Investing in gold stocks — or for that matter, the more volatile silver stocks — has never been easy. Such sentiments were exacerbated over the past two years, where the markets seemingly flirt with the idea of safe-haven assets. Unfortunately, the gold and silver spot price never convincingly experienced a bullish recovery. Instead, precious-metal proponents are left with short-term bursts of buying activities.
However, North Korea and its repressive regime’s latest round of provocations have finally made gold stocks great again. At a dramatically tense moment when the U.S. and South Korea are holding joint military exercises, North Korean dictator Kim Jong Un fired a ballistic missile over Japan. Previous launches landed in the Sea of Japan, but did not breach its actual territory.
While these provocations are nothing new, the geopolitical environment is unprecedented. At stake is President Donald Trump’s credibility, and that of the Asia-Pacific alliance. Last week, at a campaign-style rally in Arizona, Trump boasted that he tamed North Korea, thanks to his fiery rhetoric. Not wanting to look weak himself, Kim retaliated, renewing earlier fears over his threats towards the American territory of Guam.
Investment-wise, the setup for gold stocks is extraordinary. Our president won specifically on the promise of restoring American might and respect. Losing a staredown to Kim would be embarrassing to American honor; even more so to Trump’s self-worth.
To restore credibility, the White House must make good at least partially on the “fire and fury” threat. In so doing, gold stocks and silver stocks are set for a massive upside move.
Unlike the gold bullion market — which didn’t look convincing this year until North Korea happened — Randgold Resources Ltd. (ADR) (NASDAQ:GOLD) is making a killing. Up over 33% year-to-date, GOLD stock’s performance is reminiscent of a hot semiconductor company rather than a commodity miner. But should geopolitical tensions move towards an increasingly fraught place, Randgold is your money’s destination of choice.
With a market capitalization well north of $9 billion, GOLD is one of the strongest names in the sector. Despite the plethora of speculative miners, GOLD combines robust market returns with stable fundamentals. One of the consequences of the precious metals purge that began in earnest in 2013 was a flight to quality. Investors are no longer satisfied with just the mere association with precious metals — they want to see actual results.
Exposure to GOLD stock provides exactly that. It operates multiple mining projects in Africa, and most of its key mines are already producing the yellow metal. For this year, Randgold is targeting an aggregate haul of 1.25 million to 1.3 million ounces. With the North Korean crisis worrying Wall Street, prospects for higher metal prices are very reasonable.
Royal Gold, Inc (USA) (NASDAQ:RGLD) is another name among high-caliber gold stocks that has performed outstandingly. Even before the North Korean crisis reared its ugly head, RGLD was up nearly 41% for the year. Now, Royal Gold stands at over 44% YTD, thanks in large part to the escalating situation in Asia.
If political trends are anything to go by, we can expect no peaceful resolution to the North Korea standoff. The most desirable outcome requires either President Trump or “Dear Leader” Kim to acquiesce to the other. Neither situation seems likely, given their personality traits. Adding further fuel to the fire is the embattled administration of Japan’s Prime Minister Abe. Reeling from an ugly cronyism scandal, Abe’s best chance to recover is to milk the North Korean crisis for all it’s worth.
Of course, RGLD has nothing to do with this geopolitical back story. But what it does offer is a continued engine for capital growth in Royal Gold shares. In contrast to the underlying asset, RGLD has been charting a series of higher highs and higher lows this year. Prior to the North Korean missile launch, shares appeared to soften.
But due to the heightened tensions, no one is thinking about market consolidation anymore. Instead, circumstances worsened, which means a fear-trade opportunity for RGLD.
With the world’s attention firmly focused on the devolving North Korea crisis, it’s easy to forget about silver stocks. However, ignoring the white metal would be a mistake, especially in this geopolitical epicenter. Historically, silver prices have correlated strongly with gold, and that dynamic holds true to this day. And despite their “secondary” status, silver miners have performed remarkably well in 2017.
Just take a look at Pan American Silver Corp. (USA) (NASDAQ:PAAS) shares. On a YTD basis, PAAS is up nearly 22%, with a portion of that haul directly resultant from North Korea. While I don’t want to sound cynical, the Asia-Pacific turmoil couldn’t have come at a better time. After peaking in early February, PAAS began to chart a distinctly worrying pattern. The crisis quickly turned its fortunes around.
Even if the fear trade wanes for silver stocks, PAAS is still in great shape. Since the precious metals market peaked in 2011, and collapsed in 2013, Pan American Silver got busy streamlining its operations. Cutting costs and expenses wherever they could, the mining firm is a much tougher organization today. As a result of its earlier discipline, PAAS is significantly more profitable than its competitors.
Traditionally associated with second place, quality silver stocks like PAAS are as good as gold.
Whenever I have the pleasure of discussing precious metals, I like to throw in a speculative name. Few investments carry the potential of rip-roaring gains quite like silver stocks. Presently, one of my favorite speculative ideas is Great Panther Silver Ltd (NYSEMKT:GPL).
I’m looking at GPL stock as a “riches to rags back to riches” play. In 2016, Great Panther Silver shocked the investment community with a mind-blowing 220% return. GPL carried the momentum into 2017, at one point moving up to a 36% lead. However, a pretty bad earnings miss in the first quarter cratered market sentiment. With other options on the table, people simply abandoned GPL, and it’s down 20% YTD.
However, that’s looking like a mistake. Furthermore, speculative buyers can capitalize on this potential error, and I’m not just referring to the North Korea crisis. Against other silver stocks, GPL stacks up nicely in terms of profitability margins. Also, Great Panther features better revenue growth than the vast majority of mining companies. On top of that, GPL is a rarity among silver miners for its clean, zero debt balance sheet.
If you want to protect against geopolitical volatility, gold is a solid bet. If you want to profit from it, take a good look at GPL.
As of this writing, Josh Enomoto is long gold and silver.