Life at Zero Trade One — Gold Producers Still Have a Lot of Cash Coming

Life at Zero Trade One — Gold Producers Still Have a Lot of Cash Coming

The market is like a bucking bronco right now. Don’t expect an easy hold.

We were down in a lot of red on Friday…then a bounce back into green yesterday. All this tests your conviction on any stock you hold.

It’s always easy to hold on in the abstract.

But when your stocks start falling, there’s always that sense that they could keep going…and take your current net worth with them!

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Here’s how I cope with it all. I make damn sure I know what I’m holding…and why.

A lot of people don’t in the market. They look to ride momentum or technical patterns. That’s all good when it works.

But those strategies break down when things get volatile.

Often you get stopped out just to see the market reverse…and your former position taking off alongside it!

Modern finance and portfolio management doesn’t like volatility. It equates it with risk.

That may be true or useful if you’re running a fund with hundreds of millions of dollars under management.

But for the private active trader or investor, you have to see volatility for what it can be: a gift.

Yes. How else can you expect a stock you like to come back to you at a better price than yesterday?

If you’ve done your homework, why wouldn’t you add to your holdings if you can?

That’s not to say it will be the right decision. But a lower price at least gives you more margin for error if you’re wrong.

I saw a post on Twitter this morning where a day trader said you had to constantly reassess your strategy when the market changes. What worked yesterday may not work today or tomorrow.

Take the gold sector. It had a roaring time over 2019 and 2020 as margins expanded and the gold price rose. You could throw a dart at a gold stock and make money for a while.

That’s not the case today. The speccy explorers are getting dumped and the producers are trying to find a base, but it’s not clear yet they can hold.

I’m not saying avoid gold stocks. I’ve starting putting a toe in the sector. But I am aware that this dynamic is not going to turn around on a dime.

It’s going to take some time for interest to come back into the gold sector in a big way. What we can say right now is that gold producers still have a lot of cash coming.

Gold stock Ramelius Resources Ltd [ASX:RMS] is one example of the gold story lately.

The stock hit a high of $2.52 in September last year. That was a 500% rise from late 2018.

It’s now around $1.43. That puts it around a $1.14 billion market cap with $220 million in cash and gold. It’s on a Price-to-Earnings (PE) ratio of about six.

The market doesn’t leave a cash cow like that alone without a reason. The market is telling us that it thinks gold earnings are at a cyclical high.

The reasoning behind this is that real yields are rising on the global markets.

The multitrillion-dollar question is whether this movement is going to be sustained…or inflation and yields drop down again?

That’s what my friend and colleague Greg Canavan expects to happen. That’s a contrarian viewpoint right now.

Gold stocks could prove a stonking bargain right now if he’s right. Go back to those numbers on RMS above. It could double on a modest ‘PE’ expansion alone.

The Aussie dollar is the wild card here. Right now, Aussie dollar gold is $2,200.

Most gold stocks can pull an ounce out of the ground for AU$1,500. That’s a $700 an ounce margin, depending on their hedge book. That’s good!

The problem for the gold sector is if the US dollar gold price stagnates and the Aussie dollar rises.

They will leave them with margins compressing and sour sentiment. That’s not a great mix for quick fire gains.

I always look down before I look up. I don’t know what yields or the Aussie dollar will do anytime soon.

I can tell you gold stocks have a lot more potential upside right now than they did a year ago.

And yet most people won’t care. The herd were on the gold train when it was hot in 2020 — and higher risk — but now genuine value is there it probably all looks a bit too hard to figure out.

I mentioned Greg above. He’s covered the gold sector for more than 10 years. There are few I know of that are as experienced as him when it comes to ASX precious metal stocks.

Best wishes,

Callum Newman Signature

Callum Newman,
Editor, The Daily Reckoning Australia


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