Onno Rutten knows gold and silver can lag for long periods then soar

Onno Rutten, Vice-president of investment management and portfolio manager on the Mackenzie resource team, Mackenzie Investments

Onno Rutten has seen gold from many angles. While earning a master’s degree in mining and petroleum engineering, he spent a summer toiling at a gold-ore processing plant in South Africa. He worked at an engineering firm for seven years designing new mines in South Africa, Australia and Canada. Later, he switched careers to become a gold-mining analyst and then a commodity strategist. His past has served him well. His $208.1-million Mackenzie Precious Metals Fund has outpaced the S&P/TSX Global Gold Total Return Index since he became lead manager in 2013. We asked Rutten whether gold is in a new supercycle and why he’s a silver bull.

What’s your strategy to beat your index?

The fund invests in large-, mid- and small-cap miners. We apply our technical skills and industry experience to determine how much capital is needed to build a mine and discover new resources. True value creation often happens at the drill-bit, so we own juniors like Reunion Gold, De Grey Mining and Genesis Minerals. We also look at macro indicators to see if gold is in a positive or challenging environment, and can adjust our gold-bullion-versus-equity exposure.

Gold traded at US$1,330 an ounce when you took over your fund. Why did gold hit record highs this year before fluctuating in the US$2,600 range?

Over the past decade, gold followed real interest rates [nominal rates minus inflation], but it broke away from that trend in March 2022, after Russia invaded Ukraine. Russia was removed from the SWIFT international settlement system, and its foreign reserves were effectively confiscated by Western countries. This shocked central banks globally. Countries such as China, India, Turkey, Poland and Kazakhstan started to diversify away from the U.S. dollar into gold, which is outside the standard financial system. Chinese retail investors and savers also began buying gold because of the slumping stock and housing markets.

So, is gold in a new supercycle?

I don’t like the word supercyle in the context of gold. It’s an asset that helps protect against depreciation of currencies and offsets inflation. It is typically anti-correlated to the market, and its returns can be lumpy. For years, it can underperform but suddenly wake up. But I am bullish on gold now. It is being revalued because there is a big physical buyer in the market, that being central banks. We could see another revaluation if Western institutional investors, which have on average been net sellers of gold, go back to this metal as real interest rates come down.

Agnico Eagle is your fund’s top holding. Why?

Agnico has low country risk because its operations are mainly in Canada, Australia and Finland. Most assets are in Ontario and Quebec, and it also has a solid project pipeline. It benefits from weakness in the Canadian dollar because its revenue from gold is in U.S. dollars. However, its cash flow should double or triple in the coming quarters from late 2023, when it was dealing with inflation and productivity challenges due to the pandemic. We don’t think that is fully reflected in its share price.

Your fund owns Gatos Silver, Pan American Silver, SilverCrest Metals and Aya Gold & Silver. Why do you like silver?

Silver is a dual-faced beast. It’s an industrial metal, and almost half of silver demand goes into industry, especially for solar-cell production. There is solid demand because of the energy transition. But it also behaves like a precious metal.

Historically, it outperforms gold when there is a strong investor interest in that metal. It’s difficult to find good silver mines, so they are scarce assets. Gatos Silver, which is now being acquired by First Majestic Silver, SilverCrest, which is being taken over by Coeur Mining, and Aya Gold & Silver all have newly built mines.

What’s the big risk for miners?

The gold industry has a terrible record of squandering its free cash flow in misguided mergers and acquisitions, and executive pay is unacceptably high. We think companies should take a more balanced approach to capital allocation. A third of cash flow should go to keeping their assets in good shape, a third to invest in growth, and a third to shareholders in dividends and buybacks.

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