Size Matters

Amazon takes the top corporate slot and the gold price is moving. The World Gold Council predicts a better year for the precious metal but all of the world's investible gold is only enough to buy the four largest companies.

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The world has a new largest company. On Monday, January 7, when the closing bell sounded on the New York stock exchange, Amazon had a market capitalisation of US$797 billion, pushing Microsoft, worth US$784 billion, into second place. Amazon was founded only 25 years ago by Jeff Bezos, 54, who has become the world's richest person, being worth US$131 billion — nearly all of it tied to his stake in the ecommerce giant.

Microsoft had held the top spot for barely one month, having only replaced Apple at the end of November. Apple was the first company to break the US$1.0 trillion mark, three months ago, but is now back in fourth place, on US$702 billion, below Alphabet (the parent company of Google) on US$743 billion.

The premium put on size (of companies) has a weak historical record, with the factor being thought to be of meagre relevance relative to other factors and to vary significantly over time. However, an article in the September 2018 issue of the Journal of Financial Economics argued that there is a size premium when the quality of the company's assets is taken into account.

Research by AQR Capital Management suggests that a significant size premium does emerge when certain factors are considered. This premium is stable through time, robust to specification, not concentrated in microcap companies, consistent across seasons, and holds true in 30 different industries and in 24 international equity markets.

The authors (Clifford Asness, Andrea Frazzini, Ronen Israel, Tobias Moskowitz and Lasse Pedersen) found that "the resurrected size effect is on par with anomalies such as value and momentum in terms of economic significance and gives rise to new tests of, and challenges for, existing asset pricing theories".

Mining Sector

If size matters it is easy to see why the mining sector is overlooked by investors. The market capitalisation of all listed mining companies is under US$1.5 trillion (as calculated by S&P Global Market Intelligence), ie the whole sector is worth less than the value of Amazon plus Apple.

Nevertheless, gold and gold-miners have come increasingly to the attention of investors since mid-November because the precious metal is a defence against volatile markets. Despite the market turmoil of recent years, the price of gold had gone nowhere until equity markets took a tumble in October. Suddenly there is interest in gold as a quiet place to see out the current market melee.

Gold is widely expected to break above US$1,300/oz in the very near future, which makes equity in precious-metal miners attractive as a leveraged play on the metal. This might bring its own price volatility as gold-mining is a relatively small sector; the largest companies, Barrick Gold and Newmont, have a market capitalisation of only US$20 billion.

But gold miners are only attractive if the precious metal price rises; will gold shine this year at last?

Gold faced significant headwinds for most of 2018, with a strong US dollar, interest rate hikes and higher equity prices for the first nine months. As geopolitical and macroeconomic risks increased, however, stock markets sold off and the gold price ended the year near US$1,280/oz, which meant the metal had outperformed most global assets.

The World Gold Council (WGC) this week published its 'Outlook 2019' report, which concludes that gold demand is expected to benefit this year from the interplay of market risk and economic growth. In the report, WGC examined three key dynamics likely to influence how gold performs this year: financial market instability, monetary policy and the US dollar, and structural economic reforms.

Against this backdrop, WGC believes gold will become even more relevant "due to its proven track record for delivering returns, its low correlation to major asset classes, its liquidity and its risk-adjusted returns".

The financial market for gold is robust. Because of its rarity (less than 200,000 t has EVER been mined) but widespread availability, the metal is used as a store of wealth and as a source of high-quality collateral.

WGC estimates that the 'investible' gold market represents over one-third of these above-ground gold stocks; some 73,500 t, worth almost US$3.1 trillion currently. This includes bars, coins, gold-backed exchange-traded products and official sector holdings. It excludes jewellery, which accounts for about one-half of all gold stocks and is currently valued at some US$4.0 trillion. 

This suggests that all of the investible gold in the world would just be sufficient at current prices to buy the world's four largest listed companies. Is this a bargain, or not?

Chris Hinde

Chief Commentator, Mining Beacon

Previously editorial director of Mining Journal, and more recently head of S&P Global Market Intelligence's metals and mining team, Chris is now Mining Beacon's editor-in-chief and lead commentator. He posts two blogs every week, one on Monday reviewing market conditions over the prior week, and a second on Thursday looking at issues on the global mining scene. There is also a quarterly blog on business opportunities in the sector.