Rational arguments for selecting precious metal investments

Not many investment experts even consider precious metal mining. Those…

Not many investment experts even consider precious metal mining. Those that do often are tacit about their stock selection rationale. The price performance of most (if not all) precious metal mining funds or ETF’s lag that of the metals, moreover with a far higher stock volatility. It seems to be the worst choice possible.

So far, these ideas corresponds to many of the articles on this blog:

  1. Oversold miners; Lagging gold (Aug 30, 2021)
  2. Long term performance of Gold Miners (Apr 24, 2018)
  3. Gold miners persistently lagging the metal (Feb 12, 2018)
  4. The bear market logic for gold miners: Continuation and Analysis (Jul 24, 2015)
  5. Gold miners: three decades for naught (Jan 27, 2015)
  6. Decades of underperformance (Feb 2, 2011)

Presently, I wish to introduce the investment rationale for precious metal stocks as presented by Lyn Alden in an introductory article for her investment letter (dated early 2020, hence before COVID crisis and long before the gold all time high).

  • A first graph proves VanEck’s GDX mining ETF to lag the broad US stock market as represented by the SPDR S&P500 ETF.
  • A second graph, comparing VanEck’s GDX mining ETF to the GLD (unleveraged) gold ETF is confirming the above.blog articles: GDX consistently lags GLD

This is a solid argument as to be very picky when selecting precious metal stocks. A ‘wide and balanced’ mining portfolio will tend to lag precious metals, much like GDX does.

Investment rationale

Lyn Alden: “I keep about 4-5% of my portfolio in gold stocks, with a major focus on gold royalty and streaming companies. That being said, there are are also a small number of gold mining stocks I own due to their long records of good management, which is a rarity in this industry.”

Franco Nevada (FNV): is one of the best-performing gold stocks in history. They gave investors approximately 400% returns since their IPO a decade ago, and dramatically outperformed the price of gold. This doesn’t even include their dividends:

Then follows a graph comparing FNV to GLD: effectively FNV outperforms GLD over the long run. Note that the graph convenently starts by autumn 2008 as both GLD and FNV had plunged. The recovery of FNV was more swift than that of GLD. Yet the ‘moat’ starts growing only after the yellow metal had peaked in 2011. Miners were retreating back then, but FNV upheld much better. A schematic analysis of the FNV streamer & royalty business model shows why.

Much the same reasoning is followed to select Sandstorm Gold (SAND), which is more a junior gold streamer having acquired many streams which are to provide a rapidly growing revenue stream. The business is less mature, making the growth potential higher, albeit at a higher risk. 

Barrick (GOLD) is depicted as a reverse take-over by RandGold, which provided both the ticker GOLD and its successful manager Mark Bristow.

The Canadian junior producer B2Gold (BTG) completes the list. This producer is depicted as a potential takeover target.

Evaluation after 2 years

Franco Nevada continued to be the best stock in the above selection. The three others benefited well after the March 2020 plunge toward the gold all-time-high. However their 2021 performance has been disappointing, much like the broad gold mining sector. 

Barrick (GOLD) is about back to where it quoted before the March 2020 covid crisis hit the markets. 

SAND and BTG are quoting only some 10%-20% above their 2021 low and quite far below their 2020 high. Moreover both have lost over 10% since Jan 2020, before the Covid crisis hit the markets (and gold was still below where it quotes now).

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