The Ninepoint Gold and Precious Minerals Fund ended the month of July down 3.27% while the S&P/TSX Global Gold Index declined 5.09%. Investors continue to be worried about the escalating global trade war and rising geopolitical tensions. Worries caused by uncertainty often erupt into panic. We are seeing just that as pockets of panic are emerging across the developing markets. China, the second largest economy in the world, has seen its currency decline by almost 9% since April, 2018. The Turkish Lira has seen its value drop an astonishing 60% since the beginning of the year. The Argentinian Peso, the Brazilian Real, the Russian Ruble are the other victims of the emerging market carnage. The commodity complex has continued to suffer from the emerging market maelstrom. As investors have fled the EMs and into the safety of the US dollar and US equities, they have continued to press their short positions in commodities. Most surprisingly and somewhat counterintuitively, bets against precious metals, have now reached levels never before seen.
Short positions in gold are up 250% year to date. Investors are now short almost 200k contracts of gold or almost 20 million ounces of gold. We have seen gold do well following previous spikes in short interest. With almost US$24 billion of gold being shorted, any meaningful short-covering, should produce a meaningful price appreciation in gold.
Interestingly, silver shorts, are also at a record high at the time of this writing, up almost 170% year to date. The latest data indicates that investors are short almost 90,000 contracts of silver, representing almost 450 million ounces. This number is astounding to us for many reasons. With 852 million ounces of silver mined in 2017, 450 million ounces represent 53% of 2017 annual silver production. Out of 852 million ounces, 209 million ounces ended up in silver jewelry and 657 million ounces was used in industrial fabrication including silverware. The two uses of silver alone represent 866 million ounces, according to the Silver Institute report and are larger than the annual mined supply. The gap in supply and demand is met by silver scrap. Suffice to say, silver supply is tight. There are no mines scheduled to come on in the next year or two which would increase annual silver output by anything close to 450 million ounces. Unless an asteroid carrying half a billion ounces of silver lands on earth, we believe the shorts are playing a dangerous game with little to gain.
The top three contributors to the fund performance in the month of July were Gold Standard Ventures, Northern Empire Resources and Pretium Resources. Gold Standard announced drilling results of thick, high grade oxide mineralization at their Dark Star Nevada project, demonstrating the ability to grow the resource there. The Company also reported encouraging drill results at Jasperoid Wash, another high priority target. Northern Empire, which has been exploring its Sterling Gold project in Nevada, announced entering into a definitive agreement by which Coeur Mining would acquire the company. Pretium released its Q2 production, which was well ahead of analyst estimates on the back of strong grades following the successful implementation of the grade control system. Pretium also announced higher than expected production guidance for the second half of the year.
The top three detractors from the fund performance in July were Guyana Goldfields, Evolution Mining and Pan American Silver. Guyana reported a weak Q2 due to late arrival of mining equipment, deferring access to high grade ore and the company lowered its 2018 guidance. Evolution is a company that has met its production and cost guidance for seven years and finished fiscal 2018 with strong cash generation, however, the market was disappointed by its 2019 guidance. It remains one of our preferred gold producers due to a good management team and the ability to deliver significant free cash flow. Pan American is one of our preferred silver producers, the stock was subjected to profit taking after a major Canadian bank lowered their silver price forecast. Subsequent to month-end, Pan American reported a Q2 EPS beat on lower costs.
The Gold and Precious Minerals Team
1 All returns and fund details are a) based on Series F units; b) net of fees; c) annualized if period is greater than one year; d) as at July 31, 2018; e) 2001 annual returns are from 11/15/01 to 12/31/01. The index is 100% S&P/TSX Global Gold Total Return Index and is computed by Ninepoint Partners LP based on publicly available index information.
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