Your Cheat Sheet to Play a Rising Gold Price

Your Cheat Sheet to  Play a Rising Gold Price

Nobody grows up wanting to be a gold analyst,’ said a friend to me last year.

And that’s the truth. I most certainty did not.

Through my early teenage years, I swung between wanting to be an astronomer, a journalist, and a helicopter pilot.

In spite of good grades in maths, I didn’t quite have the savant gift required for physics. So that ruled out any employment at NASA.

And at five feet and four inches, my lack of height meant I wouldn’t get a gig as an army helicopter pilot (that, and my insubordination meant I probably wouldn’t have lasted long anyway).

At no point did I ever think I’d be here, writing and talking about gold.

As I’ve told you in the past, my understanding of the gold market grew through morning chats with my old man over badly made Nescafé coffee in the last few years of high school.

I had no idea I could make a job out of it…

Less than a decade on from those chats, I was working for a derivatives trading firm, watching the gold price skyrocket as the financial crisis unravelled.

Funny how things turn out…

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Another way to play the rising gold price

If you’re new to physical gold,  for all you need to know about the yellow metal.

But given that gold is in all the headlines now, does that mean the rally is over?

The yellow metal’s best gains are behind it?

Nope. Not at all.

Sure gold rallied 18% over 2019 in US dollars.

And less than four months into 2020 the yellow metal is up 13%.

In fact, when measured in greenbacks, gold is up a whopping 61% since its bull market began in December 2015.

That is a massive rally. And gains like that make it ‘feel’ like gold is in the news.

The reality is, the mainstream rarely give the metal much attention.

Other than reporting surprising daily gains or losses in reaction to an event, it doesn’t get much more of a mention.

And I’ll bet you some gold from my own stash, they barely understand where we are in the gold bull market…

It’s because of this scant attention that I not too long ago set up my service, Rock Stock Insider.

Based on my research, I reckon we are barely halfway through a rally in the physical gold price.

Meaning that the yellow still has much bigger gains ahead.

But don’t just take my word for it. Over at Rock Stock Insider I speak to global authorities on the precious metal.

The goal is simple.

Help investors understand why gold matters and then interview experts from all over the world to help give investors a bigger picture on what’s really going on.

In saying that, a rising gold price will see more investors flock to gold miners as the yellow metal moves higher.

That’s important to note, as gold miners tend to follow what’s happening with the gold price.

Check this out…

Aussie dollar gold price versus Van Eck Vectors Gold Miners
(Daily/yearly chart)


Source: Bloomberg

[Click to open in a new window]

The black line is the Aussie dollar gold price.

The orange line is the Van Eck Vectors Gold Miners ETF [ASX:GDX]. As you can see, in spite of the savage market sell-off, Aussie miners are showing signs they are set to outperform Aussie dollar gold price again this year.

GDX aims to replicate the NYSE Arca Gold Miners Index [NYSEArca:GDX], which in turn aims to track the performance of globally-listed gold producers.

The weighting of GDX is biased towards gold mining stocks in Canada (52.3%), Australia (16.1%), and the US (17.5%).

The remaining 14.1% is based on gold mining companies located in South Africa, Peru, China, Monaco, and the UK.

However, you’ll notice GDX is much more volatile than the physical Aussie dollar gold price.

This is because GDX is based on gold miners around the world.

Essentially, GDX is a mashup of international company share prices plus various currency movements.

What following the GDX does tell you, is that overall the trend for many gold mining producers is heading up.

But what about investing in individual Aussie-listed gold miners?

Well, that’s my bread and butter.

2020: The year of the mega miners

The trend for 2020 actually began around the end of 2018.

It marked the beginning of the big guys getting bigger.

Barrick Gold kicked-started the trend.

Barrick made a US$6.5 billion (AU$9.5 billion) bid for Randgold Mining back in September 2018. Suddenly, the world’s largest gold miner (based on ounces mined) was making a play for the 15th largest gold miner.

There was one thing driving the merge: For Barrick to get bigger.

Then in January 2019 — less than four months after the Barrick-Randgold merge was announced — another big merge became public.

Newmont wanted Goldcorp. Again, the world’s second largest gold miner was going after the world’s fifth largest gold miner.

These mergers mean that over the next couple of years, Newmont and Barrick will be neck and neck in the race for the title of the world’s largest gold miner.

It wasn’t just the US miners doing this either.

Aussie gold miners are in the process of becoming bigger.

As the dust settled on the Newmont-Goldcorp deal, our own Newcrest Mining paid AU$1.1 billion for a 70% copper-gold mine based in British Columbia.

The Red Chris mine — owned by Imperial Metals Corporation — is home to an estimated 20 million ounces of gold and 5.8 billion kilograms of copper.

Plus, Newcrest believes that the gold grades will increase with deeper exploration.

Then, just a few short weeks later, Australian gold miner St Barbara paid $795 million for Vancouver-based Atlantic Gold Corporation.

At a similar time, Northern Star Resources waded in and bought the Pogo site in Alaska for a cool AU$376 million.

Towards the end of last year, both Saracen Minerals and Northern Star bought a 50% stake in the Kalgoorlie Super Pit.

Each paying a little over a billion for their stake. Instantly boosting their gold mining production.

These multibillion-dollar transactions give us important clues as what’s happening in the gold mining sector.

That is, miners are out to get bigger. An ounce of gold out of the ground, is one less ounce for future production. In order to thrive they need to grow their reserves. Buying up existing mines is one way of doing that.

More importantly though, the sheer size of the transactions tell us these miners are expecting a rising gold price in the future.

After all, you don’t sink hundreds of millions of dollars into something if you think the underlying price is going to fall…

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A cheat sheet to mining stocks

Imagine if you had a cheat sheet to mining stocks?

Well, that’s where I come in.

I’m fortunate to have an impressive rolodex of people I can call on for information about certain companies, at any time, day or night.

Investing in gold mining stocks is more than just knowing the size of the reserves and how long the mine life is.

You need to dig deeper than that.

Obviously cash is king.

You should be cautious of a company with a balance sheet boosted by a fresh capital raising. You don’t want to see the company raising money and then watch it all go to company salaries.

But management is crucial in order for a mining or exploration company to survive.

Going through old ASX announcements can help you understand the ‘tone’ of the management team. Not company presentations or anything that reads like a glossy brochure. But the sort of updates a firm has to provide to the ASX.

Essentially, when it comes to mining companies, look for firms with a history of under-promising and over-delivering.

The sort of businesses that continue to beat their own guidance. Go over about 18 months’ worth of updates, and you’ll pick up on the tone.

Strong management teams tend to increase the likelihood of share price growth over the long term.

Given the high risk of finding quality deposits and the risks of mining, just taking a punt isn’t enough. You need to be talking to people in the know.

The sort of people that are already working on the big gold find…or finding the people in the room who are funding it.

That means, it’s one thing to interview the biggest gold analysts in the world. But you’ve got to have the geos, engineers, and money men on speed dial too.

And that’s exactly what I’ve been working on over here.

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia