Gold soared in 2019, and tension with Iran has pushed it to highs not seen in nearly seven years. Here’s what to do now
Gold will never produce anything … It doesn’t do anything but sit there and look at you.
So says Warren Buffett, obviously one of history’s greatest investors.
And while Buffett certainly isn’t wrong in his description, it’s fun to note that gold has handily outperformed Buffett’s Berkshire Hathaway stock over the last 12 months, as you can see below.
But what’s 12 months?
Anything can happen in that short of a time period.
Well, it turns out if we go back to January 1, 1999, we see gold has outperformed Berkshire since then too …
Now, sure, if we go back further, Berkshire has produced greater returns. We’re not trying to set up a “gold versus Buffett” showdown here.
The point is simply that while gold’s detractors are accurate in that the lifeless rock may not offer much intrinsic value, that doesn’t mean it can’t make investors a good deal of money.
***If there’s any doubt about that, just look at what happened to gold’s price in the wake of the killing of top Iranian military commander Qasem Soleimani
As you’re likely aware, last week, U.S. forces took out Soleimani, resulting in unrest in the Mideast, leading to a retaliatory strike from Iran on Tuesday.
And how has the traditional “safe haven” investment of gold responded?
Earlier this week, the precious metal reached its highest price in nearly seven years. This comes after even more gains from the last two weeks of December.
Below you can see gold posting a 6% gain since December 20.
Of course, as tensions have eased in the Mideast, gold is pulling back now.
So, where does its price go from here?
Trying to answer that question for the near-term is a bit of a fool’s errand. There are simply too many influences that can push the price in either direction.
For example, if tensions surrounding Soleimani’s death continue to ease, investors will continue to rotate back into stocks. That’s what’s happening Thursday morning as I write. On the other hand, any new violence in the Mideast is likely to push gold prices much higher.
So, forget guesses of immediate direction. Let’s look at bit further out — when we do, we see a case for more gains.
***The tailwinds pushing gold in 2020
First, gold is benefiting from bullish momentum. And since gold has no traditional means of valuation, its momentum is often all-the-more important when predicting future prices.
As you can see below, since mid-August 2018, gold has climbed over 30%.
Also note gold’s price piercing its September high (circled on the right side of the chart) after several months of consolidation. This was a key technical level.
This bullish momentum is supportive of more gains to come in the medium term.
Second, gold is benefiting from a weakening dollar.
When the U.S. dollar is weaker, it means investors have to spend more dollars to purchase the same international goods that required fewer dollars just weeks or months before when the dollar was stronger.
Given this, as the dollar weakens, that means more dollars are required to purchase the same amount of gold (all else equal). This puts upward pressure on gold’s market price.
Below, we see a chart comparing the dollar (the orange line) with the price of gold (the blue line) beginning in 2018.
Note the dollar increasing in value up until August of last year. But since then, the dollar has been pulling back.
Let’s zero in now.
Look at what’s happened to the dollar’s value and gold’s price since early December.
If this dollar-weakening trend continues as 2020 goes on, it should act as an additional tailwind to gold prices.
Finally, let’s not forget low (and negative) interest rates around the world.
As interest rates fall, and stay low, interest-paying investments lose some of their attractiveness relative to gold — not to mention the attractiveness of negative-yielding investments. As I write, the global total of negative-yielding bonds is at $11 trillion. While gold doesn’t pay a dividend, at least it doesn’t steal your money like these negative-yielders.
Putting all this together, we continue to believe we’ll see higher gold prices in 2020, though where the price will be next week is anyone’s guess — and at this exact moment, it’s selling off.
***So, how can you play this?
The easiest, most traditional way is an ETF such as “GLD,” which tracks the market price of gold. We first put GLD on your radar in the Digest exactly one year ago, on January 9, 2019. The subject line for that Digest was, “There’s a Stealth Bull Market in Gold. Are you Missing It?” Since then, GLD is up over 20%.
But for a more explosive way to play gold, let’s turn to Eric Fry, InvestorPlace’s global macro specialist.
Last year, Eric recommended two unique gold plays to his Fry’s Investment Report subscribers. Both of these companies engage in streaming and royalty deals with companies that mine gold and silver. Given this, they don’t actually mine for gold/silver. Instead, they provide financing to the companies that do.
In exchange for providing capital to a mining company, they obtain an interest in some percentage of that company’s gold or silver production. Depending on the exact structure of the financial arrangement, they receive either a streaming deal or a royalty deal.
Now, the benefit of this model is the royalty company doesn’t take on the mining risk itself, yet it shares in the upside — usually for as long as the mine produces. When a well-run royalty company strikes a great deal with a miner, it’s usually a money-printing machine.
As an example, let’s look at one of Eric’s recommendations, Metalla Royalty & Streaming Ltd. (MTAFF).
In the past, Metalla has primarily been a silver royalty company, though today, it has lots of gold in the pipeline.
But to understand how the streaming model works, let’s look at its silver operations.
From Eric (from an issue early last year when he was explaining the royalty model to subscribers):
During the three months ended Feb. 28, 2019, the company shipped and invoiced 76,775 attributable silver ounces at an average realized price of $15.23. Because Metalla’s cost to procure that silver was just $6.23, the company booked a gross profit of $9 on every ounce it sold (that is, $15.23 minus $6.23 equals $9). That’s a hefty gross margin of 59%.
But returning to today’s topic — gold — how might gold’s price affect Metalla’s prospects?
Again, from Eric:
… if gold were to catch a spark and climb back toward its all-time highs around $2,000 an ounce, Metalla could become a 10-bagger.
As I write, Eric’s subscribers are up 86% in Metalla, so we’re already close to a 1-bagger.
The stock is trading well above Eric’s suggested buy-up-to price of $3.24, so hold off on this one for the moment. Eric’s other gold royalty play is trading closer to its buy-up-to price. To learn more about it after signing up for Fry’s Investment Report, click here.
***For a gold royalty play you can act on today, look no further than InvestorPlace’s income specialist, Neil George
You may not expect to find a gold investment coming from an income expert, but given the power of the royalty model, that’s exactly what’s happening.
Neil likes the gold streaming company, Franco Nevada (FNV). The position is up 21% since Neil’s recommendation in June 2019.
Earlier this week, in the wake of the Mideast tension, Neil raised his buy-up-to price on FNV to $106. As I write, the stock is trading around $101, so there’s room to get in. For more of Neil’s analysis on FNV in his newsletter, click here.
Stepping back, gold may do nothing but “sit there and look you,” but there’s a strong case to be made that this useless rock will make you useful money in 2020. While you can play it with a more traditional investment like GLD, if you’re looking for potentially much bigger gains, check out the well-run, high-quality royalty companies like those from Eric and Neil.
We’ll continue to keep you updated here in the Digest.
Have a good evening,