Welcome to 2022! Let’s recap another fragmented and challenging year of investments, the trends and how they played out in 2021.

Is the Trend Really your Friend?

 

Some time has elapsed since I delved into that sordid world of gold speculation. During the 2020 gold rally, the ‘spruikers’ were alerting us to the onset of the next boom for the commodity, with most Analysts and industry opinion suggesting a range of US $3000 – $4000 per ounce.

So, what did happen? After nearly 16 months, which the investment sector commonly considers a medium-term investment horizon, it shows a more detailed, less distorted picture of what is going on. I will use the date of 15th Sept 2020 (circa the time of initial publication) for reference.

15th Sept 2020
AUD for this day (average) 0 .729 Closing US Gold price $ 1,955 an ounce = AUD $ 2,681/ounce

7th Jan 2022
AUD for this day 0.72 US Gold Price $ 1,790 an ounce = AUD $ 2,486/ounce

Fact: The gold boom has not been forthcoming if you held bullion or long futures in 2021. Referring to my original article on gold, I shed some light on how we can mitigate against loss through application of some simple but compelling fundamentals. Which look beyond being a bona fide member of a ‘hot’ sector.

By recognising some material ‘value’ drivers through some fundamental analysis of readily available public data, we can identify entities that offer a ‘de risking’ to other sector participants. Thus not necessarily outperforming a ‘flavoursome’ or ‘hot’sector’ but de risking against a bull run that does not eventuate or continue as expected (bear in mind I put my disclaimer at the time I am not a particular fan of the gold space).

Perhaps the 2020 indicated ‘shortlist’ below illustrates this very fact.

 

How did we go on our 2020 shortlist?

 

My shortlist looked like this; IGO, SAR, KLA, RMS.

We used grossed-up figures in brackets of dividends paid during the period and assumed we equally invested in all four stocks.

1) IGO (Then $ 4.23) – today $ 12.05 ($12.15) (Up 187%)

Sold its low-cost gold asset ‘Tropicana’, and as per writing at the time, one of my most preferred gold exposures is ‘not even a gold stock!’ Turning the focus back to its core and historical expertise of nickel. Taking out listed entity Western Areas with the cash!

2) SAR

Merged with Northern Star Resources with Trades now on ticket code NST (Northern Star Resources). If you went through with the merger, there has been a marginal loss on the stock as it converted to NST script at .3763 of NST script. Though regular and special dividends since for original Saracen shareholders largely mitigated that. A few months premium was available on SAR stock before conversion to NST, which would have provided a 20% return to SAR shareholders post written piece of Sept 2020. I would call the investment NEUTRAL on an absolute return basis if you held the stock all the way through. NST today $9.50 ($ 9.65).

The combined entity is now in the top 10 producers globally, with a production profile exceeding 2Moz per annum by FY26. New dividend policy to return 31% of cash earnings to shareholders. Merger fast tracks growth and profits, asset development—a significantly more robust entity.

3) KLA (Then $ 64.50) – today $ 56.00 ($ 57.15) ($Down 11.4%)

The Australian market has not embraced this stock even though it is awash with cash and pays quarterly dividends. Bullion and most gold stocks do not!

Has an exceptional operations record. However, feel the inability of institutions and investors to value Canadian operations, and the dual listing could be hurting it. Eventually, the market is right regardless of your view and the strong fundamentals behind it. No significant nor consistent volume ever trades, evidencing my view. However, account for the dividends it
has paid since the initial article, it has pretty much tracked identical to the spot gold price. sector Neutral to slight sector underperformance.

4) RMS (Then $ 1.82) – today $ 1.44 ($ 1.465) (Down 19.5%)

Underwhelmed in the period from an operational and share price perspective. Though some long-term experienced gold investors added to the share registry at this time.

 

What did we learn?

 

As previously mentioned, despite all the rhetoric, the gold run did not eventuate. If you invested 17 months ago, you would have lost money, which is not the outcome we seek when investing. Of the four stocks I selected, one outperformed, one is investment neutral and two lost money.

Of these two KLA (if you include its regular dividends), it aligns with the gold price performance. Proving to be sector neutral but still a slight loss as a straight-out investment. RMS lost money from an investment perspective and underperformed relative to the spot gold price.

We seek to find the critical identification of fundamentals that could potentially deliver value over and above sector peers. Of which I briefly outlined in Sept 2020. This strategy has seen an outperformance of the gold market, down 9.25% in the exampled period. The direct share ownership model has seen an overall increase of 39% over the four stocks on a gross basis from our initial capital outlay. But on a pure grossed-up basis, there is a massive 48.25% differential if you compare this
with today’s current gold price. The ASX uses grossed-up numbers as we have here.

The ASX return for the ASX200 last year of performance was (which was a record in its history, yes history!) … 24%

We achieved this even with a negative return on the gold price by adopting some simple non-sophisticated fundamentals into the mix. Not just beat the ASX200 but massively surpassed it! (Though I am using a 16-month timeline for referenced return of 39%).

 

How do we mitigate the risk?

 

If you like a sector or commodity, ‘shortlist’ some stocks representative of it and buy the stock rather than direct exposure on metals or index exchange. Otherwise, if you don’t want to do the work, you can buy a passive ETF representative of gold, but then you are out of the money 9.25%

Herewith direct share ownership, you can get multiple potential benefits and mitigate against the inherent price risk of the commodity.

Like I always say, we are buying into a business, and such an approach as used here in this example, and over the duration of your investment journey, ensures we minimize risk to downside and get it right. The trend may be exciting; Crypto, Tech, Memes as a case in point. The momentum of sectors and stocks help you little when the sentiment moves elsewhere. The trend is not necessarily your friend.

The above gold example shows that incorporating a few fundamentals can protect and enhance your investment returns. Even as in this example, a sector went backwards in the comparable period. All contrary to the prediction that the ‘experts’ got wrong. They might be right, eventually! The ‘Ides of March’ perhaps? I refer to QE ceasing, and the locked in interest rate rises for the US for 2022.

If gold runs then, perhaps I have already given you a lead on where to start to look. I prefer not to be an expert. Don’t be one either; just be someone who gets it right more often than not!

 

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Read more about Investing in Gold from our previous post.

New to investing? Read about How to keep your investment decisions simple.

Disclaimer:
This article does not take into account the investment objectives, financial situation or needs of a particular person or entity. Before acting on any investment strategy or advice you should first consult with your current ASIC accredited investment professional or seek out a compliant investment professional for such.