Preston expects the current gold market to continue surging ahead thanks to growing attention and capital from generalist investors.
During a comprehensive overview of the gold market for a Metals Investor Forum webinar, Gwen Preston explained why all signs point to gold, and how to take advantage of the rising tide.
Recounting the factors that have created the current gold bull market, the Resource Maven noted that the most pro-gold factor at the moment is negative real interest rates.
“If we look at the US 10 year, it’s currently yielding 0.6 percent. If you take inflation away from that, you end up paying over a percent to own US debt right now,” she said.
“That means that safe trade, yield-paying store of wealth doesn’t work, and always when real rates turn negative that is when gold performs, because it is the alternate to that trade that isn’t working.”
The decision by central banks to ramp up the money printers to counter the global pandemic is also pro-gold, as is the overall uncertainty that COVID-19 has added to the market.
Last on the pro-gold checklist is investors’ desire to buy the dip, a trend Preston said has made a large number of investors a lot of money during the prolonged stock bull market of recent years.
“That means there’s lots of money that wants to buy into this dip,” she said. “And there’s a lot of money that wants to position to profit from this. I think it helps that the great financial crisis was not that long ago. Investors that bought into that crash did very well.”
Preston expects the current gold market to continue growing thanks to generalist capital, which will take time to disperse throughout the sector.
Using Fidelity’s Contrafund (NASDAQ:FCNTX) — the largest mutual fund in the world, with US$112 billion in assets — as an example, the sector watcher said there are rumblings that the head of Fidelity is “incredibly” bullish on gold.
“Now, if a small percentage of a US$150 billion fund gets allocated towards gold, that has an outsized impact on our small, small sector,” said Preston.
Citing gold miners’ balance sheets and earnings, which she referred to as “some of the best around,” Preston noted that gold stocks make the most sense compared to everything else.
“Even for investors who don’t put much confidence into a gold price bull market, they can look around and just do number crunching and see that gold stocks make sense. Gold stocks stand out.”
While money pours into majors, the Resource Maven advised gold investors to look down the chain to developers with advanced assets.
Marathon Gold (TSX:MOZ,OTCQX:MGDPF), which is developing the Valentine project in Newfoundland, is one firm that has been able to rebound from what Preston described as its “COVID low.”
Shares of Marathon fell by 50 percent to C$0.85 on March 16 as markets experienced a massive liquidity crunch. In the weeks since, the company has climbed back and is currently trading for C$1.58.
For Preston, Marathon is a prime example of how to win in a gold market, as it embodies three key components: value growth, optionality and merger and acquisition (M&A) potential.
“The majors need assets like this. So these developers in advanced assets are going to get a lot more attention, and they’re certainly already getting attention from those engaged gold investors.”
While value growth and M&A potential are self-explanatory, optionality is a little more nuanced, encompassing resource size and the rising value of gold.
“As a gold bull market develops, the amount of value that the market gives per ounce in the ground really rockets up,” explained Preston. “So if you can find big deposits, they’re going to rise in value significantly (and) offer you great leverage.”
One way to get ahead of the herd is to look for developers that have lower-grade deposits. These projects, which may be getting less attention at the moment, offer great potential upside as the price of the yellow metal continues to trend higher.
In terms of explorers, Preston admitted that this space maybe slightly harder to navigate due to COVID-19 pressures, but offered some tips to consider before making a move into this arena.
For example, looking for companies that can be active in six months in the current environment will help whittle down the list of potential buys.
“And the reason is COVID-19 is making exploration hard, it’s making it expensive, it’s making it less efficient and, in some places, it’s making it actually impossible,” said Preston.
Choosing low-risk jurisdictions, as well as exciting discoveries and simple deposits, rounded out her list of factors investors need to keep front of mind when looking at explorers.
Preston did also note that in a bull market attention will eventually grow to include projects in higher-risk jurisdictions, as well as old projects that need a lot of investment to get up and running.
In terms of what to avoid, she explained that one major red flag to steer clear of is companies whose management is having trouble raising cash.
“It’s different if management is hesitant to raise money when their price is still weak, that’s capital markets management,” which is a good strategy, said Preston.
“But if they’re actually having trouble finding money, money is available for gold exploration, for silver exploration. So if they’re a precious metal explorer and they can’t raise money, that I would say is a warning flag for that company and management team.”
“It’s now time to consider the best of the rest,” said Preston.
“This market looks really robust and exciting to me. And if you limit yourself to only the stocks that you think are the very best of the best of the best, you might be limiting your ability to profit, because this rising tide effect is really going to come into play in the next while.”
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Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.