Gold & Silver Linings: Finding Hidden Gems in Precious Metals

At Matco, we are constantly searching for investment opportunities to generate returns for our clients. We examine opportunities on a global, sectoral, and company basis, analyzing macro and company fundamentals to determine potential risk/reward scenarios and identify what other investors may be missing.

One sector we have been bullish on is gold since February 2024, when the gold price was US$2,000. Our investment thesis at the time was based on four key catalysts:

1. Central bank diversification: Central banks had started buying gold again to diversify their foreign exchange reserves away from the U.S. dollar.
2. Historical valuation gap: The ratio of gold stocks to gold price was trading at a decade-wide gap, which historically has always been a buying opportunity for double-digit returns.
3. Re-inflation trade: Historically, when the U.S. Federal Reserve starts cutting interest rates, gold stocks begin outperforming the gold price.
4. Geopolitical uncertainty: Two ongoing wars (Russia/Ukraine, Israel/Hamas) and the potential for a new U.S. President created market uncertainty.

We acted on our thesis by purchasing two gold companies for the Matco Canadian Equity Income Fund and two different gold companies for the Matco Opportunities Fund. Our disciplined "growth at a reasonable price" investment process means we only buy high-quality companies that have producing or royalty assets in politically stable regions, demonstrate production growth, trade at discounted valuations, maintain strong balance sheets, and are led by management teams with proven track records of value creation.

Our due diligence has paid off, with the average gain on these four stocks reaching 108% while the gold price has increased only 65%. During the April market correction this year, we added another gold company to the Matco Opportunities Fund, and the company's stock is up 30% since our purchase. We remain bullish on gold and gold companies as our thesis continues to play out.

Silver: The Next Opportunity

Today, we see an opportunity to generate returns in silver companies. Silver demand drivers are very different from those of gold. Silver demand is driven by industrial use, specifically in electrical and electronics applications and photovoltaics. Although current global trade uncertainty due to U.S. tariffs is expected to reduce global economic growth over the next year, the global economy continues to expand.

Our investment thesis for silver is based on three catalysts:

1. Supply-demand imbalance: Global silver demand is expected to outpace supply over the next three years.
2. M&A cycle acceleration: The mergers and acquisitions cycle has begun. Gold and silver companies are flush with cash and have low leverage, providing them with the flexibility to acquire producing companies or developing assets.
3. Historical ratio reversion: Historically, gold and silver prices have been correlated at a 70:1 ratio over the long term. Currently, the ratio is 87 times and has historically contracted during bullish cycles for precious metals, which we believe we are experiencing. Therefore, we see silver and silver companies as a catch-up trade to gold and gold companies.

We have acted on our silver thesis by purchasing one silver company for each fund, using the same disciplined investment approach we employ for our gold company selection. Our average profit on these companies so far is 27%.

Spotlight: Pan American Silver (PAAS)

We wanted to briefly highlight Pan American Silver (PAAS), which we hold in the Matco Canadian Equity Income Fund. PAAS is the second-largest silver company by market capitalization at $14 billion, has grown through acquisitions, and has been operating for over 30 years. The company's stock has the highest correlation to silver at 0.78, meaning that for every $1 move in the silver price, PAAS stock should move by $0.78.

In May, PAAS announced the acquisition of MAG Silver for US$2.1 billion and is now awaiting regulatory approval. The combined company will have 11 producing silver and gold operations across Chile, Canada, Brazil, Bolivia, Peru, Mexico, and Argentina. PAAS has provided guidance for 2025 pro forma free cash flow of US$788 million, with combined production of 23 million ounces of silver and 770,000 ounces of gold. In 2026, silver production is expected to ramp up to 28 million ounces and 846,000 ounces of gold, with the full year of MAG production included. Since we purchased our position in February 2025, the stock is up 14%.

Looking Forward

In summary, we remain bullish on specific resource sectors such as precious and strategic metals. Although we are not calling for a super cycle for all commodities like we saw in 2006-2008, we believe that higher global inflation resulting from U.S. tariffs will lead to scarcity value and higher prices for certain commodities. As with every investment, determining what to buy and at what valuation will continue to be the key to generating returns over the long term.

As always, if you have any questions about Matco’s investment strategies or would like to discuss more, feel free to reach out to a Matco Portfolio Manager.