ES Baker Steel Gold & Precious Metals Fund Investment Manager’s Commentary: Q4 2021

Gold & Metals Fund


  • The precious metals sector rallied during Q4 2021, yet it was a challenging year for gold and silver due to the spectre of higher US rates.
  • The Fund outperformed its Index during the quarter.
  • A range of macroeconomic and geopolitical catalysts exist for gold in 2022, while miners are generally in strong shape for recovery.

Q4 Top performers:

  • Gold Fields
  • Harmony Gold

Q4 Underperformers:

  • Coeur Mining
  • Hecla Mining
  • Centamin

Fund Performance

The ES Baker Steel Gold and Precious Metals Fund (“the Fund”) rose +12.4% (B Class) during the quarter compared with the EMIX Global Mining Gold Index (“the Index”) which rose +9.9%, while gold rose +3.5% (in GBP terms). Full details of Fund performance can be found here.

The Fund outperformed its Index during the quarter, yet 2021 has undoubtedly been a challenging year for the precious metals sector amid a range of headwinds for gold and gold equities.  During 2021 the Fund lagged its Index, having fallen -16.9% and -8.8% respectively (in GBP terms). One key reason for this was the Fund’s higher allocation towards silver producers relative to the Index. The silver sector underperformed gold equities, as sentiment towards precious metals remained weak, while silver producers with operations in Latin America were impacted by ongoing issues relating to COVID-19.

The past year has presented challenges, yet as in previous cycles we continue to apply the same value-driven, disciplined approach, in preparation for the recovery of the gold sector which we consider is likely near. We expect the recent headwinds for the gold sector to begin to abate in the months ahead, particularly as we approach the start of the US rate hike cycle and as clarity grows over the limited scope for higher real rates.

Market Update

The precious metals sector faced three key headwinds in 2021. Firstly, the belief that current heightened inflation is transitory, widely communicated by the US Fed and other central banks, weakened demand for gold as an inflation hedge. Secondly, US dollar strength (while not always negative for gold) has been a headwind for precious metals for much of the year. Thirdly, the prospect of tapering of US bond purchases and the spectre of nominal US interest rate hikes in 2022 further weakened sentiment towards gold and silver.

“2021 was a challenging year for precious metals, yet we expect headwinds to begin to abate in the months ahead”

The interplay between heightened inflation and rising interest rates remains an influential factor for the precious metals sector at present, alongside heightened geopolitical tension. Inflation has historically been positive for real assets and, as precious metals are the ultimate real financial asset, we believe gold and silver prices will rise significantly during the new era of inflation, once current headwinds abate. Current inflation is driven by supply side factors, as well as demand sided factors, such as supply chain issues, reshoring and demographic factors, which won’t be solved by higher interest rates. Precious metals tend to have a close negative correlation with real interest rates (rather than nominal rates), and we are likely facing the shortest US rate hike cycle in history, as the risks posed by rising borrowing costs for heavily indebted economies that are used to low rates, are high. Monetary expansion will be tapered, however the increase in money supply that has already occurred is vast, with US M2 having ballooned by +12% in 2021 and +25% in 2020. The high level of public and private debt in developed markets, after two years of fighting the COVID-19 pandemic, makes even a small rise in the cost of borrowing today a risky move for policymakers.

“The interplay between heightened inflation and rising interest rates is a significant factor for precious metals at present”

Despite the recent weak investor sentiment towards gold miners, the sector is largely in its healthiest shape for many years.  With relatively strong gold prices in recent years and with capital discipline continuing to prevail, as management teams recall the errors of the last cycle, there are a good selection of high-quality companies with robust balance sheets and strong margins. Dividends and buybacks have been rising in recent years among gold producers, a trend which appears set to continue. A further bullish market factor for miners is the potential for a rotation back into value by investors, away from the growth theme which has dominated in recent years. Gold equities have reached a point of extreme undervaluation relative to general stock markets, trading on just 9.1x EV/EBITDA, with strong operating margins of 31.1% (XAU Index), compared to the S&P500 Index and NASDAQ trading on 18.5x and 36.5x EV/EBITDA multiples respectively, with operating margins of 12.3% and 9.2% (data at 31/12/2021).

Performance Attribution

Key portfolio themes in 2021 have included positioning the Fund for the recovery of the precious metals sector, as well as managing the cost inflation underway in the industry at present.  The Fund has become increasingly focused on companies which are able to partially offset rising costs through improvements to work practices, the implementation of new technologies and further continuous improvements to improve efficiencies. Rising CAPEX is a particular problem for companies under pressure to build large new projects to increase or sustain production. Yet a selection of miners with brownfield development projects, allow these companies to grow without having to see costs rise to the same degree as for new projects.

“Despite the recent weak investor sentiment towards gold miners, the sector is largely in its healthiest shape for many years”

A feature of the portfolio in 2021 has been a relatively high weighting to silver equities, compared to historic levels. Silver is a key industrial metal, as well as a precious metal, and we see a positive outlook for this sub-sector particularly given the rapid expansion of solar photovoltaic capacity, due to improving affordability, growing energy demand, government support and environmental awareness. The silver mining sector is significantly smaller than the gold sector, but Baker Steel utilises the same bottom-up investment research and value-driven stock selection for these companies.

Top performers during Q4 2021 included IAMGOLD, Gold Fields and Harmony Gold. IAMGOLD (3.9% NAV) gained +38.5% (USD) during the quarter, delivering strong performance as investors looked towards the value in the company, despite underlying risks around some of its assets. Certain operations are progressing well, while others face challenges. At the time of writing, board and management changes have begun, which we consider to be positive and will help progress towards unlocking value.

Gold Fields (1.8% NAV) gained +35.3% (USD) during the quarter. The company has transformed its balance sheet over the past few years and is returning margin to shareholders through its dividend. The development of Gold Fields’ Salores Norte project will likely have a major impact on profitability. The company offers effective beta to higher gold prices.

Harmony Gold (4.5% NAV) gained +30.5% (USD) during the quarter. The company, a South African gold producer, transformed its portfolio when it bought AngloGold’s South African gold mines, subsequently lowering costs and improving quality.  Harmony trades at attractive revenue multiples, offering effective leverage to higher gold prices. The company also owns 50% of the Wafi Golpu project in Papua New Guinea, often recognised as one of the “world’s best undeveloped copper/gold projects”, which holds the potential to transform the company. We believe that under the current environment the project is fundable and thus the market should begin to place some value on this asset.

“The portfolio is increasingly focused on companies which can partially offset rising costs through innovative work practices, and the use of technologies”

Underperforming positions during Q4 2021 included Coeur Mining, Hecla Mining and Centamin. Coeur Mining (3.7% NAV) declined -18.3% (USD) during Q4 2021. The company, a gold and silver producer, is developing the Rochester Silver project in Nevada, which could transform the company’s fortunes by adding significant silver production.  Rising costs and lower gold and silver prices have squeezed Coeur’s margins, but the company still represents a good value proposition in a rising silver market.

Hecla Mining (3.2% NAV) declined -5.1% (USD) during the quarter, following the release of weaker-than-expected Q3 2021 results. Hecla is the largest US silver producer and, despite strong performance during 2021, the company was impacted by weakened demand towards silver during the quarter. The Fund has maintained its relatively high weighting to the silver sector through investments in high quality silver producers at attractive valuations.

“Sentiment towards gold and silver miners remained subdued for much of 2021, impacting many miners’ share prices despite robust operational performance”

Centamin (1.0% NAV) declined -7.1% (GBP) during the quarter. The company has faced concerns over its long range mine plan, which impacted its share price during the period. However, subsequent to the quarter-end, Centamin has moved to an owner operator model at its Sukari mine and seen underground reserves increase by 200%. We continue to watch the position closely.


With the gold sector showing signs of having bottomed, or being near a bottom, the Precious Metals Fund is positioned for the recovery of the gold sector. We continue to focus on those companies with the best assets, effective management, attractive shareholder returns and that operate in an ethical and sustainable manner in line with our own ESG principles.

“The Fund is focused on those companies with the best assets, effective management, attractive shareholder returns and that operate in an ethical and sustainable manner in line with our own ESG principles”

It is also worth considering that gold and gold equities remain an effective hedge against global events which may negatively impact financial markets. At the start of 2022, the world finds itself in a state of heightened uncertainty and investors face a multitude of risks. The risk of further COVID-19 variants remains a threat to growth and business activity, domestic politics in the US and Europe is fractious and increasingly polarised, while inequality throughout the developed world has continued to increase. Geopolitics, an important factor for gold prices, is increasingly tense and confrontational, with Russia’s military action in Ukraine threatening to destabilise the post-war security landscape in Europe, and with rising risks surrounding China’s intentions towards Taiwan.

David Baker, Mark Burridge & Trevor Steel


Please Note: This report is a financial promotion and is issued by Baker Steel Capital Managers LLP (a limited liability partnership registered in England, No. OC301191 and authorised and regulated by the Financial Conduct Authority) on behalf of ES Baker Steel Gold & Precious Metals Fund (“the Fund”). Full details of the Fund, including risk warnings, are published in the Fund’s Prospectus and the Key Information Documents (KID) which are available on request and at We strongly recommend prospective investors seek independent professional advice prior to investing. This document does not constitute or form part of any offer to issue or sell, or any solicitation of any offer to subscribe or purchase any shares or any other interests nor shall it or the fact of its distribution form the basis of, or be relied on in connection with, any contract therefor. The distribution of this information does not constitute or form part of any offer to participate in any investment. This report does not purport to give investment advice in any way. Past performance should not be relied upon as an indication of future performance. Future performance may be materially worse than past performance and may cause substantial or total loss.  Some figures are approximate and are for information only, being drawn from different sources. Data and statements are as at end of reporting period unless otherwise stated. The Fund is authorised and regulated in the United Kingdom by the Financial Conduct Authority.

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