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I last wrote about gold this time last year and it had burst through US$1,400 an ounce and the stocks we mentioned have collectively powered ahead. Now that the yellow metal has surpassed its 2011 peak and crashed through US$2,000, it’s time to have another look at the part it can play in your portfolio.
We give you our latest research below on Under the Radar’s favoured gold stocks, Northern Star Resources (NST), Evolution Mining (EVN), OceanaGold (OGC) and the junior Pantoro (PNR).
Before we do that we investigate questions about gold itself. Can the golden run continue? Is it time to take profits? How much gold should you own and in what form? With the help of Under the Radar’s Portfolio Manager The Idle Speculator, we answer these questions and more.
Including gold stocks in a balanced portfolio is still paying off. Our homegrown gold producing favourites have returned an average 90% since the early 2018, most recently aided by a gold price that has climbed 21% in six months in US$ and 18% in A$ terms.
Under the Radar Report has had long-term success from the likes of Northern Star Resources (NST) and Evolution Mining (EVN). In fact, NST is one of Under the Radar’s best performers, having increased more than 14 fold since we first tipped it.
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 price, which is what we are discussing.
Bears will argue that gold is an entirely speculative asset, 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 having a little bit of gold in your portfolio 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.
When school and university students start telling me about some gold stocks to look at, I start channelling Joe Kennedy and Bernard Baruch, another rich man who described the scene before the big Crash of 1929.
The conditions certainly favour gold: low interest rates, US dollar weakness and almost unparalleled economic uncertainty due to COVID-19, which is all combined with an unprecedented binge of central banks around the world printing money in the form of Quantitative Easing.
The biggest factor in its favour is that 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.
But after its strong run since the worst of the coronavirus liquidity crunch, there is bound to be some consolidation, and we advise to use those opportunities to add some exposure if they do not already have enough.
Existing holdings should be anywhere between 5% to 10% of any portfolio, and a mix of low cost strong gold producers and a Gold ETF (GOLD) or bullion itself is recommended.
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, EVN, NST & OGC.
Under the Radar Report continues to favour holding Australian diversified 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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