Precious metals, resources benefit from geopolitical tailwinds

The current geopolitical climate has roiled markets, resulting in higher volatility and higher-than-desired inflation.

But funds focused on resources and precious metals have largely benefited, including this year’s LSEG Lipper Fund Award winners in the commodities, energy equity, and natural resources equity categories.

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“The world has become more multi-polar, characterized by adversity, tariffs and reindustrialization,” says Onno Rutten, portfolio manager for the Mackenzie Precious Metals Fund.

The fund won the Lipper Fund Award in the precious metals equity category for five-year performance based on its portfolio of gold mining producers, a roughly 10-per-cent allocation to gold bullion, and mid-cap miners often involved in exploration and development.

The LSEG Lipper Fund Awards offer an independent and uncompromised assessment of fund performance in more than 20 countries worldwide, including Canada, over a performance timespan of three, five and 10 years.

The United States’ unpredictable foreign, domestic and trade policies have helped drive geopolitical and economic instability, while running large deficits. The country’s growing debt has led other central banks and, more generally, investors to invest in gold due to concerns about the U.S. dollar’s status as the world’s reserve currency.

Mr. Rutten adds that most developed nations and even China are running large deficits amid higher defence spending and other fiscal stimulus, leading to concern about devaluation.

That has fuelled gold demand – though the price of the precious metal has fallen over the past year from record highs.

Silver has also hit record highs in recent years as its price is often tied to gold, amid worries about deficit spending, but it has also benefitted from strong industrial demand, says Nawojka Wachowiak, a senior portfolio manager for Ninepoint Partners Silver Bullion Fund.

The fund, which holds silver bullion and silver certificates, won this year’s Lipper Award in the commodity category for five-year performance.

“The industrial side is becoming more important for the commodity’s [price] momentum,” Ms. Wachowiak says, adding that industrial use counts for 60 per cent of demand.

“Silver has officially been deemed a critical mineral in the U.S.”

She notes demand is driven by electrification, including solar and artificial intelligence, while silver supply has not kept pace.

Precious metals’ demand strength is just one outcome of the current global disorder. Resources – particularly oil – are also experiencing resurgence due to increasingly disrupted supply chains. That’s a reversal of fortune from a few years ago, says Curtis Gillis, portfolio manager for the CI Global Energy Corporate Class fund, which won the Lipper Fund Award in the energy equity category for five-year performance.

“We had previously gone through a period where we thought the world was going to jump right to electrification,” he says, adding that led to a perception that oil would be a dead asset sooner than later.

Oil was also abundant pre-pandemic as U.S. production boomed from non-conventional reserves. More recently, production from the Permian Basin in the southwest U.S. has begun “plateauing,” he adds.

“Even before the Persian Gulf conflict, a narrative was developing that we’re going to need other sources to meet the demand and offset production declines.”

The world faces a supply crunch, Mr. Gillis says, exacerbated by the wars in Iran and Ukraine. “Canada is well positioned to benefit because of its oil sands, which doesn’t face production decline concerns.”

Mr. Gillis adds the CI fund has about 35 per cent of its portfolio allocated to Canadian energy companies. He further notes that production is also ramping up from offshore operations using new technology for deep sea exploration, development and production in South America and Africa.

The ongoing U.S.-Iran conflict, if it continues for much longer, poses a significant risk of constraining supply so much that energy prices could lead to much higher inflation, causing a global recession.

“The hope is the conflict is resolved by June because inventories are already getting very low,” Mr. Gillis says.

One challenge is that the U.S. administration has few good options, says Jeremy Lin, portfolio manager of the Purpose Global Resource Fund.

The Purpose fund won the Lipper Fund Award in the natural resources equity category for five-year performance this year. Its strategy reflects how major global events have affected precious metals and resources over the last five years.

During the pandemic, returns were driven by gold, and then by energy, amid the post-COVID period of high inflation and rising interest rates. Afterward, gold powered returns again as deficits ran high and, more recently, energy-driven performance as the U.S.-Iran conflict fuelled portfolio growth.

Mr. Lin notes the U.S. has three options. It can “walk away” from the conflict, but that would leave Iran in control of the Strait of Hormuz. It could negotiate a deal that could open the key energy transportation corridor, but it would likely have to pay hundreds of billions in reparations to Iran.

The third option involves “boots on the ground” with U.S. troops in Iran, he says.

“There are just no good options.”

Actively managed exposure to resources is likely to offer the best protection against this negative outlook, Mr. Lin says.

“Where you want to hide and potentially still make money involves being overweight to resources that are likely to continue to benefit as long as this conflict remains unresolved.”