The Boy Scouts, Captain Kirk And Gold?

|
About: Coeur Mining, Inc. (CDE), GDX, GDXJ, GG, GLD, NEM, NG, PAAS, SA, SLV, UGL, Includes: GOLD
by: Paul Franke
Summary

Now is the time to prepare for future central bank money printing, purchasing gold, and silver on the cheap.

A major bottom in the monetary metals appears to have been reached in the second half of 2018.

Don't laugh, $2,000 gold may be on deck the next 6-12 months if an unexpected black swan or recession strikes.

Gold and silver could prove the smartest and easiest hedges against financial market swings and decline during 2019-2021.

The Boy Scout motto is "Be Prepared," which means you are always in a state of readiness in mind and body to do your duty. If you think about it, that's also the motto of great leaders, even Captain Kirk of the Starship Enterprise on Star Trek. As you watch an episode play out to its successful ending, Captain Kirk is always a step or two ahead of everyone in his thinking. He always has a Plan B, or even a Plan C, for escaping each problem.

As investors, we all have choices to prepare for our financial futures. Each of us has different money needs and goals, including views on how to best fulfill our destinies. Having invested for over 30 years and being an ardent student of history, I can attest to the usefulness of owning gold/silver as hedges all the time, just in case, something goes terribly wrong in the markets and economy. It is a long-term inflation hedge, having risen at an average compounded yearly rate of +7.5% since 1968, 50 years ago, just before the U.S. dropped the gold standard for American money.

Gold has also been the premier investment asset to own during intermediate-term periods of economic calamity like the 1930s Great Depression years, the 1970s OPEC oil embargo years of major stagflation, and lately the out-of-control FED money printing years of 2001-2011 encompassing two major recessions.

To its credit, gold has held a constant value or risen in price during every large black swan event and recession in the last 50 years, outperforming the general stock market. During the economic downdrafts and political uncertainty created by the 1972-74 OPEC Oil Embargo and recession, issues with stagflation in late 1970s, the 1981-82 recession, the 1987 stock market crash, the 1989-90 recession and Gulf War period, the 2000-2001 Technology boom peak and recession, the 2001 September 11 terrorist attack, the 2007-09 recession, and more, we have experienced a flat to higher U.S. dollar gold price.

Basically, when we have encountered an economic drop that forces us to question the American way of life, or the government has decided to devalue the dollar's worth in the eyes of foreign owners, investors have demanded gold and silver. Makes sense.

You hear the stories of people who die on sinking cruise ships. Usually, they are the ones "told" everything is OK, to stay in your room, don't cause a panic. However, the individuals that decide to take action into their own hands and immediately run to the topside of the ship are the ones who survive.

In terms of the unexpected and unpredicted beginnings of economic crisis or recession, investors have been told by mainstream experts NOT to worry 100% of the time. During negative economic change or black swan chaos, CNBC, the Federal Reserve, the Wall Street Journal, and elected politicians have not in the past, and will not in the future give you time to escape unscathed. They either don't understand what is taking place, haven't thought through all the chess moves happening rapidly, or have decided to plead you stay calm and hope for the best.

U.S. investors need to become more self-reliant in their decision process. Don't count on your mutual fund manager or bullish local investment advisor having your best interest at heart, because keeping your capital is how he/she earns a living. They may be younger, lacking the experience a serious recession or market panic situation has on a balanced investing viewpoint. The current economic recovery is near a record ten years in length. Who remembers losing half their money in U.S. stocks between 2007-09? Many advisers were in middle or even grade school at the last equity market top.

Why Gold, Why Now

Regular readers know I have talked about gold investments as hedges since I started writing on Seeking Alpha. Being called a gold bug is not a bad thing in my view. I am not always bullish on gold, despite understanding its long-term importance. There have been many years in the past where I owned very small positions or none at all. Today is not the time in history to be neutral or bearish, however. I am the most bullish on gold right now since the important 1999-2001 period in terms of personal portfolio construction. Similar to my suggestions in September and October that being the first to pull the plug on bullish stock market positions could be a smart move long-term, I have been rapidly building out a gold portfolio since late summer. The chart below highlights the incredible leverage still inherent in U.S. stock holdings, on top of record business and consumer debt, on top of the record pricing of stocks vs. underlying tangible book value and business operating revenues. The record profitability of corporate America in 2017-18 is also a concern. It would seem the U.S. stock market has nowhere to go, but down for years from the late summer highs.

The U.S. gold price has witnessed the longest stretch of stability and lowest aggregate volatility the last 5 years since we left an official gold standard in 1970-71. Is it deserved? Will it continue? My answer is NO to both. Economic growth trends and high confidence in them are a mile wide, but only an inch deep. It won't take much heat to dry up the lake is my thinking. We have all convinced ourselves the economy is back on a normal growth path. But we may look back years from now with the view it was all an illusion of prosperity, propped up by unsustainable amounts of borrowed money and overconfidence. In terms of gold, there is an old Wall Street saying, "Don't short a dull market!" Especially for precious metals that have a long-term bid from continual money printing, a 5 or 6-year base pattern is something to cheer as a buyer.

There is a high correlation between U.S. fiscal deficit spending and the gold price. Basically, government spending beyond tax revenues is a stimulus to the economy, but also a debt that will require yet more money printing and inflation in the future. Over the past 50 years, the worst times to own gold relative to the S&P 500 were during the falling budget deficit vs. GDP years of the 1990s and the latest 2012-2018 span. However, after Trump's tax cuts of 2018, the deficit is now projected by every credible source to explode from around $500 billion in 2017 above $1,000 billion in fiscal 2019, so who knows how high during a recession. It is reasonable to expect by 2021 the largest deficits as a percentage of GDP in American history outside of the pivotal World War II and the Civil War years if another prolonged recession hits soon. Against the +7.5% annual compounded gain in gold since 1968, the national debt held by Uncle Sam has risen +8.5% annually and the M-1 money supply by +6.6%. Go figure. Gold quotes are a function of both, pure and simple.

As a sentiment backdrop for the most important gold bottom in decades, we saw a record net short futures position by speculators on the COMEX in the fall of 2018 and the longest stretch of bearish sentiment by gold "experts" in modern history going into 2019. U.S. Mint gold and silver coin sales last year were the lowest since 2007, as gold has languished in demand since the $1700 per ounce 2011 peak.

I am the crazy who predicted $2000 an ounce gold is coming in 2019, a few months ago on Seeking Alpha. Why? Seems improbable, if not impossible, after the U.S. economy has overcome all obstacles for a decade. The answer is foreigners are set to give up on the U.S. dollar as the world's reserve currency, and rush to the gold relic of history as the new (I mean old) standard of wealth preservation. You can read a longer explanation of my logic for vastly higher gold prices here. The summary of my July article is gold's long-term "fair" valuation vs. total wealth and money floating around the world is closer to $2000 right now, believe it or not. If the stock market tanks and we are in deep recession soon, debts and deficit spending must leap far above anything the U.S. has experienced in modern times.

My ultimate destination estimate for gold is US$5000 in 2021. President Trump is working hard to destroy the faith in American values built since World War II over generations. Consequently, the investment capital we NEED from foreigners to keep our debt-laden economy moving forward may be in the process of evaporating. If foreign investors switch to net sellers of U.S. Treasury bonds and real estate and equities in general, there is no honest way to fill the gap and prevent a total implosion in our economy. I cannot change this math, and neither will your arguments to the contrary. You will only get one opportunity in your lifetime to hedge a dollar collapse. [Actually, this will be the 4th spike higher in gold since 1968.]

If we are on the verge of a massive global contraction in trade under Trump when the economy is more intertwined economically than another point in human history, how can that end well? My argument is - if the dollar does not have serious confidence issues from foreign investors starting in 2019, when will it? Trust me, I pray what's happening in the economy and politics really isn't. I prefer the dollar not tank in value, gold stays low, stocks remain high, and economic growth continues. That's my hope, but why not prepare for something worse, Plan B or god help U.S. Plan C? What should responsible, independent, reasonable adults do?

My Favorite Gold Stocks

So, if gold is on the verge of a monster rally higher, how should you invest your capital in the sector? Below are the stocks I own or suggest today, using everything I have learned from a risk-adjusted investment perspective in the gold/silver space since 1986.

I like the SPDR Gold ETF (GLD), but I own the ProShares Ultra Gold (UGL) product. The UGL ETF is a double long gold position. The way futures and swap products currently trade at low borrowing rates (although rising in 2018), I have only experienced total costs and time decay of roughly 3%-4% annually, all else being equal since 2015. Not bad when you consider the yellow metal's price gain historically is +7.5% each year since we left gold convertibility for dollars by foreign governments. The main benefit of owning this low-cost double product comes from the daily rebalancing and compounding. If we get a large and steady rise in gold prices to $2000 an ounce this year, a 50% gain, I expect UGL (based on past trading history) to rise between 125% and 150%. Another bonus is I get to invest just half the money up front to achieve the same paper gold exposure as bullion while investing the other half of my capital in different ideas to diversify. By far, UGL is the best double ETF I can find in the precious metals area. Others have much higher costs, compound at various rates, and use different underlying contracts that translate into weaker performance over long periods of time. ProShares Ultra Gold is my largest precious metal position at the start of 2019.

Moving up the risk ladder, next we have the diversified mining creations represented by the VanEck Vectors Gold Miners ETF (GDX) and VanEck Vectors Junior Gold Miners ETF (GDXJ). Both have strong buy arguments presently. However, I only own the GDXJ Junior ETF. I think it is the best in breed idea to gain exposure to a volatile group of small gold miners individually, in one trade. I expect the smaller, beaten down juniors to run hotter and higher to the upside in a robust gold advance. GDX is your plain vanilla investment option to hold gold mining exposure with industry average risk.

The top blue-chip gold miners are Newmont Mining (NEM) and Goldcorp (GG) in my opinion. Newmont digs a fair amount of copper out of the ground, while Goldcorp produces plenty of silver as byproducts. They are the best individual miners to own from my risk-adjusted analysis. Low mining costs, diversified mine locations in safer nations for investment, large in-ground reserves, low debt levels, and high cash flows are what you want in a buy-and-hold individual mining company. Very low price to book value and price to operating revenue ratios historically, appear to bolster the bullish case in early 2019. For example, Goldcorp's 10-year average price to trailing 12-month book value is close 2x and price to sales is almost 7x. Today's $10 price is 0.7x book value and 2.6x sales, a 70% discount to historical "normal!"

The following investments are higher in volatility and risk, alongside the potential of even better upside given an unusually strong gold/silver advance in 2019. First, the iShares Silver Trust ETF (SLV) is a way to play poor man's gold. It is quite possible silver will rise faster than gold in percentage terms, as the gold to silver ratio of 80 is near the record extreme of 100 hit in the early 1930s and early 1990s. A move to $5000 gold and $100 silver (50:1) means silver investors will garner even greater profits. Plus, any move to a lower $2500 gold target alongside an even higher $200 silver (13:1) scenario cannot be ruled out if a well-heeled investor tries to corner supplies, similar to the 1979-80 Hunt Brother effort.

Silver's upside revolves around the fact the majority of metal mined every year is used in industrial products, never to be seen again. The actual above ground supply stock, including long-term investment holdings, is a much lower dollar total than the estimated US$7 trillion gold bullion/jewelry market. At today's pricing total silver reserves in vaults, warehouses and the form of jewelry are estimated to be worth about $500 billion.

Including all the gold ever mined, the $7 trillion above ground gold capitalization number dwarfs the estimated $90 trillion in fiat monies, using the broadest form, floating around the planet in 2018. You can visualize a major global recession will require a monster jump in money printing by all central banks to paper over record debt problems, similar to our situation since 2007. Imagine if the markets get nervous about $150 trillion or $200 trillion in worldwide money stock and require a 20% hypothetical backing for fiat currencies in gold, instead of 8% today. You end up with a mathematical triple or quadruple for gold repriced in fiat currencies like the dollar in the not too distant future. I discussed the current 9% number and 16% 50-year average for theoretical backing of dollars using the prevailing gold price multiplied by U.S. government held gold reserves, divided by M-1 money supply in my July article. However you slice it, gold values vs. fiat money totals today are extraordinarily low.

To achieve profitable leverage vs. silver prices, I do not recommend the ultra, double or triple silver bullion products. They are too expensive if proven wrong and silver prices fail to rise. Instead, I suggest silver focused miners Pan American Silver (PAAS) and Coeur Mining (CDE). Both have strong balance sheets with less debt than other silver producers, plus decent existing cash flows to weather a stubbornly low silver price environment. Both have quality assets backing up your shares, owning decades of reserves to mine at $20 or $30 silver. I am also encouraged they have been acquiring new assets and land packages on the cheap in 2018. These forward-thinking, well-positioned and managed mid-tier silver miners are interesting buys to me. I believe they offer the best leverage to silver prices in a lower risk fashion.

Lastly, the prospective mine development projects of NovaGold Resources (NG) and Seabridge Gold (SA) are worth considering, and I have been adding these names to my portfolio in 2019. Each owns one of the two largest undeveloped gold properties in the safest investment district for mining rights - North America. They both require dramatically higher gold prices to become a mine, and construction costs in the billions have discouraged the majors from buying them out. However, like a call option on gold, if we do get a double and triple in the world's monetary metals, NG and SA may turn into some of the biggest winners for investors buying shares in January 2019. Interestingly, their stock quotes were already rising during 2018, as large hedge funds and long-term investors want the leverage to gold prices inherent in the shares. They sell at a small fractional amount on gold reserves and resources vs. the majors. The two choices are highly speculative, where low gold prices mean share dilution over time to pay bills.

Barrick Gold (GOLD) already owns half of NovaGold's proposed Donlin mine in Alaska. The Donlin resource base is huge at 33 million gold ounces in the proven & probable categories. NovaGold's $1.2 billion market cap at $4 a share, after subtracting cash, controls better than $20 billion (its 50% share) of gold in the ground at $1300 an ounce. If they identify more gold reserves in coming years and/or the gold price jumps to $2000 or higher in 2019, the added asset value numbered in the billions shifts directly to NG shareholder worth, as the company holds no real debt or liabilities.

Seabridge is NG on steroids. SA holds an even bigger gold/copper reserve in British Columbia named the KSM project with 45 million ounces of gold and 10 billion pounds of copper proven & probable found so far. But KSM is situated in a more difficult location, with lower ore grades overall, and a higher proposed mine construction cost of $5 billion. SA's market cap is roughly $800 million at $13 a share. Both companies have survived the latest gold downturn since 2011 quite well. I would add them to your portfolio last, after all the others mentioned in this article. The higher the gold price, the more likely they are taken over by one of the majors. As few new large gold deposits have been discovered the last 20 years, at some point Newmont or Barrick or Goldcorp will come knocking on their door, offer in hand.

My gold favorites have started to really muscle ahead of the general stock market the last several months. Below is a 2-month chart of gold/silver equity performance vs. the S&P 500 index. The typical investor still doesn't understand the gold upside story, despite superb returns since the August 15 low print. My guess is gold and silver are morphing into the must-have investments of 2019.

Conclusion

In my humble opinion, if you don't own gold/silver right now, you are placing way too much confidence in our economic and political system. You trust Federal Reserve and Washington leaders way too much. You believe in the U.S. dollar's indestructibility and perhaps bitcoin when independent logic says maybe you shouldn't. Gold has done its job as the greatest financial world "invention" the last 10,000 years. Gold has provided a store of wealth and hedge against calamity like no other asset EVER in history. Governments and central banks, especially China and Russia, are still turning to it during 2018-19, as they lose faith in fiat currencies and insurmountable debts.

I have explained to people for several years, just because the U.S. stock market hadn't fallen 20% or more in a while, didn't mean it wouldn't happen soon. Peter Schiff and Ron Paul have been warning since 2008 of the problems out-of-control QE money printing and massive deficit spending needs would create in the future. What if the future is now? Just because the U.S. dollar hasn't collapsed and the gold price skyrocketed yet, doesn't mean it won't happen soon. [According to the gold price move from $35 an ounce in 1968 to $1300 now, the dollar already has collapsed in value, over time.]

It's your financial survival we are talking about. It's up to you to protect your wealth and your family, not the government, your financial advisor, the media, or fabled icons like Warren Buffett that desire a low gold price for self-serving personal wealth and economic stability reasons. Believe it or not, Berkshire's stock has roughly performed the same as the U.S. gold price since the Tech Boom peak of 1999-2000. Gold buried in the back yard has bested the S&P 500 total return the last 20 years, rising from $250 an ounce at the low in 1999 to $1300 today! Below are 20-year charts illustrating the failure of Wall Street gains to keep up with hard money gold.

If the gold price shoots higher, too much debt and excessive money printing issues are reappearing again. Purchasing gold now, after its lowest 5-year stretch of volatility since the 1960s, maybe the wisest thing you can do to prepare for the next recession or black swan event. If Captain Kirk told you the best way to survive an unexpected financial mess and ever-increasing fiat money creation was to hold plenty of gold and silver in 2019, you would listen.

Disclosure: I am/we are long UGL, GDXJ, NEM, GG, PAAS, CDE, NG, SA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.