It All Began That Weekend of April 2013 — Gold Mining Stocks Journey
Allow me to introduce myself. My name is Brian Chu. I am taking over from Shae Russell, who recently departed after more than 10 years with the business, which included a number of years writing The Daily Reckoning Australia. Like Shae, my interest is in gold investments and looking for opportunities in gold and precious metals mining stocks.
Having been largely in the higher education industry teaching in risk management, finance, accounting and statistics, I have been able to apply an analytical approach to finding stocks that have done very well over the years. As you’ll read below, cutting my teeth on gold stocks during the vicious bear market that began back in 2013 helped with that. This role will hopefully allow me to share my insights with you, and challenge me to reach a new level of understanding into these crazy markets.
I will be writing The Daily Reckoning Australia on Thursdays and Fridays. I want to dedicate the first few essays to bring you into my world and explain what drew me into investing in the high-risk and sometimes crazy industry that is gold and precious metals mining. Let’s get started…
The journey into gold
People often wonder where it all began…
For me, it was the second week of April when the gold price fell more than US$200/oz in a matter of three trading days. I watched my holdings in gold mining stocks fall quite sharply. It was like a sharp kick in the shins.
I wondered, what happened?
Then on Sunday after church, I had booked lunch with a primary school friend and we talked about the gold price and gold mining stocks. He told me about the US Federal Reserve, the central banks and the fiat currency system. I had read the news about the Federal Reserve doing Operation Twist, but had very little idea of what this was. Even though I read the Business section of the Sydney Morning Herald daily, surfed online on Bloomberg and occasionally picked up a copy of the Australian Financial Review, I never quite grasped what was going on.
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This lunch was like the moment the penny began to drop. Here’s how the conversation went…
‘The US Federal Reserve prints currency, this causes interest rates to fall, easier borrowing, more spending, inflation in the markets, inflation in the streets…’
Brian: ‘But why did the gold price drop? And will gold stocks recover?’
‘Brian, let me explain to you this: the gold price is not meant to drop but it is because the price is controlled by the central banks and investment banks who trade it. As for gold mining companies, they are different to gold. You should buy and hold gold because it is cheap and it has to rise.’
B: ‘Wait a minute, how come gold price to rise in future does not mean gold stocks will also rally?’
‘Because gold stocks are a business. They can go down even as gold price goes up.’
B: ‘OK…not sure what this means but OK, so more about gold. What types of gold should I hold?‘
‘Well, you can buy allocated gold in bullion stores or you can buy coins and bars. I buy allocated units of gold.’
B: ‘Uh huh…’ *in my mind I was thinking about gold stocks*
‘Brian, if you want to buy gold stocks, I will flick you an article I have about them and you can read about it.’
B: ‘Thanks for that, I look forward to it.’
So it was, I decided to take the gold stocks route. Even as the gold price continued to fall, gold stocks were seriously getting smashed. Some of my readers probably still remember that it was like the French Army in the Battle of Agincourt — the reputedly invincible heavy cavalry was getting cut down by arrows while helpless in the mud.
In such cases, many would call for a retreat. Cut your losses and fight another day.
I decided to take the plunge. I sold most of my other stocks in the portfolio and doubled down onto gold mining companies. The article my friend sent me (the ‘ERA Gold Sage Report’ for those who want the nitty-gritty details) I trawled through it especially on the production cost and production volume table of the ASX-listed gold stocks. I made my picks and added to them with my fortnightly paycheque as a lecturer in risk management and finance. Luckily at that time I was single so I could wear the losses and not be accountable to anyone. Though, when I mentioned it to my parents, they were not particularly supportive, for obvious reasons. The journey was fraught with frustrations and there were times that I wondered if I had gone mad.
I held on. I did not throw in the towel. Was it confirmation bias that pushed me on, or was it because I started to realise the trick to identifying the undervalued stocks — to separate the wheat from the chaff?
You would want to think that it was a smooth ride from there. A few years on and I can look back and say I made my millions and be on my way to join the ranks of Eric Sprott, Rick Rule and John Paulson.
Not so fast…
For those who were in this sector during 2013–19, before gold soared past AU$2,000/oz, there is so much more…remember the gold price movements during this period? I will reproduce it in the chart below:
Source: Thomson Reuters Datastream
If you look at the chart from early 2013 to mid-2014, that was like a roller coaster ride in itself, though the bumps are lost in the big picture of things. There is a story embedded amidst the rallies, the dips, the tops and bottoms. Some of us may remember with fondness those climbs we have seen from late 2014 to mid-2016, and also those two jumps in mid-2019 and during 2020 up till the peak in August 2020.
For me, the darker moments in the journey served as the fuel to be better prepared for what is coming ahead.
To be continued…
Editor, The Daily Reckoning Australia
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