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Please note: The Frank Talk articles listed below contain historical material. The data provided was current at the time of publication. For current information regarding any of the funds mentioned in these presentations, please visit the appropriate fund performance page.

This AI Company Is the Future of Gold Exploration
February 11, 2019

 

Goldspot

Gold mining is one of the very oldest human occupations. The earliest known underground gold mine, in what is now the country of Georgia, dates back at least 5,000 years, when people were just starting to develop written language.

Over the centuries, a number of innovations have emerged that disrupted and forever changed how we explore and mine for gold and other metals. Think dynamite, or the steam engine.

Lately, however, innovation has slowed. Mining companies are in cost-cutting mode, and many producers have favored generating short-term cash flow, often to the detriment of longer-term value. In last year’s “Tracking the Trends” report, Deloitte analysts observed that “miners from 50 years ago would find little has changed if they entered today’s mines, a situation that certainly doesn’t hold true in other industries.”

Mining has consistently underspent in innovation relative to other industries
click to enlarge

Consider the earth-shattering change that’s taken place in oil and gas over the past two decades. Fracking and horizontal drilling have completely revolutionized how we extract resources from the ground, making hard-to-reach oil and natural gas accessible for the first time.

No equivalent technology exists in precious metals. Some companies are now using cutting-edge technology like blockchain to improve supply chain efficiency and transparency, but to date there’s no “gold fracking” method. As a result, metal ore grades are decreasing, and large-scale gold discoveries are becoming fewer and farther between.

One company thinks it has the formula to reverse this trend. I think it could be sitting on a gold mine, pun fully intended.

Meet Goldspot Discoveries

“Some people call it ‘peak gold,’ but I tend to think of it more as ‘peak discovery,’” says Denis Laviolette, the brains behind Goldspot Discoveries, a first-of-its-kind quant shop that aims to use artificial intelligence (AI) and machine learning to revolutionize the mineral exploration business.

A geologist by trade, Denis conceived of Goldspot while serving as a mining analyst with investment banking firm Pinetree Capital. His vision, as he described it to me last week, was to disrupt mineral exploration as profoundly as Amazon disrupted retail and Uber the taxi business.

Central Banks Haven't Bought This Much Gold Since Nixon Was President

“We have more data at our fingertips than ever before, yet new discoveries have been on the decline despite ever increasing exploration spending on data collection,” Denis continues. “We believe Goldpsot can change that. Harnessing a mountain’s worth of historic and current global mining data, AI can identify patterns necessary to fingerprint geophysical, geochemical, lithological and structural traits that correlate to mineralization. Advances in AI, cloud computing, open source algorithms, machine learning and other technologies have made it possible for us to aggregate all this data and accurately target where the best spots to explore are.”

Hence the name Goldspot—though I should point out that Denis considers the Montreal-based company “commodity agnostic,” meaning it collects and aggregates data for all metals, including base metals, not just gold.

Moneyball for Mining

Denis has the record to back up his extraordinary claims. In 2016, Goldspot took second place in the Integra Gold Rush Challenge, a competition with as many as 4,600 worldwide applicants. After consolidating more than 30 years of historical mining and exploration data into a 3D geological model, the company was able to identify several target zones with the highest potential for gold mineralization in Nevada’s Jerritt Canyon district, among several others.

Moneyball

Goldspot’s targeting approach was a complete success. New zones were discovered by AI, validating the company’s models of finding patterns in the data that humans alone couldn’t have seen.

The exercise stands as an example of what can be unlocked when machine learning is applied to geoscience.

“When I first entered the field, geologists were still using pen and paper, and I’m not even that old,” Denis says. “We were paying for all this data, but no one was really doing anything with it.”

 

Denis’ quant approach to discovery reminds me a lot of Billy Beane, the former general manager of the Oakland A’s and subject of the 2003 bestseller and 2011 film Moneyball. Beane was among the first in sports to pick players, many of them overlooked and undervalued, based on quantitative analysis. His strategy worked better than anyone anticipated.

Although the A’s had one of the lowest combined salaries in Major League Baseball—only the Washington Nationals and Tampa Bay Rays had lower salaries—the team finished the 2002 season first in the American League West.

Similarly, Goldspot seeks to help mining companies cut some of the costs and risks associated with discovering high-quality deposits—something it’s managed to do for a number of its clients and partners, including Hochschild Mining, McEwen Mining and Yamana Gold.

And speaking of teams, Denis has assembled an impressive roster of PhDs and experts in geology, physics, data science and other fields.

But Wait, There’s More…

The company, not yet three years old, does more than assist in exploration. It also invests in and acquires royalties from exploration companies, similar to the business model practiced by successful firms such as Franco-Nevada, Wheaton Precious Minerals, Royal Gold and others.>

The difference, though, is that Goldspot has developed an AI-powered screening platform to identify the very best and potentially most profitable investment opportunities.

For this, Goldspot has also received accolades. It was one of only five finalists in Goldcorp’s 2017 #DisruptMining challenge, for “revolutionizing the investment decision model by using the Goldspot Algorithm to stake acreage, acquire projects and royalties, and invest in public vehicles to create a portfolio of assets with the greatest reward to risk ratio.”

I’ll certainly have more to say about Goldspot in the coming weeks. For now, I’m excited to share with you that the company is scheduled to begin trading on the TSX Venture Exchange early this week. The future belongs to those that can mine data and harness the power of AI, and I’m convinced that what Denis and his partners have created fits that bill. Congratulations, and the best of luck to Denis Laviolette and Goldspot Discoveries!

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of (12/31/2018): Integra Resources Corp., Hochschild Mining PLC, McEwen Mining Inc., Yamana Gold Inc., Franco-Nevada Corp., Wheaton Precious Metals Corp., Royal Gold Inc.

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Central Banks Haven't Bought This Much Gold Since Nixon Closed the Gold Window
February 4, 2019

Central Banks Haven't Bought This Much Gold Since Nixon Was President

Something big is happening in the gold market right now, and nowhere is that more apparent than in central banks of emerging economies. Last year was a watershed in the size of official gold purchases, as banks added an incredible 651.5 tonnes (worth some $27.7 billion) to their holdings, according to the World Gold Council (WGC). Not only is this a remarkable 74 percent change from 2017, but it’s also the most on record going back to 1971, when President Richard Nixon brought a formal end to the gold standard. In the final quarter of 2018 alone, central banks purchased as much as 195 tonnes, the most for any quarter on record, according to leading precious metal research firm GFMS.

Net Central Bank Gold Purchases in Fourth Quarter 2018 Were Highest on Record
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As I’ve shared with you before, central banks have been net buyers of the yellow metal since 2010 in an effort to diversify their reserves away from the U.S. dollar. Last week, I had the opportunity to discuss the issue with SmallCapPower’s Vasudha Sharma. You can watch the conversation by clicking here.

Most Western nations already have a comfortable weighting in gold relative to their total reserves, so the demand is almost strictly from emerging markets. Among the biggest purchasers last year were Russia, Turkey and Kazakhstan, and we also saw China add to its holdings for the first time since 2016. Meanwhile, Hungary, Poland, India and a number of other countries took deliveries for the first time this century.

Central Banks Recognize Gold as an Effective Diversifier and Store of Value

With gold representing a whopping 74 percent of U.S. reserves, the Federal Reserve has historically had the largest position among global central banks. (Venezuela’s weighting, at 76 percent, has lately roared past the U.S., but that’s thanks solely to hyperinflation and its rapidly deteriorating economy. I’ll have more to say on Venezuela later.)

Other countries have a lot of catching up to do—i.e., gold buying—to get to the same level of diversification. Russia, for instance, has the fifth most gold in the world at 2,066.2 tonnes, but this amount represents only 17.6 percent of its total reserves. In sixth place is China, whose holdings (a reported 1,842.6 tonnes) represent a very small 2.3 percent of reserves.

Below you can see Russia’s ongoing strategy of “de-dollarization.” To date, the Eastern European country has liquidated nearly its entire position in U.S. Treasuries to fund its rotation into gold. According to the WGC, Russia bought 274.3 tonnes in 2018, its greatest amount on record, and the fourth consecutive year of purchases above 200 tonnes.

Russian Gold Reserves Have Grown as a Result of De-Dollarization of its Reserves
click to enlarge

Gold Is the Only Thing Left of Value in Venezuela

Gold made even more headlines last week as it relates to Venezuela. The beleaguered South American country, as you probably know, is in the midst of a potential transfer of power, from current president and dictator Nicolas Maduro to the more centrist Juan Guaido, whom the U.S., European Union and other world governments have recognized as the de facto head of state.

Since the U.S. and other countries have imposed heavy sanctions on Venezuela and its oil industry, the cash-strapped country has had to rely on its gold holdings to make international bond payments, mostly to Russia and China. But the days of Maduro’s plundering of Venezuela’s hard currency might be numbered, and not just because he could be removed from power soon.

Central Banks Haven't Bought This Much Gold Since Nixon Was President Venezuela's Nicolas Maduro (left) shakes hands with Russian president Vladimir Putin. Both strongmen's countries have a strong fondness and appetite for gold.
Photo: Kremlin | Creative Commons Attribution 4.0 International

Last week Guaido sent a letter to U.K. Prime Minister Theresa May and the Bank of England (BoE), urging them not to send $1.2 billion from any sale of Venezuela’s gold reserves—held in the BoE’s vaults—to Maduro’s “illegitimate and kleptocratic regime,” according to the Financial Times. “Maduro has stolen a huge quantity of state assets,” including Venezuelan gold, a part of the letter reads. “There is no doubt that he will, if allowed, also steal the assets held by the Bank of England, which rightly ought to be saved to support the recovery of Venezuela.” The bank has honored Guaido’s request and is blocking Maduro’s efforts to sell the metal.

Later in the week, a Russian Boeing 777 allegedly landed in the capital city of Caracas and was loaded up with as much as 20 tonnes of Venezuelan gold, according to Bloomberg. It was later reported that the jet, for reasons unknown, left Caracas without the gold payment. There were additional reports, however, also by Bloomberg, that another aircraft, this one from the United Arab Emirates (UAE), had landed in the country and was awaiting delivery of the gold instead.

Venezuela's Oil Production Fell for a Third Straight Year in 2018
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These incidents are certainly dramatic, and I’m eager to see how they play out, but I think the key takeaway is that gold is an exceptional store of value. It’s the only asset of any value to which a socialist autocrat like Maduro still has access. The bolivar is worthless, and the country’s once powerful and influential oil industry is fading fast. Without gold, Maduro is powerless.

Four Straight Months of Gains. What’s Gold’s Next Move?

The gold rally that began late last year, when equities turned rocky, continued into the new year as the historic U.S. government shutdown gripped investors, and signs that Fed Chair Jerome Powell was set to pause monetary tightening intensified. For the fourth straight month in January, both the price of gold and gold mining stocks posted strong gains. Before then, the price of gold was down for six straight months, a losing streak we hadn’t seen in 40 years, when the yellow metal fell each month from December 1988 to May 1989.

Gold and Gold Producers Were Up For Fourth Straight Month In January
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The yellow metal ended last month at a nine-month high, and with the U.S. dollar expected to lose momentum on higher deficit spending, we could see prices surge to as high as $1,400 or even $1,500 an ounce this year.

I’m not alone in my bullishness. Billionaire Sam Zell, creator of the real estate investment trust (REIT), bought gold for the first time in his life, citing the fact that supply is shrinking.

And Mad Money’s Jim Cramer also came out strongly in favor of the yellow metal last week.

“We are big gold believers here,” Cramer commented. “Now gold is at $1,300, we think gold is going to $1,400, $1,500. We suggest that everybody have a little bit of gold in their portfolio.”

I second Cramer’s suggestion. My recommendation has always been a 10 percent weighting in gold, with 5 percent in bullion and jewelry, the other 5 percent in high-quality gold mining stocks and well managed gold mutual funds and ETFs.

Did you miss our updated Periodic Table of Emerging Markets? Read all about it by clicking here!

 

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

Diversification does not protect an investor from market risks and does not assure a profit.

The NYSE Arca Gold Miners Index is a modified market capitalization weighted index comprised of publicly traded companies involved primarily in the mining for gold and silver. The index benchmark value was 500.0 at the close of trading on December 20, 2002.

A real estate investment trust (REIT) is a company that owns, and in most cases operates, income-producing real estate. REITs own many types of commercial real estate, ranging from office and apartment buildings to warehouses, hospitals, shopping centers, hotels and timberlands.

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Why This Billionaire Just Bought Gold for the First Time in His Life
January 23, 2019

Sam Zell buys gold for the first time in his life

Billionaire Sam Zell just announced that he bought gold for the very first time in his life because, as he puts it, “it is a good hedge.” In a recent Bloomberg interview, the Equity International founder and creator of the real estate investment trust (REIT) admitted to seeing an opportunity in gold’s increasing supply shortage.

“For the first time in my life, I bought gold because it is a good hedge,” Zell, 77, told Bloomberg. “Supply is shrinking, and that is going to have a positive impact on the price.”

He added:

“The amount of capital being put into gold mines is at most nonexistent. All of the money is being used to buy up rivals.”

I believe Zell’s reasons for investing in gold are sound, and I’ve discussed them in detail a number of times before. Supply is indeed shrinking. The “low-hanging fruit” has likely already been mined, and it’s become prohibitively expensive for many companies to look for large-scale deposits, to say nothing of developing them. As you can see below, the number of ounces in major discoveries has been falling for years, and exploration budgets are still far below the 2012 peak.

The amount of gold in major discoveries has been trending down for years
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We Believe Supply-Demand Fundamentals Look Constructive

As if to confirm Zell’s reasoning, the Canadian Imperial Bank of Commerce (CIBC) forecast in a report this week that a gold deficit will emerge in 2019 “on the back of stronger demand over the next two years, primarily  from bar hoarding, net central bank buying and exchange-traded products (ETFs).” Peak production, according to the bank, will occur in 2021 at close to 34 million ounces, but then decline to under 16 million ounces by 2030.

World gold supply is expected to peak in 2021
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Demand isn’t abating, though. We’re seeing appetite grow for the precious metal, not just from investors but also central banks, which have been net buyers since 2010. According to CIBC, several central banks stepped back into the market last year, most notably the Reserve Bank of India (RBI), which until recently “has expressed negative sentiment around gold purchases.”

CIBC raised its gold price forecast this year to $1,350 an ounce, up from $1,300. The bank is also looking for $1,400 an ounce in 2020.

But These Gold Miners Could Be Even More Effective as a Store of Value

As attractive as I think gold bullion looks right now, there could be some incredible opportunities in gold equities, which are extremely discounted compared to the S&P 500 Index.

Among CIBC’s favorite gold equities are Agnico Eagle, Wheaton Precious Metals, B2Gold and SSR Mining—all of which we own in either our Gold and Precious Metals Fund (USERX) or World Precious Minerals Fund (UNWPX).

And in an article dated January 22, Bloomberg analysts David Stringer, Ranjeetha Pakiam and Danielle Bochove point out that a good place to look for gold equities could be mid-sized producers, which have outperformed both bullion and the entire global mining industry. For the 12-month period as of January 18, four miners in particular—Kirkland Lake Gold, Northern Star, Evolution and OceanaGold—all posted double-digit performance. By contrast, the Bloomberg World Mining Index was down more than 20 percent.

Gold producers the top performers in the Bloomberg mining index
click to enlarge

Northern Star, one of the top holdings in USERX as of December 31, was up 54 percent for the 12-month period. The Australian producer had a phenomenal fiscal year 2018, with net profit up a respectable 3 percent even as the price of gold was in decline. Dividend payouts were raised 6 percent. And the company continues to carry no debt.

Consolidation in the Goldfields

Sam Zell’s other point—about miners allocating their capital not to projects right now but to acquisitions—is also well-made. Indeed, industry consolidation is beginning to happen, which could possibly signal that the industry has found a bottom. Back in September, mining giants Barrick Gold and Randgold Resources announced a deal worth $6.5 billion, making the world’s largest gold producer by annual output. That record will stand for only four months, as Newmont Mining just made public its own plan to buy rival Goldcorp for $10 billion.

The next deal to surface could be nearly as large. It’s now rumored that South African producers Gold Fields and AngloGold Ashanti are interested in merging. Although the rumor has not yet been confirmed, Gold Fields CEO Nick Holland said in an interview this month that “if you are going to survive in the long term, you are going to have to look at consolidation.”

With combined output of 6 million ounces in 2017, a Gold Fields-AngloGold merger would create the world’s third largest producer after Newmont-Goldcorp (7.9 million ounces) and New Barrick (6.6 million ounces).

Gold Fields, which we own in the Gold and Precious Metals Fund (USERX), was up as much as 4.19 percent in New York trading on Tuesday on the news. From its 52-week low in September, the South African company has now risen a remarkable 78 percent.

Curious to see what other companies round out the Gold and Precious Metals Fund and World Precious Minerals Fund’s top 10 holdings? Learn more by clicking here!

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Foreside Fund Services, LLC, Distributor. U.S. Global Investors is the investment adviser.

Gold, precious metals, and precious minerals funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The prices of gold, precious metals, and precious minerals are subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5% to 10% of your portfolio in these sectors.

A real estate investment trust (REIT) is a company that owns, and in most cases operates, income-producing real estate. REITs own many types of commercial real estate, ranging from office and apartment buildings to warehouses, hospitals, shopping centers, hotels and timberlands.

The S&P 500 Index (Standard & Poor's 500 Index) is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies by market value, The index is widely regarded as the best single gauge of large-cap U.S. equities.

There is no guarantee that the issuers of any securities will declare dividends in the future or that, if declared, will remain at current levels or increase over time.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the Gold and Precious Metals Fund and World Precious Minerals Fund as a percentage of net assets as of 12/31/2018: Agnico Eagle Mines Ltd. 1.65% in Gold and Precious Metals Fund, 0.00% in World Precious Minerals Fund; Wheaton Precious Metals Corp. 2.50% in Gold and Precious Metals Fund, 0.20% in World Precious Minerals Fund; B2Gold Corp. 0.51% in Gold and Precious Metals Fund, 0.00% in World Precious Minerals Fund; SSR Mining Inc. 2.82% in Gold and Precious Metals Fund, 0.00% in World Precious Minerals Fund; Kirkland Lake Gold Ltd. 0.00% in Gold and Precious Metals Fund and World Precious Minerals Fund; Northern Star Resources Ltd. 4.56% in Gold and Precious Metals Fund, 0.00% in World Precious Minerals Fund; Evolution Mining Ltd. 0.00% in Gold and Precious Metals Fund and World Precious Minerals Fund; OceanaGold Corp. 0.00% in Gold and Precious Metals Fund, 0.03% in World Precious Minerals Fund; Gold Fields Ltd. 1.03% in Gold and Precious Metals, 0.00% in World Precious Minerals Fund; AngloGold Ashanti Ltd. 0.00% in Gold and Precious Metals Fund and World Precious Minerals Fund. Barrick Gold Corp. 0.00% in Gold and Precious Metals Fund and World Precious Minerals Fund; Newmont Mining Corp. 1.01% in Gold and Precious Metals Fund and World Precious Minerals Fund.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

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The Newmont-Goldcorp Deal Is Positive News for Gold Mining
January 15, 2019

The Newmont-Goldcorp Deal Is Positive News for Gold Mining

Consolidation season has finally arrived in the goldfields, just as many experts and analysts have been predicting for some time now. With exploration budgets having been slashed since their 2012 peak, and because there are today fewer and fewer ounces of gold available to be mined, one way forward for producers of all sizes will be to ramp up mergers and acquisitions (M&A) activity.

You might have heard that Newmont Mining will be buying Goldcorp in a massive $10 billion deal. The resultant company, to be headquartered in Denver, will be the world’s largest gold producer by number of ounces mined—larger even than what’s being called “New Barrick,” after the $6.5 billion merger of industry giants Barrick Gold and Randgold Resources, announced back in September. Whereas Barrick-Randgold produced a combined 6.6 million ounces of gold in 2017, Newmont-Goldcorp was responsible for as much as nearly 8 million ounces.

The Newmont Gold Corp deal will create the worlds largest gold producer
click to enlarge

I see this news as positive overall for the metals and mining industry, which has long signaled the need for consolidation. As I explained in a Frank Talk Live segment back in October, it’s when an industry has found a bottom that you start to see big M&A deals. A couple of years ago, the very talented people at Visual Capitalist showed in an infographic that mining M&As peaked in the aftermath of the financial crisis.

A Positive Case Study in M&As: Domestic Airlines

This tacit rule applies not just to metals and mining but also to most other industries. Look at domestic airlines. It’s easy to forget now that between 2005 and 2008, more than two-thirds of U.S. airlines were operating under Chapter 11 bankruptcy protection. A huge wave of consolidation followed, giving us the “big four” carriers—Delta, American, United and Southwest. Profits surged to new highs. This year, according to the International Air Transport Association (IATA), global airlines should see their 10th straight year of profitability, and fifth straight year where “airlines deliver a return on capital that exceeds the industry’s cost of capital, creating value for its investors.”

Consolidation Could Speed Up the Closer We Get to “Peak Gold”

So will gold miners follow suit and consolidate (more so than they already are)? And will this lead to a similarly sustained period of outstanding profitability?

No one can say for sure, of course, but my guess is that we’ll continue to see more and more deals the closer we get to the idea of “peak gold.” As I’ve shared with you before, the yellow metal is getting exponentially more difficult and costly to mine. The “low-hanging fruit” has likely already been plucked, so to speak. Exploration budgets have been slashed, and the days of 20- and 30-million-ounce gold deposits could be behind us, to say nothing of 50-million-ounce discoveries.

The amount of gold in major discoveries has been trending down for years
click to enlarge

To replenish their own reserves, big-name miners such as New Barrick and Newmont might decide to absorb smaller-cap junior producers with provable mines instead of spend higher and higher costs to scour the world for progressively harder-to-find deposits.

Says Michael Siperco of Macquarie Research, the Barrick-Randgold and Newmont-Goldcorp deals could “spark a wider consolidation in the industry, where too many gold companies are chasing too few assets.”

Only time will tell if this happens. I’ll be curious to see what companies could be next to strike a deal!

Stay up-to-date on this potential trend by subscribing to our FREE, award-winning Investor Alert!

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 12/31/2018: Newmont Mining Corp., Barrick Gold Corp., Newcrest Mining Ltd., American Airlines Group Inc., Delta Air Lines Inc., United Continental Holdings Inc., Southwest Airlines Co.

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Gold and Commodities Set to Soar in 2019
January 14, 2019

Summary:

  • An update to the Periodic Table of Commodity Returns.
  • Goldman Sachs issues an overweight recommendation for gold and commodities.
  • Paradigm Capital says royalty companies are the “best bet” in metals and mining.

Our ever-popular Periodic Table of Commodity Returns has been updated for 2018 and is now available on the U.S. Global Investors website! I invite you to get lost using the interactive feature, which easily allows you to highlight a certain commodity, the top performer, the most volatile and more.

Explore the new periodic table of commodity returns 2018

Palladium was the best performing commodity for the second year in a row, returning 18.59 percent in 2018 after ending the previous year up a phenomenal 56.25 percent. As we’ve noted before in the Investor Alert and elsewhere, palladium and gold prices are now near parity, with a razor-thin spread of only around $2 separating the two at the moment. Late last year, the white metal actually overtook the yellow metal for the first time since 2001 on increased demand from automobile manufacturers. More than 80 percent of world supply is used in the production of catalytic converters.

Not to be outdone, gold ended 2018 on a high note, beating global equities and commodities for the fourth quarter. And as I mentioned before, it was the sixth most liquid asset class, with daily trading volumes nearly identical to that of S&P 500 companies.

Goldman Bullish on Gold, Forecasts $1,425

With a majority of investors now betting that the current rate hike cycle has peaked, the U.S. dollar looks to be in retreat, having lost about 1.7 percent over the past month. Mike McGlone, commodity strategist at Bloomberg Intelligence, writes that he believes the “2019 dollar downtrend has legs.” This is constructive for metals and commodities in general, gold specifically. On Friday, in fact, the yellow metal achieved a “golden cross,” whereby the 50-day moving average crosses above the 200-day moving average—a very bullish sign.

Gold Achieves a Golden Cross
click to enlarge

Among those that are most bullish on the precious metal is Goldman Sachs. In a report last week, the investment bank maintained its overweight recommendation and raised its 12-month price forecast up from $1,350 an ounce to $1,425, a level last seen in August 2013. Goldman analysts contend that the gold price “will be supported primarily by growing demand for defensive assets, with a slower pace of Fed rate hikes in 2019 boosting demand only marginally.”

The World Gold Council (WGC) made a similar case in its 2019 outlook last week, predicting that global investors will “continue to favor gold as an effective diversifier and hedge against systemic risk.” The rise in protectionist policies around the world is chief among the risks since they tend to lead to higher inflation and slower economic growth over the long term, according to the WGC.

I believe the current government shutdown, over funding for a wall along the southern border, is evidence of the risks protectionist policies pose. Now the longest in U.S. history, and with no end in sight, the shutdown could start to take a toll on the economy the longer it lasts, according to Federal Reserve Chair Jerome Powell, and perhaps even cost the U.S. its triple-A credit rating.

Commodities Could Also Be a Buy Right Now

Goldman Sachs isn’t just bullish on gold. Commodities also look like a strong buy, the bank’s analysts say, after prices were slashed late last year. Before the fourth quarter, commodities were following the “late-cycle playbook.” Up 16 percent, they were the best performing asset class of 2018. But with the Fed now “on hold” and there being “low risk” of a recession, Goldman says it can now argue “with confidence” that the sell-off last year was a “mid-cycle pause.”

This is actually good news for commodities, as mid-cycle pauses have historically been a buying opportunity. Look at the chart below. It shows that, with few exceptions, commodity prices rallied in the days and weeks following a “pause” signal from the Federal Open Market Committee (FOMC). And as you might already know, Powell recently commented that the Fed “can afford to be patient” and “flexible” when it comes to additional rate hikes.    

Mid-Cycle Pauses Have Historically Been a Buy Signal for Commodities
click to enlarge

Goldman maintains an overweight recommendation for commodities, with a 12-month forecast of 9.5 percent.

Gold Royalty Companies Are the “Best Bet,” Says Paradigm Capital

It’s no secret that I’m a fan of royalty and streaming companies. (You can read my posts featuring Franco-Nevada and Wheaton Precious Metals.) I’ve long admired these companies for generating profits and creating value, even when the metals market is flat or weak.

Last week, Paradigm Capital reaffirmed my conviction in the royalty model. The Canadian investment dealer shared its research into the long-term performance of the various tiers in gold mining, from juniors to seniors, from explorers to developers. The royalty companies—which include not just Franco and Wheaton but also Royal Gold, Sandstorm and Osisko Royalties—are the “best bet” when seeking to “make money in gold equities,” according to Paradigm’s senior analyst, Don MacLean. He adds: “Royalty companies have the best business model in the sector, by far.”

Below, you can see that royalty companies have outperformed all other tiers, including gold itself. They collectively delivered 16 percent in compound annual growth from 2004 to 2018. Put another way, they returned a massive 884 percent in cumulative change, compared to gold at 300 percent.

Gold Royalty Companies Have Outperformed All Other Tiers Since 2004
click to enlarge

Many junior and senior producers have struggled over the same time period, but Paradigm writes that gold equities are like “coiled springs” and should outperform the precious metal if a “meaningful” gold rally of 10 percent or more occurs. Right now large-cap seniors are leading the rally, having increased 24 percent over the past three months, followed by intermediates (up 18 percent) and royalty companies (up 15 percent). This is in line with past gold equity rallies, Paradigm says, as the largest producers have historically performed best at the start.

My focus lately has been on how the idea of “peak gold” might drive the need for mergers and acquisitions (M&As) within the metals and mining industry. It’s been almost a decade since the last round of deals, and because there’s a sore lack of big discoveries right now to replenish reserves, I feel as if we’re due for more M&A activity this year. The Barrick Gold-Randgold merger, announced last September, might have been just the start of a new wave of consolidation.

We learned just today, in fact, that Newmont Mining plans to buy Goldcorp for a reported $10 billion, thereby making the world’s biggest gold producer. Look for my thoughts on this later!

On a final note, our very own Ralph Aldis, precious metals expert and portfolio manager, shared his top stock pick for 2019 with MoneyShow. To find out which one it is, click here!

 

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The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The S&P GSCI Total Return Index in USD is widely recognized as the leading measure of general commodity price movements and inflation in the world economy. Index is calculated primarily on a world production weighted basis, comprised of the principal physical commodities futures contracts.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 12/31/2018: Franco-Nevada Corp., Wheaton Precious Metals Corp., Royal Gold Inc., Osisko Gold Royalties Inc., Sandstorm Gold Ltd., Newmont Mining Corp., Barrick Gold Corp. 

Share “Gold and Commodities Set to Soar in 2019”

Net Asset Value
as of 02/15/2019

Global Resources Fund PSPFX $4.59 0.03 Gold and Precious Metals Fund USERX $7.51 0.15 World Precious Minerals Fund UNWPX $2.94 0.05 China Region Fund USCOX $8.11 -0.07 Emerging Europe Fund EUROX $6.48 0.05 All American Equity Fund GBTFX $24.03 0.18 Holmes Macro Trends Fund MEGAX $16.80 0.16 Near-Term Tax Free Fund NEARX $2.20 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change