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Chinese miners may go slow on next M&A wave for gold, silver, says fund manager

Chinese buyers who have been active in the global gold and silver sectors may be more interested in directly purchasing the physical commodities rather than investing in the mining process, according to Ned Naylor-Leyland, fund manager at the London-based Old Mutual Global Investors.

"I think the big trend for China will be more about importing physical metal rather than buying mining assets," Naylor-Leyland, who helps manage a portfolio valued at £34.6 billion as of March 31, including investments in gold and silver bullion as well as mining equities, said in an interview with S&P Global Market Intelligence.

"We have seen quite a bit of investments from Chinese companies in the global space," he added. "[But] a lot of capital was misallocated and lost during the end of the last commodity cycle and that has made people more cautious."

Naylor-Leyland noted that investment in gold and silver for its currency value is more common among Chinese investors, compared to mining investments.

The fund manager also expected M&A activities in the gold and silver sectors to pick up in the next two to three years as a result of relatively low levels of exploration investment in recent years.

"Those companies who have been developing new mines in the last few years would eventually be bought for premiums to current prices," he said, noting that companies who are running on the last ounces would have to make some fairly aggressive M&A moves in following years. "So we like to buy the stocks that are going to be bought rather than those that are doing the buying."

On prices, Naylor-Leyland believed that the negative outlook for real interest rates will support gold and silver prices.

"The sentiment towards investing in gold and silver would last for several years," he said. "We are coming out of a negative period and moving into a positive one at the moment."

He added that the market is almost driven entirely by one factor — real yields.

"If the market feels that the dollar is accruing purchasing power, then price will go down. That is what drove the big changes for about four years between 2011 and the end of 2015," he said, noting that the market is moving towards another direction where players expect the dollar to lose purchasing power.