How I Found Gold In Whitewater Rapids

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Includes: GDX, GDXJ, GLD, GTU, IAU, OUNZ, PHYS, QGLDX, SGOL
by: Greg Silberman, CFA

Summary

The question of Gold as an investment intrigues me!

Nobody, it seems, is ambivalent to the shiny yellow metal.

Either you Hate it! In which case you may be in the camp of a barbarous relic.

Or you Love it? In which case you may be a crackpot doomsayer preparing for War against the government.

Is there not a middle road when it comes to Gold?

Would a smart investor not recognize that, in all things investing, there is a season?

And isn't it possible that Gold's season may just have arrived?

But I get ahead of myself.

Let's review...

It's not hard to be a Gold Bug if you grew up in Johannesburg, South Africa… known in Zulu as Egoli… The Place of Gold.

The University I attended was called the University of the Witwatersrand (try saying that fast three times).

  • Wit
  • Waters
  • Rand

Translated into English from native Afrikaans (a Dutch-derived language) it means "Ridge of white waters" and refers to a 56-kilometer escarpment of hard, erosion-resistant quartzite rock, over which several rivers form waterfalls.

The abundance of Gold beneath this rock formation is without equal anywhere else in the world.

Over 50,000 tons have been mined since this precious metal was first discovered here in 1886. This accounts for approximately 50% of all the Gold ever mined on earth and is the reason the South African currency was named the "Rand" in 1961.

It's hard not to be a Gold Bug when you grew up on top of that veritable Pot of Gold ha ha!

Gold exists in our DNA

We admit we don't fully understand the factors that consistently drive the price of Gold.

What perplexes most analysts about Gold is its fuzzy logic, that is, no one factor can always be counted on to dominate for a successful foray into the Gold markets.

Let's explore some consensus views:

  • "Gold is an inflationary hedge and should go up during bouts of inflation."
  • "Gold is a fear-based trade and goes up when fear is rising in the financial markets."
  • "The Gold price is driven primarily by jewelry demand because supply changes very little on a year over year basis."
  • "Gold is an ancient metal which holds no value in our modern digital age."

Our answer to the above is a resounding YES! All of the above are/were true at some point in time or another.

Click to enlarge

Figure 1 - Gold Price 1980 - 2016

20-Year Bear Market

From 1980 to 2000, the Gold price cratered from a high of $850 to a low of $226.80 in 2001.

A 20-year Bear Market can and did affect an entire generation of investors who became acclimated to thinking of Gold as a dead instrument NEVER worth owning.

Bull Market - first decade of the 2000s

Then as if a Phoenix from the ashes, Gold started moving higher during the 2000-2002 equity Bear market. At that time, the dot.com boom was imploding (fear), credit spreads were widening, and a recession was on the way. Real Interest Rates were falling as the Fed lowered interest rates and inflationary expectations waned (the opportunity cost for holding Gold became lower).

A simple trend-following system that went LONG Gold when it was above its 20-month moving average would have captured a large portion of that decade-long bull run of approximately 400%.

Of interest, is Gold's performance during the 2008 crisis where it initially dropped ~30%, but swiftly regained its status as a fear trade, as a banking crisis swept across the financial landscape.

For our own book, we spent most of that decade Down Under in Australia. Dabbling in junior miners and having a helluva time doing so. We even took a trip to Perth, Australia - the most isolated city in the world and relatively close to Western Australia's Gold, Uranium, and other Base Metal ore bodies.

Logical Correction?

As if the exuberance got too much, 2012-2015 saw a correction in Gold. Quite logically, a bear market was required to dampen the spirits of the bulls and reawaken the fears of another secular decade-long disappointment (good investments need a lot of public skepticism to work). Not by chance, this period coincides with a general equity bull market and hence overall financial fears subsided.

What has changed?

Our attention to Gold recently piqued again, as it once again pierced its 20-month moving average (figure 1 - 2016 onward) moving higher.

We revisited some of the South African miners to gauge if what we were seeing was real...

We know from experience that the SA miners are highly leveraged to the price of Gold. They have high debt: equity ratios, are plagued with labor and other operating risks and stand to benefit from a collapsing South African Rand.

Click to enlarge Harmony Gold Mining is up 522% since December 1st, 2015.

And this reminded us of the early phase of the bull market that started in 2001.

What are the potential factors driving Gold this time?

  1. Conviction in Central Bank's ability to stimulate economies is waning. [GS: The lower and middle classes sense that we never left the 2008 recession which is likely the reason a non-establishment candidate (Donald Trump) has found such favor amongst those voters].
  2. The US Dollar rise seems to have stalled since mid-2015.
  3. Volatility has picked up in Equity markets.
  4. Weak oil prices are a major plus as it lowers input costs for miners.
  5. Yields on more than $7 trillion of government bonds worldwide are now negative. Instead of paying the bank for the privilege of depositing your money there, why not rather hold Gold coins in your possession?

Gold Investment Strategy: Focus on Value Creation

Mid-tiers and juniors that are creating value through growth look undervalued to us due to market concerns over project financing or acquisitions. Some of these companies may need additional capital if Gold prices average around $1,100 or less.

Of particular interests are the Australian mid-tiers and junior miners, because the Australia market does not carry the same financing stigma as some of its global peers.

Sentiment toward Gold has recently become more positive which is a short-term warning sign to us that a pullback is possible, but the signs for a more enduring move higher in the long term are quite apparent!

Greg

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Thank you for reading my post. I regularly write about private market opportunities and trends. If you would like to read my regular posts feel free to also connect on LinkedIn, Twitter or via Atlanta Capital Group.

Greg Silberman is the Chief Investment Officer of Atlanta Capital Group. Atlanta Capital Group specializes in creating custom private market solutions for RIA/Family Office clients and is an active acquirer of independent wealth management practices.

Advisory Services offered through Atlanta Capital Group.

Securities offered through Triad Advisors, Member FINRA/SIPC.

Atlanta Capital Group is not affiliated with Triad Advisors

Nothing in this article should be interpreted as a recommendation to buy any security. Please conduct your own due diligence.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.