What an October… for Gold!
I spent a couple of days in sunny, near-balmy Toronto, a few weeks back. I attended a private get-together of some of the most successful precious metal investors in the world — people with serious amounts of gold in vaults and big money in the bank to back up what they have to say.
Today, I’ll share a few great ideas that I picked up during my time with these precious metal experts.
Bullish on Gold, Especially When ATMs Don’t Work!
Long term, I’m bullish on gold (and silver, too). Of course, the prices of precious metals have gyrated up and down in recent years… and stagnated. That’s the nature of price action for these elements.
One key issue is that central banks — and “big bankers” — hate precious metals because there’s no counterparty risk. Stated another way, with physical gold and silver, your accounting has to be honest. Big/central bankers and politicians hate that.
Another issue is that I believe precious metal prices are heavily manipulated (long story). It’s evident that precious metals take a beating amongst the allegedly “well-educated” classes — meaning those who drank the Econ 101 Kool-Aid. With gold, however, over the long haul, we only have to own the best assets and be right once — and we’ll be right in a life-altering, good way.
Let me digress for just a moment. What will you do when (not if) we experience a true currency crisis? Can’t happen, you say? Of course it can happen — it usually occurs when great nations enter into big wars (another long story). Looking around, I can certainly envision the U.S./NATO and other allies getting into one or more big wars. Much as I hate to say it, I just can’t dismiss the idea. Rest assured, if war breaks out, you’ll probably have little or no warning about it.
Then when it comes to currency crises, it’s not as if most of the current political classes even understand the idea. And they sure wouldn’t tell us about it if they saw it coming.
An ATM line In Athens… July, 2015
In other words, we’ll go to bed one night feeling OK (if not good) about holding dollars in the bank. We’ll awaken the next morning to news that banks are closed until further notice while the government reissues some new form of currency that will invariably NOT preserve yesterday’s wealth into today. You’ll go from feeling OK to being poor.
When this scenario plays out, people will probably riot in the streets. You might even be out there too, tossing Molotov cocktails, or you might just remain secure in your house, cleaning your rifles and pistols and pondering how your stash of gold and silver will help you transition from one currency to another.
I understand that you can’t eat gold and silver; that’s not my point. I’m saying that a stash of bullion will sure help you maintain purchasing power and wealth. So get some gold.
Bottom line here is that I believe every investor ought to have some portion of his/her assets in gold — beginning with physical metal. Of course, once again, let me emphasize that it has to be YOUR metal, which YOU control. When you buy metal, take delivery. Don’t fall for the argument that someone else can hold your gold in their supposedly “secure vault” and that it’ll always be there when you need it. No, not the day after a currency crisis hits.
So buy gold. Own gold. Hold it personally, in a safe or safe-deposit box. Oh, and never brag about it to anyone! Don’t mention it, ever. When you own gold, you hold something valuable. Don’t be dumb and draw a bull’s-eye on your head.
What Else, Besides Physical Metal?
Simply put, with a budding rebound forming it’s important to keep a few gold names on your radar – we could see a fantastic turnaround, here.
Back in early September, I wrote that “right now, I think there are pulses in many of the bodies that litter the battlefield. They are the survivors of a three-year smack down, the ones that have raised cash in a mining depression, that can squeeze a buck until it cries, that can wring cost out of the equation from every angle. These are the survivors on which the next cycle will pivot.”
Then I wrote that “the best opportunity I see in gold — which could deliver the first green shoots in your portfolio — is royalty companies.” I mentioned Franco Nevada (FNV: NYSE) as among the best of them.
An ETF with Exposure to the Best of the Industry
Now let’s get around to that recent trip to Toronto. I spent the day in the offices of the Sprott Group, founded by super-investor Eric Sprott. “Super-investor,” indeed… he has the gold to prove it.
As money-managing institutions go, publicly traded Sprott Resource Corp. is among the best of the best — a survivor of the mining and resource investment crash of the past few years. Sprott has over $9 billion under management, has no debt, spins cash and pays a dividend.
One of the best ideas I heard all day at Sprott — and there were many — is a gold miners exchange-traded fund (ETF) that Sprott runs in-house. It’s called, appropriately enough, the Sprott Gold Miners ETF (SGDM: NYSE).
SGDM is composed of a collection of 25 top gold mining companies with the highest “historical beta” to the price of gold.
Indeed, when gold prices move up, shares in the collection of miners move even more. All this and you don’t have to “pick stocks”: Sprott has already done that scrubbing process.
Sprott’s analysts focus on factors that have long been considered strong historical predictors of share price performance, such as year-to-year revenue growth, assessed quarterly. Indeed, this measures actual production and grade, versus pie-in-the-sky PowerPoint shows of speculative ounces “along trend” or such.
The Sprott management team continually tracks the gold miner ETF, buying and selling to rebalance on a quarterly basis. The idea is to buy into plays with the best balance sheets, considering that mining is capital-intensive and requires years for many mines to find their stride.
Key metrics include companies’ balance sheet strength and financial flexibility. The best of the bunch make the cut; others are pared back or culled from the list. In essence, SGDM is designed and managed to capture the upside of a rising market, although you need to keep an eye out and step aside in the event of a fall in gold prices.
Right now, SGDM is selling under $15 per share, a relative low over the year and reflecting the year’s fall in gold prices. Yet that’s the idea, isn’t it? If gold prices are falling, SGDM falls to reflect the constellation of mining shares. Yet when gold prices creep back up, this is a perfect way to gain exposure to a closely watched selection of A-list mining companies that should benefit from higher prices.
If gold prices are rising, then what’s a great way to play the action? Well… first, own some physical gold. Second, royalty trusts. Third, take a hard look at the Sprott Gold Miners ETF (SGDM: NYSE).
That’s all for now. We’ll see what the market brings us in the coming weeks. It could certainly set the stage for something big in our favor…
Byron W. King
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