What is the main gold stock?
Gold stocks have finally jumped to a new US$ high, surpassing its 2011 peak. Can the gold stocks run continue? Is it time to take profit on gold stocks? How many gold sotcks should you buy now and in what form. In this article we answer these questions about gold stocks and more.
Including gold stocks in a balanced portfolio is still paying off. Under the Radar Report's homegrown gold stock producing favourites have returned an average 90% since early 2018, most recently aided by a gold stock price that has climbed 21% in six months in US$ and 18% in A$ terms.
Under the Radar Report has had long-term success from the likes of two gold stocks. In fact, one of these gold stocks is one of our best performers, having increased more than 13 fold since we first tipped it.
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How can I invest in gold stocks in Australia?
Our recommended strategy to invest in gold stocks in Australia is to avoid gold stock companies with single mine risk; focussing on the second tier gold stock producers as they grow organically or through sensibly priced off-market mine acquisitions. It could be argued that subsequently, these gold stock companies are now first tier.
Australia’s extraction expertise should never be underestimated. What you pay for this skill, experience and potential is the key to making money. Of course, you should overlay this with a view on the gold stock price, which is what we are discussing in this article.
Is gold a good buy right now?
Bears will argue that gold stocks are an entirely speculative buy right now, which relies on a greater fool to buy. To an extent that is true. The proof of the pudding from our perspective is the long history of gold as a store of wealth. It is also portable, fungible, anonymous and easily tradable.
The importance of buying gold stocks now has only increased over the past few months. The unlimited money printing triggered as a response to the coronavirus, on top of existing record levels of government debt, has a number of implications. In the medium term these would appear to be very supportive of the price of gold in US$. It is possible that A$ strength will offset that somewhat, if US$ weakness continues to be part of the gold story.
In our view the reluctance of central banks worldwide to increase interest rates from current levels of zero, which means that real interest rates will be negative, significantly increases the risk of inflation in the medium term. Ultra-low interest rates also mean that the cost of holding gold for a professional investor is negligible.
Conversely, single mine producers will continue to struggle due to competition for funding in high risk assets. The good ones will attract M&A interest, some of it from larger players we cover. Click here for a 14-day free trial and access our research on the best gold stocks on the ASX.
We continue to favour holding Australian diversified gold stock producers but at current levels they are very expensive. Even if the gold stocks aren’t the best value today, the key is to get to know them. When the price dips and your portfolio is ready for gold exposure, you can transact with more confidence.
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What are gold stocks worth?
The pandemic is causing gold to break out above US$1,900 an ounce and like other parts of the economy, the virus has accelerated existing trends. In April 2019, when gold was US$1,400 an ounce, we said the price was being driven by four main factors, which largely continue to be the case:
- A change in language from the US Federal Reserve, which now looks so insignificant compared with its giant steamroller buy everything response to the coronavirus liquidity crisis only one year later.
- An escalation of the trade war between the US and China, which is not improving by any measure. Elevated geopolitical risk: North Korea, Russian election influence, China/India border, COVID-19.
- The depreciation of the A$ against the US$, which continued for a long time, and only reversed recently and sharply
Priting money underwrites the price of gold stocks
US Government on balance sheet debt will have increased by almost 50% by the end of 2020 from pre-crisis levels of $22tn. The virus has brought a new scale to the monetisation of US government owned debt by the Fed Reserve. History shows that debt monetisation is a completely circular system, which depends on people maintaining faith in the currency deficit would be funded?
Now that the deficit is likely to quadruple this year and will be at least double that for years and years to come, who will fund that? US savers? Since the 70s, Americans have historically not saved enough. With a weakening US$, at some point, offshore buyers could go on strike, since their US$ assets will be depreciating. Other currencies have their own risks, and can be extremely volatile, overshooting intrinsic fair value (whatever that is) by a very large amount for a very long time.
Gold is not an obligation of the US government
You need to protect yourself with a financial asset that is not compromised by political exigencies. Gold and other hard assets have the historical record of maintaining long-term purchasing power despite violent currency fluctuations. We have always reminded subscribers that gold remains a portable and tradable financial asset that is not an obligation of the US Government, or anyone else. That is still its appeal.
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