Eric’s 99% return from his “Best Stock of 2020” is in the books … his pick for 2021 … how it’s going to benefit from what’s likely to be a 2021 gold boom
Congrats to Digest readers who followed Eric Fry into his pick for InvestorPlace’s annual Best Stock for 2020 contest …
They just celebrated a 99% return with Freeport-McMoRan (FCX). It’s a top-tier mining company that surged in 2020 based on growing demand for commodities, rare earth metals, and precious metals.
But let’s turn to the more pressing question …
How do we match, or hopefully beat, this 99% return in 2021?
In today’s Digest, let’s profile the pick Eric believes is the answer.
This stock has multiple tailwinds driving it and a unique business model that prints cash under the right circumstances (circumstances that Eric believes will be playing out this year).
So, cheers to FCX. But let’s now take a look at Osisko Gold Royalties Ltd. (OR), Eric’s pick for InvestorPlace’s Best Stock for 2021 contest.
***The factors that will kick gold’s rally back into gear
For any newer Digest readers, Eric is our global macro specialist and the editor behind Fry’s Investment Report. As a macro investor, he evaluates markets and asset classes from a big-picture perspective to identify attractive opportunities.
Once something is in his crosshairs, he digs down to find the right, specific investment to play the opportunity.
It’s been a powerful strategy …
In his decades in the business, Eric has dug up more 1,000%+ gaining investments than anyone we know of in the newsletter industry. And in 2020, he combined his strategy with gold and silver to help his subscribers generate a slew of triple-digit returns, many of which we’ve profiled here in the Digest.
Here in 2021, he’s looking to add another name to his precious-metals-winners list with Osisko.
Now, before we dive into “why Osisko?”, let’s look at the case for bullishness in the precious metals sector at large. After all, if we can’t make the case for a strong gold and silver market in 2021, then whatever strengths any particular metals company has are largely irrelevant.
Big-picture, gold had an interesting 2020.
After a monster bull run that culminated in a record-high back in early August, the precious metal fell prey to a bear attack. Below you can see it dropping 8% since its peak while the S&P has climbed 12%.
But Eric doesn’t expect this underperformance to continue …
I am now predicting that the lagging gold market is offering the most promising opportunity of 2021.
Although gold has been slumbering for the last several months, it may be reawakening soon, thanks mostly to what the chart below shows.
In mid-December, the U.S. Dollar Index (DXY) touched a new two-year low. A weakening dollar is good news for gold.
For example, the gold price jumped 20-fold during the 1970s — a period when the Dollar Index slumped 30%. Two decades later, as the Dollar Index was tumbling 40% between 2001 and 2011, the gold price rocketed more than 600%.
Moving to recent history, the Dollar Index topped out at the end of 2016 and has drifted 12% lower since then. Over that identical time frame, the gold price has advanced 60%.
If the dollar’s downward trend gains momentum, the gold price should continue trending higher, perhaps a lot higher …
***Why gold will shine in 2021
Beyond a weak dollar, Eric points toward two additional tailwinds behind the precious metal — the U.S. federal deficit, and the huge volume of negative-yielding bonds around the globe.
On the first point, Eric writes that the U.S. federal deficit — the amount of money the government borrows and spends in one year — has rocketed to the highest level since World War II.
It’s now so large that it equals 15% of our nation’s GDP. For added context, World War I saw U.S. debt to GDP at 17% and the American Civil War at 11%.
Back to Eric:
Big, fat deficits often beget rising inflation, which usually triggers the gold-buying impulse. That’s because massive government spending always leads to some form of money printing, which is the thing we call inflation …
This new inflationary trend may be underway already. According to the United Nations Food and Agricultural Organization’s monthly index, global food prices rose 6.5% from a year ago in November — hitting a new five-year high.
Likewise, the Bloomberg Agriculture Spot Index has jumped more than 30% since May and recently touched a new six-year high.
To see how this impacts gold, the chart below shows the U.S. budget deficit in blue and gold’s two-year price change in orange. The chart dates back to 1982.
In short, you’ll see gold’s price roughly mirroring the rising and falling of the national budget deficit.
As we stand today, is there any reason to believe our government is going to get a handle on its debt problem?
Consider the latest round of stimulus just paid out — and President-elect Biden’s suggestion that it’s just a “down payment” on yet another, far larger stimulus package that he’s going to champion.
Our government’s debt problem is completely out of control. It cannot be fixed. Expect to see even greater deficits and/or currency debasement. Unfortunately, it’s that simple.
***As to Eric’s final tailwind of negative-yielding bonds, the world is now at an all-time record of $17.9 trillion in debt that’s priced to yield less than nothing
Keep in mind, this figure of $17.9 trillion is up from less than $8 trillion in March. That growth is astonishing.
Worse, if we look at negative real yields — meaning what yields are after factoring in inflation — then the number climbs to a jaw-dropping $31 trillion around the globe.
Back to Eric:
That’s $31 trillion worth of “crazy.” So it’s not a stretch to imagine that some portion of the world’s bondholders might shift some of their capital from negative-yielding bonds to zero-yielding gold …
While nothing is guaranteed, the gold market clearly possesses plenty of fuel for a major new rally in 2021.
The chart below provides a taste of what could be in store for gold. I’m not predicting gold will top $7,000 an ounce during the next three years. But if gold racked up the same percentage gains it did during the 2006-’11 rally, it would top $7,000 an ounce by early 2024.
Now, with these tailwinds behind gold better understood, let’s look at Eric’s pick for how to play things.
***A top-tier gold company with a portfolio of cash-flowing assets
When you’re investing in gold or silver, you have many options.
You could buy physical gold or silver (usually in the form of coins or bullion). Then there are ETFs that track the respective prices of the metals, such as “GLD” for gold. You also have mining companies, which you could further break down into large and small miners.
Finally, you could look at “streaming” and “royalty” companies. This is where we find Eric’s pick, Osisko, which combines both of these last two models.
Let’s look at each.
A streaming company typically provides financing to mining companies that are having cash-flow trouble. In exchange, the lender receives the right to purchase at a set price some fixed percentage of the mining company’s future metal production.
Here’s Eric explaining how this works for Osisko:
In 2017, for example, Osisko struck a streaming deal to pay $33 million to Taseko Mines Ltd. (TGB) for the right to purchase Taseko’s share of the first 5.9 million ounces of silver produced by the Gibraltar copper-silver mine in British Columbia, Canada …
But importantly, Osisko won’t be paying market price for the silver it receives under the streaming deal. Instead, it will pay just $2.75 per ounce for it. In other words, Osisko acquired the right to purchase future silver production at an 88% discount to the current silver price.
That’s a streaming deal: Taseko gets a big check up-front, and Osisko gets many years of silver production at a big discount.
What about a royalty model?
That’s a bit different. With royalties, the company that provides the financing receives a percentage of the mining company’s future production — sometimes for as long as the mine produces the commodity.
With Osisko, investors are getting both streaming and royalty exposure.
Back to Eric:
The company is a midsized royalty and streaming company that holds a portfolio of 138 royalties, streams, and precious metal offtake agreements.
Of these 138 assets, 16 are in production, including the world-class Canadian Malartic gold mine that Yamana Gold Inc. (AUY) and Agnico Eagle Mines Ltd. (AEM) operate in Quebec …
Year after year, the Montreal-based company has been growing its portfolio of streaming and royalty deals, which means it has been growing its “attributable production” of precious metals.
***One final bullish feature
Beyond its streaming and royalty businesses, Osisko was recently engaged in some direct mining ventures. But in late November, the company spun them off into a different business entity.
This left Osisko as a pure-play streaming/royalty company.
Here’s Eric on what this means:
By becoming a pure-play royalty company, Osisko’s stock could gain an upward “re-rating” that would value the company more in line with other stocks in the gold royalty and streaming sector.
For example, Osisko is currently trading at about half the valuation of Wheaton Precious Metals.
Perhaps Osisko deserves to trade at a discount to Wheaton, one of the premier stocks in the royalty sector. But a 50% discount seems too severe, based on comparative fundamentals.
So, I expect this steep discount to narrow over the coming months.
There’s more to this story than we have room to dive into in today’s Digest, so click here to read Eric’s entire profile. And to learn more about Eric’s other gold and silver plays in his Investment Report portfolio, click here.
I’ll give Eric the last word:
A variety of favorable catalysts could combine to boost Osisko’s share price significantly in 2021 … and beyond.
Have a good evening,