Gold offers a sparkling opportunity
Almost every investor claims they are the contrarian type, courageous, independent thinkers ready to fend off the crowds. And over 90% of motorists consider themselves to be above average drivers, an obvious statistical impossibility. Yet there is one cantankerous group that can rightly claim to be true individualists: the supporters of gold and, in particular, gold stocks.
Part of their boredom stems from their skepticism about fiat currencies which can be, and have been, seemingly endlessly printed. Even though the Federal Reserve said last week it would start slowing its $ 120 billion in monthly asset purchases, it comes after a record more than doubled since March 2020, before the Covid-19 pandemic hit. becomes an economic crisis. Other major central banks have embarked on similar currency expansions.
So far, the repulsion for paper currencies has been expressed in a flight to cryptocurrencies, rather than bullion and mining stocks, the traditional fears of inflation. Meanwhile, gold lovers and its producers are arguably the most opposed, and perhaps the loneliest, investors.
The recent performance of metals and mining stocks has done nothing to attract investors. Gold appears to be heading for its first losing year since 2018, as highlighted in this week’s Commodities Corner column. The
SPDR gold stocks
(ticker: GLD), the largest bullion exchange-traded fund, is 11.9% below its peak in August 2020.
Gold stocks have been in good faith bear markets. The VanEck Vectors Gold Miners (GDX) ETF, which tracks industry majors, is down 26.1% from its July 29, 2020 high, while the VanEck Vectors Junior Gold Miners (GDXJ) ETF, which follows the smallest numbers, is 29.7% below its peak, also reached on this date.
According to a recent report by global strategists at JP Morgan, led by Nikolaos Panigirtzoglou, the perception that Bitcoin is a better hedge against inflation has spurred a flow of gold ETFs to cryptocurrencies. Gold’s failure to take advantage of inflationary signs helped accelerate change. Performance hunters were undoubtedly tracking Bitcoin’s 111.9% gain this year or Ethereum’s 511.2% rise.
But among the few and proud believers in the yellow metal is Trey Reik, a managing member of Bristol Gold Group, a consultancy firm for institutional investors. Indeed, he says gold stocks are the trade of the decade, at least for those willing to go against the consensus.
First, he notes, the group’s recent lagging performance follows a period of strong returns. according to Morningstar.
But more importantly, says Reik, a transfer of assets of just 2% to 3% by institutional investors would create a tidal wave of money that would overwhelm the relatively small group. The entire precious metals mining industry has a market cap of $ 580 billion, which is eclipsed by the $ 2.5 trillion of a mega-capitalized stock such as
(AAPL). Elon Musk, the leader of
(TSLA), alone is worth about 60% of the market value of all gold miners, Reik notes modestly.
So just a trickle of a few hedge funds or endowments could cause stocks to soar. But the group has a bad reputation as being just a perpetual call option on bullion traded at inflated valuations. In addition, historically, many mines have struggled with mismanagement that was poor capital allocators. After the bull market of the first decade of this century, they borrowed to grow, just in time to get hammered by the 40% bear market in gold from 2011 to the end of 2015.
That has changed, says Reik Barron. It provides various metrics (as of September 30) which show that the NYSE Arca Gold Miners Index (the basis of the GDX ETF) is trading at a significantly lower valuation than the
index. Gold miners achieve a price-to-earnings ratio of 13.45 times, compared to 24.34 for the benchmark large-cap index. They also trade at 1.6x book value, compared to 4.51x for the S&P 500. Finally, they offer a dividend yield of 2.31%, to which he adds that it is not chopped liver, against 1.38% for the S&P 500.
But what is less appreciated, Reik continues, is that the miners pay off their debt. According to Canaccord Genuity’s estimates that he cites, they will go from total debt of $ 18 billion in 2014 to net cash (beyond debt) of $ 15 billion by 2022.
Yet sentiment towards miners varies from indifferent to hostile, despite inflation turning out to be more intransigent than transitory and their management and measures improved. Crypto, on the other hand, is the shiny new object that is attracting speculative interest as the vast stock market steadily rises.
Reik says the gold acts as a store of value at the moment. But for a “hockey stick take off” in the squad, the broader market should stop setting new highs almost daily. So there is no rush to buy gold stocks, at least not until the group emerges and catches the interest of traders, most likely due to a pullback from an initial lead, issues -he.
For those real upsets looking to put some of their wallet into those unloved latecomers, Reik prefers the junior miners of the GDXJ ETF. They could become acquisition candidates for majors in the GDX ETF, which must replace the running out reserves. But remember, as you watch your friends surf the bull markets for full investor and media attention, the opponents are very much alone.
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Write to Randall W. Forsyth at [email protected]