This could see gold stocks rocket

Friday, 3 January 2020
Adelaide, Australia
By Bernd Struben

  • Show us your papers!
  • In the mailbag…Why cash is ‘a must have’

If you think gold’s rally in 2019 was remarkable, hold on tight for 2020.

That’s the consensus view among our analysts and editors. Though even the most bullish gold bugs caution it won’t be a smooth ride higher.

When I last wrote to you in 2019 on 24 December — before switching into full holiday-dad mode — gold was trading for $1,485.52 per ounce. At time of writing it’s at US$1,529.56 per ounce. That’s a gain of 3.0%, quietly made while most investors had tuned out of the markets.

Last year’s 18% gain, by the way, was gold’s best performance since 2010. You can see the one year price chart (in US dollars) below:



chart image
Source: Gold Price
Click to enlarge

Bullion is still just shy of its 4 September peak at US$1,550.30. But we don’t expect that to last for long.

With gold up 18% in 2019, most gold miners made hay. Some more than others…

The VanEck Vectors Gold Miners ETF is a useful benchmark for the larger miners. It tracks 48 of the world’s biggest precious metals mining companies. And it gained 40% in 2019.

Australia’s biggest gold miner, with a market cap of $22.7 billion, Newcrest Mining Limited, gained 33.5% last year.

While some gold stocks did see their share prices fall, the biggest gains were made by the smaller miners. The junior miners are riskier…but when they deliver they can deliver big.

Like ASX listed Emmerson Resources Limited, with a market cap of just $51 million. The share price rose 71.4% last year.

Or Aussie miner Gold Road Resources Ltd, with a market cap of $1.2 billion. The stock gained 97.0% in 2019.

Those gains far outshine the 18% rise in the price of bullion.

These big gains among the junior miners can come when they strike a rich vein or on other good news. But much of the outperformance comes from the fact that gold miners are heavily leveraged to the price of the yellow metal.

We’ve covered this before here in the Insider. But as a quick review, gold miners’ costs don’t go up or down with the price of gold. They remain constant.

Let’s say it costs a miner $1,000 to extract an ounce of gold. If the gold price is $1,200 per ounce, they’re making a $200 per ounce profit.

Now say the gold price rises to $1,500. The company’s costs don’t change, so it’s now booking a profit of $500 per ounce. While gold only went up 20% the company’s profits soared 150%.

Getting back to our expectations for gold in the year ahead. If gold does continue to trend higher, gold stocks could potentially deliver many times gold’s price gains.

But if you’re after the really big gains in the smaller end of the sector, proceed with caution. Even with rising gold prices some of these stocks will head lower and take your money with them.

Over at our sister company, Fat Tail Media, Aussie gold expert Shae Russell has narrowed the field to a handful of small Aussie gold miners. Ones she expects to lead the pack in 2020. You can get the details here.

Now a look at the markets.

Markets

In the first day of trading in 2020, US and European markets notched up some sizeable gains. And Aussie stocks are following them higher today.

Investors cheered China’s central bank again lowering the amount of cash reserves Chinese banks must hold. Coupled with signals the phase one trade deal with the US should be inked this month, all three major US indices closed for new record highs.

Overnight, the Dow Jones Industrial Average closed up 330.36 points, or 1.16%.

The S&P 500 closed up 27.07 points, or 0.84%.

In Europe the Euro Stoxx 50 index closed up 48.09 points, or 1.28%. Meanwhile, the FTSE 100 gained 0.82%, and Germany’s DAX closed up 136.92 points, or 1.03%.

In Asian markets Japan’s Nikkei 225 is closed for the New Year holidays. China’s CSI 300 is down 0.40%.

The S&P/ASX 200 is up 48.92 points, or 0.73%.

West Texas Intermediate crude oil is US$61.16 per barrel. Brent crude is US$66.25 per barrel.

Turning to gold, the yellow metal is trading for US$1,529.56 (AU$2,188.67) per troy ounce. Silver is US$18.02 (AU$25.80) per troy ounce.

One bitcoin is worth US$6,932.89.

The Aussie dollar slipped back below 70 US cents overnight to 69.84 US cents.

Show us your papers!

Staying with gold, but shifting continents…

Alarming developments are afoot in Germany.

As part of a wider European Union anti-money laundering directive (AMLD5), which kicks in on 10 January, Germany is cracking down on private gold sales.

Germans have just six more days to purchase up to €10,000 (AU$16,000) of bullion anonymously. Next Friday that limit drops to €2,000 (AU$3,200). It was only in 2017 that the limit was lowered to €15,000.

No time wasters, the Germans.

Now it’s not that Germans can’t buy more than $3,200 of bullion. But if they do, they’ll need to undergo criminal background checks first. Which includes, of course, showing the authorities their papers.

The EU’s broader legislation goes even further. And it gets worse.

As Bitcoin.com reports,

‘[The] directive has big implications for holders of crypto and crypto businesses. Its impending policies have already squeezed some out of the industry, at least temporarily, but crypto is far from the only area that will be affected.

Per the legislation, non-transparent assets, accounts, and even private safety deposit boxes will now be subject to state information gathering by law.’

Shudder.

Little surprise that the EU is also a lead player in the war on cash.

2019 saw the last €500 note printed. They’re still valid. But they’ll be removed from circulation by the banks. Not unlike some Aussie pollies calling for the elimination of the $100 note.

Which takes us to today’s mail…

In the mailbag…Why cash is ‘a must have’

In yesterday’s Insider, reader Rick wrote in to say how he was made to show his ID to withdraw $5,000 from his bank in Tassie. The teller informed him the government would want to see his license details.

This is his money, mind you.

And as we can see unfolding in the EU, governments aren’t just targeting cash. But any easily tradeable assets…like gold and bitcoin.

If they succeed — and they’re on the path to ‘victory’ — your wealth will no longer be yours to do with as you please. Every dollar you spend will be on record.

Worse, you could be subject to bank bail-ins if your bank finds itself in financial difficulties.

And then there are negative interest rates. Central bankers’ dystopian solution to all the world’s economic malaises. Rid the world of cash and cryptos — and identify and monitor all gold buyers — and they can set rates as low as they wish. Then you can either watch your savings shrink each year…or run out and spend your money as ordered.

Of course, there are some sticky issues with eliminating paper currency. As reader Steve wrote in to point out:

In response to your Insider article today regarding the ongoing push to ban cash, I think you should consider the current bushfire crises. The lack of physical cash has proven to be a real problem when there is mass power outages and shops and petrol stations can’t use EFTPOS.

One can only imagine how much damage could be done by a nation state that decided to destroy a power grid or shut down the banking system for longer than a few days. Personally, I think physical cash is a must have and to ban it would weaken national security.

Thanks Steve.

Many of the arguments in favour of banning cash are made on the grounds of national security, like fighting terrorism. Hopefully your line of thinking will give the national security hawks pause.

And hopefully everyone affected by the bushfires can access food, petrol, shelter and medicine.

Housekeeping

In the weeks ahead, I’ve lined up an all-star cast of Port Phillip Publishing’s editors to bring you the Port Phillip Insider. I’m taking a few weeks leave to soak in the South Australian coastline with the family. I’ll be back with you on Tuesday, 21 January.

Until then…happy investing!

Cheers,
Bernd