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The Fed Sends Markets Reeling
Last Thursday, Fed Chair Jerome Powell roiled markets with a hawkish outlook.
“It is appropriate in my view to be moving a little more quickly,” said Mr. Powell in a meeting with the IMF. “I also think there’s something in the idea of front-end loading.”
The Dow Jones reacted with predictable gloom. By Friday afternoon, the index had dropped nearly a thousand points — its biggest single-day decline since February 2020.
Those “buying the dip” were also caught flat-footed: markets declined another 1.5% the following Monday.
The bottom line: Recession fears are leaving few places for investors to hide.
One sector of stocks, however, is still doing well:
Since the start of the year, the VanEck Gold Miners ETF (NYSEARCA:GDX) has advanced 10%. Canadian gold firm Osisko Mining (OTCMKTS:OBNNF) is now up 45% since getting recommended in The Moonshot Investor last fall. Recommended Allegiant Gold (OTCMKTS:AUXXF) has done almost equally well.
As markets continue their wild swings, many mid-cap gold companies provide “recession insurance” to portfolios while leaving the door open for more significant gains.
Mr. Powell has signaled that the Fed has finally woken up to inflation. Investors shouldn’t ignore the signs.
Gold Mining Moonshots
Gold has always been a tricky investment. The metal produces no dividends or earnings, making supernormal growth virtually impossible. Since 1930, gold has trailed U.S. stocks by 4.8% per year; investors would have been better off buying t-bonds.
And those companies that dig up gold often fare no better.
Shares in Newmont (NYSE:NEM), the world’s largest gold miner, have trailed the broader stock market by a massive margin since 1990. $10,000 invested in NEM would be worth just $19,000 today, compared to $119,600 in the S&P 500 index. Mining firms typically face high capital investments, decreasing the chance of landing a Moonshot winner.
But gold has been an undeniably strong source of downside protection. During the 2008 financial crisis, the shiny metal broke through $1,000 just as stocks were going in the opposite direction.
And on occasion, some miners offer massive returns. Smaller expiration firms like Asante Gold Corp (OTCMKTS:ASGOF) and Firefinch (OTCMKTS:EEYMF) have risen 2,000% in the past year on unexpected discoveries. When you’re buying a miner for cheap, a significant discovery can send shares up 2x… 5x… 10x overnight.
In other words, choosing the right mid-cap gold miners can be both “recession insurance” and “Moonshot material” simultaneously.
Picking the Right Gold Miner
To be clear, investors should tread carefully around gold. Newmont’s 5% return on invested capital sits just below its 5.3% cost of capital. From a business standpoint, it’s a bit like watching a slow swimmer be pushed downstream by a slightly faster-moving current.
Smaller miners are also even more prone to disaster. Last year, a subsidiary of Canadian-based Centerra Gold (NYSE:CGAU) was forced to declare bankruptcy after the Kyrgyz government seized control of a mine. Putting all your eggs in a single former Soviet state basket apparently comes with some drawbacks.
But choosing the right miners can generate splendid returns, as recommendations in Osisko Mining and Allegiant Gold have shown.
My favorite strategy for identifying these Moonshots is the Insider Track — which measures and follows insider purchasing. Since many gold mining executives are former geologists (or have access to them), they can often identify promising dig sites long before official drill hole results are published.
These trades are perfectly legal if they’re done on instinct. And by following these kinds of trades, my Insider Track strategy has identified companies like Osisko before they announce major discoveries.
There’s also an element of value investing at play here. Companies with lower costs of production like Barrick Gold (NYSE:GOLD) tend to outperform their competitors over the long run and I’m constantly searching for firms with high ore grades. When you’re producing a commodity as fungible as gold, cost control becomes a strong differentiator.
Two Insider Track Winners
As gold has continued its Fed-induced rise, insiders have been snapping up shares in midcap gold companies. This week, two new miners join the Moonshot list.
Skeena Resources (SKE)
Mid-cap miner Skeena Resources (NYSE:SKE) is a surprisingly low-risk bet on the future of Canada’s gold mining industry.
The company owns the Eskay Creek site, a mine closed by Barrick Gold in 2008 due to its declining production. Low gold values through the 2010s meant there was little reason to restart production.
Today’s high prices have changed the math. With spot prices at nearly $2,000 per ounce, older mines are now gaining a second lease on life. And because the Eskay Creek site has a long production history, geologists have a far better idea than usual about the site’s mineral content.
Insiders have taken note.
In the past month, five insiders have bought significant stakes in the firm. On Friday, CEO Walter Coles added another CAD 376,000 to his holdings.
Though gold prices will undoubtedly fluctuate, an investment in Skeena Resources is a safer bet than most.
Dakota Gold (DC)
Dakota Gold (NYSEAMERICAN:DC) provides a similar story back home, south of the Canadian border.
The company owns 42,000 acres in South Dakota’s Homestake Formation, a gold-producing region since the late 1800s. And with gold prices on the rise, many of these older sites are once again becoming worthwhile.
Two weeks ago, the firm announced it was expanding its drill program at Richmond Hill, an area already known to have commercially viable deposits. Phase 1 drill results could be ready within several weeks.
But insiders aren’t waiting on the official findings.
Since mid-April, the firm’s CEO and a major shareholder have added to their stakes. Together, they now own 20% of the company.
With DC shares down 50% since their backdoor listing, ordinary investors might also want to join in. Dakota Gold might not be the cheapest miner in the world, but it’s one with a far lower risk profile than most.
When Insider Track Investments Fail
In January, Netflix (NASDAQ:NFLX) CEO Reed Hastings used a 20% drop in share price to double down on his NFLX holdings. He would ultimately spend $20 million buying up shares.
But sometimes, insiders also make mistakes.
Last week, the streaming giant announced its first-ever subscriber loss for the quarter. Shares cratered 40%, handing Mr. Hastings a $9 million loss on his investment.
Much like car seatbelts and airbags, the Insider Track strategy always needs a second source of safety to work. Blindly following what others do is a recipe for disaster.
In some cases, the “buy” signs are apparent. The low correlation between gold and stocks makes mid-cap gold miners particularly attractive. And some biotech drugs show earlier promise than others.
But other times, things are less clear. Small-cap firm Jones Soda (OTCMKTS:JSDA) has long seen insider buying but has failed to expand far beyond its home market. And plenty of microcap stocks are bought and sold by insiders trying to fool unsuspecting investors.
The Insider Track strategy gives a slight advantage to regular investors. But don’t forget that finding Moonshots is still a challenge nonetheless.
P.S. Do you want to hear more about cryptocurrencies? Penny stocks? Options? Leave me a note at email@example.com or connect with me on LinkedIn and let me know what you’d like to see.
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On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.