Whether or not to buy or sell gold stocks is a question exercising fund managers almost more than any other equities, with the complication of ethical and environmental overlays adding risk and expense.
Wingate Asset Management chief investment officer Chad Padowitz said gold was never on the fund's menu, whereas for Platypus Asset Management resources and energy senior analyst Anna Kassianos, the metal's inclusion or exclusion depended on how many boxes were ticked.
While not quite a black swan, the origins of gold can affect its value. The Perth Mint refinery's general manager, David Woodford, said gold mined in war zones had "the potential to make its way to our refinery, so we are vigilant in our investigations into the credibility of our sources".
Woodford acknowledged it was impossible to determine the origins of all recycled, second-hand or scrap gold. The mint was one of the first three gold refiners in the world to be certified under the Conflict-Free Smelter Program, which provided credible third-party valuation of a smelter's procurement activities.
AMP Capital head of sustainable funds Dr Ian Woods said one of the key issues facing gold stocks was the increasing need to move to countries with higher social and political risks and poor infrastructure.
"The resulting interruption to production, uncertainty on regulatory environment and delays to projects means significant risk faced by investors in companies, especially with only one operation," Woods said.
"An increased focus on the role of companies in bribery and corruption and the need for companies to proactively resist accepting these practices - for example, the recent UK Bribery Act and recent discussions in Australia on facilitation payments - will also change the usual business environment that some gold companies have operated."
Padowitz said Wingate preferred companies that could increase dividends and buy back shares over time while growing their business over time. "As gold companies don't encompass these characteristics, we tend to avoid them," he said.
"Historically, gold companies have done a poor job of converting increases in gold prices into cash flow. This is largely due to the exploration and capital costs of replacing production. They tend to spend everything they make to grow production.
"This issue is not unique to gold mines, but for some reason it is particularly acute within the sector. It's for this reason that, despite near-record prices compared to a few years ago, gold shares are languishing at multi-year lows."
Gold companies, like other miners, "suffer the challenge of needing to replace what they have mined", he said.
"Usually because of inflation and scarcity of convenient locations, it costs more to replace what you have already used. This dynamic hurts the cash-flow statement far more than the income statement and can lead to optically appealing earnings, yet no cash. Hence the predilection for rights issues and low dividends within the gold sector," he said.
The gold price was also an unforecastable commodity. "It is not dependent on consumer/industrial supply and demand like other commodities, but rather is controlled by investment and speculative flows," Padowitz said.
Kassianos said Platypus had invested in Newcrest and Alacer last year, "but promptly exited when signs emerged that the promised production growth would take significantly longer and be delivered at a much higher cost".
"We don't invest in gold equities purely for gold price exposure; companies need to tick a number of boxes," she said.
Platypus sought companies with potential for growing high-grade reserves and long-life production, underpinned by low-cost operations run by quality management.
"Regis Resources ticks all the boxes now, but we invested well before it entered the ASX 300 based on our view on management's ability to deliver. This has enabled us to ride successful commissioning of Moolart Well and high-grade drilling results from Garden Well, and our patience is expected to be rewarded with a threefold lift in production," Kassianos said.
While the gold price was notoriously difficult to forecast, she said, in the past 10 years, bullion and gold equities performed well from mid-July to late September. The drivers included the Indian festival and wedding season, and to a lesser extent "the inaugural, largest gathering of gold bulls at the Denver Gold Conference - where global producers and explorers parade their wares to attract global investors", she said.
