Should you invest in gold or gold stocks and how to get started
Hey Bow Tie Nation, Joseph Hogue with the Let’s Talk Money channel and a special video for you today. Those of you in the Nation will remember, we did a series on investing in gold four months ago, March 20th was the first video, and in the five months since, the price of gold has surged 28% and reached an all-time high just recently.
But I wanted to give you an update because we’re starting to see the price bounce around a lot and I know a lot of you are asking if gold is still a good investment.
So not only are we going to look at why you should be investing in gold, how to know where gold prices will go, we’re also going to get insight from an insider to the industry, the Chairman of a $300 million gold mining company to give us his experience in the market.
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An Insider's View of Gold Prices and Investing in Gold
I want to get right into it, we’re going to get that Chairman on first and then we’ll talk about those supply and demand fundamentals to show you how to know if gold is a good investment now or whenever you’re watching the video.
So I want to bring on Amir Adnani, Chairman and Founder of GoldMining Inc., that’s ticker GOLD on the TSX and GLDLF here in the States. The company is a $300 million miner with projects in Brazil, Canada, the U.S. and Colombia. Amir directs the company’s resource acquisitions across the Americas. He’s also the President and CEO of Uranium Energy Corporation, ticker UEC, and one of Fortune magazine’s 40 under 40.
And when I heard we could get Amir for an interview, I had to check out the company’s stock price, because…well I’m nosy that way, and was blown away to see GoldMining up 113% over the last year versus shares of the GDX Vectors fund of gold miners and its 46% run so hopefully, besides that insight into gold prices, he’ll let us in on what to look for to find competitive advantages in gold miners.
Amir, thank you for joining us and offering your insight.
Gold and silver are both up 100% since lows. The stock market isn't crashing, inflation is nowhere in sight…what do you attribute the increase in prices to and how high can it go?
- Gold has become a must-have asset for geopolitical risks and the general debasement of the dollar
- The Fed has committed to keeping interest rates near zero for years, this combined with taxes could sap productivity and other assets
- Gold is the only asset the Fed can't print! We've created more debt in the last 90 days than in any other period.
Now talk to me about the supply side; I've heard a lot about miners pulling back on capital investment through the 2013-2018 period, is that affecting supply?
- The past eight years have been a historic bear market for gold. As a result, major producers cut investment. Mining is a depleting business and if you're not investing…your pipelines are going to run low. The industry is now approximately 50% lower on its pipeline of resources.
- You're going to see more and more consolidation and acquisitions on a wide scale. It started a year ago with the super majors but will flow down to the mid-sized miners and smaller.
- If you were going to look for gold with a grassroots operation, it could take 10 years just to get to permitting. So to fast-track this, you go out and acquire resources and miners that have already gone through the process.
GoldMining Inc is trading at its 52-week high after big developments were announced. How do these affect the company going forward? Is the share price unavoidably linked to the price of gold or is it able to keep producing profits even if gold prices moderate?
- Well-run and well-structured companies should provide an outperformance to the commodity price. That's just a function of operating leverage and management.
- As investors, you want to look at the strategy of each company. Besides the Chairman of the company, I'm also the founder and largest stakeholder. You don't get that with the majors. Management is more like a hired gun, they don't have as much skin in the game. So you want to look for companies where management has that strong, vested interest in performance.
- Our view has been that you should be buying gold resources when gold is lower. We were buying gold projects in 2010 and 2012 when gold was closer to $1,000 rather than $2,000 an ounce. We paid basically $0.10 on the dollar for the assets in our portfolio.
- Now we are looking to harvest the benefits of this strategy. We're going to advance the portfolio of assets through development and joint ventures. We're also creating a royalty company, Gold Royalty Corp., which will give investors exposure to royalties and a strong portfolio of assets.
How Supply and Demand Affect Gold Prices
Supply is fairly stable but has those cyclical variations, mostly just after a long period of lower prices when miners pull back on capital spending so you get the opportunity to see consolidation and supported prices for at least a few years.
Demand for gold is really where you get the year-to-year variations in price because some of these can rise and fall quickly. You’ve got four major sources of demand for gold.
- Investors which includes physical gold and ETFs that hold physical gold – this is actually a fairly small portion of demand compared to the others but can affect the price at the margins. Besides the return, an allocation to gold helps protect against inflation and loss of value in the dollar and over the last three decades, annual volume of gold held in portfolios has increased by over 200% according to the World Gold Council.
- Central Banks hold gold as a safety asset along with U.S. Treasury notes but we’ve seen a real shift away from Treasuries and the dollar, especially by Russia and China. In fact, Central Bank buying of gold has increased for 10 consecutive years and is likely to keep rising.
- Jewelry is actually the single biggest factor at around 50% of total demand for gold with India and China accounting for about half of that. Jewelry demand rises and falls with the price but that financial progress of these two countries and the billions of people entering the middle class means there will always be demand here.
- Industrial and Technology – gold is actually one of the best conductors of electricity so it’s used in a lot of electronics. This is usually the most cyclical source of demand because of course, when the economy slows, less electronics and industrial uses need less gold but it’s also around this time that investors move into gold as a safety asset so there’s something of a counter-balance on this one.
How to Invest in Gold and Gold Stocks
So a lot of those demand factors are going to be supporting the price of gold and I think investors should have some exposure in their portfolio even after that 28% run in the price since March.
Of course the question here is how to invest, whether it’s in physical gold or stocks.
We’ve talked about physical gold before and I hold some but there are some drawbacks. The fees are really high, usually something like a 4% charge on each side to buy and sell, so that price has to move about 10% higher just to break even. You’ve also got storage costs and other risks.
With stocks, you can invest in the ETFs like the SPDR gold shares that holds physical gold and then sells shares in the inventory but really the investment I like is investing directly in the miners.
With the miners, you don’t pay an expense fee like you would with the SPDR gold shares. You also get investment in a company that’s producing profits, so we’ll look at that returns chart again; GoldMining Inc is in green, the gold miners fund, the GDX is in red and then in purple I’ve added shares of the GLD gold fund.
And what you notice is that the miners and GoldMining here give you the potential to vastly outperform gold prices on return. These are leveraged companies that are not only benefiting as the price of gold increases but also just from that good management that’s producing higher profits.
I like gold here. I wouldn’t be jumping in with everything but I have just over 5% of my portfolio in the asset through physical holding and gold miners. Besides that potential return, this is going to be one of your best assets for those what-if scenarios like a stock market crash or just that general trend lower in the value of the dollar.
Check out GoldMining Inc, that’s ticker GOLD in Toronto or GLDLF in the U.S., and don’t forget to join the Let’s Talk Money community by tapping that subscribe button and clicking the bell notification.