Gold remains on sound footing, and over the next 12 to 24 months, I see its price advancing further on strong fundamentals. Mean reversion, in particular, is the theme I believe investors should be focused on in 2020 and beyond., asserts Frank Holmes, CEO of US Global Investors and editor of Frank Talk.
This was the message shared by Bloomberg Intelligence commodity strategist Mike McGlone in a note to investors this week.
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As McGlone points out, both the stock market and U.S. dollar have recently increased at their fastest pace since the beginning of the millennium, whereas gold’s rate of change has slumped after hitting its all-time high of $1,900 an ounce in 2011. The law of mean reversion suggests a rerating could occur in the early 2020s.
“The unsustainability of these trends in the third decade is a primary support factor for the dollar price of gold,” McGlone writes.
“Unless the greenback and U.S. stocks are embarking on a new higher plateau,” he adds, “dollar-denominated gold is poised to take the all-time new highs baton.”
Both bullion and miners are currently below their mean, indicating they’re undervalued relative to the market. For mean reversion to take place, either gold will need to soar to new all-time highs or beyond, or stocks must tumble. In both cases, holding gold, I believe, is rational and prudent.
One of the best ways to “supercharge” your gold position, I believe, is with precious metal royalty and streaming companies — think Franco-Nevada (FNV), Wheaton Precious Metals (WPM), Royal Gold (RGLD) and others.
The world’s largest royalty and streaming company with a market cap of $25 billion, Franco Nevada has outperformed gold bullion and gold equities in both bull markets and bear markets.
Investors who like gold do so because they understand that the yellow metal can limit losses in their equity position and reduce volatility. Adding a royalty company such as Franco-Nevada to the mix can be like injecting nitro into your souped-up sports car.
This is because while they enjoy a lot of the upside potential when gold prices are rising, royalty companies share very little of the downside potential with producers and explorers when the metal is in decline. Royalty companies are better insulated from bear markets because they have a diversity of high-quality active mines in their portfolio.
What’s more, they’re not the ones spending money to develop a project. They simply put up the capital, and in exchange they enjoy either a royalty on whatever the miner produces or rights to a stream of metal supply at a fixed, lower-than-average cost.
It’s a win-win for the miner and royalty company, a win-win-win if you also include the investor. In particular, Franco-Nevada, which makes approximately $3.5 million per employee, is in a league all its own.
If Royal Gold were in the S&P 500, it would rank second in revenue per employee at $18.4 million, following only Host Hotels & Resorts, which generated an incredible $30.2 million per employee in fiscal year 2018.
It doesn’t hurt that, as of August 2019, Royal Gold had only 23 employees. Compare that to the workforce of major metal producers such as Barrick, with 18,400 employees; Newmont-Goldcorp, with 39,600 employees; and BHP Billiton, with 62,500 employees.
I often recommend the "10 Percent Golden Rule", with 5 percent in physical gold and the other 5 percent in gold equities. But to supercharge your portfolio, I would strongly consider royalty and streaming companies.
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