Since our last update in mid-July, Osisko Gold Royalties (NYSE:OR) has continued to deliver relatively forgettable returns for 2021. The stock is down 7% year-to-date, matching gold’s 7% retreat year-to-date.
In other words, neither gold nor gold stocks have been a 2021 success story… at least not yet.
Perhaps the last three months of the year will stage a reversal of fortunes. Certainly, precious metals aren’t lacking for reasons to stage a great big rally. Two of the biggest reasons are:
- 30-year-high inflation readings; and
- Soaring government deficits.
Both of these trends are well established today — and intensifying.
After topping $4 trillion last March, the 12-month federal deficit has declined to “just” $2.8 trillion — equal to 12.5% of U.S. GDP.
That’s a big number.
Meanwhile, the six-month average U.S. inflation rate is hitting its highest levels since Dances With Wolves won an Academy Award 30 years ago.
Historically, great big governments deficits, coupled with great big inflation readings, trigger great big gold rallies.
Perhaps this time is different. But there’s a reason why many seasoned investors say “this time is different” is the most expensive phrase in finance: history repeats itself.
Admittedly, gold is barely registering a pulse at the moment; the wax figures at Madame Tussauds Museum seem more vibrant and lifelike.
But that’s simply how gold behaves from time to time. It “does nothing” for such extended periods of time that investors begin to doubt it could fog a mirror.
Gradually, they turn their back on the comatose metal and leave it for dead. But that’s usually about the time it comes back to life. After gold’s decade-long dormancy from 1991 to 2001, for example, it suddenly sprung to life and soared 500% over the ensuing decade.
More recently, the gold price drifted 40% lower during the seven year stretch from 2011 to 2018. But then it revived once more to rally as much as 70% from its 2018 low.
That rally was probably the first phase of what will become a much bigger move. Now that gold prices have spent more than a year going nowhere, the precious metal has gained plenty of rest for its next major move higher.
Importantly, the last year of nonaction has fostered so much negative sentiment toward gold that, from a contrarian perspective, it’s well overdue for a rally. The gold market, just like the stock market, tends to lurch higher at precisely those moments when most investors dismiss that possibility.
The present moment would certainly qualify: right now, most folks want little to do with gold.
On a net basis, investors have withdrawn more than $15 billion from the SPDR Gold Shares ETF (NYSEARCA:GLD) over the past 12 months. That’s the most rapid and sizable retreat from this gold fund since 2013.
To summarize today’s approximate investor attitudes, they like stocks, adore crypto and feel sorry for gold and silver.
“Both metals are suffering from a complete lack of investor interest,” griped Ole Hansen, head of commodity strategy at Saxo Bank A/S, during last Thursday’s abrupt selloff.
Such are the moments that often ignite a gold rally… especially if the yellow metal has a good reason to make a move… like if inflation is on the rise and/or government deficits are soaring.
Despite the challenging conditions in the gold market, Osisko has succeeded in boosting it gross earnings (EBITDA) for nine straight quarters.
Looking to next year, the company is on track to grow EBITDA by about 20%, even without any potential help from a rising gold price.
But this company-specific success won’t count for much if gold prices continue to languish. On the other hand, if the gold market finally catches a tailwind, I would expect Osisko’s stock to outperform its peers by a wide margin.
I realize that gold might seem as irrelevant today as a complete set of Encyclopedia Britannica, but I suspect the ancient monetary metal still possesses some relevance in the modern era.
So don’t be surprised if gold and stocks like Osisko suddenly awaken from their comas to score a big gain when investors least expect it.
Bottom line: the hedge almost no one seems to want may still be one of the best ones to own during the uncertain times ahead.
On the date of publication, Eric Fry did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Eric Fry is an award-winning stock picker with numerous “10-bagger” calls — in good markets AND bad. How? By finding potent global megatrends… before they take off. In fact, Eric has recommended 41 different 1,000%+ stock market winners in his career. Plus, he beat 650 of the world’s most famous investors (including Bill Ackman and David Einhorn) in a contest. And today he’s revealing his next potential 1,000% winner for free, right here.