If this is the decade of the commodity, then the single most attractive area for equity speculators remains the gold-mining business. The entire industry is swimming in cash, while spot prices and physical demand for precious metals remain strong. Gold, silver and copper have been holding up exceedingly well, as the rest of the stock market corrects. And it isn’t just the store of value argument or the so-called haven status of gold; the fact of the matter is that the global supply of the commodity is relatively unchanged, while demand (particularly from India and China) is going up.
If I had to choose one stock market sector to focus on as an analyst and investor, it would be precious metals—gold in particular. It’s one of the few global industries with improving fundamentals and, because there is always demand for physical precious metals (even if economies are in recession), there are always companies out there worth speculating on.
Right now, the rest of the stock market is in significant turmoil and there’s a lot of fear driving the share price action. But gold shares have been outperforming the market not only because the spot price is hitting new records, but also because gold-mining companies are now consistently reporting record financial results.
It can be difficult stock picking in the mining universe. There’s nowhere near the number of fly-by-night gold miners as there used to be. Standards for drilling results and feasibility studies are now quite stringent and I would argue that a Street analyst is likely to be more accurate in predicting the cash flow from a modern mining operation than just about any other kind of business.
There are basically two kinds of mining opportunities for equity speculators. There’s picking an established producer with a forecast of cash costs and expected production. Then there’s the pure-play venture capital opportunity, which is a company with a property and some cash in the bank to go drilling for metal. Either way, you have to do your homework or you’re just throwing darts at a board.
In the current environment, I would weight a speculative, pure risk-capital equity portfolio somewhere close to 50% in gold-related investments. From my perspective, it’s the only industry that’s generating meaningful growth and it’s the only way for speculators to beat the current volatility in the broader stock market. Investing in gold is something that not all people are comfortable with. The business is tied to a commodity and, by their very nature, commodity prices are risky, unpredictable instruments. But with the general economy stalled and the stock market in the doldrums, gold mining is one of the few booming industries with strong expectations.