For more than 5,000 years, gold and silver have been used by different cultures as payment and exchange medium. Several thousand exploration companies worldwide are looking for new, economically minable deposits. Although annual investments of billions USD are made in exploration, the number of significant new discoveries of ore bodies is low. It is important to know that every gold mine is finite and the depleted resources have to be replaced in order to ensure a steady gold production. As a result, the Mid-Tier and large producers are always looking for junior producers and exploration companies to expand their project pipeline.
Why invest in physical precious metals?
- Gold and silver have been successfully used as a means of payment or exchange for thousands of years and have proven to be a safe store of value. Gold protects against loss of buying power / inflation. With the equivalent of an ounce of gold you can buy a good suit since the Middle Ages. Gold has all the characteristics that money needs: it is divisible, scarce, fungible, durable and portable.
- In many cultures, such as India and China, gold and silver is highly valued. People use physical precious metals also for their retirement saving plan.
- Physical precious metals in their own safe storage is one of the real assets that can be accessed immediately in case of crisis.
- Precious metals offer protection against inflation. Credit notes, certificates, daily and fixed-term deposits do not even guarantee the inflation compensation in the money and credit system, which is ‘manipulated’ by central banks.
- Physical precious metals represent an insurance against a collapse of the global overburdened financial and economic system. Precious metals thus make your assets crisis-proof.
- Gold and silver are accepted all over the world and are suitable as a means of exchange for the respective currency or other goods.
- Gold has a negative correlation against many other asset classes such as equities and currencies (especially the USD).
- Precious metals are the ultimate hedge for the next inevitable financial crisis.
- Gold and silver can not be printed or reproduced at the push of a button in exchange for the ‘Fiat paper money’ and are not dependent on any third party payment promises.
Background information on gold
- Gold has in the periodic table of the elements the symbol Au and the order number 79. The latin name is Aurum.
- The melting point of this precious metal is 1,064.18 ° C. and the boiling point is 2,970 ° C. The density of gold is 19.32 g / cm3 at 20 ° C. Gold is a heavy metal.
- Because of its ductility, gold is fabricated also in 1/10,000 mm thin films (gold leaf). It is also very stretchy. A wire with a length of up to 6,000 m can be produced from 1 g of gold. The electrical conductivity of gold is also one of its positive properties and makes it very popular in semiconductor production.
- It is estimated that approximately 170,000 tons of gold have been produced (mined) since the beginning of civilization.
- The annual production of all goldmines worldwide has been declining for years and amounted to 3,236 tonnes in 2016. The three largest countries were China, Australia and Russia. The demand for gold was 4,570 tonnes in 2016 according to the World Gold Council. A significant portion of the annual gold supply is covered by the recycling industry. According to the World Gold Council, roughly one third of the global gold supply is attributable to recycled gold.
- Declining of new discoveries of economically mineable ore bodies and the sinking ore grades have, in our opinion, a strong influence on the global gold industry in the future. Many old mines are increasingly exhausted (depleted), so we are assuming a shrinking supply / declining global gold production.
- On August 15, 1971, the gold backing of the USD was lifted by the famous Nixon decree. It was the birth of the current unsecured Fiat paper currency system. This system is based on the confidence that the associated debt will be repaid in the future.
- A wide range of uses for gold e.g. in the jewelry industry, in the microchip production, in the manufacture of medical devices and as a dental prosthesis.
Why investing in selected gold stocks?
- The shares often have a strong leverage against the gold spot price.
- Unhedged gold producers achieve higher profits with rising gold prices, if the overall cash costs remain the same.
- In-situ gold resources, which have not yet been mined, represent a value store.
- Even if only a fraction of the listed exploration companies might delineate an economically minable ore body from an exploration concept and then bring them into production, the profit potentials for investors are often enormous in these cases.
A look at historical valuation ratios of various asset classes with each other, can make an important contribution in the strategic asset allocation process:
An approach to assess the (current) valuation level of a commodity or asset class to any other investment instrument or asset class is the calculation of the direct trade ratio among each other.
For example, the current “Gold to Silver ratio” is calculated as follows: Dividing the price of an ounce of gold ($ 1,280) by the price of an ounce of silver ($ 16,27). The result or ratio is currently at 78.67 ounces, so with an ounce of gold a total of almost 79 ounces of silver can be bought. Looking at this ratio at different dates in the past, tendencies can be shown which asset class was “relatively” cheaper or more expensive in direct comparison. Thus, it would have been useful in the retrospective to sell gold and silver in January 1980 and to exchange them into the equity market (for example, the Dow Jones Index).
In the table below, we have calculated different ratios at various time points. According to the US Federal Reserve Bank of Minneapolis, the value of a given good in 1980 (for example, an ounce of gold) of $ 835 would be the inflation-adjusted equivalent in 2017 of $ 2,539. If, for example, the spot gold price reaches the inflation-adjusted high of 1980 at 2,470 again and the gold / silver ratio would fall concurrently to 40, a theoretical silver price of USD 63,48 might be possible.
Precious metals stocks in historical comparison to equities (S&P 500 Index):
The chart shows the historical ratio between the Philadelphia Gold and Silver Index (XAU Index) and the S&P 500 over the last 20 years. The low ratio indicate, that gold and silver stocks are trading much cheaper compared to the broader S&P 500 stocks. It is striking that the current ratio of 0.025 is even lower than levels seen in year 2001 (0.031). or in other words, gold and silver stocks are currently valued lower as in 2001 when the spot gold price was below USD 300 compared to the S&P 500. If the all-time high ratio between the two asset pairs of 0.193 from 2011 is reached again and the S&P 500 would remain at the current level, the XAU index would have a massive upside potential to a level above 500. For a variety of reasons, we expect disappointment in global equity markets and a significant upward movement for the precious metal sector within the next 9-15 months.
Precious metals stocks in the historic contest to Spot Gold:
The chart shows the historical ratio between the Philadelphia Gold and Silver Index (XAU Index) and the spot gold price over the last 20 years. We have drawn a downtrend of the ratios since 2007 into the chart. A falling ratio means that the gold and silver producers included in the XAU index are performing worse than the gold price. Although the precious metals have been performing very well since the beginning of 2016, the downtrend in recent months could not be overcome as of yet. Conservative investors might wait until the breakout above the decade long downtrend is materilized.