Commodities - OCTOBER 1, 2014

Gold’s future remains untarnished

by Brad Berton

As the market price of gold bullion fell quickly two years ago after its meteoric rise toward $2,000 an ounce during the previous four years, investors and analysts who had fueled the 2008–2012 ascent suffered no shortage of “I told you so’s” from nonbelievers.

Advocates with far more credibility than radio talk show host Glenn Beck have long touted the yellow metal as a strategic hedge against inflation. But when all the hype over inevitable inflation was ultimately deflated by continued stable price levels in the years after the Great Recession technically ended, bullion fell fast from the $1,800 vicinity toward $1,200 per ounce between late 2012 and mid-2013.

Five not-quite-so-volatile quarters later (relatively speaking), bullion remains roughly in the $1,200s. And gold and mining securities, along with indices tracking them, have followed similar paths.

Predictably, many registered investment advisers are now advising their clients to take the contrarian route: invest in gold mutual funds, exchange-traded funds and/or stalwart gold-related stocks — and ride the next uptick to attractive returns (whenever it comes).

Others are looking deeper at the sector to identify and recommend mining companies with particularly promising near-term prospects, which entails assuming somewhat greater risks aimed at generating alpha-class returns (without waiting on a general rally).

Natural resources analyst Jeb Handwerger, founder and editor of the popular industry information website, ranks among those expecting the bullion price to eventually continue upward — and probably sooner rather than later.

In fact, rather than viewing gold bullion’s roughly 30 percent value hit as an embarrassing defeat for gold speculators, Handwerger sees the rapid ascent and dramatic decline as part of a generally “sustainable uptrend” over the longer term.

But in the prevailing environment with bullion values and sector stock prices so far off their peaks from several years back, Handwerger also favors insightfully uncovering individual stock investment bargains over more market basket–type vehicles. And that necessarily requires advisers to do a lot of what wealthy clients pay them for: homework.

Handwerger perceives particular value in some of the sector’s shiny nuggets: small-cap and “junior” exploration-minded mining companies able to access high-grade deposits at favorable overall costs. With discoveries of such deposits on the wane, and with so many large-cap miners operating on thin margins at their current cost structures (and gold’s prevailing spot-market prices), he expects that some of the better-positioned smaller operations will become share-boosting takeover targets.

While advisers have the option of deferring to management at many gold- and mining-focused mutual funds and ETFs, Handwerger thinks they can serve clients much better amid beaten-down valuations by becoming enlightened stock-pickers. Quite a few small mining companies that once traded in the $10-a-share vicinity are now waddling in penny-stock territory — so picking the right companies can prove quite lucrative, Handwerger stresses.

Hence the challenge for investment pros aiming to outperform indices is to be as meticulous as a would-be buyout suitor in assessing a company’s management team as well as financial position and resources, technological capabilities, asset base, and jurisdictional considerations, he elaborates. Handwerger also stresses that advisers and investors prepare for rocky rides to riches, as individual stocks tend to swing even more widely than gold’s ever-volatile spot price.

Additional consolidation in the sector indeed appears likely. SNL Financial’s Metals & Mining division reports that gold specialists have played the most prominent roles as the industry worldwide witnessed more than $20 billion in M&A deals during this year’s second and third quarters.

As yet another proposed merger between industry giants Newmont Mining and Barrick Gold fell apart in April, the highlight deal has been Yamana Gold and Agnico Eagle Mines’ joint $3.5 billion acquisition of Osisko Mining. But larger outfits acquired numerous smaller gold-focused companies as well.

Handwerger believes the latest valuation trends portend another erratic near-term uptick in bullion and mining stock values. After generally underperforming bullion since the Great Recession hit seven years back, pricing trends of late provide evidence mining companies are starting to outperform the mineral’s spot-market price movement — a traditional harbinger of general gold appreciation.

Handwerger likewise suspects the long-expected inflation is likely to rear its head in due time as the Federal Reserve eases off its once-aggressive quantitative easing bond purchases, allowing interest rates to rise through more purely market-driven forces. That may well prompt a lot of investors to shift capital from the stock and bond asset classes the QE programs have artificially inflated in favor of alternatives such as gold and other real assets that tend to appreciate in inflationary periods.

Perhaps most notably, Handwerger also remains bullish on gold’s longer-term prospects as well. Another run at $2,000 per ounce can’t be too far off, he believes. And the price seems destined to eventually hit $3,000 and beyond — although he acknowledges his grandchildren may end up being the beneficiaries.


Brad Berton is a freelance writer based in Portland, Ore.

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