We’re in the midst of a crisis, and I’m not talking about the novel coronavirus pandemic. Cash is under assault, so investors should take care to guard their investment portfolios.
Beyond social distancing and mask-wearing, Covid-19 is forcing people to develop new consumption habits, but the economic medicine governments are doling out is killing cash. Shifting portfolio weight into gold and its associated stocks is an important bulwark against the encroaching threat.
When the word “trillion” comes up so often in fiscal conversation, it’s easy for people to lose perspective on cash value. The Federal Reserve throwing around “trillions” like it’s nothing is certainly cause for alarm; I remember when a “billion” was a fantastic quantity.
To my mind, it’s evident money won’t be able to hold value for long under these conditions. That presents an opportunity for other asset classes to take over. Gold has long been a reliable place to store wealth, and that should only get better. Owning gold stocks is also a viable alternative for this long-term thesis. Bitcoin could serve the same purpose, but that particular asset comes with plenty of detractors.
But you don’t have to take my word for it. Just look at what the central banks are doing to cash. It’s as if they’re racing to see who can devalue money the most by providing endless stimulus here and even more so abroad. Once governments decided their populations needed to quarantine, they committed themselves to spending unprecedented sums of money to restart the economy after shutdowns end.
In the U.S., the Federal Reserve set rates to zero in a emergency meeting for an unlimited time span. And the rest of the world is already at negative rates. The ECB even announced loans at an interest rate of -1%. This is harmful on so many levels, yet leaders have deemed it necessary.
I’m not here to judge or try and offer alternative ways out of the present mess. I’m sure those in decision-making positions have their reasons for the choices they’ve made. But I do want to share a few opportunities to invest in gold and gold stocks to hedge against the topsy-turvy moves being made in financial world:
Of course, the best thing to do would be buying actual gold and stashing it. Alternatively, these three tickers should mimic the portfolio-hedging of an actual gold stash.
Gold stocks to Add Sparkle to Your Portfolio: SPDR Trust (GLD)
During the gold mega-spike of 2011, GLD topped out at $186 per share. During the following 12 months, the ETF tried making new highs on three occasions, all unsuccessful.
What followed was a long slog of bearish gold markets, until now. The present rally in GLD stock is approaching failure levels from eight years ago. That means bulls are in charge for as long as they continue setting higher-lows.
I don’t expect buyers to burst through the high watermark at first effort. The normal price action would be to fail once or twice before eventually accomplishing the breakout. Once that happens the reward would be about a $40 rally per share.
The longer it takes a stock to revisit a major prior top, the bigger the overshoot will be when resistance is overcome. Simply put, we’re staring down a tremendous opportunity to own gold assets. And the GLD ETF is the simplest and most direct way of mimicking owning actual gold.
Patience is key, as possible dips would offer opportunities to pounce. If there ever was a buy-and-hold strategy for investment, this instance takes the cake. There are no management flubs to fret over when investing in precious metals, and adding gold to the coffers is a must-do for any long-term investor.
Barrick Gold (GOLD)
The second best thing, if you can’t own actual gold, is owning the stock of the companies mining the stuff. an integral piece of gold’s value isn’t simply the fact people love it, but that it is hard to find and difficult to extract.
And this precious metal is only getting rarer to find and harder to extract by the minute. They say that all of the gold that has been mined in human history could fit in a handful of Olympic-sized swimming pools. Companies specializing in mining the asset have an opportunity to benefit from increases in value of gold.
Gold mining companies are guaranteed to have strong demand, so they can capitalize on that from their current infrastructure now. Last week, the CEO of Barrick Gold expressed similar bullishness. The company also shared expanded profits, a 55% year-over-year increase. The company learned valuable lessons during the gold crisis of 2011, so they have a great setup for the future. They know what it takes to tighten belts, so there are very few inefficiencies.
Barrick Gold stock is fundamentally cheap, with a 12 price-to-earnings ratio and trading at just two times book value. Though it runs the risk of falling with the entire market due to another Covid-19 disruption, GOLD stock has very little fluff value to shed.
The potential upside for GOLD outweighs the potential downside of another short-term correction on Wall Street. In other words, this is a risk worth taking, especially compared to other regular company stocks in the market.
Technically, the stock is approaching a major accident scene on its chart dating back to April 2013, which marked the start of an 80% correction. The bulls now have momentum, so with a bit of work they can deal with that neckline the same as GLD can deal with its high mark.
Shorter term, beating $28.50 is priority number one. This would invite more buyers to maintain the upside momentum. GOLD has rallied 125% in a matter of weeks, so it’s best to wait for a dip to $24 per share if possible.
Newmont Corporation (NEM)
The same theme covers not just GOLD but also NEM stock. Newmont Corporation would also benefit from a steady rise in the value of gold. There are no flagrant mistakes from management, so as long as they continue to execute on plans then the stock should be higher in the future.
Newmont just reported decent earnings results in spite of coronavirus shutdowns. They also announced they will be ramping facilities back up to full operations soon enough.
NEM stock is up 100% from the bottom of the recent market crash, so it can afford to breathe. The bulls need some rest before they try to take out the year’s high.
A dip towards $56 per share should do the trick, but then again trying to time the perfect entry in a very long-term investment is futile. It comes down to time frames and personal preferences. Ideally, NEM would fall to $52 to make for a perfect short-term buy, but then again those who wait for “perfect” might be waiting a long time.
Of course, there’s also the matter of the dividend, same as for GOLD. Both pay out dividends at rates over 1%, which is a whole bunch more than what investors get from U.S. bonds or the banks. This could also make them attractive for outside investment, given yields overseas are presently negative.
Unlike GOLD stock, NEM is near its all-time high, which could be an indicator of increased Wall St. confidence. If Newmont trades above its last major low of $72.40, then it could serve as a catalyst for a major rally
In all three cases today, the thesis is to own the shares for a long time. While short-term gyrations are important for momentum, the endgoal remains hedging against a potential cash value crisis. There will be setbacks, but nothing that should shake investors out. While there are no sure things, gold stocks have an advantage over the competition when it comes to this dead cash thesis.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. Join his live chat room for free here.
