MoneyWeek Report: September 2020

The gold bull is back The best ways to invest in precious metals today MoneyWeek Gold Report: September 2020

3 | WHY EVERYONE SHOULD OWN A BIT OF GOLD

4 | WHAT REALLY DRIVES GOLD PRICES?

5 | BELIEVE IT OR NOT, INFLATION IS COMING OUR WAY

7 | : SO MUCH POTENTIAL, BUT SO MUCH RISK

8 | EVEN WARREN BUFFETT IS INVESTING IN GOLD NOW

9 | THE BEST OPPORTUNITIES IN GOLD MINING

Cover: Adam Stower | All Pictures: ©iStock Photos: Except Page 8 ©Getty Images

2 | CONTENTS MoneyWeek Gold Report: September 2020 Here’s why you should own gold

John Stepek depending on what’s happening in the world. But it’s Executive Editor highly unlikely to go to zero until we can produce it out of thin air, in which case we’ll have solved the scarcity problem and we won’t need money anymore in any n September 2011, gold hit an all-time high in US case. Idollars of $1,923.70 an ounce. That was an intraday That’s what makes gold unique. That’s what gives high (ie, it happened during the session). The closing it its diversifying properties. And that’s why we reckon high was a bit lower, set in August 2011 at $1,891.90. you should pretty much always own at least a bit of This year, both of those highs have gold, regardless of the backdrop, finally been beaten. It’s only taken or whether the outlook is bullish nine years. Good things come to or bearish for the yellow metal. those who wait, it seems. This is why we’ve always told Of course, you could argue that MoneyWeek readers to own it. these numbers are not as significant as they might seem. Once you take Conditions are ripe for further inflation into account, gold is still gains below the 2011 US dollar high. However, currently we also That in itself was also below the like gold for a second reason – 1980 high, which saw gold spike to because the conditions are ripe for $850-odds. And on the other hand, gold and related investments to gold has been setting new all-time continue to go higher, even from highs in pretty much every other here. We have more on why in global currency for a while now. the rest of this report, but on the For example, gold’s 2011 high in sentiment side, I’d just note that pounds was around £1,180. Today, the levels of exuberance (news it’s around £1,500. magazine covers, mainstream Lest you think this is purely television and radio appearances Brexit-related, it’s the same story by gold commentators) that we for the euro. A record high in 2012 saw in 2011 aren’t apparent yet. (just after European Central Bank That’s partly because gold’s boss Mario Draghi drew a line got plenty of competition from under the eurozone crisis with the likes of tech stocks and Tesla his “whatever it takes” speech) of to keep investors occupied. But around €1,380 has given way to it’s also because this has been a fresh highs above €1,600. particularly stealthy and quick So, yes, gold still has a way to go bull market. Just a few months to hit an inflation-adjusted dollar ago, market commentators were high. And yes, it’s a very dollar- pointing at gold’s slide during centric way to look at things, given the early days of the coronavirus that gold has been hitting new crash and joking about its “safe records in every other currency for haven” qualities, having failed ages. to understand that in a crash, But the US dollar is the most the quality stuff (blue chips, important currency in the world. Treasuries, ) gets And the fact that gold has now Gold: everyone should own at least some sold off to fund margin calls on all hit a genuinely new high in said the dodgy stuff. currency, means that it’ll draw a lot more attention than So, while we’ve seen the occasional big number target all the other new highs did. ($3,000 from Bank of America a few months ago), I don’t think we’re at the peak of interest in gold yet. So, What’s next for gold? if you don’t own gold, it’s worth holding some. After So, what now? In the short term, as with any asset, it’s all – even Warren Buffett, the world’s most famous anyone’s guess. You shouldn’t be worrying about the investor, is betting on gold now (see page 8). And if you short term, because you’re not a day trader. In the longer already own gold, but you are interested in placing a bet term, we like gold for two reasons. on prices rising further, then there are other options to One, we see it as portfolio insurance. It’s something consider, including gold’s volatile sibling, silver (see page you should always have in your portfolio – along with 7), or precious metals miners (see page 9). bonds, equities (and property), plus cash – simply We’ll be continuing to follow gold’s progress (as because it does something that no other asset class does. well as that of other precious metals) in MoneyWeek Gold doesn’t rely on any other counterparty for its magazine over the coming months. However for value. If you own equity, the underlying company can anyone new to the magazine, this report contains our “Gold go bust. If you own a bond, the underlying company gold-related coverage from the past few months in or government can go bust. And if you hold cash, the order to get you up to speed quickly. For more on gold doesn’t rely underlying government can go bust. – including its history, a guide to buying gold coins, on any other Gold on the other hand, is just an inert, relatively rare and an extensive list of bullion dealers and purchasing metal that human beings happen to place a value on. So methods – go to moneyweek.com/gold where you’ll find counterparty it has “intrinsic” value. That value goes up and down all of our precious metals coverage. for its value”

3 MoneyWeek Gold Report: September 2020 What really drives the gold price? With inflation fears rising and interest rates nailed to the floor, the outlook for gold is bright – here’s why

John Stepek Executive editor

iven that gold has finally hit a new record in US Gdollar terms, not to mention the fact that it’s already at, or near, all-time highs in almost any other currency you care to mention, you might be wondering (particularly as a sterling investor): can gold really go much higher from here? To answer that, we need to look at what drives the gold price. Many investors think that gold is an inflation hedge (in other words, it goes up when prices go up), but that’s not the whole story. What really drives gold is movements in “real” interest rates (ie, interest rates after inflation – defined in more detail below). In short, falling real rates are good news for gold. Gold carries no credit risk (a gold bar can’t go bankrupt); it has a long-term history of retaining its value through a range of economic backdrops; and when the yield on other assets is falling, or even negative, the 0% yield on gold doesn’t seem so bad. So today’s environment of growing concern about inflation, plus near-0%, or even negative, nominal interest rates, looks good for gold.

But will real rates keep falling? The gold price isn’t just about inflation Governments are taking on a great deal of debt to contend with the impact of the coronavirus lockdown. “Governments need inflation to erode away So while some expect central banks to raise rates if inflation appears, it’s unlikely. Even a small rise in rates public debt” would render this debt unpayable. Governments need we discuss in more detail on the next page – then real interest rates to remain below inflation in order to erode interest rates may well continue to fall. away the value of the debt. Markets don’t move in straight lines and with all the So it’s no surprise that at the end of August, at the fresh attention being paid to precious metals, volatility annual Jackson Hole conference, the Federal Reserve, (ups and downs) is likely to pick up. But the backdrop America’s central bank, announced that it will be taking remains promising. You can buy physical gold from a a more relaxed approach, allowing inflation to run bullion dealer, or get exposure using one of the many above its 2% target to compensate for all the years that exchange-traded funds (ETFs) available, such as Royal it has been below target. Mint Physical Gold (LSE: RMAU). If you’d like to bet This combination of low rates and rising inflation on silver – which tends to outperform once a gold bull is called “financial repression” and it’s not a new tool. market gets going – then consider a silver ETF such as So assuming that inflation does rise – which seems WisdomTree Physical Silver (LSE: PHAG), but do bear likely given the scale of public spending, a topic that in mind that silver is far more volatile. I wish I knew what a real interest rate was, but I’m too embarrassed to ask A “real” interest rate is your savings will have equation (named after the second example it’s standard Treasuries of a simply an interest rate more purchasing power famous US economist minus 1% (you are losing similar maturity, gives that has been adjusted to a year from now. Irving Fisher, who refined money in real terms). the “break-even” rate – take inflation into However, if inflation is the calculation). However, One way to get an idea the level of inflation that account. (A “nominal” running at 3%, your while this gives a more of market expectations will result in an ordinary interest rate is one that savings will have less precise answer, for most for inflation is to compare Treasury delivering the has not been adjusted for purchasing power when purposes it’s much easier yields on index-linked same financial outcome inflation). This matters you withdraw them in a to simply subtract the government bonds as an index-linked one. because inflation reduces year’s time, even though inflation rate (which can (which enjoy inflation Using this measure, the value of any future the £1,000 will have either be current or protection) to normal notes Sam Goldfarb in stream of income. grown (in nominal terms) expected) from the government bonds. The Wall Street Journal, Take a bank account to £1,020. Of course, the nominal interest rate. In the US, for example, inflation expectations into which you plan to rate advertised by the So in the first example taking the difference have risen sharply since place £1,000. If inflation is bank will be the nominal above, the real interest between the yield on May, even as yields on running at 1% then a 2% one, not the real one. rate is 1% (you are Treasury Inflation- both Treasuries and Tips nominal interest rate The real interest rate is earning a “real” return of Protected Securities have fallen, implying that looks quite respectable – given by the Fisher 1% a year), whereas in (Tips) and the yield on rates will remain low.

4 MoneyWeek Gold Report: September 2020 It may not look like it right now, but inflation is coming our way Coronavirus lockdowns have triggered a huge global recession. And central bank money printing didn’t lead to inflation after 2008. So why are we saying that it will now? John Stepek explains why it’s different this time oronavirus and our reaction to it have inflicted Cmassive damage on the global economy. Vast numbers of people are unemployed, and many businesses remain on the brink, with activity rebounding at varying rates. So why are a growing number of analysts concerned about the prospect, not of deflation (which you’d more readily associate with a deep recession), but of inflation? There’s one simple answer – it’s all the money printing. Central banks across the globe, emboldened by their post-2008 actions, have slashed interest rates, embarked on even more quantitative easing (QE) and moved from buying government bonds to snapping up all sorts of other assets. Soaring global stock markets are just the most obvious result of this largesse.

Why now? Yet while most people would agree that central banks have played a key role in the rally since March, there’s an obvious objection to the idea that this will feed into the “real” world, rather than just boost markets. If money printing leads to higher prices in the shops and higher wages in the workplace, then why haven’t we seen much of this sort of inflation since 2008, when we last saw a big batch of money printing? An even trickier question is this: why has Japan been fighting an endless, mostly losing battle with deflationary pressure since its asset bubble burst 30 years ago, despite its extraordinary money-printing efforts since then? The first question is relatively straightforward to Japan: a constant struggle with deflation answer. Money printed by central banks gets into the “real” economy via the banking system. The problem buys a JGB from a bank, as opposed to another type of after 2008 is that the banks were bankrupt. They didn’t investor, then no new money has been created – they’ve “What’s have the capacity to lend any money – instead, what just swapped assets. Since QQE began, Japanese bank behind they needed was time to lick their wounds and fix their holdings of JGBs have fallen steadily – but inflation balance sheets by gradually recognising bad debts over hasn’t been sparked (yet). the fear of an extended period, in such a way that wouldn’t reveal inflation? their underlying insolvency. So money printing was It really is different this time merely plugging a massive hole elsewhere in the system. When you grasp why QE didn’t “work” before, you There’s Without it, the post-2008 environment, lacklustre as can see why today is quite different. For one thing, the one simple it was, would have turned into something more like banking system is in much better shape. It’s no longer a the 1930s. In other words, any inflationary impact yawning deflationary black hole, swallowing up money answer: all of the central bank money printing was offset by the as fast as it can be printed. For another, this is genuinely the money deflationary impact of the banking crisis. new money – we’re not just juggling bond holdings What about the stickier problem of Japan? Although between central banks and banks. Instead the money printing” Japan’s bubble burst in 1990, Japan’s first experiment being printed is being spent by governments trying to with QE in the early 2000s ran into a similar problem mitigate the worst of the shutdown. This in turn has as in the post-2008 environment – central bank money at least helped to offset the surge in unemployment. printing largely offset balance sheet repair by bankrupt Many consumers have seen their balance sheets improve banks. The more recent, more aggressive experiment dramatically during lockdown. That may not last, with money printing (known as QQE – quantitative but it’s a better starting point than during a “normal” and qualitative easing), only really began in earnest in recession (and of course, support measures may well be 2013, shortly after Shinzo Abe’s election, as part of his reinstated if the recovery is too long in coming). strategy to reignite the Japanese economy. This all comes at a time when supply chains are under As James Ferguson of the MacroStrategy Partnership pressure across the globe, due to coronavirus. And it explains, the problem this time is that by this point doesn’t help that, as Louis Gave of Gavekal puts it, with Japanese banks were among the biggest holders of “the Fed, European Central Bank and Bank of Japan Japanese government bonds (JGB). If the central bank backstopping credit markets, and governments moving

5 MoneyWeek Gold Report: September 2020 to prop up all sorts of businesses, we seem to be entering inflationary endgame seems extremely likely. So what “In the longer a world where bankruptcies, at least for big firms, will should you invest in? be stopped”. This undermines competition, encourages run, and governments to protect “national champions” and The cheapest sector in markets today inflationary leaves valuable scarce resources in the hands of Given that we’ve just seen one of the most rapid bear inefficient operators, all of which damages productivity markets in history swiftly followed up by one of the endgame and is ultimately inflationary. Jeremy Grantham, quickest rebounds, you might think that there’s little seems very co-founder of US asset manager GMO, may have put out there that’s still obviously cheap. However, that’s it best in a recent podcast with Patrick O’Shaughnessy not entirely the case. As Pierre Gave of Gavekal put it likely” of OSAM: “You have no goods, no services to buy and strikingly in a research note earlier this year, “if you had lots and lots of money to buy it with. So of course, it’s invested $100 into the S&P GSCI commodity index in an intrinsically inflationary process. We are cranking January 2012, today you would be left with $32. The out paper as the output of goods and services drops way same $100 invested in the MSCI World equity index down and that can easily go wrong”. would be worth $225, while $100 in the JP Morgan global bond index would leave you with $134”. In other The politics of economics words, commodities have had an absolute shocker for Then there’s the political environment. Albert Edwards almost a decade now. of Societe Generale points to an interesting report from The good news on that front is that it means they the CSIS think tank, which notes that growing mass now look very cheap, particularly relative to everything political protests “are in fact part of a decade-long trend else. At the end of April, the aforementioned Jeremy line affecting every major populated region of the world, Grantham and his GMO colleague, Lucas White, put the frequency of which has increased by an annual out a paper pointing out that commodity producers average of 11.5% between 2009 and 2019… While tend to trade at an average discount of around 28% each protest has a unique context, common grievances to the wider market (using the S&P 500 in the US as overwhelmingly centre on perceptions of ineffective a benchmark) – so they’re always a little undervalued governance and corruption… Citizens are losing faith by markets in any case. However, by the end of March in their current leaders, elites and institutions and are 2020 that discount had widened to almost 80% – taking to the streets in frustration and often disgust”. unheard of in at least a century. So even if commodity Against this backdrop, it’s little wonder that we see such prices were to remain exactly where they are now, as enthusiasm for Modern Monetary Theory (MMT). Its Grantham and White put it, “public resource equities academic practitioners might feel that their arguments would be well positioned to generate strong returns, are not adequately represented in the media, but the either through a revision in valuation or through the important thing is what politicians take from MMT. high dividend yields on offer”. And the main lesson they will take from it, rightly or Importantly, this isn’t just a play on hopes for a rapid wrongly, is that you can conjure up money to spend post-coronavirus “recovery”. As Gave adds, all of the on whatever you (or more importantly, your potential normal forces – urbanisation, a population that’s still voters) want without any short-term consequences. growing and the infrastructure needed to support We may still see further deflationary scares before them – point to ongoing demand for commodities. consumer price indices rise significantly, says Edwards. Meanwhile, more fiscal stimulus, plus a “sense “I too believe that massive monetary and fiscal stimulus that each country should retain at least some local will begin to drive CPIs higher, but as Milton Friedman manufacturing capacity” in a world where “just-in- said, ‘monetary policy works with long and variable time” supply chains are no longer deemed sufficiently lags’”. So he still reckons we’ll see “in the interim a resilient, should also boost demand. So how can you deflationary bust”. However, in the longer run an invest? We look at some options below. How to invest for a more inflationary world As Grantham and White range of different performers in the sector. As commodities are rising too point out above, big commodities (which is why George Cheveley, manager (silver has monetary and diversified miners offer it’s a riskier bet than the of the Ninety One fund industrial uses, whereas decent dividend payouts BlackRock trust). points out, miners currently gold is very much a these days (which wasn’t As we always note, gold is have “low debt levels, the monetary metal). One way always the case). You could something to own in your highest margins we’ve seen to invest is via a fund opt for single stocks but portfolio as a hedge against in years and [they are] tracking the silver price, we’d be more inclined to inflation, financial increasing returns to such as WisdomTree Silver invest using a fund. repression and general shareholders”. (LSE: SLVR). Thankfully there is a wide instability. You can buy And with most annual One likely casualty of range to choose from. physical bullion or get production “unhedged” (ie, higher inflation, meanwhile, BlackRock World Mining (LSE: exposure via an exchange- being sold at current prices is the US dollar. Financial BRWM) is a hardy perennial traded vehicle such as rather than previously repression (efforts by in the sector which holds WisdomTree Physical Gold agreed ones), any rise in central banks to keep many of the biggest mining (LSE: PHAU) or The gold prices goes “straight to interest rates low and thus names in the world. (LSE: RMAU). Right now, the bottom line”. reduce debts via inflation) A riskier play, but one that miners also look more If you’re feeling a bit more means that bond prices may also has a decent record promising than they have in aggressive, you could take a be propped up by central within its sector, is Baker a long time. bet on gold’s more volatile banks (for a time, although Steel Resources (LSE: BSRT). Precious metals mining sibling, silver. Silver has they’ll still be unappealing Its largest holding is FTSE funds are a good way to been playing catch-up with investments if inflation 100 precious metals miner diversify your exposure gold recently, but is still really does take off), but the Polymetal, but it also invests across a risky sector. cheap in relative terms and strains have to show up in unlisted resources firms Citywire highlights Ruffer should arguably be able to somewhere, and the involved in the exploration Gold and Ninety One Global do better in an environment obvious candidate is the or production of a wide Gold as two of the top in which industrial currency.

6 MoneyWeek Gold Report: September 2020 Silver: the world’s most infuriating metal Gold’s sibling metal has so much potential – but a tendency to disappoint, warns Dominic Frisby Silver: plenty of potential Dominic Frisby Yet in August 2020, silver Investment columnist was trading at around $27 an ounce. That was a lot higher than where it started the year egular MoneyWeek readers will know my long-held – and everyone has been going Rcynicism towards silver. I own the metal – quite nuts about the metal as a result a bit of it in fact, although not as much as I once did, – but it’s barely half the price when I was a true believer. I also have shares in a couple it was in 1980, or in 2011 for of silver mining companies that have finally woken up that matter, when it rose all the after a long slumber. way to $50. I recognise silver’s enormous two-pronged potential. You wait years for silver to On the one hand, like gold, it is a monetary metal. make a move and then when The word for “silver” and the word for “money” are your back is turned, off it goes identical in umpteen different languages. So it’s a play to the races. What can I say? on all the things that governments and central banks are There are lots of powerful Silver: buyer beware doing to debase your money – printing it, suppressing narratives to propel silver interest rates and all the rest of it. higher. The fact that it’s cheap relative to its all-time “Silver’s So silver goes up (and down) for all the same reasons highs is yet another of them. gold does. Not only is it a play on this theme, it is a There’s also the fact there there is about 15 times going up. geared play. It tends to rise a lot more than gold does – more silver in the world than there is gold, yet the gold Enjoy the and fall by a lot more too. price is about 65 to 70 times the silver price. It should On the other hand, unlike gold, silver is also an be just 15 times (in theory at least). For that to happen, ride. But industrial metal, used in a gazillion different products: silver should be trading at more than $100 – that is the manage computers, smartphones, jet engines, solar panels – true value of silver, many would argue. they all contain silver. You’ll find silver, if you look Silver will go to $100 one day, of that I’m sure. your risk!” hard enough, in batteries, detergent, deodorant, wart Maybe that is where it’s going on this move. Silver to treatment, antimicrobial lab coats, 3D printers, plastics, $100 will just be another episode in the insane year that jewellery, cameras, photography, wood preservation is 2020. and water purification, among other things. But when you’re dabbling in silver, just remember Just about every new technology, from medical to this: it is utterly unreliable. It always reneges on its electrical seems to have silver in it, so owning silver is promise; it goes down a lot faster than it goes up; it’s like a picks-and-shovels play on new tech. Meanwhile, your friend, the alcoholic, with untold potential, if only on the supply side, you will constantly hear warnings they could get off the booze. They’re off the booze, they (usually from silver-mining companies) of a looming tell you; they’ve got their life back on track – they’ve got supply shortage. Pure silver plays are rare – silver is a fantastic new job, they’ve re-married. mostly produced as a by-product of mining for other Then they show up at your important job function metals, especially zinc. I think the world’s largest silver hammered, insult your boss and the next thing you producer is BHP Billiton, and you have to look really know they’re wandering round the park with a plastic hard if you want to find silver on its inventory. bag shouting at trees. What’s more, rumours about manipulation of the Silver’s going up. Enjoy the ride. When it rockets silver price on the futures exchanges having been going there’s no feeling like it, and these parabolic moves can on for decades. One day this is all going to unwind, the go on a lot longer than you think. But they can also end bad guys will get found out, they won’t be able to deliver a lot quicker than you think. We might see $50. We the silver they’ve sold – and silver will go to da moon might also see $15. Don’t be scared to take some profit (where, legend has it, it originated). off the table. And above all – manage your risk! Silver plays catch up with gold If gold is the “money of the price action is also a to the yellow metal this year, and 3D-printing. Indeed, kings” then silver is “that of reminder that silver is a but is now stepping “out of around half of silver gentlemen”, says Ned much more volatile gold’s shadow”. The gold/ demand stems from Naylor-Leyland of Jupiter commodity than gold. silver ratio certainly industrial uses. Supply Asset Management, writes Silver tends to follow gold, suggests further upside, constraints are proving Alex Rankine. The precious but at a “lag”, says a recent says Naylor-Leyland. In another tailwind, says Clara metals are “siblings”. Goldman Sachs note 2011, when silver hit a Ferreira Marques on While the gold rally has quoted by Krystal Chia and record $49.50, you needed Bloomberg. Latin America grabbed the headlines, Ranjeetha Pakiam on just 32 ounces to buy one is the world’s biggest silver silver has seen even greater Bloomberg. Typically, a ounce of gold, yet that ratio miner, but virus-linked gains so far this year. The gold rally gets underway has risen above 60. closures in Peru and Mexico rally has been driven by first, then gold bulls, looking As well as being a should see production fall similar forces to those for a way to diversify their precious metal, silver is by 7% this year according to pushing gold higher: falling bets, turn to silver. The used in industry, including figures from The Silver “real” yields and a growing metal has been trading at fast-growing areas such as Institute. There is “room for desire for a safe haven. Yet “close to a record discount” solar panels, 5G networks silver to keep shining”.

7 MoneyWeek Gold Report: September 2020 Buffett buys Barrick: a big deal for gold Warren Buffett, famous for disliking gold, has just invested in one of the world’s biggest gold miners

Dominic Frisby as an investment. “Gold is Investment columnist a way of going long on fear, and it has been a pretty good way of going long on fear from time to time”, he said. old – and, more specifically, gold shares – received “But you really have to hope Gan unexpected endorsement this year from the people become more afraid in most unlikely of sources. Warren Buffett’s Berkshire a year or two years than they Hathaway investment vehicle announced it had bought are now. And if they become roughly half a billion dollars’ worth (21 million shares) more afraid you make money; of gold mining giant Barrick Gold (NYSE: GOLD). if they become less afraid you The reason so many are so excited is that Buffett has lose money, but the gold itself always been rather outspoken against gold – he’s almost doesn’t produce anything.” as well known for that as he is for his investing prowess. Buffett may not like gold, Yet now, perhaps the most successful investor that ever but for sure he understands it. lived, has gone long gold miners. Good news for gold miners Warren Buffett: not a gold fan Buffett may not like gold, but he understands it It’s worth stressing, that Let’s start with Buffett’s long stated dislike of gold. Berkshire Hathaway has not bought gold. It has bought “Buffett may Here’s one famous Buffett line: “It gets dug out of the a dividend-paying, gold-mining company that happens ground in Africa, or someplace. Then we melt it down, to have the ticker symbol GOLD. So Buffett’s “lack of not like gold, dig another hole, bury it again and pay people to stand utility” complaint is satisfied. but he sure around guarding it. It has no utility. Anyone watching Barrick, once the world’s largest gold producer, used from Mars would be scratching their head.” to be a laughing stock. Its hedging policy meant that in understands Gold, as we have stated many times, is a store of the 2000s it was selling gold for around $300 an ounce the metal” wealth. It is inert and useless. It’s very uselessness is when the market price was more than double that. As a why it makes it such a good store of wealth – such good result the stock became a perennial underperformer. money. But that’s the reason Buffett dislikes it: he likes Even today, its shares are still trading at around “investing in America”; in businesses that are active; he the same price as they were in 2006, when gold was doesn’t like inactivity. a third of the price it is today. But Barrick, under the As he once put it: “The problem with commodities management of CEO Mark Bristow, who effectively is that you are betting on what someone else would pay took Barrick over via the much slicker operation for them in six months. The commodity itself isn’t going Randgold Resources, is a different beast altogether and to do anything for you… it is an entirely different game a better-run company. to buy a lump of something and hope that somebody It is also worth noting that, although Berkshire’s else pays you more for that lump two years from now buying and selling is attributed to Warren Buffett, he is than it is to buy something that you expect to produce now 90 and his partner Charlie Munger (who is even income for you over time. less of a gold fan than Buffett) is 96. They do not play “I have no views as to where it will be, but the one the same role in the Berkshire strategy that they once thing I can tell you is it won’t do anything between did. There is a good chance that the purchase came from now and then except look at you. Whereas, you know, either one of their lieutenants, Ted Weschler or Todd Coca-Cola will be making money, and I think Wells Combs, who each manage about $15bn of Berkshire’s Fargo will be making a lot of money and there will be a equity portfolio and, especially, the sub-$1bn lot — and it’s a lot — it’s a lot better to have a goose that investments such as this, that for Berkshire are tiny. keeps laying eggs than a goose that just sits there and The Barrick investment amounts to one thousandth of eats insurance and storage and a few things like that.” Berkshire Hathaway’s $500bn market cap. I’m a gold diehard, as you probably know. And Nevertheless the change of direction is a big deal for this argument against gold is one that frustrates many gold and gold miners. The sector, which is tiny relative diehards, particularly when it comes from a position of to the stock and bond markets, will be taken more ignorance. It’s one, however, that I have some sympathy seriously by big players. There are goodness knows how with. Gold’s purpose is to store what you have, to hedge many Buffett trackers and copycat vehicles that will against inflation, debasement of money, and so on. now follow. Buffett’s never been interested in that. He is interested in Gold miners will get more coverage, more analysis, businesses, in people, in growing his wealth. No wonder more publicity. And with the increased analysis, many he doesn’t like gold. will discover better value further down the food chain, And his position does not stem from a position of and so new money will work its way down. ignorance. He grew up in a pro-gold household. His All in all, for gold mining investors, this is a good father, the congressman Howard Buffett, championed thing. At the same time – also significantly – Berkshire a return to a gold standard and repeatedly spoke out announced reduced exposure in financial stocks, and a about it. “Human freedom rests on gold redeemable complete exit of airline and restaurant stocks. money,” he said. “Paper systems end in collapse… Meanwhile, after 15 years of bear market, the ratio Taxpayers must regain their right to obtain gold in between gold and gold miners has finally turned up. In exchange for the fruits of their labour.” other words, the miners are starting to outperform the Who knows? Warren Buffett may feel the same way metal. We could be in the early stages of a secular bull as to America’s money. That doesn’t mean he likes gold market. Hang on to your hats – and your positions.

8 MoneyWeek Gold Report: September 2020 Sit tight and ride the gold bull: the upswing is just beginning With money being printed like there’s no tomorrow, the backdrop for the yellow metal and miners remains auspicious, says Dominic Frisby. Here he reviews his most recent tips and suggests some more

Dominic Frisby Investment columnist

ne of the best books on investment you will ever Oread is Edwin Lefevre’s Reminiscences Of A Stock Operator. It’s a thinly disguised biography of Wall Street legend Jesse Livermore, regarded by many as the greatest trader who ever lived. I am not alone in having a great affection for the passage in which Larry Livingston (a pseudonym for Livermore) recalls a veteran trader, old Mr Partridge, with whom the firm was extremely unhappy because he was giving “very little in the way of commissions”. Every time old Mr Partridge was given a tip to sell a stock so that he could buy it back at lower prices, he would thank the tipster politely, smile and just say, “It’s a bull market”. He didn’t want to lose his position. Livermore concludes: “In a bull market your game is to buy and hold until you believe that the bull market is near its end”. “Money is made by sitting, not trading,” Livermore said. “It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight!”

The other side of the trade Should we keep sitting tight on our gold (and perhaps Gold miners are going to be busy silver) holdings? Gold peaked at above $2,070 in early August. It has fallen back since. However, to me this feels like a sell-off of the “healthy correction in a bull A global money-printing bonanza market” variety. Circumstances are different from 2011, the last time “Gold is not One reason to think so lies in the other side of the gold was this high. In 2011, the concept of negative just a weak gold trade: the US dollar. Gold is priced in dollars and interest-rate policies barely existed. The US national so they have an inverse relationship; a fall in the dollar debt was almost half what it is now. dollar story. makes gold cheaper in other currencies. The Federal Reserve’s balance sheet was sub-$3trn, It’s also a The greenback has been sinking since mid-March, compared with $7trn today. The European Central when the US dollar index (a measure of the dollar Bank’s balance sheet has tripled since 2011. The Bank weak fiat- against the currencies of its main trading partners) was of England’s balance sheet has – well, expletives are not currency at 103. Now it’s in the low 90s. President Donald Trump acceptable in this magazine. wants a weaker dollar. He has said so many times. In The US dollar index meanwhile, was at 73, a full 20 story” an election year it matters even more. When the dollar points lower than where it is today. It was, as much as is weak, assets tend to rise and so people feel richer. He anything, the dollar turning up after 2011 that did for wants people feeling rich. They will be more likely to gold and especially, for gold miners. vote for him. In 2011 the bull market was ten years old. The If the dollar goes to 88 – and bear in mind that narratives were tired. This bull market is not mature it spent the entire period from 2006 to 2014 below – it is, what, three, four years old? When did it start? 88 – then gold will likely be a good two or three December 2015 at $1,050? Or August 2018 at $1,170? hundred dollars above where it is now. And downward If you say the latter, then we are barely two years in. momentum in the dollar is so great that at the moment There are a lot of people out there who are new to I have to say I will almost be more surprised if we don’t the gold story – and it is a persuasive one. I haven’t even hit 88 this year than if we do. The euro in particular been asked to go on the telly yet to talk about gold. It looks like it’s in a new bull market against the dollar. all says this bull market is young and points to higher Gold’s strength is not just a weak dollar story. It is a prices down the road. How much higher? weak fiat currency story. It is a global money-printing bonanza story. Take sterling. In the first half of 2019, How high can it fly? gold was trading below £1,000 an ounce. It began 2020 Forecasts span a wide range. One form of technical at £1,150/oz. Then it rose north of £1,500/oz. analysis, so-called Fibonacci ratios, gives relatively

9 MoneyWeek Gold Report: September 2020 modest targets, from $2,260 to $2,800. Charlie Morris luck getting Tesco to accept them. (I know someone “Gold over at The Fleet Street Letter is talking $2,700. Bank of who got himself arrested for attempting to do just that!) America is saying $3,000. You can buy bullion online via the likes of Glint, sovereigns are Analyst Trey Reik of the Bristol Gold Group observes BullionVault, Goldmoney, BullionByPost, The Pure legal tender, that, ever since the launch of QE3 (the third wave of US Gold Company or GoldCore, and have it stored for quantitative easing, or money printing) in September you in vaults in safe places such as Zurich or . though good 2012, gold has exhibited a tight inverse correlation to You can buy exchange-traded funds (ETFs). You can luck getting the trailing 12-month US federal budget deficit. buy options, futures, warrants, contracts for difference Until March of this year, every $350bn move in (CFDs) or spread-bets. Tesco to the budget deficit – in whichever direction – saw an With the potential to get leverage, why bother taking accept them” accompanying $300 inverse move in the gold price. on the individual company risk of a miner, particularly Should this eight-year correlation continue, the given the dishonesty, incompetence and political risk $1.944trn second-quarter deficit would imply a $3,200 that pervades the sector? gold price. In April the Congressional Budget Office And so, on a relative basis, gold miners were estimated a 2020 deficit of $3.7trn (the US fiscal year perennial underperformers. Since 2004, barring rallies runs until 30 September). That suggests a gold price in 2005, 2009 and early 2016, gold has outperformed above $3,850 by year end. Even if you discount the the miners. The ratio between the two has ground correlation by 50%, that still gives you a gold price of lower, hitting all-time lows in 2015, which were $2,700 by year end. revisited in March of this year. That has produced a Meanwhile, the hard-core gold bugs are in something so-called double bottom pattern on the chart, which of a prediction war: $5,000, $10,000, $20,000. For often presages a change in trend. Indeed, the ratio has now, I’ll happily take a consolidation and sideways trade now turned up. Is this the beginning of a new secular for the next six months. bull market in gold mining, relative to the metal? One would certainly hope so. We need to see this ratio Compelling fundamentals continuing to rise. If this ratio ever goes back to where The fundamentals for gold don’t need spelling out. it was in the 1990s or mid-2000s, mining investors will There’s social unrest. Negative real interest rates. A make a lot of money. looming Cold War with . Economic depression. While gold is now close to all-time highs, the miners But above all money is being printed like there’s no are a long way off that. The HUI – the NYSE index of tomorrow. In his magnum opus, The Power Of unhedged large-cap gold miners – would have to rise by Gold, author Peter Bernstein declared: “As gold’s more than 70% to reach its old peaks. The mid caps, as unquenchable beauty shines like the sun, people have represented by the US ETF, GDXJ, would have to rise turned to it to protect themselves against the darkness by more than 100%. There is a lot of relative value to be ahead”. Is Covid-19 over? I have no idea. There is had. certainly some blue sky on the horizon. But we have yet And yet, even with all the underperformance, we to suffer the consequences of this extraordinary money have seen something of a mania. Since the Covid-19 creation. market sell-off in March, the small caps have been There are times to own gold, silver and miners and doubling, tripling and more. I covered gold in there are times not to. I rather think this is one of those MoneyWeek in May 2020, and I was saying it felt frothy times to own. Before the recent pullback, gold was then. It only got more frothy. overbought, frothy, bubbly – all those things. But all Frothy manias in small-cap mining stocks do not those things are features of a bull market. end well. But, for now, I’m going with the notion that this mini-mania and correction was the end of the Why miners have struggled beginning, rather than the beginning of the end. In the Great Depression of the 1930s, America’s largest gold-miner, Homestake, was the go-to stock. Miners to research now (all tips as of August 2020) It multiplied many times over. As gold rose in the Back in early May we tipped several gold mining inflationary boom of the 2000s, which ended with the operations. Let’s review those and consider some more. global financial crisis and all the money printing that Firstly, there was UK-listed investment trust Golden followed, many argued the same would happen again. Prospect Precious Metals (LSE: GPM). It’s not the But it didn’t. Gold did well, but the miners, bar a biggest trust in the world (its net asset value is around few short-lived periods of excitement, were a source £50m), but it’s a simple way to own a basket of mid-tier of constant disappointment, only in exceptional cases mining companies. In May it was trading around 35p, delivering their much-vaunted leverage to gold. By way got to 74p, and as of early August – the time of writing of example, Barrick, the world’s largest gold miner, – it’s around 57p. It’s a good vehicle for those who just trades at roughly the same price today as in 2006, when want general exposure to gold mining. I own some in gold was at $600. my Sipp. It’s not the bargain it was, but if the sector The reason, as I have argued on these pages many carries on rising so will GPM. times, was that in the 1930s it was illegal for Americans In September last year my top pick was Wesdome to own gold. The infamous Executive Order 6102, Gold Mines (Toronto: WDO) at C$6. It’s done signed by President Franklin D. Roosevelt on 5 April fantastically well. In May it reached C$11 and now 1933, forbade “the hoarding of gold coin, gold bullion (early August) it sits around C$13, having been north of and gold certificates within the continental United C$14. With around 135 million shares outstanding its States”. The only way American citizens could get gold market cap is closing in on C$2bn. Wesdome has been exposure was via Homestake. producing gold for more than 30 years in , but a In the 21st century, the reverse applies. There are couple of years ago it made a new discovery next to one umpteen different ways to own gold or get exposure to of its mines that had been expected to shut down soon. the gold price. You can buy physical bullion, bars and This gave it a new lease of life. It is fully valued now, but coins, in a shop such as Baird & Co or Sharps Pixley. If it’s a quality company with quality management and you buy sovereigns or Britannias, you won’t have to pay assets and surely remains a takeover candidate. As with capital-gains tax, as they are legal tender – though good GPM, take advantage of any pullbacks.

10 MoneyWeek Gold Report: September 2020

My second tip in May was Rio2 (Vancouver: RIO) at too opaque, bid-offer spreads are too wide – I could go “Since the C$0.49c. That too has done well. At one point it got to on. But with Greenland mining operation AEX Gold a dollar and it now (early August) sits around C$0.80. raising £42.5m to float on there recently, even Aim, market CEO Alex Black has a history of building mines that rotten beast that it is, is seeing some life. bounce began others thought would not work, and Rio2 – in Chile – is My favourite Aim stock is Altus Strategies (Aim: his latest venture. I like this stock. ALS). It operates in various African countries – in March, One other stock in my portfolio that I was very Morocco, Mali, Ivory Coast, Ethiopia, Liberia and small miners excited about in May and still am today (early August) Cameroon – and is what you would call a project is Minera Alamos (Vancouver: MAI). It has three open- generator. It farms out assets in joint ventures, royalty have been pit operations nearing production. MAI’s aim is to be deals and so on, thus getting others to pay for the doubling, the “next mid-tier gold mining company” with 200,000 drilling and development. I participated in the initial ounces of gold production a year. It is well on its way. public offering (IPO) in 2017. The company has made tripling and One property, Santana, should start producing later great progress since then. But at around 60p, not far off more” this year and another, La Fortuna, by the end of 2021. its IPO price of 50p, it offers value. The company has a market capitalisation of around C$280m and is currently trading around C$0.65. It has (Note – this article was first published on August 12th, held up well in this correction – but if it pulls back, buy and all prices and information are correct as of that the heck out of it. date. Do your own research before investing in any of the stocks in this report– or any stock for that matter). Generating projects and profits on Aim I’m not a fan of Aim. It’s illiquid, costs are too high and

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