Gold has shown an outstanding resilience against a strengthening US dollar over 2014 and the start of 2015. Is now a good time to invest in a gold mining bond? In this article, we look at the performance of gold and FIIG’s two USD gold mining offerings, Newcrest and Kinross (only available to wholesale investors).
Gold is currently trading at a four-month high of US$1,275.94/ounce. In the wake of the Swiss currency turmoil, gold’s attractiveness as a safe haven asset has become even more compelling, encouraging market analysts to predict the gold price will break through US1,300/oz in 2015. With gold showing resilience throughout 2014 and an outlook for increasing gold prices in 2015, now is a good time to consider an investment in gold through one of the Newcrest or Kinross bonds on offer.
While gold usually moves in the opposite direction to the US dollar, it surprised the market in 2014 by holding steady on its 2014 opening price of $US1,205.90/ounce, despite an 11% rise in the US dollar against most major currencies since September. At its current price of $US1,275.94/ounce, the gold price is up almost 6% since the beginning of 2014. In Australian dollar terms, this translates to a 14.7% increase in the Australian dollar gold price since the start of 2014.
More recently, the removal of the cap on the Swiss Franc last week has prompted investors to move even more money out of currency and into gold because of its safe haven status. Since the start of January, the gold price has risen 7.9% in less than a month.
The local share market responded to the gold price increase with a re-rating of most gold stocks – notably Newcrest’s share price has increased over 40% since November, with the resilience in the gold price combining with the strength in the US dollar to deliver an improved earnings outlook for the company.
Interestingly, the Newcrest US dollar bonds have only increased by between 0%-3% over the same period of time, and in Australian dollar terms the bond prices have increased by between 6%-9% after allowing for currency gains from the stronger US dollar. In fact, credit spreads have moved in the opposite direction to what would be expected given the improvement in the gold price. Credit Spreads on the Newcrest 2021s are almost 40 basis points (bps) wider since the start of November, while spreads on the 2022s are up about 13bps. With a share price increase of over 40%, you would expect spreads to be tighter against the levels they were at in the start of November. The chart below maps the performance of the stock price and bond price since November:
The Newcrest bonds have been issued in the US dollar bond market, and so while they are an Australian listed company, the value of their bonds is sensitive to the general market conditions facing the US dollar bond market. We believe the widening of spreads on Newcrest is as a result of being caught up in a general widening of credit spreads seen across the board, as opposed to a particular credit concern with the company. As a guide, since November last year, the 10 year spread between 10 year US ‘BBB’ corporate bonds and US Treasuries has increased by 23 basis points.
FIIG provides access to three Newcrest bonds and one Kinross bond, with the following indicative yields to maturity offered.
- Newcrest 2021 bond – 4.68%
- Newcrest 2022 bond – 4.90%
- Newcrest 2041 bond – 6.225%
- Kinross 2024 bond – 6.02%
Newcrest provides a good example of where the stock price and bond price have not been correlated. We believe this is to the potential benefit of bondholders, particularly if gold price forecasts of US1,300/oz and above eventuate and the credit rating of the company improves. In addition, the Newcrest bonds offer exposure to the ‘safe haven’ US dollar currency. The company has an investment grade credit rating and a market capitalisation of almost $10 billion. With the stock price up 40% since November and a flat bond price during that period, there is a good buying opportunity in the Newcrest bonds at current pricing.
For investors seeking a higher yielding offering, Kinross offers yields about 1% higher than the similarly dated Newcrest bonds. With the company having an investment grade credit rating and a market capitalisation of US$4.1bn (A$5.0bn), the bonds look like compelling value.
Note: Foreign currency bonds are only available to wholesale investors. All prices and yields are a guide only and subject to market availability. FIIG does not make a market in these securities.