment play due to the pandemic, silver’s value too is expected to outpace the growth seen in gold as its industrial use in solar panel production and technology is expected to drive demand for buying bullion. But for Stamford, Connecticut-based long/short equity shop Equinox Partners there is a better way to play the volatility in the sector and that is via a niche stock sector bet that is understood to have yielded a whopping gain of 54% plus in 2020. Alternatives Watch caught up earlier this month with Equinox CIO Sean Fieler to get a better understanding of how precious metals gains are driving his long only hedge fund book these days. “There is a high degree of correlation between metals prices and mining companies,” observed Fieler. “There is just not a lot of resources being applied to gold and silver mining today and that’s the opportunity.” The $600 million hedge fund firm is understood to have outperformed the large-cap HUI Gold Miners Index by 229% net since 2007. While returns dipped slightly in January (-7.7%), the performance is in line with the HUI Gold Miners index. The firm’s expectations remain ‘golden’ as the investment thesis as the U.S. government debt continues to rise going into another round of fiscal stimulus and the value of the U.S. dollar dips as the Federal Reserve injects capital. This on top of growing demand for silver and gold on an industrial basis and following a buying spree of gold by global central banks as a flight to safety in the volatile markets of 2020. When the pandemic shutdown drove down stock markets, mining companies traded lower right along with other equities. But according to Fieler, over the last two years capital has been spent buying precious metals and not in the mines themselves, that is set to change. Much of that buying of hard assets too has been driven by the growth of the precious metals ETFs by investors. “Talking to institutional investors, it is very different today from what we saw a year ago,” said Fieler. While he expects initially money will go into the metal directly, eventually capital will get through to the mining sector. Many investors are still underweight silver and gold, let alone mining companies, he added. The deep bear market in mining stocks continues with junior mining company stocks trading at steep discounts -- up to 80% of their net asset value. That was the case going into 2020 and over the course the year the gap to NAVs only grew. At a time when the U.S. stock market is trading at record highs, it is easy to see that value is hard to find. Still Equinox owns 25 to 30 names in the mining sector. The average holding period is five years for Equinox. The companies themselves tend to be listed in Australia and Canada, but they operate all over the world. And the trend Equinox is riding out is far from over, according to Fieler. “This is the second inning,” he said. “You don’t see any of the late cycle mentality and you are still seeing very early cyclical skepticism.”

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