Checking in on Eric Fry’s gold pick for our InvestorPlace annual contest … tracking gold’s continuing weakness … one catalyst that could spark an upward reversal

Right now, the market is offering investors a sale on Eric Fry’s pick for InvestorPlace’s 10 Best Stocks for 2021 contest.

I suspect many won’t take advantage.

The reason why points toward an interesting behavioral quirk of investing … we often get the timing of our buying and selling reversed.

Cullen Roche once said, “the stock market is the only market where things go on sale and all the customers run out of the store.”

The opposite is often true as well, as the below cartoon from Paul Claireaux illustrates.

When prices surge, we often cheer and eagerly open our wallets to buy more. Yet when prices tumble, we circle the wagons, assume the sky is falling, and refuse to benefit from the market “sale.”

Investors who followed this pattern with Eric’s pick in last year’s 10 Best Stocks contest suffered a major opportunity cost.

From January 1, 2020 through late-March of last year, Eric’s recommendation, Freeport-McMoRan (FCX), collapsed nearly 60%, as you can see below.

Quite the sale price.

But then it staged a furious rally, resulting in Eric placing third in the contest as FCX climbed 99% on the year, despite that 60%-kneecapping.

Today, Eric’s pick for 2021’s contest is down too, though not nearly to FCX’s extent last year.

The stock is Osisko Gold Royalties Ltd. (OR), which has been drifting lower as the price of gold has languished since last summer.

As I write Tuesday morning, OR is down 7% on the year (gold is down nearly 9%), while the S&P is up nearly 9%.

So, the question before investors today is simple …

Is this a sale-price on a quality stock? Or a precursor to more weakness to come?

Today, let’s see what Eric thinks.

 

***The catalyst that could kick gold’s price back into gear

For 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.

This process led Eric to multiple trades in the gold sector in 2020, with fantastic results for the first half of the year. He was able to help his subscribers lock-in a handful of triple-digit returns from gold and silver.

But after setting a record-high in August of last year, gold has been muddling south, as you can see below.

This is what has been weighing on Osisko’s stock price.

So, before looking at Osisko itself, we need to start with what’s happening with gold and whether this weakness is going to turn around.

From Eric’s Saturday issue of Smart Money:

Although it is impossible to cite a specific reason why the gold price has been drifting lower, the dollar’s recent uptrend is certainly part of the reason.

After bottoming out at 89.20 on January 6, the Dollar Index has advanced nearly 5%.

That’s a big move in the world of currencies. And since gold tends to move inversely with the dollar, the greenback’s recent winning ways have produced losing ways for the gold market.

Below, you can see this move from the Dollar.

 

But Eric notes that all is not doom and gloom for precious metals.

In fact, one major developing trend could light a fire under the gold price once again.

 

***The potential tailwind of massive federal deficits

Back to Eric:

Typically, when the federal deficit is soaring, one of the best kinds of stocks to own is a gold stock. And at the moment, the deficit is not merely soaring — it is skyrocketing to multidecade highs.

 

 

The annual federal deficit recently topped $3 trillion — a titanic sum equal to more than 16% of our annual gross domestic product. That 16% number is the largest federal deficit since the 1940s deficits that financed World War II!

Let’s add some additional context to our national deficit/debt situation to drive home the significance of this issue.

USDebtClock.​org has crunched the numbers, and our current U.S. national debt figure stands at about $28.1 trillion.

Let’s break this down to see what this means on a “per-taxpayer” basis. We’re choosing “per-taxpayer” and not “per-citizen” because roughly 50% of our nation doesn’t pay federal income taxes.

As an income-tax-payer, your share of the federal deficit is now more than $224,000 dollars.

Worse, it’s growing … fast. That’s because the U.S.-federal-debt-to-GDP number is ballooning to unsustainable levels.

According to USDebtClock, this debt-to-GDP number clocked in at 53% in 1960. Twenty years later, it had actually fallen to 35%. But by 2000, it was up to 58%.

Today, it stands at a jaw-dropping 130%.

In other words, for every dollar our economy creates, the government is creating $1.30 dollars of debt.

Keep in mind, this is just for our existing debt. It doesn’t factor in unfunded liabilities.

Unfunded liabilities are all of the “stuff” the U.S. government has promised to pay out to its citizens in the future. You have Social Security, Medicaid, pensions, and various social safety-net programs, among other things.

These expenses are very real … they’re enormous … yet they’re not reflected in that nearly-$28 trillion+ debt figure we’ve been discussing. That’s because these unfunded liabilities are future expenses. Our government is all-too-happy not to include them in our official debt calculations.

USDebtClock only breaks down this number to liability-per-citizen (not taxpayer). So, as you take in the following, remember that you — as the taxpayer — actually owe more than this …

Your portion of the government’s unfunded liability tab is $491,537. And yes, that’s on top of the $224,000 you owe for its existing debt.

Back to Eric:

In times past, runaway government spending of this magnitude would trigger the gold-buying influence.

But as you can see from the right side of the chart above, the gold price has not yet responded in any major way to our major deficit spending.

Maybe this time is different. Maybe bitcoin is “the new gold,” as many crypto fans assert. Time will tell.

But even if the gold price merely muddles along, Osisko Gold Royalty remains on a solid growth trajectory.

 

***Osisko will shine if gold’s price shifts back into high gear

Osisko is a midsized royalty and streaming company that holds a portfolio of 138 royalties, streams, and precious metal offtake agreements.

Eric notes that, of these 138 assets, 16 are currently in production, including the world-class Canadian Malartic Mine that Yamana Gold Inc. (AUY) and Agnico Eagle Mines Ltd. (AEM) operate in northwestern Quebec.

This Malartic mine is a big deal. One, it’s already Canada’s largest gold mine. Two, a new underground discovery has added nearly 15 million ounces to the project’s total resources. In February, Yamana and Agnico announced that they would spend $1.3 billion to develop this deposit.

Back to Eric on the significance of this:

Osisko bears none of this expense but stands to reap significant cash flow from its royalty on this project once the new underground mine moves into production.

Last year, Osisko produced approximately 64,000 gold-equivalent ounces (GEOs). But the company expects that number to jump to at least 78,000 GEOs this year.

But this isn’t the only tailwind behind Osisko.

Eric points out that the company expects its annual gold equivalent production to double over the next three years to more than 140,000 ounces based on prospective output that is already in the pipeline.

Back to Eric for how all this might shake out in the numbers:

The consensus of analysts on Wall Street and Bay Street expects Osisko to double earnings per share to about $0.55 over the next two years.

At that level of profitability, the stock would be trading for 25 times earnings. But these estimates do not include any prospective boost from rising gold or silver prices.

Nor do these estimates anticipate any upside surprises from the ongoing exploration at Canadian Malartic. But upside surprises would be no surprise at all.

If the gold price continues to muddle along throughout 2021, Osisko will likely do the same. But a less-bad gold price could work wonders for the stock.

 

It’s too early to suggest the floor is in and gold is ready to see a sustained climb again. But this is a good start.

Either way, Osisko’s current price relative to its growth trajectory appears to be a strong buying opportunity.

Here’s Eric’s take:

… even if the yellow metal fails to dazzle investors this year, Osisko’s impressive growth profile could lift the stock to market-beating gains over the next couple of years … and put it back in the running in the InvestorPlace 10 Best Stocks for 2021 contest.

Coming full circle, Osisko is down here in 2021 — but so was Eric’s pick last year, and we know how that turned out.

But whether you decide Osisko is right for your portfolio or not, it’s worth a few minutes to reflect on how you perceive bouts of weakness in the market and in specific stocks. Specifically, does it represent a buying opportunity, or more losses to come?

Obviously, each situation will be different, but most investors’ kneejerk reaction is to be uncomfortable with falling prices. It’s far more comfortable to buy after prices have clearly turned the corner and established a strong upward trajectory.

But on this note, perhaps Rob Arnott, founder of Research Affiliates, and a pioneer of factor-based indexes, put it best …

In investing, what is comfortable is rarely profitable.

Have a good evening,

Jeff Remsburg