We’re at the tail end of a mature boom market. World equities are still at unsustainable Icarus-level heights with limited worthwhile additional upside with the increasingly risk to a steady and massive sale (with the occasional “dead cat bounce”) should geopolitical events take a nasty turn for the worse.
For this reason gold remains one of the few commodities whose value will increase dramatically during a “Niagara Falls trajectory” as part of the normal cyclical marketplace. Despite the low volatility index, I believe the Minsky Moment is still in play.
Today’s geopolitical and economic threats have increased most notably:
- Potential escalation of US-China trade war against the backdrop of a slowing and heavily indebted Chinese economy. Market forces may overwhelm China’s efforts to stabilize their economy in times of crisis.
- Deliberate hostilities and/or miscalculations in & around the Strait of Hormuz with respect to draconian sanctions on Iran.
- Unpredictable production quota decisions and/or even the dissolution of OPEC + cooperation at the upcoming late June OPEC meeting.
- Historically high global debt levels exacerbated by the disturbing unknown level of debt in the opaque shadow market.
- Trump keen on aggressive political and economic aggressive policies to support his 2020 reelection.
More ominous however is the steadily increasing of gold purchases by central banks.
According to the World Gold Council report 2 May 2019 in their section entitled “Gold Demand Trends 1Q2019 Central Banks and other institutions” world central banks have made the biggest purchases of gold since 2013 continuing their momentum into 1Q2019 following their record-breaking 50-year high purchases in 2018. Quite notable was the wide spread of central banks who have aggressively increased their gold holdings ranging in countries including Russia, China, Turkey, Qatar, Ecuador, Colombia, India and Kazakhstan.
This tactic is open to interpretation as to why central banks globally have year-on-year steadily increased their gold holdings. Perhaps it’s a precursor to cushion the inevitable market decline. Presently historically low interest rates and high debt levels give central banks little maneuverability to stimulate economies during a downturn.
Elevated geopolitical tensions will remain as we approach zero hour to the next global economic downturn. The question remains with an economic downtown as to the rate of descent, the depth, its duration and whether it will have a symmetrical or asymmetrical impact on industries.
Small Gold Mining Firms
In addition to the purchase ETFs such as iShares Gold Trust Fund (IAU) or physical gold, another option is investment in smaller gold mining firms which are more nimble and offer far greater flexibility and less media “drama” compared to their behemoth brethren.
According to the Wall Street Journal article 14 March 2019 “No Big Rush for Gold-Mine Deals” in addition to the high-profile M&A battle between heavy-weights Barrick Gold Corp. and Newmont Mining Corp., mergers have not materialized because of low share prices, historical failures by past mergers and an overall risk-averse management.
In March I attended the Family Network Office Gold Show in NYC where several smaller gold mining companies provided presentations to prospective investors.
There were two particular firms which I was keen on. The first was a two-hour one-on-one meeting with Black Dragon Gold (OTC:BDGCF) CEO Paul Cronin. Black Dragon successfully completed both a debt and management restructuring. Financially they’ve reduced their debt considerably. With respect to leadership they have a new and deeply experienced Board of Directors and technical and financial management team. Their operations are located exclusively in the Asturias region of Spain which means geopolitical risk low because of its location in the EU. For this reason Mr. Cronin believes that the firm is undervalued.
The second was a one-on-one meeting was with Maverick Mines Founder & CEO Randolph Marsh. This firm’s specialty is in purchasing previously producing mines in the western US and applying the latest extraction technology. Investments can be achieved through private capital structures or Opportunity Zone investments. He explained that many mining professionals are ex-Special Forces who were born and raised in similar terrain as Maverick’s mining operations, certainly a dedicated crew.
I recommend that investors to undertake their own due diligence before committing to investments in these firms to insure that these firms provide the level of risk and return that meets their objectives.
What does this all mean? While gold prices remain low despite multiple geopolitical events, it’s the perfect time to buy in any form because there’s not much more downside to gold markets or upside to equity markets. The present-day pricing scenario represents the classic case study opportunity of buying low and increasing your portfolio of precious metals to and even beyond recommended the rule-of-thumb 10% maximum asset allocation.
Disclosure: I am/we are long IAU. 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.