Seeking Alpha • Jan 11
Why ASA Gold and Precious Metals Could Perform Well
Summary
Gold is on the rise, driven by strong and compelling macroeconomic and geopolitical factors.
Investors should consider ASA Gold and Precious Metals Limited, as this asset management company has a high beta gold.
The current price level seems to present interesting entry points.
There is also a risk that gold will not perform as expected, but this is lower than it was a few weeks ago.
Gold Price Outlook
The price of an ounce of gold traded via Gold Futures with expirations in February 2023 (GCG2023) was $1,876.70 at the time of writing.
Over the past week, gold prices are up 5.6% on rumors of a slowdown in economic activity in 2023, underscoring the precious metal's safe-haven properties.
Two main reasons are fueling demand for gold as a financial instrument to mitigate headwinds from adverse macroeconomic factors.
The first reason is high inflation, which tends to erode the value of the portfolio while the holder struggles to protect the various assets listed on the financial markets.
The second major factor is the economic recession that will result from the U.S. Federal Reserve's tightening of monetary policy.
Raising interest rates just as quickly to stem inflationary growth is not only a direct tool to restrict access to credit, but the Fed wants consumers and businesses to be less optimistic about the future.
So, the rate hike is just a signal that the Fed is sending to the economy, which, along with statements and opinions from politicians and institutions, amplifies propaganda aimed at specific behavior by households and companies. If these economic actors are less optimistic about the number of possibilities that the economy has for growing, it should lead to a more cautious stance on the money at their disposal.
Their changed stance should be reflected in lower consumer spending and investment capital, which in turn will ease pressure on the prices of goods and services as demand for goods and services slows down and cash flow in the economic system decreases.
As for U.S. annual inflation, markets will be updated with December data next Thursday. There is great expectation that another chunk will contribute to the downside curve, which has fallen from a record 9.1% in June 2022 to 7.1% in November 2022.
The lower figure, say around 6.7% as estimated from the below curve from Trading Economics, would still not do much to ease wealth concerns, as the 2% target of stable prices and healthy employment is still a long way off.
Source: Trading Economics
Further rate hikes on federal deposits are therefore needed, and the "hawks" of Atlanta and San Francisco Fed Chairmen already foresaw the possibility of a hike of up to half a point from current levels in their respective speeches yesterday.
Another rate hike will increase the likelihood of an economic downturn, with more companies embracing the downsizing policy of Amazon.com, Inc. (AMZN), Salesforce, Inc. (CRM), Twitter Inc. (TWTR) and Tesla Inc. (TSLA) in response to an expected drop in sales and profits.
Inflation and recession will continue to put strong upward pressure on the troy ounce of gold, leading economists to predict a steady rise in the price to $1,960.01 an ounce by the end of 2023.
Take Advantage of Rising Gold Through ASA Gold and Precious Metals Limited
To take advantage of a rising gold price, investors should increase their allocation to assets that track gold in the market, perhaps favoring those assets that tend to grow faster than the precious metal.
Therefore, investors should consider adding shares to their position in ASA Gold and Precious Metals Limited (ASA), as this stock appears to possess the above trait while it trades gold-backed assets and tracks the price of the precious commodity.
The chart below provides an indication of the high volatility of the ASA Gold and Precious Metals stock price compared to the ounce of gold traded through gold futures expiring in February 2023 (GCG2023).
Source: Seeking Alpha
However, if the weekly returns on ASA Gold and Precious Metals are taken as the result of a linear relationship in which the gold futures contract expiring in February 2023 (GCG2023) is the input or independent variable, the average result is the weekly returns on ASA more than double the weekly return on GCG2023.
When the 12-month weekly returns of both securities are combined according to the above relationship, the model shows that ASA has a beta gold of around 2.
So, this means that an investment in ASA Gold and Precious Metals should rise much faster than the expected increase in the price of gold.
ASA Gold and Precious Metals Limited
ASA Gold and Precious Metals Limited, headquartered in Portland, Maine, is an asset management firm that invests in the public stock markets worldwide.
Specifically, ASA Gold and Precious Metals Limited invests in shares of companies engaged in the gold and other precious metals industry as exploration, asset development and mining companies.
ASA Gold and Precious Metals Limited also invests in exchange-traded funds that track the price of gold and other precious metals. ASA Gold and Precious Metals Limited has been in operations since 1958.
In constructing its portfolio, the company relies on the work of analysts and other professionals who conduct fundamental analysis and take a bottom-up approach.
As such, the Investment Manager makes allocations to companies that it believes have a high likelihood of delivering very good results over time.
Investment expectations are based on a number of qualitative and quantitative factors. The former refers to the respective boards of directors of the different companies in the portfolio as well as the experience and expertise of the managers. The quantitative factors include the use of various financial metrics such as price/earnings, enterprise value/EBITDA ratios, EBITDA margins, and estimates of the company's profitability growth potential.
Therefore, as part of its fundamental analysis, ASA Gold and Precious Metals Limited scans the metals and mining companies sector looking for stocks whose market value is below the fair market value, which is assumed to be the intrinsic value of the investment. If the condition is met, there is a high probability that ASA Gold and Precious Metals Limited will buy the share capital of this company, since in this case the company's shares will be considered undervalued by the market.
In addition, ASA Gold and Precious Metals Limited conducts meetings with the miners' executives and dispatches its own emissaries to the sites where the miners conduct their exploration and exploitation of mineral deposits.
ASA Gold and Precious Metals Limited Stock Valuation
As of November 30, 2022, ASA Gold and Precious Metals Limited had net assets of $325 million, or a net asset value per share of $16.87. When this is compared to a share price of $15.66 (at the time of writing), it reflects that ASA stock is trading at a discount of 7.2%.
Source: Seeking Alpha
ASA Gold and Precious Metals Limited stock is trading almost in line with the 200-day simple moving average line of $15.74, which could also provide an indication that current entry points might still be attractive despite the recent rally in the share price of 28.4% from the Nov 3 bottom of $12.12.
Another clue in this vein could be provided by comparing the chart above with the one below, where the VanEck Gold Miners ETF (GDX), the most widely used benchmark for the metals and mining stocks industry, is instead trading well above its long-term trend of the 200-day simple moving average line of $28.85.
Source: Seeking Alpha
Therefore, ASA Gold and Precious Metals Limited could offer the shares of precious metals companies at an advantageous market price other than at a discount to the net value of the assets.
ASA Gold and Precious Metals Limited Portfolio Composition in Terms of Net Asset Value
As of 30 November 2022, ASA Gold and Precious Metals Limited's portfolio comprised, by net asset value, 76.5% gold, 16.6% diversified miners, 4.3% silver, 1.7% cash and 0.9% platinum and palladium.
Mining companies made up 53.9% of the total shares, while exploration companies made up 34.3%, development companies 10.1% and net cash 1.7%. Allocations to royalty companies were not made.
