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By: Matt Badiali — August 19, 2020

Buffett Goes All In On Gold

Editor's Note: Today we have something very special for you. We recently went searching high and low for the very best "Guest Editor" to write for you every week...

... and we found him!

I'll introduce the two of you in a second...

But first, here's why we went searching in the first place...

Right now the federal Reserve is printing money at an astonishing, unprecedented (and very dangerous) rate.

This massive "stimulus", and the inflation it can cause, is all but certain to suck the wealth from millions of Americans. That train is already rolling...

Sadly, we're left with one option. We have to put ourselves on the RIGHT side of the coming wealth transfer.

That means paying close attention to what the smartest and savviest market minds have to say.

Enter Matt Badiali...

Matt is much more than just a brilliant writer. He's also a specialist in an area of the markets you'll be hearing about more and more, as that "stimulus" works its unhappy "magic" -- resources and precious metals.

The man is a trained and credentialed geologist, meaning he comes by his market expertise honestly. I'll let him tell it...

"I'm a 15-year veteran of natural resource analysis. As a geologist, I found that first-hand knowledge was the best kind. So I've been all over the world looking at projects, talking to management, and meeting with the people who do the work."

"That's the best way to make money and avoid the pitfalls that fill the natural resources sector."

Finally, Mr. Badiali is also a keen student of the "true market". He's second to none when it comes to sifting the chaff to find (and explain) what's really going on... right now.

Today, he's going to walk you through the real story about gold. You'll want to pay close attention.

We're proud to count Matt Badiali as a contributor to True Market Insider.

********************

This headline in The Wall Street Journal caught my eye:

Gold Will Need More Bad News to Keep Prospering.

As I kept reading, the tone grew more bearish.

In the opinion of the Journal: “If the economic recovery continues, expect the precious metal to suffer.”

I laughed when I read it. Because it was clear to me that the author was trying to find some way to make sense of what’s going on.

The problem is… his ignorance could end up costing you a lot of money.

Gold is the best-performing traditional asset in the world this year. And most investors don’t understand what makes gold move.

I see it everywhere, not just The Wall Street Journal. Twitter is awash in false narratives and goofy theories about gold. And these could become expensive mistakes if you miss this market.

If you look at the gold price in any major currency — British Pound, Canadian Dollar, Euro, Swiss Franc, Philippine Peso, Mexican Peso, Chinese Renminbi, Japanese Yen, etc., you’ll see a trend. Gold is up in every single one of those currencies this year.

Every single one.

And the price of gold is up an average of 26% across 13 major currencies. To put that in perspective, the S&P 500 Index is up 4.7% year-to-date.

This run higher in the price of gold isn’t going to end just because the U.S. economy improved in July. (This isn’t about the United States, after all.)

The real driver of gold is simple supply and demand.

And right now, smart money all over the world sees trouble with paper money. For that reason, they’re moving into gold.

The reason is simple. Physical gold is insurance against the unintended consequences of the unprecedented “fiscal stimulus” this year.

Fiscal stimulus is just a fancy term for printing money out of thin air. There’s a strong possibility that the new money won’t be worth the paper it’s printed on.

In the past, investors went to long-dated bonds. But today, Japanese and European bond yields are negative. In the U.S., the blue-chip bonds yield is near zero.

That’s what’s driving up gold prices… it’s a stable store of value that will outpace inflation. As Ruchir Sharma, chief global strategist for Morgan Stanley said in a New York Times editorial piece:

“… but these times aren’t normal. Unless a vaccine appears quickly, central banks stop printing money frantically and real interest rates start rising again, it is difficult not to be a gold bug now.”

And while gold still has room to run higher, there’s a much better way to invest in this trend today. We’re going to follow the lead of Warren Buffett.

Buffett’s Berkshire Hathaway bought Barrick Gold (NYSE: GOLD). That was after GOLD’s shares rose more than 90% since its March low.

Some investors would look at that move and figure they missed it… but they would be wrong.

You see, Barrick and its peers are what’s known as “price takers”.

While they can control their gold production, they must sell the gold for the market price. That’s a frustrating aspect of the mining industry. You can cut costs to the bone, and it won’t necessarily help.

And back in 2015, that’s what happened.

The gold mining industry saw a wave of bankruptcies as the gold price fell to $1,050 per ounce. Atna Resources, Cerro Grande Mining Corp, and Allied Nevada all buckled under the low gold prices.

The companies that survived are much tougher.

They understand how to control costs. Most can make money with gold prices below $1,300 per ounce. That means, with gold over $2,000 per ounce today, those companies can expect massive windfall profits.

That’s what Buffett’s team at Berkshire recognizes. They went out and bought a big, liquid gold miner in Barrick. They will make money on that trade.

But we can do better…

You see, Berkshire Hathaway can’t buy the smaller gold miners. They couldn’t put half a billion dollars in most of the mid-tier companies. It’s too much money and the risks are too high.

But we can.

And we should, because these stocks are going to soar. When the wider market sees the kind of profits these companies make, selling gold at $1,900+ per ounce, there will be a frenzy.

In fact, I expect some of the smaller gold miners’ prices to double by the end of the year.

Three companies that have a chance are Alacer Gold (TSX: ASR), Iamgold Corp (NYSE: IAG), and Torex Gold Resources (TSX: TXG).

These three companies are all have a market cap at or under $2 billion. They all produce gold below $1,000 per ounce. That means they will all see a dramatic jump in profits in the second half of 2020.

The table below gives us a quick snapshot of the companies:

Market Cap Gold Mining Cost Price to Current FCF
Alacer Gold $2.0 billion $628 per oz 8.5
Iamgold Corp $1.9 billion $935 per oz 9.3
Torex Gold Resources $1.3 billion $740 per oz 10

These companies are extremely cheap compared to their price to free cash flows (FCF).

Let me explain.

Free cash flows happen when you make more money than you spend. It’s cash that the company generates beyond its needs. And it’s a sign of a strong company.

The industry average price to FCF is 42 times right now, which puts these three companies squarely in the “extremely cheap” category.

In summary, there are two strong tailwinds for these three companies. First, they’re going to make a lot more money on these higher gold prices. Second, the companies’ quality will earn them a higher price to FCF multiple.

As the market heats up, I expect these efficient, profitable miners to begin to trade at a premium.

Good Investing,

Matt Badiali

Contributor, True Market Insiders

 

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