Precious Commodities:
Assessing Gold and Oil
in the Pandemic Age

The Covid-19 pandemic delivered a tremendous macroeconomic shock to global economies, which continues to reverberate in commodity markets as countries slowly begin to reopen for business. Precious metals veteran and Portfolio Manager Robert Cohen and Dynamic Strategic Energy Class Portfolio Manager Jennifer Stevenson provide their perspective on gold and oil, and how they’re positioning their respective funds in the current economic climate.

Another Golden Opportunity

At the very beginning, every crisis, including the Great Financial Crisis, starts the same way. People panic-sell, they sell everything, there are margin calls, they need liquidity, and everything sells down. When calmer heads prevailed in 2008, the gold sector was the first one to start performing. The same thing happened here, so no surprise.

The gold bullion price hung in, the gold equities got hammered, and then when the calm was restored, the gold price continued upward with all of the stimulus that was announced, about $3.trillion in the United States, and stimulus from around the world. Then it started moving the gold price higher.

Record Stimulus: Setting the Stage

While the broader stock market has recovered a lot faster than it did during the Financial Crisis, I don’t believe we’re through this crisis yet. If you look at the expansion of the M2 money supply and all the stimulus that is coming this way—it overshadows 2008. Don’t forget, when the Financial Crisis started, gold was approximately $800 an ounce. When this started, it was nearly double that, or just over double that.

During the Financial Crisis, we threw $1.trillion or $2.trillion at the system, and now we’ve already added $3.trillion more. If you just contrast it back to the days before 2008, the Fed balance sheet was around $1.trillion. By the time we come out of this, it’s going to be $7.trillion. I think gold’s got a long way to go from here, just to reflect its purchasing power.

The Age-Old Question: Bullion or Equities?

Ultimately, it depends on the investor objective. Bullion is great insofar as you always own that ounce of gold you purchased, but you get reasonable returns.

When you’re looking at equities, you get a much more pronounced leverage to the underlying gold price. If you pick the right equities, you can actually have some long-term performance, not only through owning the right equities but also through the exploration results.

In Dynamic Strategic Gold Class (See Fund Profile), bullion currently accounts for roughly 35% of the fund. But overall, there is more reason to be bullish on equities, so that fund is at the lower end of the range we have set for bullion.

About Robert Cohen

Having joined Dynamic Funds in 1998, Portfolio Manager Robert Cohen has over 25 years of experience in the mining industry and currently manages several precious metals-focused funds. Prior to joining Dynamic, Robert worked as a mineral process engineer at copper and gold mines in Canada, Chile and Australia. Learn more about Robert and Dynamic Strategic Gold Class (See Fund Profile).

Crude Reality

The oil demand shock has been absolutely enormous, and it came on the heels of what was already excess supply after the Saudis decided to flood the market with oil in March. At the time, it looked like the demand shock could be up to 30 million barrels a day – nearly a third of total consumption – and it’s looking now like it’s 17 million, which is still unbelievably huge.

Preparing for the worst

Back in January, when I was looking at this virus starting to spread, I looked at the portfolios and my first thought was that this could impact growth. The stocks I owned in the Permian Basin in Texas are valued on the basis of production growth, and they’d had a nice run into year-end, so I took them out of the portfolio, totally.

Then I made sure everything was defensively positioned, and that the companies we owned had manageable commodity exposure, bulletproof balance sheets and experienced management teams that had dealt with crises before.

Signs of Life

Since May we’re starting to see recovery in things like refineries. On the transportation side, we’re seeing increases in demand for diesel, and gasoline demand is finally starting to improve.
We’re seeing that demand increase at the same time as we’ve had a tremendous retraction in supply.

Preparing an Offensive Mindset

It was critical to see demand start to come back in May, coupled with a substantial response to cut supply coming out of the OPEC+ meeting. We saw the supply response, so that’s important to feel like we can wait for demand improvement to be able to go on the offense.

But for my funds, it doesn’t mean that you run out and invest all your cash. It means that, with this kind of market volatility on the days when my screen’s all red, that I go into still the best, most defensive names, but just add some more at a great valuation. If you’ve got good visibility, good management skills and good balance sheets, then layering in companies like that, at a really attractive valuation, it’s a nice place to be.

About Jennifer Stevenson

Jennifer Stevenson joined Dynamic Funds as a Portfolio Manager in 2010 and is responsible for several energy and resource-focused mandates. Currently based in Alberta, Jennifer has extensive energy industry experience and has been active in the sector for nearly three decades. Learn more about Jennifer and Dynamic Strategic Energy Class (See Fund Profile).

A Word About Alternatives

Dynamic offers a suite of alternative investments managed by experienced, active portfolio managers. Alternative investments can provide the right tools to thrive in different market conditions. As such, finding the right asset manager and portfolio management team is essential to achieving long-term success.

Visit dynamic.ca/active (site) to view our entire suite of Active Alternatives™.

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