2019 finishes with an extra kick for investors. Part of that is the continued strong run of the market, erasing memories of last year’s near bear market and extending the decade-long bull. There also are plenty of market headlines and events that have sprung over the end of the year, from Phase 1 trade deals to M&A to political whirlwinds and more.
More trivially, the 2010s are ending and the 2020s begin. It’s been quite a decade for equity investors, with the S&P 500 returning more than 250% in that time. Even underperformance could leave a portfolio in good shape, and any alpha that was found would really leave investors well off.
Where does that leave investors and the markets for 2020, at the start of a new decade? That’s what we try to answer in our annual Marketplace Roundtable series. We are publishing roundtable discussions featuring more than 80 authors from across the spectrum of investing styles and focuses you find on Seeking Alpha: Macro to value investing, small cap to energy, gold to quant and alternative strategies, and more.
Today’s discussion focuses on gold and precious metals, after a year where gold awoke and became a market leader. We’re featuring the following panel:
- The Critical Investor, author of Mining for Alpha
- Victor Dergunov, author of Albright Investment Group
- Gold Mining Bull, author of The Gold Bull Portfolio
- Geoffrey Caveney, author of Stock & Gold Market Report
- Simple Digressions, author of Unorthodox Mining Investing
- Itinerant, author of Itinerant Musings
The Critical Investor: As I am focused on the commodity markets, which in turn is driven by China developments for the most part, I haven’t experienced a very bullish 2019 so far in general. China growth has cooled off, and so has demand and pricing for most commodities, except gold. The US-China trade war, a strong US dollar, inverted yield curves for US bonds, lowering interest rates, QE programs in Europe, Fed repo actions haven’t instilled much confidence in the markets behind the scenes this year. However, all this and subjects like Iran or Trump’s impeachment seems to be brushed aside for some reason on Wall Street for now, for some mysterious reason delaying the almost inevitable upcoming recession, as certain important indicators point at it. Amazing.
Victor Dergunov: I see a bull market that’s extremely likely in the very late stages of its life cycle. In fact, the primary factor that seems to be keeping it alive is extremely easy monetary policy provided by the Fed. Yes, the music will stop, and likely soon. I am looking for a significant slowdown in the economy, possibly a recession sometime next year. Thus, this bull market may finally come to an end sometime in mid 2020.
Gold Mining Bull: I believe stocks will initially head higher to start the year, but I think we’ll likely see at least a 5%-10% decline by year-end. Rising inflation could be a major factor that drives stocks lower in 2020. For one, Fed Chairman Jerome Powell recently told reporters that he will focus on boosting inflation, which has not met the 2% target set by the central bank, and others in the Fed are calling for it to raise its target inflation rate to 4%. I believe higher inflation, along with increased central bank buying and positive supply/demand fundamentals, will drive gold prices to $1,750 next year.
Geoffrey Caveney: In the short term and medium term, this stock market is likely to keep going higher for now. Eventually there will be a recession and bear market, but that may still be 1-2 years away.
Simple Digressions: In my opinion, the US stock market is in a classic bubble and the only question is when it’s going to crash. What’s more, I do not think that we will see any early indication of an incoming crash as was the case ahead of the last bear market in stocks (2008 – 2009). As a result, I see no sense in investing in the so-called broad market represented by such plays as Apple (AAPL), Amazon (AMZN), Google (GOOG) (GOOGL) and many, many others.
Itinerant: I don’t see the music stopping before the elections in the US in general. And specifically for gold I’m bullish for 2020.
The Critical Investor: I have actually learned two lessons: The first is stick more patiently to a fundamentally sound story that’s a few months late regarding catalysts for unclear reasons, and the second lesson is always stick to your money management rules and never think a certain story is “different this time,” as in junior mining, losses can rack up quickly that way.
Victor Dergunov: 2019 showed that the U.S. economy and stock markets are extremely resilient. Most economic data coming in toward the end of the year has been surprisingly strong. Employment, consumer, GDP, and other data has surprised many analysts to the upside. Thus, a lesson I learned in 2019 is that the U.S. economy can expand longer and more robustly than I had previously anticipated.
Gold Mining Bull: I got a little too carried away investing in high-risk gold exploration stocks. I have since reduced my stakes in such stocks, and focus primarily on larger miners and takeover targets.
Geoffrey Caveney: Always take some big profits off the table when you are sitting on big gains, especially in volatile markets and sectors. In the new gold bull market in 2019, and particularly in junior gold miners, it was important that I strategically took profits at key moments in the late summer and early fall.
Simple Digressions: This year was the year of consolidation in the precious metals sector. We saw Barrick (GOLD) merging with Randgold, Newmont (NEM) with Goldcorp (GG), plus a number of other takeover bids. I think that this trend will continue into 2020. Unfortunately, if I’m correct, I will have less work to do as an analyst. On the other hand, why not select a few undervalued gold / silver mining companies ready for being acquired?
Itinerant: Don’t be afraid to take profits.
The Critical Investor: It probably had to wait until negative real interest turned up again, although it was kind of surprising as it happened against a strong dollar and strong markets, so seemingly no reason for a fear trade as it usually implies.
Victor Dergunov: It was all about the Fed and the perception of easier monetary policy down the line. Lower rates, more QE, a weaker dollar, higher inflation are all likely to occur due to Fed policy. The Fed already started using some measures like lowering rates, stopping QT, injecting capital into banks as a preventive move to try and delay the recession. In the future, the Fed will probably use similar tactics and others to lessen the shock of a slowdown or a recession and then more of the same to stimulate the economy out of a recession. This should turn out very positive for gold and the whole gold/silver/miners (GSM) sector.
Gold Mining Bull: Gold has had a great year despite a strong stock and job market and moderate inflation. The Fed has been pretty supportive of gold as it has lowered interest rates after seeing some signs of a slowing economy. Global central banks also continue to buy gold at a record pace. Russia, China, India and Turkey have been adding to gold reserves consistently in 2019. We’ve also seen strong inflows into gold exchange traded funds such as GLD. All of these factors contributed to higher gold prices in 2019, and will likely support prices in 2020.
Geoffrey Caveney: First of all, the Fed and interest rates. The stunning, complete, total reversal from raising rates through the end of 2018, to cutting rates by the middle of 2019, was and is the financial story of the year. This was the first real rate-cutting cycle since the 2008 financial crisis and Great Recession, since it was the first time rates have been high enough to actually cut them since then. This interest rate direction shift will impact financial markets for years. Gold will benefit.
Simple Digressions: I do not think it was a big move. At the time of writing this piece gold and silver are up 15.3% and 9.7%, respectively, compared to the end of 2018. What is more, the gold / silver ratio suggests that the current bull market in precious metals is very weak.
Itinerant: The gold price finally broke out of its sideways trading range. Capital started to flow back into the resource sector, and M&A has woken up again.
The Critical Investor: We saw during the 2008 crisis that confidence in all asset classes vaporized, and the gold price stayed neutral, so return-wise it indeed was a good way of storing value. But holding cash would have generated the same results, and if you ask me this would be a smarter and less risky way of saving wealth when a crisis comes along. I’m not a big fan of holding physical gold, as it comes with costs, spread, time to sell, etc., over cash. This is all in case of a market crash combined with a recession hitting quickly. When a gradual crash would drag everything down over a span of years, it might be the case that gold could do well, and in that case gold producer stocks could sidestep this long-lasting sell off for stocks in general, and actually prove to be one of few asset classes that could profit. And as their multiples are based on cash flow mostly, a higher gold price results in higher returns for gold stocks.
Victor Dergunov: Yes, I agree that we are on the verge of a paradigm shift in many respects. It has become clear that the U.S. economy is not capable of properly functioning in a “normalized rate environment.” There’s simply too much debt in the system to allow the economy to grow with “normal” interest rates.
U.S.’s debt to GDP ratio is at about 105%, which is extremely high and the U.S. pays about $400-$500 billion annually just to service the enormous $23 trillion national debt (which is increasing by about a trillion dollars per year). The U.S. technically cannot default on its debt as the Fed can essentially create as much fiat currency as is necessary. Thus, the likeliest scenario is very low or possibly zero/negative rates to control servicing payments in the future and higher inflation to essentially “inflate the debt away.” Naturally, this is extremely positive for gold and gold-related assets which should appreciate substantially over the next decade.
Gold Mining Bull: Yes, I think Dalio has brought up several good arguments in his support of gold and the key drivers for a higher gold price in 2020 and beyond. Central banks will continue to devalue their currencies, as they have no better option with such huge liabilities, and we’ll see gold increasingly seen as a store of wealth by investors. I think this will lead to increased interest in gold miners as well. While Dalio owns shares of the GLD, readers should know that his hedge fund also has substantial stakes in various gold miners.
Geoffrey Caveney: Of course Dalio is right. It has a lot to do with my comments about the new interest rate cutting cycle above. Keep in mind that “the 2020s” is a long, long time. There will be many stages and turning points along the way. For example, likely a rising stock market in 2020, then at some point a bear market and recession in 2021 or 2022, then eventually a recovery from that, but with lots of inflation to go along with it. In general, gold itself will be one of the most stable assets throughout these twists and turns, going up with low rates and higher inflation, but not going down so much like other assets will in a bear market.
Simple Digressions: I’m a very dull and conservative gold bull. In other words, no fireworks as in the case of Ray Dalio. My main thesis is pretty simple – gold is a must for a long-term contrarian and conservative investor understanding the Austrian approach to global economy.
Itinerant: Ray Dalio is certainly more qualified than I am to present his set of macro arguments with which he bolsters his thesis. However, we both seem to arrive at a very similar conclusion coming from different angles: Gold deserves a place in a well-balanced portfolio. Whether or not 2020 will be a year where more people agree with this view I don’t know, but I suspect that continued gold price strength will lead to increased interest in the yellow metal in the near-to-mid-term
The Critical Investor: That gold could go to crazy levels like US$5,000 or US$10,000 when we get to a new financial crisis. The last crisis didn’t indicate this potential at all, and when all modern day politics fail and we do get to these levels, I do believe we have arrived in a world where money has no value anymore and for example doomsday preppers rule, and this is something I strongly believe no politician, whether they be Trump, Putin or Xi Jinping, would like to see either and will avoid at all costs.
Victor Dergunov: Many investors seem to be missing the big picture regarding gold. To try to put it simply, despite the world’s financial system being decoupled from gold, gold still appreciates roughly in tandem with the U.S.’s expanding monetary base. This correlation is clear, and can be traced back to the 70s when the U.S. essentially unilaterally decoupled the world from the gold standard.
One thing that market participants may be missing is that the monetary supply expansion that occurred after the financial crisis of 2008 was not a temporary phenomenon, but is essentially the “new normal.” The future holds a lot more QE, money printing, and monetary base expansion. Thus, you can expect to see much higher gold price going forward, and hopefully investors will be wiser this time and not see this as a temporary phenomenon but as a perpetual debasing of fiat currencies.
Gold Mining Bull: That investors need to be buying gold for the price to rise. Gold has significant demand from central banks and jewelry purchases.
Geoffrey Caveney: There’s still a lack of understanding that gold has now become one of the relatively safer assets there is today in the financial world. As I wrote above, gold goes up with low rates and higher inflation, but doesn’t go down so much in a stock bear market. Gold can be thought of as kind of like inflation-protected cash with some extra upside potential available. But too many people still see gold itself as risky, volatile, etc. Now and going forward, gold itself has in fact become, and will be, generally less risky and less volatile than most regular stock market sectors, for example. Very few people understand this today.
Simple Digressions: Western investors do not perceive gold as a currency – for them gold is just a speculative play. What’s more, it looks like the entire Western world is very busy with speculation now. For example, look at the US stock market driven for many years by momentum players instead of fundamentals. My advice is simple – keep in mind that gold is an ultimate currency so at least a small position in this metal really makes sense.
Itinerant: There’s so many conspiracy theories about gold out there I couldn’t even begin to list them here. I don’t see any merit in any of them, and it usually serves investors well to ignore them when making money allocation decisions.
The Critical Investor: For the reasons I explained above, I don’t invest in physical gold. If I see gold going up for some reason in a normal market, I would always invest in gold producer stocks for the leverage on the gold price.
Victor Dergunov: Gold, silver, miners, or GSMs as I refer to them, are a built-in component of our portfolios. I do not simply view these assets as hedges but rather as center pieces, especially in times such as these, where paradigm shifts seem likely, and stock markets could be very close to topping out. GSMs represent about 25% of total assets in most of our model portfolios, and nearly 30% of our core long portfolio.
Gold Mining Bull: Gold miners are the main focus of my portfolio, and precious metals-related investments make up about 20% of my overall net worth. So, I’m invested quite heavily in the sector.
Geoffrey Caveney: Gold is more than a hedge, but not the only focus of my portfolio. Holding 10% of one’s wealth in gold always is a good idea. Senior gold miners and gold royalty/streaming companies can be another solid 5%, and strategically chosen and tactically timed junior gold miners can be up to another 5%. Of course the details can always vary depending on each individual situation, and on the timing of particular market turning points, but these are solid basic general guidelines.
Simple Digressions: It’s focused on gold / silver mining companies plus a long position in physical gold through (CEF).
Itinerant: Metals mining is a focus for me as this is where my core expertise lies. I hold some bullion which I view as a hedge which I will hopefully be able to pass on to my children.
The Critical Investor: As gold seems to be the only metal with a pulse these days, and I expect the Fed to lower interest rates further to keep Wall Street going, I see further potential for gold to shine in 2020. However, if Trump manages to pull off a strong deal with China, base metal demand can improve quickly, generating opportunities in for example copper/zinc/nickel which are all heading toward deficits.
Victor Dergunov: Pay attention to gold and silver prices in 2020. I think under the right conditions, gold could climb to $1,600-$1,750, and silver can easily surge to $20, $25 or possibly higher. I like various investment vehicles like [[SLV]], [[GDX]], ]]GDXJ]] as well as select gold and silver mining companies.
Gold Mining Bull: Keep a close eye on central bank demand for gold in 2020, as well as inflation rates in the U.S. and abroad. I think we’ll see increased bank buying and higher inflation in 2020.
Geoffrey Caveney: Pay attention to precious metals vs. base metals over the course of the next few years. Gold and precious metals will be relatively more stable, while base metals will be very volatile and may fluctuate wildly. In the long term of 10 years, copper and base metal prices should be much, much higher. But how will we get there? Base metals should benefit somewhat from a global financial and economic rally in 2020, but then they could get crushed in a bear market and global recession. Some time after that base metals will recover, rally again, and soar to huge highs later in the decade. Pay close attention to base metals at all times – timing the twists and turns will be critical. Again, gold and precious metals will be relatively more stable and less volatile over the course of these periods.
Simple Digressions: This year my favorite golddollar indicator (those interested, please, scroll through my articles on gold on Seeking Alpha) made an all-time high. During a healthy bull market in precious metals this indicator goes in tandem with gold prices. If I this thesis is correct, I expect gold to follow the golddollar indicator in the not so distant future.
Itinerant: The industrial world is changing and we will hear a lot more about the “decarbonization” of transportation and power generation and the electrification of seemingly everything. This trend will have a profound impact on the resource sector and will provide opportunities in 2020 and well beyond.
The Critical Investor: Adriatic Metals (ADT.ASX), a junior developer with a polymetallic project in Bosnia Herzegovina. Their Rupice project is very high grade, and they recently announced spectacular scoping study results, with an after-tax NPV8 of US917M ( = A$1348M) and a truly world class after-tax IRR of 107.4%, which means a wide margin of error when developing this further. They are working on a Pre Feasibility Study (PFS) now which is planned to be completed in Q2, 2020, and a Definitive Feasibility Study (DFS) planned for Q4, 2020, alongside the necessary permitting which goes smoothly so far, not in the least supported by a very good team on the ground. They recently raised A$25M, which will take them through permitting and the FS. Their current market cap is A$309M, which is less than 23% of the NPV8. They are looking at even making improvements from scoping study to PFS, so I expect an ongoing re-rating when Rupice is being derisked at high speed. If a scoping study project stage is valued at 23% of NPV8, a PFS stage could very well be valued at 40-50% of NPV8, because of the extreme profitability premium that comes into play with these kind of projects. There’s also potential in discovering even more resources as exploration is ongoing besides development, but the current size and quality of Rupice already is very rare, and would certainly generate lots of interest for mid tier producers, so I would be surprised if Adriatic Metals is still around in a year from now.
Victor Dergunov: For 2020, one of my favorite plays is the gold/silver/mining sector. The economy will likely slow in 2020 and may even go into a recession. Thus, the Fed will need to lower rates and will likely have to expand the monetary base (introduce more QE). This should be extremely bullish for gold, silver, and mining companies as it could spark higher inflation, cause the dollar to weaken, and enable interest rates to go further south.
Some of my favorite assets in this sector include iShares Silver Trust (SLV), VanEck Vectors Gold Miners ETF (GDX), VanEck Vectors Juniors Gold Miners ETF (GDXJ), as well as select gold and silver mining stocks. We like Kirkland Lake Gold (KL), Newmont Goldcorp (NEM), First Majestic Silver (AG), as well as various other companies in this space.
Gold Mining Bull: RNC Minerals (OTCQX:RNKLF) is a top pick for 2020. I think the junior miner has strong potential to reach 100,000-plus ounce annual production in the near term, which should result in a higher valuation. Recently, it reported its highest monthly production yet, with 9,485 ounces produced. I’m expecting strong 2020 guidance to be released in early Q1, plus a continued growth in monthly production and a corresponding reduction in all-in sustaining costs to under $1,000/oz.
Geoffrey Caveney: Barrick Gold (GOLD). The market and even the gold sector still do not fully appreciate just how dominant Barrick is becoming in the gold mining industry. Their size, their acquisitions, and their ruthless efficiency will all be critical in the gold mining industry over the next 5-10 years. The gold price will continue to rise, but inflation and all costs also will continue to rise along with it. To take the best advantage of that, you need lots of gold resources to mine, but also very efficient management of the rising costs. Barrick is by far the best positioned gold miner to accomplish both of those things.
Itinerant: Gold Standard Ventures (GSV) controls the Railroad gold project in Nevada. I view it as a most interesting development stage project in a very attractive location. The current share price does not reflect its value as it has been affected negatively by the formation of the Nevada Gold Mines JV between Barrick Gold and Newmont Goldcorp, with some added pressure by tax loss selling.