ASA Gold and Precious Metals Ltd (NYSE:ASA) is structured as a closed-end fund to generate long-term capital appreciation in the gold mining industry. The attraction here is the actively managed research-driven strategy with the opportunity for the portfolio manager to identify compelling opportunities.
Favorably, with a 57% return over the past five years, ASA has outperformed sector benchmarks like the VanEck Gold Miners ETF (GDX), as well as the price of gold through the SPDR Gold Shares ETF (GLD).
While precious metals miners have been under pressure more recently, we maintain a bullish outlook on gold and see room for ASA to build positive momentum going forward. The fund is a good option for investors to capture diversified exposure into precious metals miners.
What is the ASA Fund?
A big theme for ASA is the investment strategy centered on deep fundamental analysis where the team brings together extensive industry expertise, close industry relationships, and regular onsite due diligence. This level of institutional expertise with an exclusive focus on gold and precious metals mining makes ASA unique among closed-end funds ((CEFs)) and more commonly passively-managed indexed ETFs.
Going through the last portfolio update, ASA stands out with its small-cap or junior miners’ exposure, with companies under a market cap of $2 billion representing 71% of the fund. This covers miners at all stages of development between major producers and more speculative exploration and development companies.
Down the list, more high-profile sector leaders like Barrick Gold Corp (GOLD) and Agnico Eagle Mines Ltd (AEM). The takeaway here is that the allocations reflect the portfolio management team’s particular market views and value perspective.
Overall, the composition here is very distinct compared to the indexed GDX ETF or even the VanEck Junior Gold Miners ETF (GDXJ). Keep in mind that this list is expected to change through regular turnover.
In terms of performance, ASA is down about 10% in the last six months, covering a period of weakness for precious metals miners, even as GLD is up about 2% over the period. At the same time, this is a narrower decline compared to the -14% selloff in GDX and GDXJ.
Despite the otherwise resiliency of gold, currently within 5% of an all-time high, the sense is that sentiment towards miners is poor facing global macro headwinds. These include high interest rates making mining developments more difficult on the funding side, as well as a stronger U.S. Dollar. General themes in the industry include mining companies dealing with rising operating costs in recent years and hitting margins.
Another important consideration is that ASA is a closed exchange fund, the actual market pricing typically trades at a spread to the underlying net asset value. The current spread of -13% is around the average over the last several years.
The understanding is that the discount reflects the fund structure, with the upside being that investors are essentially owning the portfolio at below fair value. One line of thinking is that during a strong bull market in miners, sentiment toward the strategy can allow the spread to narrow, driving an incremental return to shareholders.
What’s Next For ASA?
Any bullish case for ASA and precious metals miners will need gold and silver pricing to cooperate. Gold has been trading in a relatively tight range going back to a breakout in 2020 when it first breached the $2000/oz level.
The good news here is that we see several tailwinds that can represent a catalyst for the next leg higher in what has been a secular bull market. Precious metal mining stocks within the ASA portfolio should benefit from the higher earnings potential.
We can talk about gold as a hard asset against the endlessly climbing fiat money supply. The store of value dynamic has been a strong factor as well historically. While those ideas are important, we see the relationship with interest rates as a key technical driver of the market price.
Simply put, higher market interest rates make gold relatively less attractive considering the carrying cost. We can take that connection further by looking at the real rate as the spread in interest rates and inflation. Historically periods of declining real rates have been bullish for gold as was the case between 2019 and 2021, while the inverse often represents a headwind.
The good news here is an expectation that interest rates have a downside as the Fed begins to roll back its quantitative tightening later this year. While the pace and timing of those Fed rate cuts remain uncertain, we see gold benefiting from less restrictive global credit conditions.
Beyond that, themes like record Central Bank demand, tight global inventories, as well as the flight to safety component amid ongoing geopolitical tension should be enough to keep a bid on gold.
As it relates to the ASA fund and the underlying miners, the backdrop of rising metal prices could be enough to kickstart higher levels of activity and positive sentiment in the sector.
From the fund price chart, ASA has traded around a relatively narrow range since late 2022. We expect a breakout higher this year where mining stocks will outperform the price of gold. In this scenario, ASA should shine as the ideal environment for an actively managed strategy.
On the other hand, the key risk we see would be the possibility that real rates remain elevated for longer, or even make a new cycle high compared to the recent pullback. This scenario evolving through a yield curve steeping could develop if the Fed delayed cutting rates or was forced to tighten monetary policy even further.
Ultimately between the number of paths macro can take in 2024, our call is that there are more roads leading to bullish outcomes for precious metals on a risk-adjusted basis.
ASA is a high-quality fund that has earned its reputation as a reference point in precious metals mining investing. In our view, the fund can work for investors in the context of a broader more diversified portfolio either as a standalone allocation to the sector or complementing indexed gold and silver vehicles.