{"id":127876,"date":"2018-06-05T23:10:52","date_gmt":"2018-06-05T23:10:52","guid":{"rendered":"https:\/\/www.countingpips.com\/?p=127876"},"modified":"2018-06-05T23:10:52","modified_gmt":"2018-06-05T23:10:52","slug":"oleary-and-holmes-are-both-right-on-gold-gold-stocks","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2018\/06\/oleary-and-holmes-are-both-right-on-gold-gold-stocks\/","title":{"rendered":"O\u2019Leary and Holmes Are both Right on Gold & Gold Stocks"},"content":{"rendered":"
June 5, 2018<\/div>
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By FirstMacroCapital<\/strong><\/div>\n<\/div>\n<\/div>\n<\/header>\n
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Mr. Wonderful, Kevin O\u2019Leary, and Frank Holmes recently took different side the gold(bullion) vs. gold stocks. Gold and gold stocks are two different asset classes and saying which one is better. One is a commodity (Gold) and the other is equity (Gold Stocks). It\u2019s like comparing multiple championships winning athletes, Sydney Crosby (NHL), Lebron James (NBA), and Tom Brady (Football) and saying one of these players is the best athlete of all-time.\u00a0Gold and gold stocks offer two different purposes for an investor\u2019s portfolio.<\/strong><\/p>\n

WHY OWN GOLD BULLION?<\/strong><\/h3>\n

You own gold in bullion form and keep it in storage as an\u00a0insurance policy for your other financial assets.<\/u>\u00a0It acts as a counterbalance against other assets in your portfolio. Investors flock to gold as a \u201csafe-haven\u201d asset, just like cash because they aren\u2019t willing to take on risk. Gold is like a cash position in your portfolio, you don\u2019t get paid to own it. Think of Gold as another currency (cash position) that you have exposure too, and you can use it as a counterbalance against your riskier assets.\u00a0If gold isn\u2019t important, then why do Central Banks own it on their balance sheet? For investors, it\u2019s a way of being your own Central Bank.<\/strong><\/p>\n

\u201cI have a 5% weighting in gold. The GLD and physical bullion. Which I store and pay for the storage. The value of the commodity is whatever it is every day.\u00a0<\/em>Kevin O\u2019Leary (Kitco)<\/a><\/p><\/blockquote>\n

Kevin O\u2019Leary isn\u2019t the only one who has gold as a counterbalance in their portfolio. Here is what Ray Dalio of Bridgewater thinks about gold:<\/p>\n

\u201cWe can also say that if\u2026 things go badly, it would seem that gold (more than other safe haven assets like the dollar, yen, and treasuries) would benefit, so if you don\u2019t have 5% \u2013 10% of your assets in gold as a hedge, we\u2019d suggest that you relook at this.\u201d \u2013\u00a0<\/em>Ray Dalio<\/em><\/a><\/p><\/blockquote>\n

Egyptian billionaire Naguib Sawiris investing half his net worth in gold<\/p>\n

\u201cAnd people also tend to go to gold during crises and we are full of crises right now. Look at the Middle East and the rest of the world and Mr. Trump doesn\u2019t help.\u201d (Marketwatch)<\/em><\/p><\/blockquote>\n

JP Morgan<\/p>\n

\u201cUnderweight equities, long duration, long gold, and long the yen as Fed policy slows the economy and real rates collapse.\u201d JP Morgan via ZH<\/em><\/p>

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GOLD IS TRADING LIKE A COMMODITY<\/strong><\/h3>\n

After the dollar-gold window was broken in the 1970\u2019s gold trades more like a commodity because it isn\u2019t pegged to the US dollar.\u00a0That is why gold, has better matched the cycle of the commodity booms since that time. Will it be treated again like<\/strong>\u00a0before?<\/strong>\u00a0We think that\u00a0\u201cYes, gold will more than likely be pegged in some form to a currency<\/em>\u00a0at some point in the future\u201d.\u00a0<\/strong>Will it be more like past gold standards? Maybe, history repeats, just not exactly the same as before. It could be in a digital format because that is the way the world is going. We aren\u2019t sure. But we follow the worldview that there are cycles and history repeats. We think that the mantra, \u201cThis could never happen\u201d<\/em>\u00a0means it can happen again and probably will happen, just in a different twist.\u00a0Everything has a time when it gets center stage. Gold standards will come, and then they will go.\u00a0<\/strong>For now gold trades more like a commodity.<\/p>\n

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GOLD STOCKS AND CYCLE<\/strong><\/h3>\n

When O\u2019Leary says gold miners are horrible investments is a bit of hype and bluster.<\/p>\n

O\u2019Leary:\u00a0<\/em>\u201cThe history of mining has been abysmal\u2026 I don\u2019t need to have a manager in the middle screwing up his capital cost allowance, not controlling his costs. (Kitco)<\/em><\/p><\/blockquote>\n

This is like saying all technology stocks are profitable like Apple. \u00a0<\/strong><\/p>\n

The gold sector has one major commonality with every other sector. They are all cyclical!\u00a0The question is, what cycle do they follow? Gold mining stocks and gold are part of the larger commodity cycle. If you understand the cycle, you understand that there is a time to buy and a time to sell. Gold miners generate an incredible amount of free cash flow once the sector has bottomed.\u00a0<\/strong>Why? Management teams are forced to really look at their costs and focus on generating profits because investors demand it. Just like after the Dotcom bust, investors started to demand revenue, not just user growth. Let me say that again\u2026Revenue! Profits were demanded as well.<\/p>\n

Kevin O\u2019Leary is right when he says \u201cMore and more investors are thinking the way I do. They are thinking about return of capital.\u201d<\/em><\/p><\/blockquote>\n

But you are seeing it some darling tech stocks right now<\/strong>, particularly in the private tech side focusing aggressively on growth.\u00a0Look at Wayfair, an e-commerce company sells home goods online. Revenues have increased by more than 4X, yet $0 in profits over the past three years.\u00a0<\/strong><\/p>\n

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During the last gold peak, investors demanded growth in terms of ounces at all cost from management, and in the bottom, investors reversed course and realized profits are essential for survival.\u00a0You know its approaching a top when its ounces at all costs. The technology sector has recently been like this, companies like Tesla(TSLA), Wayfair (W), where it has been growth at all costs. As the tech cycle turns, investors will demand profits from these companies, not just customer growth on Wayfair and auto deliveries from Tesla. This is a 100% guarantee because investors will get spooked when the cycle turns and expect profits.\u00a0<\/strong>Right now, investors have been rewarding gold miners for delivering on production and showing profitability. In 2017, gold miners delivered record dividends.\u00a0Gold miners are set to show strong revenues in 2018 because of the continued elevated gold price above $1,300.<\/strong><\/u><\/p>\n

\u201cTesla will be profitable & cash flow+ in Q3 & Q4, so obv no need to raise money,\u201d\u00a0<\/em>tweeted<\/em><\/strong><\/a>\u00a0Musk<\/em><\/p><\/blockquote>\n

OTHER WAYS TO INVEST THAN ROYALTY STOCKS & GOLD MINERS?<\/strong><\/h3>\n

But there is more than one way to play the gold sector.<\/strong>\u00a0I am always amazed, when I speak with portfolio managers and receive emails, they always bring up explorers, producers, and royalty stocks to invest in stocks.\u00a0Seek where the profits are, and you will find the gold<\/u>.<\/strong>\u00a0Look at Apple, it generates the most profits in the cell-phone industry over the past 8 years, its revenue grew incredibly over that same time-period. So why not repeat the same process in the gold sector?<\/p>\n

We think there is a better way to think about investing in gold & silver stocks, and commodity stocks in general.\u00a0Does the company generate a percentage of their sales related to gold and silver?\u00a0<\/u>It opens you up to many different companies with exposure to other commodities or other industries.\u00a0Seek companies that are growing revenue, but still, give you exposure to gold and silver.<\/strong><\/p>\n

We can see the day when companies that derive a percentage of their revenue from precious metals will be added to ETFs.<\/p>\n