The shocking future of gold
Gold is sure acting like it’s trying to break out.
As gold has taken off and is back in the headlines, making a strong move higher in the last few months, I’ve been receiving a lot of questions and getting in a lot of debates about it and other precious metals and the companies that mine them.
With so many other commodities crushed, this strength in gold could become a self-fulfilling prophesy as money managers look for a place to get some commodity exposure, making gold miner stock multiples expand ever faster. We don’t have to invest in any commodity, but if I had to own a commodity, I’d want to own gold. And I do own gold coins and bullion, but no gold miner stocks and no gold ETFs.
Why not gold miners?
Marketwatch, CNBC, Fox Biz’s favorite analyst and one of my own favorites too, Kevin Kerr, and I got into a discussion about the gold miners just yesterday when I wrote: “I’m concerned that EVERY miner stock I check has billions of dollars of debt and needs gold to stay here or go higher to pay it off. I’d rather own gold coins than gold miners.”
For example Silver mining stock, SLW, has $1.5BB in debt and $100 million in cash and it sounds like a leveraged up way to bet on silver getting to $25 or $30 so they can make enough money to service/pay back that debt and earn some profits for shareholders. I’m not interested in a over-leveraged silver miner stock, personally.
$GG has billions of dollars of net debt and I’m not interested in investing in any commodities-related stock that’s heavily indebted. Specifically, I wouldn’t want to bet on the gold miners, most of whom have terrible balance sheets which makes me uncomfortable in giving you a long-term bet since I don’t believe it’s good risk/reward on the premise.
Kevin wrote back: “Hey Cody, yeah this is not going to be a straight shot higher for gold, or silver for that matter, although I like it better. No we are in this range for awhile. We see$20-25 down days followed by $20-25 up days. I think the debt issue you raise for many of the miners is well taken, they have a lot of that to mop up, and I think we see further consolidation. I think the floor for gold is more like around the $1180 level.”
There’s a real lack of profitability at the gold miners if gold were to fall back near $1100 again. At $1300 an ounce, the gold miners can make some real cash and pay their debt obligations. At $1500 an ounce, the gold miners can really start to make some money for shareholders.
The long-term debt that most of these gold miners carry is problematic and investors in these stocks are basically betting that the price of gold will rise back to $1200 or higher in the next few months so these gold mining companies can at least survive. The set up for gold miners is akin to the same analysis I’ve found when I’ve analyzed energy and oil stocks as most of the companies in the sector have too much debt and investors in oil stocks are basically betting that oil itself will rise back towards $50 or higher in the next few months so those oil companies can at least survive.
So as I was saying, I think the price of gold is going to stay/head higher, at least for a while. But if gold drops to $1100 again, my gold coins will be down 12% from their current levels and the gold miner stocks would likely be down 50-80% from current levels, and some would be wiped out. Gold miner stocks have too much debt in general for me to want to risk buying them, but they are a high-beta way to play the price of gold itself.
What about just buying some precious metal ETFs so you don’t have to handle the physical stuff?
Well, first of all, everybody loves touching and looking at gold! Further, I’m not a fan of precious metal ETF’s other than if you’re using them for a short to mid-term time frame. I think at some point, the major precious metal ETF’s won’t be able to deliver all the promised physical metal that they purportedly represent.
If you want to bet on the price of gold for the next three weeks or three months or one year, GLD is a decent way to do that. If you want to bet on the price of silver for the next three weeks or three months or one year, SLV is a decent way to do that. If you want to hedge your portfolio with silver for the long-term risks of currency devaluation and financial disruption, then of course only silver coins and a little bullion are the way to go.
We learned in 2008’s financial crisis that paper promises from banks aren’t worth the paper they’re written on when the crap hits the fan. So if you’re using GLD and SLV and other paper promise precious metal ETFs as hedge against economic/financial crises, then it sort of defeats the purpose.
So what is the near-term and long-term outlook for gold?
Back on November 11, 2011, I wrote a Scuttle that predicted: “Feet to fire gold action guess: Gold to stagnate around $1100 into year-end. Gold to fall closer to $1000 in a panicky sell-off if and when the Fed finally raises rates a bit. Gold to hit $2000 sometime in the next decade after that.”
That’s just about exactly how it played out since then, as gold dipped near $1050 in a panicky sell-off after the Fed finally raised rates a bit.
And now? I wouldn’t be shocked at pull-back of 5% in gold near-term, frankly but the path of least resistance for gold for the next few months and next few years and especially the next few decades is higher. The tipping point for a major spike of 20-30% or more in the price of gold is if/when the FED formally moves to an easing cycle again, which I expect to see sometime in the next few months. Long-time readers and followers of mine will recall times when I’ve been bearish and even short precious metals. So this might come as a shock to them – I expect to see gold revalued 5- or even 10-fold in my lifetime.
With the Central Bank and Corporatist governments that run every major developed economy doing everything they can to devalue their fiat currencies….yes, I do think Gold is headed quite a bit higher over the next five years. Maybe could even hit $2000 per ounce over that time frame. But that’s not something I’m trying to game. I just own my gold coins and bullion and expect that someday before I do in the next, say, fifty or so years, they will be worth 5-10x what I paid for it.
Finally, here’s a must-read debate from a round table of professional and armchair gold experts full analysis and insights about ETFs vs gold coins vs gold miners vs the US Dollar — the very topics I hit on here in today’s article. And if you want a free copy of my ebook called “Everything You Need to Know About Investing in Gold and Silver” just shoot an email request to us at support@tradingwithcody.com.
