In today’s issue:
- Physical gold demand is strong
- By contrast, gold mining firms are out of favour
- Investors can take advantage of what appears a historic opportunity
Yesterday I wrote about signs of stress in the physical gold market.
Today I’ll explain why this presents investors with such a good opportunity.
Yes, gold will probably continue to rally for a variety of reasons: debt, deficits, inflation, tariffs, geopolitical uncertainty… I could go on.
Gold may be the ultimate safe haven but it’s also a non-yielding, non-productive asset. Investors have other, potentially better options than to merely hoard gold. I’ll show you one example today…
One of these is to purchase shares in gold mining firms. They’re the “picks and shovels” of the gold world. They dig deep holes in the ground and extract and refine ore before selling it into the market.
If they dig holes in the right place, operate their mines efficiently and keep costs under control, they can make a tidy profit. If the price of gold continues rising, that profit will be all the greater.
Several weeks ago I observed that gold mining stocks were trading at historically low valuations and had lagged behind the rising price of gold in recent years. But I also noted that was beginning to change.
Indeed, this chart of the GDX gold miners’ index versus gold:
Source: Koyfin
That’s impressive recent performance for certain, but the miners are still playing catch-up to the gold price rally that began back in late 2022.
But now, let’s step back a bit further in time. What’s happened only recently isn’t the full story. Here is a 20-year chart of the above:
Source: Koyfin
Yes, gold has soared over the past few years but the miners have yet to even break out of their 20-year range!
I do own physical gold. It helps me to sleep at night. But I’ve also accumulated gold mining shares in recent years, anticipating an eventual breakout. That time may now be approaching.
There are good fundamental reasons beyond the high price of gold to think so. Mining operations costs, while higher than a few years ago, haven’t risen anything like the price of gold.
Hence operating margins are high, as is cash generation. While some of that cash must be re-invested to extend mine life or develop new resources, there is still plenty left to trickle down into profits. Well-run mining firms strike a balance, reinvesting cash only in high-value projects for their shareholders.
Mining is not without risks. Sometimes an explorer digs expensive holes in the wrong place. Sometimes ore extraction costs exceed expectations. Sometimes there is outright fraud, although that is rare.
(Note: Bre-X is perhaps the most famous modern example of gold mining fraud on a large scale. There was a big-budget film based on it – Gold (2016) – that is worth a watch.)
Investors should always perform due diligence before investing in any company. Gold miners are no exception. No business is without its risks. But current valuations are attractive and there are several gold mining firms we are currently recommending over at The Fleet Street Letter.
Another, potentially safer option is to become a gold-secured financier. That is, extend credit to a gold miner, secured by produced gold, at some agreed forward price.
This is what gold royalties companies do. They perform due diligence on specific mines and pre-purchase gold from the miners in anticipation of future production.
Royalty arrangements are a win-win for miners and their investors. The former lock in attractive financing for developing, expanding and operating their mines. The latter have the opportunity to acquire future production at a discount.
By purchasing shares in a royalties firm, you’re able to take part. Think of it as a way to receive a gold-backed “coupon” while also participating in potential future gold price upside.
Over at The Fleet Street Letter, we’re also currently recommending a leading royalties firm, one with a large, diversified portfolio of arrangements with multiple well-established mining firms in North America and around the world.
The outlook for both miners and royalties firms is excellent, as my colleague Nick Hubble and I discuss in this recent interview here.
Until next time,
John Butler
Investment Director, Fortune & Freedom
Myth of Empire
Bill Bonner, writing from Baltimore, Maryland
Quintili Vare, legiones redde! (Quintilius Varus, give me back my legions!)
– Emperor Augustus, after the Teutoburg Forest disaster
Oh what a jolly, juicy, jingo-ed up world!
As Dan Denning explained, we’re still waiting for the feds to take out millions of dollars’ worth of subscriptions to Bonner Private Research… thus guaranteeing we get behind their efforts to improve the world. We’re open to bribery as well as flattery.
In the meantime, we’ll explain our very-minority view more carefully. To the dismay of many readers, we doubt that Trump was spared by God to lead a renaissance in the US. You could say that he was selected by God – inasmuch as God and Nature are one – to do what he is doing.
But nature abhors a vacuum, said Aristotle. Nothing ever finds no place. Then again, nothing ever fills all space, either, because nature also despises a monopoly. Everywhere you look, you see not just one plant… not just one kind of person… nor one hair color… nor one brand of vacuum cleaner or one type of whiskey. No one person has all the answers, all the money, or all the power. And no matter how witty or dim we are, we will die along with everyone else.
Empires expand. But they never seize all the power or all the space. And it is not long before the imperial race has ‘over-stretched.’ Napoleon in Moscow… Hitler in Stalingrad… Yamamoto in the Pacific… the Romans in the Teutoburg forest.
Jack Snyder refers to it as a ‘myth of empire’… that security can be enhanced by expanding outward… conquering more territory and setting up more garrisons.
The same myth exists in business. Successful companies often acquire other businesses. If they make a profit by building swimming pools, they try their hand at making movies… or publishing a newspaper. They stretch… until they lose their balance. As recounted in these pages several times, Jack Welch, an expander par excellence, bought a new company every week, while he was enjoying his heyday at GE. The stock rose ten times from 1990 ‘til the end of the decade.
But it’s hard enough to run one company… or one country… let alone dozens of them. After 2000, GE stock lost 80% of its value. It took years to fully recover.
The US is now the cock o’ the walk, with huge military and economic advantages over its rivals. It famously spends more on its military than the next ten nations combined. Its consumer market is the richest in the world… and its dollar is still the go-to currency for people everywhere.
No single other nation can come close. It would take a very rare talent to bring it down. But it’s only a couple weeks into the new administration and already Donald Trump is off to a good start.
The BBC:
Trump tariff ‘made something snap in us’ – many Canadians see US rift beyond repair
After US President Donald Trump threatened Canada with steep tariffs, Monika Morelli from Montreal cancelled her subscriptions to Netflix and Amazon, two giant American companies. She also called off a trip that she had planned for later in the year to New Orleans. “There is something that has been irrevocably broken now, after centuries of the US and Canada being allies,” Ms Morelli, 39, told the BBC.
And this from the India Cable, where a deportee describes his trip back to India:
“For 40 hours, we were handcuffed, our feet tied with chains and were not allowed to move an inch from our seats… the crew would open the door and shove us in… [to the bathroom]”
Make enemies all over the world. And stretch. Already US troops are stationed in 800 bases (some of them secret) overseas. And every day brings the threat of another grab – Canada, Mexico, Greenland, Panama, Gaza.
But even with Trump at the helm, the USS America probably has a few good years before sailing to Alang. What should it do? What course should it take? Historian Paul Kennedy frames the challenge:
The task facing American statesmen over the next decades, therefore, is to recognize that broad trends are underway, and that there is a need to “manage” affairs so that the relative erosion of the United States’ position takes place slowly and smoothly, and is not accelerated by policies which bring merely short-term advantage but longer-term disadvantage.
A genuine ‘America First’ agenda could probably ensure a graceful, peaceful and civilized future. Yes, the US could calmly and carefully husband its resources. It could cut $2 trillion out of current spending, going back to 2019 levels, and balance the budget. It could stop trying to run the world and bring the troops home.
Or, it could follow the well-trod path into the Teutoburg Forest.
Regards,
Bill Bonner
Contributing Editor, Fortune & Freedom
For more from Bill Bonner, visit www.bonnerprivateresearch.com
