It was a good day to start the week, that is unless you were heavily invested in gold stocks. On Monday, biotechnology firm Moderna (NASDAQ:MRNA) announced Phase 1 trial results for their novel coronavirus vaccine. Although the sample size was very small – involving only eight volunteers – the results were very encouraging. Naturally, this one event buoyed equities but put a damper on safe-haven assets.
Does this signal the end of gold stocks and the beginning of a V-shaped economic recovery? I highly doubt it. Yes, the vaccine trial revealed that volunteers developed a strong immune response, similar to or above the magnitude seen among patients who naturally recovered from Covid-19. At the same time, eight people is an awfully small sample, as I mentioned. Plus, the study has not been peer reviewed.
Moving forward, I wouldn’t expect a straightforward journey. The Food and Drug Administration has approved Moderna to start Phase 2 trials and the company plans to start larger-scale trials in July. However, the process is necessarily rushed due to the urgency of the matter. So, onlookers are right to be concerned about procedural effectiveness.
Of course, approval doesn’t equate to efficacy. It may take several months at least to truly determine if Moderna’s vaccine is the real McCoy. Until then, many things can go wrong. If you thought gold stocks were volatile, you should look at the litany of biotech implosions.
As “The Wolf of Wall Street” character Mark Hanna said, “Implosions are ugly.” And that’s about the only thing I can quote from that movie.
So no, gold is still relevant. Here are three reasons to consider this sector.
Gold Stocks Are More Convenient Than Gold
No matter how many times pundits sang the praises of the Moderna vaccine, I still don’t see an easy way to recovery. In April, the economy nuked 20.5 million jobs, virtually eliminating the growth enjoyed following the Great Recession. As well, you have over 36 million Americans filing for unemployment benefits since this crisis began two months ago.
Just by sheer numbers, the concept of a quick recovery counters logic and what we know about the economy.
Until our elected official presents a viable and credible plan to again make America great again (AMAGA?), the backdrop has never been more supportive of gold. However, it’s also fair to point out that buying physical bullion is a cumbersome affair for a host of reasons. Thus, gold stocks make sense because of their convenience.
For conservative investors, you can stick with the powerhouses, such as Barrick Gold (NYSE:GOLD) or Newmont (NYSE:NEM). Additionally, gold-based exchange-traded funds are available, such as the benchmark SPDR Gold Trust (NYSEARCA:GLD). Really, there’s something for everyone in this market.
Risk Factor to Consider: Keep in mind that you don’t actually own any gold when you buy mining companies. Therefore, if you have an extremely pessimistic view of the economy, then this segment may not be right for you.
Miners Typically Have Greater Upside Potential
Many folks simply want to protect themselves or to park their money as a hedge against inflation. For such purposes, physical bullion is the better approach. Especially during a time of crisis, gold gives you confidence that you just don’t have with other investments.
That said, if you’re looking for profitability, few sectors can equal the explosiveness of gold stocks. Based on growing fears of economic and fiscal instability – we blew up our budget to the tune of trillions of dollars – you’d figure that international central banks are eager to ramp up their gold reserves. Therefore, demand for the yellow metal should be very strong at least throughout this year.
To capitalize on this development, speculators may want to consider the mining complex. Mainly, it comes down to the math. With a price tag of over $1,700, a doubling in value would translate to over $3,400. That would require a significant spike in demand.
On the other hand, it’s more feasible for a $50 stock to jump to $100, which frequently happens. In addition, gold stocks are readily available to the investing public and therefore feature higher volume. Thus, positive news could see a dramatic surge in interest which the underlying asset would have difficulty replicating.
Risk Factor to Consider: Before diving into gold stocks, you should also be aware that they’re typically riskier than physical gold. Bad news could see miners cratering, whereas the underlying asset could merely incur a modestly negative session.
A Reasonably “Accurate” Proxy
For investors that want to invest in gold but don’t want to deal with the hassles of the physical market, gold stocks not only offer convenience but also a measure of predictability. Now, I’m not suggesting that gold is somehow an easy market to call, because it’s not. Rather, if fundamental factors work for gold, they usually apply for the broader mining complex.
For example, I don’t think it’s any coincidence that the miners showed exceptional vigor during the gold rally of the 2000s decade. It’s also no accident that gold mining is suddenly one of the hottest businesses given the destruction of the mainstream economy.
And with gold stocks, you can simply enjoy the profitability of being positioned in the right asset without the extra hassles that go along with buying physical precious metals. Plus, when it’s time to sell out, it’s very easy to do so.
Risk Factor to Consider: While gold stocks tend to trade with gold’s fundamentals, you must be aware that you’re buying equity in a company. Put another way, gold can’t go bankrupt but a mining company can. Finally, when you’re talking about junior mining firms or companies levered to speculative exploration projects, all bets are off.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he is long gold.
