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Veteran business journalist and investigative reporter Olev Edur takes you behind the performance numbers for close-up look at the people, processes, and portfolios that make investment funds tick.

By Olev Edur  | Tuesday, September 06, 2016

When it comes to investing in precious metals funds, what a difference a year can make. For the 12-month period ended July 31, 2015, the category’s average one-year return was a dismal -31.8%. For the 12-month period through July of this year, the category’s one-year average was a stunning 114.7%. And precious metals funds have surged as a consequence, posting triple-digit gains over the past 12 months. The Sprott Silver Equities Class A, for example, gained 147.2% in the 12 months to July 31.

Sounds great, and it would have been if you’d bought a lot of precious metals in July 2015. But as noted by Maria Smirnova portfolio manager of Sprott Silver Equities Class in Toronto, the S&P/TSX Global Gold Index (in U.S. dollars) had fallen 80% during the preceding four years.

“Gold is up 114% this year, but that’s not much when you consider it came down 80% from its highs [between September 2011 and November 2015],” says Smirnova. “You would have needed quintuple growth to get back to where we were five years ago.”

“That [114%] gain looks big, but I don’t think we’re at the end of the range yet,” Smirnova adds, pointing to the fact that historically, the gold index’s average return from a cycle trough has been about 500%.

And, the Sprott Silver Equities Fund may be one of the best places to capitalize on that upside, because silver tends to perform better than gold in bull markets. “This fund is designed very specifically for silver exposure,” says Smirnova. “It’s designed to benefit from bull markets.


“If you look at the gold/silver price ratio, it oscillates from a range of about 30:1 to 80:1,” Smirnova explains. “During bear markets, the ratio expands, and silver declines in relation to gold, and when the ratio contracts, silver outperforms gold. Last year the ratio was up to 84:1 and now it’s down to 70:1. I believe we have entered a new up phase in precious metals this year, and that shrinking spread confirms we’re in a bull market.”

Accordingly, Smirnova has been adjusting her fund’s portfolio to maximize continuing gains. “Last year the focus was on the larger, more liquid companies with production,” she says. “Now we’re adding more juniors, like the exploration companies. Juniors fly more in a bull market; they’re more leveraged to the commodity.”

As for why the turnaround in precious metals has taken place at all, Smirnova points to general global economic conditions. “Gold is driven by macroeconomic events, with an inverse correlation between real interest rates and gold prices,” she says. “We’re now in a period of low to moderate economic growth globally, with GDP estimates being revised downward in many countries. Most central banks have adopted very accommodating monetary policies, and in fact 40% of global sovereign debt now has a negative yield. That’s all helping gold and silver.”

The key catalysts, Smirnova adds, were that U.S. interest rates not having risen as fast as anticipated (“Everyone expected four interest rate hikes from the U.S. Federal Reserve this year, but so far we haven’t had any.”); Japan has adopted a negative interest rate policy (“People look at the U.S. as being important, but Japan is very important too.”); and Brexit (“After the vote, Britain lowered its interest rates and introduced quantitative easing, and gold shot up.”)

With little by way of signs that the global economy is picking up as a result of all this stimulation, though, Smirnova believes precious metals will continue to shine for some time to come, although she hedges when asked how long the sheen will endure: “Globally, the world has not been in a situation like this before,” she says. “But while we may not be into a prolonged bull market, I’m confident that we have a few more years of upside coming.”

Olev Edur is an experienced financial and business journalist and a frequent contributor to the Fund Library.

Notes and Disclaimers

© 2016 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without written permission is prohibited.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.

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