The coronavirus outbreak and the effects of COVID-19 have gone deeper and wider than most people would have expected. That applies just as much to markets as anywhere. Whether it's a tech sector that is supporting our new work from home or re-rating as expensive EV/Sales multiples make less sense; a healthcare industry under the spotlight to find a vaccine, a cure, or provide treatment to patients; or various parts of the financial sector that have shown acute strain as the economy goes into the freezer for a few weeks, and what increasingly looks like a few months or more of containment - there are no real safe havens or quiet zones.
Gold would appear to be the exception to that. After a sharp-sell-off in March matching with the market's overall panic, the price of gold has re-achieved 52-week highs, and is up double digits so far this year. Trends don't always persist, and there's more to the metals complex than the price of gold. So we convened a panel of gold and miner focused Marketplace authors to ask for their takes on the space. Our panel is:
- Geoffrey Caveney, author of Stock & Gold Market Report
- Gold Mining Bull, author of The Gold Bull Portfolio
- SomaBull, author of The Gold Edge
Our questions are in the header font, with authors' responses following. Disclosures are available at the end of the article.
Gold is up about 11% year to date and just off 52-week highs. Thoughts about how the metal has performed?Geoffrey Caveney, author of Stock & Gold Market Report: Gold was in a strong bull market before the crisis; gold remains in a strong bull market now. Sure, there are periodic sell-offs, pullbacks, and corrections, as is normal in any bull market. But keep your eye on the 200-day moving average. Gold tested it in the third week of March, held that level, and has gone higher ever since. The standard chart with price, 50-day, and 200-day moving averages is a picture-perfect bull market look: price above both moving averages and all of them sloping upward. Gold is a very good place to be right now.
Gold Mining Bull, author of The Gold Bull Portfolio: Gold is reacting to the coronavirus and the Fed's actions exactly as you'd expect. The current environment (0% rates, unlimited QE and expanding Fed balance sheet) is very bullish for gold and will likely take the metal to new all-time highs in 2020.
SomaBull, author of The Gold Edge: Gold is performing exactly how it should be. It was already in a bull market before the COVID-19 crisis hit, as the cure to the debt and deficit crisis in the U.S. (and globally) is to simply print our way out of it. The economic impact of COVID-19 has not only worsened the balance sheet of the U.S., but it has sped up the end-game. A record amount of money - QE infinity by the Fed and $2+ trillion stimulus package - has been created over the last month to fill holes in the economy and balance sheets of corporations. If gold can't perform in this environment, then it would be failing at its only job: protect purchasing power. Having said that, back in February, I did warn my subscribers that gold could get temporarily taken down if COVID-19 caused a global stock market sell-off - as all assets are initially sold in a panic. It happened in 2008, and as expected, it happened when the stock market crashed last month. But gold always rebounds once the first wave of selling is complete, and it doesn't take long to fully recover. Which we have seen this time around as well.
Many view Gold as the obvious beneficiary of unprecedented stimulus that has to lead to asset price inflation. Is that how you view it at this stage?Geoffrey Caveney: That is one bullish factor among many for gold right now and going forward. Aside from inflation, there is the simple safe haven demand. Gold is like a form of currency that no government can simply devalue by fiat. The gold price can rise even when the dollar is getting stronger too, so gold even has value in deflationary environments, although the deflation will last maybe a couple of years, and then the inflation will dominate the rest of the decade. Unlike virtually all other metals and commodities, gold is almost completely non-dependent on industrial demand, so it doesn't face the same recessionary price pressures as oil, copper, or even silver.
Gold Mining Bull: Yes, you can't print gold - it's the ultimate store of value - and I believe more investors are starting to realize this. I'm seeing more interest in gold from institutional investors and banks, for example Bank of America analysts recently predicted $3,000/oz gold price by 2021.
SomaBull: If you superimpose a 50-year chart of gold in USD over a 50-year chart of M2 growth in the U.S., you will see that gold increases with the money supply. The over $1 trillion increase in M2 from early March 2020 to early April has never been seen before. The percent change month-over-month is the highest ever recorded. The stimulus package(s), along with other actions taken by the Fed and the U.S. government, are creating this unmatched surge in M2. Gold is drastically outperforming because for non-gold-related assets, the stimulus is simply filling in deflationary voids. These other asset classes are moving higher in price, but they aren't keeping pace with monetary inflation. Gold is.
What do you see as the biggest risk to gold or gold miners?Geoffrey Caveney: The risk to gold miners is much, much bigger than the risk to the gold price itself. Mining is still a human activity that is impacted by the pandemic crisis restrictions. Even when you watch the TV show "Gold Rush," they are doing interviews from home on webcams like everyone else and temporarily suspending operations. I have now become *very* selective about the gold miner stocks, both seniors and juniors, that I recommend.
Another medium-term risk to gold miners is the risk of some governments deeming gold mining to be "non-essential" economic activity. They may consider metals with more industrial and medical uses to be more essential to mine than gold. For example, some governments may "ration" the distribution of mining and construction equipment, favoring other miners over gold miners. These are not necessarily immediate or 100% risks, but it is a risk to keep in mind. Be very selective about which gold miners to invest in.
Gold Mining Bull: Gold: If the economy somehow sharply rebounds and GDP growth exceeds pre-coronavirus levels, it may lead to investors taking money out of gold and into risk assets like stocks. Gold miners: Political turmoil and coronavirus-related closures pose a short-term threat.
SomaBull: This is a low-risk environment for gold, especially compared to the current risks in other assets. Deflation and positive real interest rates - typically the biggest risks to any bullish gold thesis - aren't a concern, as the money stock is rising sharply and real interest rates are negative. There is weakening demand for jewelry (particularly in India), but investment demand has more than picked up the slack. There would need to be a contraction or lengthy stagnation in M2, and/or a reversal in interest rates, for this gold bull to be derailed. As for the gold miners, while many have seen their stock price recover fully over the last month, the vast majority are still quite undervalued and trading as if gold was at $1,400, instead of ~$1,700. There is a significant price buffer already, as the miners are posting robust (if not record-breaking) profits at $1,500 gold, which is $200 below current prices. The biggest risk I see with the miners, is not so much falling gold prices, but potential COVID-19-related shutdowns lasting longer than expected and disrupting cash flow.
There are other metals that are much more economically sensitive - copper comes to mind, for example. Any metals that stand to benefit from the current climate, or that you're avoiding?Geoffrey Caveney: I want to add silver to the list of economically sensitive metals. If you look at the charts objectively, silver has traded much more like copper in this crisis than like gold! Many precious metals people may not want to believe it, but it's true. My advice about silver: Instead of watching the Gold/Silver Ratio, follow the Copper/Silver Ratio instead. Silver and copper will both recover when the global economy recovers. They, much more than gold, are the true inflation-dependent metals. Silver may look very "cheap" right now compared to gold, but the silver price is actually still quite normally in line with copper.
At a certain moment during this bear market, both copper miners and silver miners will be excellent value buys to make large gains on a 5-10 year time frame. But I very much doubt that moment has arrived just yet so soon. They have farther to fall for now, and better bargain values will be available later in 2020 or in 2021.
Gold Mining Bull: Copper is a strong long-term bet on an upcoming supply-demand imbalance, and it stands to benefit from the proposed U.S. infrastructure plan. It doesn't have as much upside as gold, but I think it'll get back to $3/lb within the next couple of years. Silver is also a good bet on strong physical demand and the potential for industrial demand to rebound sharply.
SomaBull: Physical silver is very appealing at current levels. Silver is an industrial and precious metal, and the industrial side is being given far more weight during this crisis. However, the premiums for physical silver that investors are now paying are off the charts, as there is little silver that is available for sale. You also have a significant amount of silver supply now temporarily offline because of mine shutdowns - due to governments trying to contain COVID-19. This is offsetting weakening industrial demand. Silver is a tiny market compared to gold, and it doesn't take much of an increase in investment demand to create a spike in price. If gold continues to move higher, it should pull silver up with it. Then there could be an eventual surge in Ag as it catches up to gold's performance. Copper, I'm indifferent to at the moment. Other base metals (e.g. zinc and lead) I would avoid, as those will remain in the doldrums. A strong bout of inflation could light a fire under the base metals, but silver and gold will likely be outperforming.
What are you looking for in mining investments in the current market?Geoffrey Caveney: Strong management teams in safe geopolitical jurisdictions that have excellent working relationships with local officials and a well-established history in their area.
Gold Mining Bull: Gold miners that are focusing on managing costs vs. growing production, low future capex requirements or projects that carry strong economics (low upfront capex and low all-in costs), insider buying, and potential takeover targets.
SomaBull: I'm always looking for gold and silver mining stocks that have clear bullish catalysts, which haven't been priced in yet. When you find those companies, you don't need physical gold/silver to increase in value, as these stocks will move higher with or without help from the underlying metal. I believe that's one of the reasons why I continually outperform the sector. What I'm doing today is no different, however, I'm more cognizant in the current environment of potential future disruptions in mining operations due to COVID-19 outbreaks. I also think that companies with operations in underdeveloped countries - which aren't as well equipped to handle an outbreak - need to be monitored more closely. There are many unanswered questions about COVID-19 and its lasting effect.
What is the time frame you're looking at for the metals or miners you're looking at? In other words, is this a short-term period of turmoil or the start of a long cycle, or something else?Geoffrey Caveney: As I wrote above, for the metals themselves, gold is strong right now and going forward. For the miners, a very select group of gold miners are good investments right now and going forward. For copper and silver miners, it is better to wait for more of this bear market to play out. The time to invest in them will probably come in late 2020 or in 2021.
Gold Mining Bull: Gold and gold miners have entered the next phase in this bull market and I'm expecting miners to outperform as they provide leverage to gold prices, they'll likely benefit from super-cheap oil prices (lower costs) and they are historically undervalued compared to physical gold. Increased M&A activity will also likely be positive for the sector as the combination of mines and projects should lead to cost savings.
SomaBull: Before COVID-19 hit, I envisioned at least a 3-5 year bull run in this sector, where gold would reach $3,000+ per ounce and many gold mining stocks would move up multiples from current levels. I'm not changing my price target for gold, but I do believe COVID-19 has upped the timetable. The gold mining stocks were on the verge of breaking out and entering the next (and most profitable) phase of their bull cycle. COVID-19 has only temporarily delayed this event, as the gold miners are knocking on the door again.
Any specific stocks or metals you like in this climate, and what's the story?Geoffrey Caveney: Barrick Gold (GOLD) is a simple example of a strong senior gold miner to invest in right now and going forward. Their management team builds the kind of strong working relationships in the areas where they operate that are now and will be so essential in the world we will live in during and after this crisis.
Gold Mining Bull: I have publicly recommended Kirkland Lake Gold (NYSE:KL) for several years and have made a lot of money on the stock, but I think it could be headed even higher. The company is producing enormous amounts of cash flow and the Detour Lake acquisition could pay off handsomely. Kirkland Lake also has one of the strongest balance sheets in the sector with $700+ million net cash. In the short term, I'm hoping for a pullback before I'd consider adding to my position.
SomaBull: Most of my picks are reserved for subscribers, but I continue to view Barrick Gold (GOLD) as one of the best stocks to own, period. Even if one isn't bullish on gold. The fundamentals for the company keep improving as the net debt approaches zero. They are extremely well-diversified, have low costs, and the stock trades at a forward valuation that is much lower than its peers. Barrick is up over 30% YTD, and up over 85% in the last year. It's been a top pick of mine for a while, and I still see significant upside potential in the stock at current gold prices.
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Thanks to our panel for their discussion on the sector, which is certainly in the spotlight. Check out their work at the links above.
We will be publishing a more general stock-picking roundtable on Sunday, and then restarting the cycle of topics for the current environment. Any requested topics? As always, let us know below.
See also Global Economic Downturn Moderates In May, Led By Renewed Growth In China on seekingalpha.com
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
