Written by Jeffrey Christian for Northern Miner.

Analysts at CPM have studied the precious metals and commodities markets, including investment trends in mining equities, since the 1970s. More than studying them, we have been integrally involved in advising buyside investors, sell-side banks and brokers, and the mining companies themselves. This long and intimate involvement gives us insights into the transformations that clearly now are wracking the buyside, the sellside, and the mining industry.

CPM conducted a study of OTC and exchange metals markets in 2018 and early 2019. As part of this project we bought the best list of managers at hedge funds, commodity trade advisors, and commodity pool operators. Of the 6,800 fund managers on the list, 132 trade metals. Of those, 35 base their investment decision on economic and fundamental factors. The rest traded based on price charts, price momentum, and computer-generated trades.

Fewer than 2% of professional money managers focusing on futures and options even trade metals, and fewer than 0.5% pay attention to trends in the metals markets, the mining industry, fabrication and investment demand, and the economic and political environments that shape these fundamentals.

CPM now is studying institutional investment trends in mining and exploration companies. Institutional investors are suffering from a range of transformations. There is a trend toward lower fees, reducing revenues and profits. Funds increasingly are investing in indexed ETFs and funds packaging numerous companies rather than individual companies. They also are shifting from funds managed by human portfolio managers and research teams to funds driven by computer generated decisions.

When Barrick made overtures toward Newmont earlier in 2019 a rumor spread that “not even Evy Hambro’s fund” at BlackRock owned Barrick shares. In fact, it did. In fact, and very tellingly: There were 65 BlackRock funds that owned Barrick shares. Five of them were managed by analysts and portfolio managers. The other 60 were indexed funds and ETFs.

The BlackRock data reflects similar changes in equity investment trends, away from investing in individual companies based on fundamental analysis toward investing in indexed funds and ETFs.

The shift toward investing in indexed ETFs and funds means that those mining companies large enough to be in such indices have seen their prices rise as generalist investors have bought such indexed investments in response to rising gold prices. Smaller mining companies not in such indices have been largely flat and face increasing difficulty in raising capital.

Banks and brokers meanwhile are experiencing major negative shocks themselves. Their revenue models are being shattered by the virtual and actual disappearance of broking fees, rising costs, increased regulatory requirements and expenses, poor returns on installed capital, and a reluctance on the part of their institutional investors to pay for broker-generated research.

As we studied these major transformations on the buyside, the sell side, and the consequent financial pinch on the mining industry, the question arose concerning what this means for CPM’s service provision to investors, mining companies, and the sell side of financial markets in the future. The answer partly is evident in the past.

As institutional investors pivot away from free research from banks, brokers, and promotional agencies supported by mining companies, they are focusing on what is being called curated research, picking and choosing a limited number of highly respected, independent, unbiased, knowledgeable research and advisory services. CPM is viewed as a quality source of research on precious metals and commodities by those institutional investors that still are economically and fundamentally driven. One executive put it succinctly: CPM sells research; they sell advertising.

This suggests that the future client portfolio at CPM will be much as it has been since we bought our independence from Goldman Sachs in 1986. In 1991 we were told that three of our institutional investment clients represented more than two-thirds of the open interest in Comex gold futures and options markets. The reality is that the precious metals physical and mining equities markets have been characterized by relatively small numbers of highly focused investors who pay attention to the fundamentals.

These markets today are witnessing a shift away from fundamentally driven investment decisions toward mechanized, automated mass-market investment products. This trend will last until markets change in a way not predicted by the algorithms, based as they are on history and not present circumstances. Meanwhile, there will continue to be any number of investors, wealthy and ordinary, who will continue to want some sentient human beings managing at least a part of their money. Those investors will continue to focus on the fundamentals of the mining industry, the metals markets, and the underlying economic and political environment or landscape. They will continue to outperform the indexed funds, especially at turning points, as was the case in 2001, 2007, and 2011.

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