Gold Shareholders Wield Their Voices
Market review
Opposing market forces caused the gold price to consolidate for a third month in May. Stock market weakness stemming from a breakdown in tariff negotiations between China and the US was supportive. Gold also gained from falling real rates as five-year US treasury yields dropped below 2%. However, a stronger US dollar and weaker commodities pared gains. The US dollar index stood firm, near the top of its recent trading range, while commodities fell sharply on tariff and broader economic concerns. WTI crude oil fell 15.9% in May while copper declined 9.5%. Gold edged higher, gaining US$21.90 (1.7%) over the month to end at US$1,305.45 per ounce. Gold stocks also rose with the NYSE Arca Gold Miners Index up 3.0% and the MVIS Global Junior Gold Miners Index advancing 0.2%.
Central bank demand remained strong in the first quarter, as the World Gold Council reported a 145.5 tonne increase. This was the highest in six years and a 68% increase from a year earlier. Serbia became the latest country to announce intentions of increasing its official gold reserves.
Outlook
May saw a slew of poor manufacturing results. The ISM Index, industrial production, Markit flash purchasing managers, and durable goods all trended lower. Shipping and freight demand dipped and poor auto purchases caused retail sales to fall. The latest Duke University/CFO Global Business Outlook survey found nearly half of the CFOs in the US expect a recession by the end of the year, and two-thirds see a recession in the next 18 months. All these stand in sharp contrast to consumer sentiment, which jumped sharply. We think the Fed’s policies would lose their efficacy if manufacturing trends towards a new recession. Returns from gold may remain lumpy until the market sees the Fed losing control of a weakening economy.
Shareholder engagement and governance in gold mining
As the 2019 proxy season comes to a close, we have shareholder engagement on our minds. One of the positive crisis-era financial regulations coming from the 2010 Dodd-Frank Act is the proxy vote on executive compensation or “say on pay”. This provision effectively enables shareholders to decide whether CEO’s are overpaid. While the vote is non-binding, companies take it very seriously and we’ve seen gold companies make changes to their compensation policies if say-on-pay approval falls below 80%. The emergence of ESG (Environmental-Social-Governance) investing has further focused investors on corporate governance.
Shareholder engagement is on the rise with the objective of aligning company incentives and goals with those of their shareholders. According to Activist Insight, as reported in the Wall Street Journal, in 2018 a record 284 companies globally were publicly subjected to demands from activist investors, with 194 board seats changing hands, also a record. Meanwhile, mutual fund investor Neuberger Berman stated their opposing views publicly 60 times in 2018, up from 40 in 2014.
When it comes to shareholder engagement, funds fall into one of three categories:
- Activist – private equity and hedge funds who take an activist approach by changing board seats and top management. Activists often engage in proxy battles.
- Active – mutual funds with specialists who actively pick stocks and have deep knowledge of company fundamentals. Actively managed funds express their views through proxy voting and pushing quietly for change, while occasionally expressing their views publicly.
- Passive – Exchange-traded and other index-tracking funds that typically employ governance committees that guide proxy voting.
VanEck is in a somewhat unique position of managing both active and passive gold funds. We have seen shareholder returns suffer earlier in this decade due to misguided acquisitions, indebtedness, and poor operating performance. While low gold prices have enforced financial and operating discipline on the gold industry, we would not want to return to the poor business practices that characterised the boom years. We have become more engaged with boards and managements with the goal of maintaining discipline throughout the gold cycle, and have seen similar increases in engagement from other gold investors.
Through proxy season we believe our engagement and votes help companies keep the interest of shareholders front and center. We sometimes find it necessary to vote against management. As specialists who know the gold industry well, we also sometimes disagree with the recommendations of proxy advisors. The combined efforts of shareholders seeking to maximize returns using proxy votes, private discussions, and public opinions helps insure that the gold industry acts responsibly and remains prosperous.
IMPORTANT DISCLOSURE
All company, sector, and sub-industry weightings as of 30 June, 2019 unless otherwise noted.
References: Wall Street Journal, “Activist Investors Gain Clout as Stocks Tumble” (2018, December 26). Retrieved May 31, 2019.
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Published: 10 June 2019