Why ASA Gold and Precious Metals Could Perform Well (NYSE:ASA)

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.

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 (NYSE: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).

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%.

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.

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.

A significant part of the portfolio (about 35%) appeared to be invested in exploration and development activities. From a conservative perspective, this aspect of the portfolio could pose a challenge as there appears to be an industry trend to value the net present value [NPV] of mineral projects based on high gold prices, reflecting a significant increase from the $1,425-$1,450/ounce average over the past 10 years. The average is shown in the chart below from Trading Economics.

Ten years encompass enough bull and bear markets in the gold market.

Furthermore, a discount rate of 5% used by the operators in the discount models may not be appropriate even in a rapidly rising interest rate environment due to the Fed’s monetary policy against elevated inflation.

However, such NPVs from mineral projects could also be welcomed by the market and act as a catalyst to support the market valuation of ASA Gold and Precious Metals Limited. It just depends on how the market processes the information.

Approximately 75% of the portfolio is allocated to gold production, with large producers (over 1 million ounces per year) accounting for 15% of the total, medium producers (500,000 to 1 million ounces per year) 16% and small producers (less than 500,000 ounces per year) year) with a share of 24%. As for the type of securities in ASA’s portfolio, more than 95% were equities, of which 72.4% were small caps, 19.7% were mid-caps and 6.3% were large caps. From this perspective, the portfolio appears well-positioned to take advantage of small stocks’ above-industry beta gold, which could potentially provide a strong boost to the share price of ASA if gold rises rapidly.

Addition Information on the Share Price

ASA Gold and Precious Metals Limited has a market cap of $302.08 million and a 52-week range of $ 11.93 to $23.79. ASA Gold and Precious Metals paid a dividend of $0.01 on Nov. 23, leading to a forward dividend yield of 0.13% as of this writing.

Of course, there is also a risk that gold does not perform as expected today, which will hurt the performance of ASA shares. A bit like what happened throughout most of the summer and the entire fall of 2022, when gold lost some of its appeal in favor of a fast-appreciating US dollar in FX markets.

The risk that this factor could continue to play against gold is present but should have diminished. The U.S. trade deficit, whose policy plays a major role in determining the U.S. currency, should stabilize around $60-62 trillion in the coming months (see chart below from Trading Economics), versus $75 to 95 trillion during the strong US dollar/gold in bearish mode.

A less strong dollar than the one seen in the market until a few weeks ago, when it even reached parity with the Euro, will help boost some exports.

Conclusion

Gold is on the rise, driven by strong and compelling macroeconomic and geopolitical factors. To benefit from the rise in precious metals prices, investors should consider ASA Gold and Precious Metals Limited as this asset management company, which invests primarily in gold mining and exploration stocks, tends to rise faster than precious metals in bull markets.

The current ASA price level seems to present interesting entry points.

There is a risk that gold will not perform as expected, but this has been diminishing over the past few weeks.