It’s Been Tough - but Now is the Time to Invest in Gold

“It’s been tough, it’s been rough,” says Chris Mancini. But now is the time to invest in gold.

Mancini, an analyst at Gabelli Asset Management (NYSE:GBL), explained on the sidelines of the recent Mines and Money conference in New York that he sees the yellow metal as “a hedge that’s necessary to have” in today’s world.

In particular, he pointed to the current levels of debt in the economy and “what’s been happening in terms of central bank intervention and monetary policy” as concerns.

At Gabelli Asset Management, Mancini helps run a number of funds, focusing mainly on precious metals miners. When asked if now is a good time to get into gold stocks, he said yes — with a caveat.

“I think that there’s a lot of value right now, so if you’re a very patient investor and you have … the stomach to weather some potentially pretty severe volatility, I think you will be rewarded,” he said.

Watch the interview above for more insight on gold and gold stocks from Mancini. You can also read the transcript below.

INN: We’re here at Mines and Money, and this the first time that we’re talking. Can you start by telling me a little bit about yourself and what you do at Gabelli Asset Management?

CM: Sure. I am an analyst at Gabelli Asset Management, I follow mining companies. Gabelli is a New York Stock Exchange-listed company, it has around $43 billion under management. Primarily it’s value investing led by a team that’s led by Mario Gabelli, the founder of the firm.

Within that $43 billion there are couple funds, which are gold- and natural resource-oriented funds. There is a $300-million open-end gold fund called the Gabelli Gold Fund, and then two closed-end funds, which are income funds. I focus on mining companies, primarily precious metal-mining companies, and I help manage those funds, including the open-end gold fund.

INN: Earlier today you participated in a panel here focused on gold — what is your view on gold so far this year? Has it performed as you expected or were there surprises for you?

CM: So far it’s performed pretty much as I had expected. There has been — what happened last year was that I thought the yield curve was going to actually start to invert. And I thought what was going to happen was that as interest rates rose, the market was going to see that it wasn’t sustainable … because there’s too much debt in the economy. And the yield curve was starting to invert into the end of the year.

What happened was that the big tax bill was passed, and that was a huge form of stimulus for the US economy that essentially is bringing growth forward right now. It’s a trillion dollars of tax cuts in all, and it’s gotten the economy juiced right now for the first half of the year, probably for the rest of the year. And that’s going to allow the Fed to raise rates without necessarily having as big of an impact on the economy as they otherwise would have had without the effects of this big stimulus in the form of tax rates. So the yield curve is not as close to inverting now as it was it the end of last year.

Ultimately at the end of the day I think it’s going to take an inverted yield curve to cause the gold price to really rally. So as long as we’re feeling the effects of this stimulus I think gold will probably be range bound. Once the effects of the stimulus wear off and the economy has to deal with and adjust to higher interest rates, I think the yield curve again is going to start to invert and gold’s going to do a lot better.

INN: So that’s really what we need to see to have gold move higher. What about geopolitical issues and things like that, which people also look at in terms of gold?

CM: I think geopoliticals can have an affect, [but] I think that at the end of the day, what gets gold to move higher is really supply and demand based on individuals wanting to own it as a hedge against currency debasement. That currency debasement could come from the risk that a government repossesses bank accounts, it could come from the risk that there’ll be some kind of bombing campaign or an actual invasion of a certain country.

For example, if there were risk in South Korea that North Korea were to actually, God forbid, invade South Korea, then South Koreans would probably go and buy lots of gold. I don’t think that risk is extremely high right now, and despite all the rhetoric that’s taken place over the past year or so, I don’t think that risk has really ever been over the past year that high. So again, I think that geopolitical risk can play into the gold price, but at the end of the day it’s really going to take effect if there is physical demand from a country in which that geopolitical risk is talking place.

INN: You mentioned the Fed — how many rate hikes do you think we’re looking at for 2018?

CM: I think that we’re going to have a couple more this year. I think the Fed is going to keep raising rates according to their schedule, and I think again they’ll be able to raise rates according to their schedule because we’ve had this really big stimulus in the form of tax cuts. I think this year it’s really going to go as planned. And then next year, again once the effect of the tax cuts starts to wear off, the question is will they be able to continue to raise rates? And I think that we’ll start to have issues towards the beginning to middle of next year.

INN: There’s lots of different variables. Do you have a specific gold price prediction for this year?

CM: For this year I think it’s going to be pretty range bound between $1,300 and $1,375. I think that next year it probably moves up above $1,400, and then the hope is that we’ll start to see a sustainably higher gold price, and that is what’ll really I think get the gold stocks to move.

INN: That was my next question — what should investors be doing in this environment, and is it a good time to invest in gold stocks? It sounds like maybe we need to wait a little bit?

CM: I think if you’re patient, now is a good time. I think though that if you’re looking for a quick bang for your buck, you might not get it in gold stocks now, quite frankly. I think that there’s a lot of value right now, so if you’re a very patient investor and you have the stomach for it, the stomach to weather some potentially pretty severe volatility, I think you will be rewarded. Although again … it’s extremely hard to time this. It’s hard for me to say, “look, wait until September 30 of 2018, that’s when to get in.” I’d say that you can expect again some volatility in the market, but if you’re very patient there’s a lot of value, so now would be good time to invest.

INN: What criteria do you use when you’re picking stocks, and are there any specific gold stocks you think are good investment currently?

CM: We look for a companies that have first and foremost the best assets in the world, so the best mines — long-life, generally low-cost mines. And the jurisdiction is extremely important too. Then we look for companies which have good very management. Those are companies that have been proven to be able to exploit that gold in the ground, and once the gold is pulled out of the ground and they generate free cashflow, do a good job of allocating that free cashflow, or allocating that capital. And then thirdly we look for valuation, so we look for — we aren’t going to pay an extremely high price for something that has those first two attributes, but we are willing to pay up for those two attributes.

In terms of gold stocks which meet that criteria, one is actually Randgold Resources (NASDAQ:GOLD), which has an excellent — it has two very good top-tier, top-decile mines. One’s the Loulo-Gounkoto complex in Mali, and the other is the Kibali mine in the DRC. And then they have another mine, Tongon, in the Ivory Coast. Those mines are going to generate lots of free cashflow. That company has cash on its balance sheet, the management has been excellent in allocating cash. We think that at the end of this year they’ll be able to pay a $4- to $5-a-share dividend, and hopefully show that that’s sustainable over time, because they are going to be building another project called Massawa. If they pay a $5-per-share dividend this year, the stock’s $80 per share, that equates to something like a 6-percent dividend yield. I think the market will recapitalize the stock at a much lower dividend yield and a much higher stock price.

INN: Any final thoughts or advice you would leave gold investors with for the year?

CM: I just think that everybody should have gold in their portfolios. I think that it’s a hedge that’s necessary to have in these unprecedented times in terms of the levels of debt in the economy and what’s been happening in terms of central bank intervention and monetary policy. Everybody should have some. It’s been tough, it’s been rough, but you really just have to be patient, and now’s a good time to maybe average down or just start to have a position because there is a lot of value in the market.

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Securities Disclosure: I, Charlotte McLeod hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in contributed article. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.