Gold is the go-to precious metal right now. Everyone is talking about it and investors are clamoring to buy gold – both the commodity and gold mining stocks.
In spite of its popularity, few investors understand gold (or silver) and why these precious metals move in the market the way they do.
We recently spoke to Reginald W. Ogden, a financial advisor with Canaccord Wealth Management, who is an expert on gold. He literally wrote the book on gold investing, called The Ultimate Gold Stock Trader – it was one of the first books on gold trading.
Mr. Ogden told us about how gold changed since he first wrote the book: "Gold is a wonderful trading vehicle but there has been a sea change. When I wrote the book, 94% of the long-term demand came from jewelry demand. Only a little bit came from investment. Now it's switched and now it's about 50% from investment demand."
Along with demand, there has also been a change in supply. Mr. Ogden explained: "Also, when I first wrote the book, the old central banks of Western Europe and North America still had gold reserves while the emerging countries put hardly any of their funds into gold. More recently, Russia, China, India, and others have turned their money into gold."
As a result of these shifts, Mr. Ogden reported that these changes "enabled the gold commodity funds to prosper. Prior to that, gold commodity funds had been a failure until the overall structure of the market changed."
That might be the case with gold as a commodity, but we wanted to know how gold stocks have changed. Mr. Ogden pointed to a couple of the key facts: "At the time I wrote the book, the PE ratio of North American gold stocks was around 40. At that time, gold wasn't scarce because India and China weren't buying at the levels they are now. We have a complete reversal right now. Gold as a commodity itself is scarce but there are 2,400 to 2,500 gold mining stocks. The PE ratio has gone down from 40 down to 10."
Our conversation then broadened to silver stocks: "For a long time, it was hard to make money in silver stocks. There were silver companies but they weren't in production. But now with silver prices going up, the words 'profitable silver mine' is no longer an oxymoron. I prefer some of the silver stocks to the silver commodity. A lot of these silver mines are being put in for a very low capital cost and can be extremely profitable."
Another shift that Mr. Ogden is seeing is the shift away from low-grade mines that are hoping to be profitable on quantity and a shift toward high-grade mines that will be profitable from the quality of their resource.
"In South Africa and Australia, we've always paid a premium for quality resources. There are too many large low-quality mines going into production. But everybody forgets that mining companies are large consumers of commodities – labor, electricity, diesel, machinery, and equipment. For example, Kinross has said that they were buying replacement tires for their large dump trucks twice a year at a cost of $40,000 per tire. That was 2 1/2 years ago, now those same tires sell for $110,000 each. So the cost of these large, low-grade mines is endangering the survival of mines," observed Mr. Ogden.
We asked Mr. Ogden if he had any recommendations of high grade gold and silver stocks that our readers would be interested in. Because of his licensing and position, he is not able to provide recommendations. However, he does provide MetalsNews readers with some excellent guidance to uncover potential investments: "I believe in the axiom that the Spanish had: To find a silver mine, first find a gold mine. There are a number of gold-silver mines that don't require much capital to go into production and they don't have many regulatory issues. You don’t want a large, low-grade heavy-capital mine that can be taken over by the government. You want to stay under the radar with small mines. There are only a few quality stocks with a high grade. Most high grade properties are small. So when you get a multi-vein operation or a high grade mine with large resources – that's the holy grail of this business."
Even better are the companies that are generating cash flow from operations. "Mines that are using cash flow to generate growth, there is a willingness to fund those on the street because they have cash flow. This market is going from growth to net, quantity to quality, and the less capital investment required, the better."
This leads us to ask the one question that every investor wants to know right now: What is going to happen in the market in the near term and how can investors invest sensibly with that information.
In spite of what many others are saying, Mr. Ogden is bullish on commodities… a few years from now: "Gold is going to increase in trading range incrementally as the demand [for gold] shifts. The trading range is going to be greater than the incremental net change. I think we're going to have some darn good moves up or down. That's why you trade gold stocks because they go up and down. I see incremental gains in gold bullion… but I don't see it racing away. Most stocks and commodities trade within the shadow of their previous ranges. Even when they breakout, the breakout will be smaller in the net gain. That will happen for the next 5 to 10 years. When China moves into consumption, we'll have a bull market in commodities - two or three years from now."
So, what should investors do? To summarize Mr. Ogden, they should look for smaller, high-quality gold and silver mines, especially ones with a multi-vein operation or mines that are already generating a cash flow from production right now. Then buy (after doing due diligence) with the expectation of a resurgence in growth in the next few years.
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