We attended the Mines and Money, Asia, conference in Hong Kong last week. A key focus was gold.
It was a great conference, and as explained yesterday, the gold theme wasn’t all bullish.
Don’t be shocked.
Investors generally have a love-hate relationship with the precious metal.
Indeed, with central banks printing trillions of dollars and setting ultra-low interest rates, lots of people are surprised that gold’s remained lower for longer. The precious metal remains in a five and a half year bear market, despite the bullish arguments.
Of course, that doesn’t mean the gold price will stay depressed forever. Jim Rickards believes gold will hit US$10,000 per ounce in the long term. And in spite of my short-term bearish view, I’d be surprised if the gold price doesn’t at least quadruple in the long term.
In other words, we believe that gold — and gold stocks — offer the best long-term investment potential. So, while it’s worth building a portfolio of ASX gold stocks, it depends on when and what you buy.
Gold at highest level since election
The Australian Financial Review reported overnight:
‘Gold jumped nearly 2 per cent to a fresh five-month high overnight as investors sought assets seen as havens from risk amid mounting political and security concerns over North Korea, the Middle East and the looming French election.
‘Global tensions escalated as Western countries were joined by Middle Eastern allies in a push to isolate Syrian President Bashar al-Assad following a chemical attack in the country last week.
‘Spot gold was up 1.5 per cent at $US1273.44 per ounce by 3.10pm on Tuesday in New York, after hitting a fresh high since November 10 at the session high of $US1275.16.
‘US gold futures ended the session 1.6 per cent higher at $US1274.20.’
There’s plenty of geopolitical uncertainty around the world. It appears politicians are, unfortunately, trying to distract the people from their problems and start another global war. This is something we don’t want, but should prepare for.
The gold price — the hedge against the confidence in government — has reacted strongly following the uncertainty.
Will gold’s rally last?
I have no idea. But it’s worth breaking down the analysis…
Gold’s bullish angle is self-explanatory. It should outperform during times of global uncertainty, and become a safe haven during times of war.
The bearish argument isn’t discussed much. If global war breaks out (something no sane person wants), gold may surge higher initially (as it’s doing now) and then fall. The US dollar may eventually receive the majority of capital flows, sending assets (i.e. gold) lower in a state of panic.
Indeed, gold could be a great or terrible investment in the short term. That’s why it’s worth controlling what we do know, rather than speculating on the yellow metal’s near-term future. For that reason, I’ll explain my mindset when recommending gold companies to readers.
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What gold companies to buy now
Despite the overnight action, gold remains in a bear market — a fact that shouldn’t be ignored.
In this environment, ‘penny gold’ stocks offer the most share price rewards.
Penny gold stocks are already hated, with expectations low. In a depressed gold environment, these stocks can easily outperform. They merely need to find the golden treasure chest, upgrade a resource, or acquire a good project. Either one of these catalysts could turn around a ‘penny golds’ fortune. For that reason, I’m focusing on uncovering the best ‘penny gold’ stocks at Jim Rickards’ Gold Stock Trader.
By taking on a bit more risk, with a little bit of patience, your portfolio could grow significantly. And when the precious metals bull market kicks off, the best speculative stocks tend to make the most gains during the bull market.
A portfolio of ‘penny gold’ stocks should do well, in our opinion.
What about gold royalty companies?
A royalty company spends shareholders’ money to finance gold miners’ operations. In return, the royalty company gets a percentage, or royalty, from the mine’s revenue. That means, for little capital risk, the royalty company gets exposure to the exploration upside and gold price.
Franco-Nevada Corp [NYSE:FNV] is the world’s largest gold royalty streaming company. It owns royalties streams in gold mining, as well as other natural resource investments, such as oil and gas. Royalty companies tend to have the lowest financial risk. That’s because they don’t have the high costs burdening mine operators. With plenty of potential on offer, FNV should be one of the best stocks during the next gold bull market.
At the conference, I had the opportunity to see Kevin McElligott, Managing Director of Franco-Nevada Australia, talking about the royalty business with Jeremy Gray, Managing Director of Cartesian Royalty Holdings. Cartesian Royalty Holdings is backed by US$2.4-billion private equity firm Cartesian Capital Group. The pair were interviewed by 35-year mining veteran Lawrence Roulston, Managing Director of WestBay Capital Advisors.
Jeremy, Kevin and Lawrence know their stuff. Kevin provided good insight into Franco-Nevada and suggested they don’t always look for royalty deals with established companies.
I found that interesting. But not surprising. Kevin said Franco-Nevada has a ‘soft heart’ for doing deals with smaller companies.
Jeremy, in particular, discussed his preference for doing deals with smaller gold companies. He prefers companies with market capitalisations of less than $20 mln. However, companies with less than $5 mln are ideal. He believes that significant upside potential stems from these companies.
Interestingly, that’s exactly our approach at Jim Rickards’ Gold Stock Trader. I’ve been focusing on companies that few people know exist. The idea is to buy into them while others think their businesses are worthless. If their businesses turn around, tremendous share price rewards are on offer — though that may not happen overnight.
Don’t just buy any gold company
Of course, the turnaround story may not happen at all. But with the reward on offer, it’s worth taking the risk if the story and project stack up.
Being from Australia, Jeremy also said he prefers companies that aren’t discussed on HotCopper — Australia’s largest stock market forum.
That’s a good observation, and something I also agree with.
Generally, the most undervalued gold miners are rarely discussed on HotCopper. That’s because they are going under the radar, and are often ignored by the majority.
Indeed, the best penny gold stocks offer plenty of potential. That’s why I spend hours analysing their projects for my readers, making sure they stack up.
Remember, Franco-Nevada wasn’t always large, or widely known. It started with a few small deals, which went big — a royalty model that Cartesian Royalty Holdings is following. It wants to strike royalty deals with gold companies that have a 300,000-ounce resource (or no resource at all), and watch it grow to two mln ounces. If that happens, the royalty company would receive an exposure to the exploration upside, and any rise to the gold price.
It’s a win-win.
So don’t be scared of smaller companies. While they appear extremely risky at face value, if you take the time to investigate and appreciate what’s happening behind the scenes, generally, there’s a lot of potential that is ignored by the market.
Despite my focus on smaller companies, royalty companies also offer great potential.
That begs the question: Should you buy FNV?
The price you pay for it matters. And despite conventional wisdom, unlike ‘penny gold’ stocks, royalty companies are exposed to the gold price. As long as gold remains volatile and in a bear market, there should be a better time to buy FNV.
Editor, Markets & Money
PS: There’s a new Jim Rickards’ Gold Stock Trader tip coming out tomorrow. It may well be the most unknown ‘penny gold’ company on the ASX. But that could change quickly. Wait until you read the story. To find out more, click here.