The Gold Rally

Gold has been making headlines of late as we witness a meteoric rise in the gold price of recent months. It’s surging!

Commentary even suggesting we are simply forming a basis, a precursor from which a further more pronounced rally could emanate. Bank of America analysts suggesting $3000 an ounce by October! Really?

I am not one to predict where the price will go but it has certainly brought plenty of focus to the gold sector, for both companies and that of the commodity itself.

I will preface this by saying that generally I do not like gold mining companies and rarely do I even consider the commodity (bullion) as an investment option.

I have one company with gold exposure in my portfolio currently (a multi commodity producer) and have owned gold companies many times but have NEVER held Gold companies for the long term (over 2 years, too darn volatile!). I invest when I am taking a view on the gold price, I am not seeking safety. I don’t view it this way.

 

Should you invest in Gold?

You see, gold is a high-risk investment and believe it or not, there is plenty of ‘accounted for’ gold around. It is very costly to mine and can only be captured when prices are high. They are high cost businesses that consistently miss the mark in their operational performance, due largely to the high reliance on technical data for their decisions and the complexity (geology) of actually getting to where the gold is!

Often, this exposes the massive divide between potential and reality in the performance of many gold mining operations, meaning companies are consistently updating the market on their underwhelming operational performance. It is hard work and hard to get right the gold mining game!

However, it does not mean we should dissuade ourselves from exposure if we believe there is some further upside and potential gains to be made. Plenty of pundits certainly believe more upside is to come. Current technical (volumes) and fundamentals (printing of money) may just point to a further, more sustained rally in the space. Anyway you look at it, the near term indicators do look particularly strong.

But as I always say, we are buying business and therefore we must have a plan, an exit and arm ourselves with knowledge. Otherwise you are gambling! And we are always trying to achieve success more often than we are wrong. That is how we outperform.

Reality check

A blaring example of what I am saying is seen in Victoria. Nowhere else in the world has more gold been extracted than in the world famous ‘golden triangle’ (Bendigo, Ballarat and Stawell). It’s actually a rectangle as St Arnaud, Avoca and everywhere in between counts when the triangle is referenced. It is the foundation upon which Melbourne’s famous Collins Street was built (the hub of Australia’s biggest city in the 1800’s and the financial capital)! The technical data says there is almost as much gold still in the ground as has been found to date! A whopping 80 million ounces still to come!

I quote Victoria’s Department of Jobs, Precincts and Regions’ Earth Resources website; “The Geological Survey of Victoria estimates that only half the gold that may exist in Victoria has been found over the past 169 years, putting the state in prime position for a second gold rush.”

Yet all companies bar one exception (Fosterville mine, KLA) have consistently failed to make money out of mining here. It is too costly (nuggety formations, literally 3 km’s down in hard rock, close to large populations!) so operationally miners have failed; consistently over promising and under delivering, chewing up investor capital all along the way.

 

Gold or Bullion?

But herein lies the opportunity as I see it to ride the ‘gold rush’ boom. I have a preference for direct investment in a gold producing company, rather than stand alone gold bullion ownership. And here is why.

If we can identify a mining company that is delivering profits and costs appear to be lower than some of its peers, then here we can get three direct benefits of this gold rush! The targeted gold mining stock (actually mining the stuff, not exploring!) will for one, actually ‘piggy back’ off a ‘bullish’ gold price. Ideally look at pure gold plays as this way you get the full benefit of the commodity surge reflected in the share price. Refer to the attached ASX gold producers share price chart to clarify my point.

5-year ASX-listed gold stocks versus gold spot performance

5-year ASX-listed gold stocks versus gold spot performance. Chart by TradingView

Secondly, by selecting a company in the production phase there is also a higher likelihood of you, a part owner of this business, to be in receipt of a dividend. Gold companies do pay dividends in gold booms! So, two bites of the cherry so to speak!

Bullion will pay no dividend and gives you no benefit for identifying a high performing entity in the sector (easier said than done) which the share position will. Which is the third reason I prefer stock ownership. The market loves outperformance to industry peers.

Remember gold is purely speculative and extremely volatile, not ‘safe’ and ‘defensive’ investments as we are led to believe. We need to dump those beliefs, view it as any other commodity and see what the drivers of price are.

So, look at gold as an investment opportunity like any other, with upside, downside, but bear (no pun intended!) in mind that it is more speculative and riskier than you might think.

Did you know that the long term holding of gold has actually been a very under-performing asset? Very contrary to the broadly held belief.

Professor Jeremy Siegal (Wharton Finance – University of Pennsylvania) found that if you had invested $1 in gold in 1802 it would be worth (approximately) $3 today. Yet if you’d invested that $1 in the share market in 1802 it would be worth $1,033,487 today.

 

Present

The sector is running ‘hot’, this is obvious. So, whatever your position, let’s look at some of the local players, some household names and some not so obvious in the next edition and how we go about assessing one producer over another. It is a good time to do so as most of the major Australian gold players have declared their gold price assumptions moving forward. These have a variance from as little as $1,200 ounce to $1,750. So yes, it can even be hard comparing gold with gold!  I will extrapolate to provide clarity and the logic behind them. These will be important in sizing up where to look for your little piece of the gold rush!

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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.