Precious metals

[benrickert]

@giskard Very interesting. Have you followed the hedge fund Horizon Kinetics’ argument for gold royalty companies? Similar to yours. And it’s sound. It sounds like the best exposure to gold. They are big on franco nevada and sandstorm. What I have an issue with is the very high multiples they are trading at.
- How do you think about valuation of these companies given high multiples to earnings p/e and free cash flow?

[giskard]

I've just started reading about gold stocks as well but am wondering now:
1) What about the impact of decreasing mining yields in the sector?
2) It seems obvious that low oil prices imply increased profits but when I looked at the charts there seems to be a high correlation between gold prices and oil prices as well (https://www.macrotrends.net/1334/gold-p ... orrelation)? Are we sure the price of gold will not be coming down?
3) A lot of these companies seem to be not only mining gold but also copper and other metals. Is increased profitability for gold sufficient to offset potential decreased profits from other metals?

1) I was reading due to gold production the inflation rate of the gold supply is about 1.6% a year. I think we are going to see gold supply drop due to covid related shutdowns so I guess we'll see what happens. Should increase the spot price of gold right?

2) Oil is a commodity and it seems nearly all commodities are correlated in this demand shock, so they should all fall. But gold is being treated as a store of value, or hard money. So its the only thing the held steady. To answer your question no I'm definitely not sure it won't be coming down. If we get serious deflation I'm sure it could drop a lot. But I also think central banks will act to counter deflation because deflation would bring a debt crisis like no other.

3) In most cases I think they are just small amounts. Definitely look though. I was looking at the annual reports of all the royality streamers and Wheaton for example had some palladium exposure, but mostly it was gold and silver. Franco Nevada has energy exposure though !

[giskard]

@giskard Very interesting. Have you followed the hedge fund Horizon Kinetics’ argument for gold royalty companies? Similar to yours. And it’s sound. It sounds like the best exposure to gold. They are big on franco nevada and sandstorm. What I have an issue with is the very high multiples they are trading at.
- How do you think about valuation of these companies given high multiples to earnings p/e and free cash flow?

You know I actually read that report just a few hours after I was writing that last comment. It was really validating to read it haha. I like FNV less now that shale has crashed and knowing they have something like 15-17% of their revenue tied to shale gas royalties.

I don't know about the PE ratios and if that is a meaningful thing to look at for royalty companies, they seem to be very lumpy because of the way they invest money. I think it might be similar to looking at PE ratios of REITS, I don't know that it makes sense, but I agree I don't know how to accurately value these vs a normal company. At this point I'm basically speculating on a rise in gold and I need to continue to understand the space even more.

[benrickert]

Agree that P/E multiples of royalties are not comparable to the average company in the s&p500. But if it’s an investment and not speculation in Ben Graham’s words, there would need to be some kind of benchmark to make sure it is not unreasonably overvalued. Yes, the gold story sounds right, but inn a highly complex system - the markets - with lots of different variables to assess it could end up being just that - a good story...?

[Mister Imperceptible]

The last time premiums went this high was 2008. In the next three years, premiums on physical did not come down to reflect the lower paper prices, but rather paper prices advanced to reflect physical reality.

....

Physical gold was reliably had for 2% over spot the last few years. In February I bought junk silver at 18 USD an ounce for 2% under spot. Now at 15 spot they are asking for 24 USD an ounce.


....

The gold-silver ratio is 113 if you are using the paper prices. It is below 80 using the street price.

Silver blew thru $20 and $21 and is up over 7% on the day. There is still a shortage and premiums are still high.

[guitarplayer]

Silver blew thru $20 and $21 and is up over 7% on the day. There is still a shortage and premiums are still high.

I read your entries on the Investment Log and man I cannot grasp it. Is it too simplistic to say that you recommend investing in gold/silver in one way or another at this time?

[Mister Imperceptible]

It can always go lower in the short term but the Federal Reserve can’t print gold. Where is the money for the next stimulus package coming from?

[enigmaT120]

Gold doesn't generate wealth. Working human beings do.

[Mister Imperceptible]

I agree. I also believe that if I negotiated my hourly rate at X number of paper scrip per hour I have the right to defend myself from people making that paper scrip worth less.

[Lucky C]

Precious metals prices tend to go up when they've been going up.

[ertyu]

would you guys say i missed the trade? fintwit has moved on to shilling slv

[giskard]

would you guys say i missed the trade? fintwit has moved on to shilling slv

Probably not, its a trend and trends tend to continue. IMO we are at the beginning of a big trend up over a couple of years. Silver hasn't actually done much until just this week.

If its worth anything to you, I bought more SIL and SILJ this week because I think the miners are lagging the metal price which doesn't make sense to me when they should be going up 3x what the metal does.

[Lucky C]

fintwit has moved on to shilling slv

Is trading precious metals based on Twitter trends a profitable strategy?
It might be if you manage to write a good algo to automate it (competing against all the other algos trying to do the same).

Otherwise it might make more sense to ignore Twitter for trends and use a different rule for trading. Probably slower paced that Twitter trends. Think multi-year trends rather than the flavor of the week.

[ertyu]

that's exactly the thing tho lucky -- they claim this will be a multi-year trend. would this be correct? no idea.

[Lucky C]

It's certainly not correct for them to claim that they know it will be a multi-year trend. But clearly this week's performance improves the probability that it's the start of a longer trend. Each day and week of this trend will improve those odds, but for now we're just looking at a big 3 day rally, in a volatile commodity (more volatile than gold), in an overall extremely manic market. If it turns out to be a 5-year silver bull market, even if you miss the whole first year you will still capture most of that, while getting in at a time when it is obvious that it's already a longer-term trend.

On the other hand, there are other trend strategies that would work on shorter timescales that would probably signal you to get into silver this week, but I don't trade on that short of a time scale.

Also keep in mind that silver tends to do poorly during equities bear markets, whereas gold tends to do well. So if you are worried about another stock crash, gold is more likely to be the better option based on history. But this year is pretty wacky so who knows.
https://goldsilver.com/blog/if-stock-ma ... nd-silver/

[shemp]

Case for precious metals is very strong, but as a trade, not a permanent holding, since metals have negative yield due to holding and transaction costs. I'm at a point in life where I yearn for permanency, which is why I sold SLV a week after buying this past April, back when silver was $14. Not a terrible trade, since the stocks I bought instead also have done well, though not as well as silver. I just couldn't tolerate the idea that, by owning silver, I'd have to keep playing close attention to markets forever. Right now, it's easy for me to pay attention and I enjoy doing so, but I know a time is coming when I'll want to ignore markets for many years, like I did from 2011 or so until about 2018 most recently, but also 1998 to 2007, and youth to 1996. But that's me.

For those in the accumulation phase, case for metals is that negative real interest rates push all asset prices higher, and metals have the advantage that no business risk involved. What you need to do is hold precious metals until price inflation is strongly underway, possibly causing problems for stock prices because of how inflation interacts with tax code. Then trade metals for stocks/bonds when real interest rates go up. Higher real interest rates will hit all asset prices, but hopefully crowd will keep metal prices elevated longer than prices of stocks/bonds. Or at least that's how it worked in the 1970's.

Personally, I just loaded up on oil and other energy stocks, Russia, emerging markets in general, value stocks. Together, such a portfolio should do well enough in inflation. Buried in those ETFs are lots of mining stocks, so not entirely lacking exposure to precious metals.

[giskard]

Personally, I just loaded up on oil and other energy stocks, Russia, emerging markets in general, value stocks. Together, such a portfolio should do well enough in inflation. Buried in those ETFs are lots of mining stocks, so not entirely lacking exposure to precious metals.

This is other trade right now that looks interesting. If this crisis drags on we will get huge supply destruction (O & G bankruptcy and wells being shuttered), and then we get demand pickup finally we will have a huge imbalance and price spikes, (maybe) regardless of your views on inflation.

I'm afraid the O & G trade is too early though, I'm thinking the right time to get in will be at the depths of the 2nd wave (or fall?) lockdowns.

Precious metals on the other hand look set to just slowly grind higher until monetary policy changes which could last a while. Powell has said they expect to keep interest rates at 0% for 3 years. They will probably do yield curve control at the long end. I don't think we need to (or will) see $5000 gold, or even $3000 gold. The gold pumpers are getting too excited and unrealistic.

A realistic scenario is this: If we just slowly get to $2000 gold over the course a year the miners are going to have incredible profits. Then in 2021 we slowly get to $2250. Then in 2022 we slowly get to $2500. A lot of them have a cost of production at only $900 an ounce or so. And this seems likely since gold is holding its highs. August contracts are at $1875 now. Not an incredible trade, but gold just has to stay where its at and these companies will be rolling in cash.

And on silver, let's say it gets to $30 by 2022 or 2023. Still ends up being a great trade and not even close the previous high in the 40's.

[fiby41]

Perhaps as a multigenerational insurance against poverty post-FI.

Costs:
3% Goods & Service Tax (GST)
10% custom duty, if imported. I read somewhere most gold is imported here from Switzerland.
Between 10 to 15% making charges/maker fee for ornaments
5% GST on above making charges

Pros:
GST has eliminated the hassle of calculating excise duty, value added tax and state levies so that except the marginal difference in spot prices there is no benefit for buying in one city/place over others.
Men who've never earned anything on their own wearing golden chains and women that come to what are minimum wage jobs dressed head to toe in jewelry exist because atleast one of their ancestors was good with money and all the in-between links connecting them to that ancestor respectful enough not to squander it.

Cons:
Saw a chart of gold prices for the past 100 years. Its averaged around 4%/annum?
Coins being fungible don't seem to make good heirlooms.
15% is too high a price for adding sentimental value. "fiby41 was here" written on the bar with engraver pen, electric pencil, pin or chisel should diminish the value enough to prevent reselling with the added side-effect of inspiring them to pursue FI.

[ertyu]

depths of the 2nd wave (or fall?) lockdowns.

I'm not sure this will actually occur. The muricans at least seem determined to let the fittest survive and to print for whatever they're worth. Yes, if this was an actual proper bear market we should've started grinding down 2 months ago, but will we? Who cares about demand destruction when money printer go brr

[Lucky C]

silver tends to do poorly during equities bear markets, whereas gold tends to do well

Stocks down, silver down, and gold up today.