Sven Carlin discusses how to invest in gold and silver in later 2019. Investing in gold and silver is tricky – there are no dividends, only the gold price that depends on supply and demand.
How To Invest In Gold And Silver In Late 2019
Q4 2019 hedge fund letters, conferences and more
Transcript
Good day fellow investors. Welcome to the stock market news with a long term fundamental twist. And over the last few months, there has been a lot of commotion about gold as it went from 1100-1200 to 1500. And there is a lot of gold, let's say cheering in on YouTube, I want to give you a really a fundamental risk reward perspective. Nobody can predict gold prices over the next three, six months, longer term, but what you have to understand is the risk and reward of what might happen and how to apply that to your portfolio in order to make money in it.
We're going to discuss the gold bull thesis as mentioned the risk and reward the historical price of gold, the cost curve so what are the minus miners costs to produce that gold, compare it to the price and then discuss, gold miners, how I approach them, how you can invest, what's the risk/reward, Ray Dalio's approach to investing in gold? What does he mean when he says, "how to invest in gold?" I'm going to finish with the way I'm exposed to precious metals by declaring my silver investment that I am already long for a while. And that should give you a good perspective on how to invest in gold in 2019.
Let's start when it comes to YouTube, you must be really careful about fear. Fear is easy to sell. If I make a video stock market crash, economic collapse, views shoot up because people are triggered by fear. They are afraid to lose what they have and therefore they watch it and it's easy to sell.
Fear and precious metals
So if you make people scared about recessions, about inflation, about losing their job, etc, you can sell them easily on let's say, an investment a hedge like gold, and on YouTube. There are many, many investors like that YouTube channels that are like a broken clock. They keep telling people gold, gold, gold, buy gold, it's the best investment out there. There are only positive things on their website but you have to understand their business is commission on buying, trading and selling gold. So they have products that sell, make money on whatever happens with the gold price.
They just need people to buy gold. If you look how does a broken clockwork just Google for example, Peter Schiff 2011 the worst is yet to come for the markets and economy. This markets are up two times since then probably. Gold price correction 2011, this was written December 2011. What correction gold prices will just continue to go up.
Unfortunately those that invested in gold in 2011 are still down from the peaks. And here that's what I don't like. Very good theory with Peter Schiff, I agree with a lot of his points, but he's not he's only showing the possible reward, he has to show the risk out there. So and that's what I'll do here.
Why bears sell gold
There is the reward, I agree with Peter Schiff. I think gold can go to 5000 20,000. Nobody knows. But you have to always put it in a risk reward perspective to see what will happen. Let's check this a little bit. So over the last week, gold prices dropped actually, as things cool down in Hong Kong, maybe there will be a deal with the trade wars. Brexit will be easier or at least will be with a deal or something like that.
So things happened. Stocks went up, gold went down. And over the long term, still gold is up hugely but stocks are two up hugely so on top of it stocks give you a dividend. So it's not really said that you will make money with gold in place of stocks. But let's look at the historical price. This is the long term trend. This is since 1971. Since the conversion, gold dollar was cancelled. So since then dollar was debased and gold prices rose or better to say that the dollar lost its value compared to gold. So gold prices went from 65 to 685.
In the 70s-81, then there was 20 something years of just going down from 685 to 250, then spiked up to 2011, then down to 2016, I think was the low when it hit 1050. So from 2011 to 2016, five years of very, very negative news. And then since then it spiked again 50% up over the last years.
Pros and cons of investing in gold
The thing is that nobody knows where gold prices will go over the next five years, neither 10 years, nobody knows because this is really unpredictable. We don't know whether how much of things are priced in how much are not priced in, there are many ups and downs, smaller ups and downs that make you think this is a new trend and then it reverses, etc. Further ETFs as gold prices go up, people rush into buying gold and then push gold prices even higher.
But when gold prices start going down, people rush into selling those gold. They don't want to hold gold gold in ETFs. And you see how the real key here is behaviour. How are people going to react towards what's going on in the economy and are they going to seek gold or not?
Gold and bear markets
The fact is, can you handle a 30-40% decline in gold prices over the next 12 months? That's a question not that it's going to happen. Can you handle it? If you can handle it, if you can rebalance like Ray Dalio saying by adding more than then you are up to investing or speculating with gold. On the other hand, gold doesn't give you a dividend, there is no yield, there is a cost of storage and you cannot lend it out to someone etc. So that's something you have to keep in mind when putting gold into your portfolio.
That is the risk/reward perspective. Let's go to the fundamentals when analysing any commodity I always like to look at the cost curve. So this is the cost curve for gold and you can see that the average all in costs are around 1080 per gold ounce. There are very low cost producers with 600-800 all in costs. And then the average is around 1000 and then up to 1200.
And even higher depending on the mine. But in general, most miners at current gold prices are having very, very, very nice margins. So the question is, how sustainable is this without real inflation, without real inflation in the mining costs, that production will probably go up. There might be some oversupply of gold later, and that might push gold prices down. So keep this in mind. I always look at the average cost production costs for every commodity, just on a healthy margin their debt will be the average long term price of the commodity. Until these mining costs don't change. There actually isn't inflation.
Leverage and investing in gold
So we cannot see long term gold prices being high. If you go back to the long term chart of gold prices, look, they have fallen to 1050 which is the average mining costs. So the spike the exuberance spike was there for the demand for the quantity demanded. But then those returned again down we have again a spike and we'll see how it will evolve. Nobody knows where the price of gold will go, you have to see how to go about investing in it.
If you go into gold miners, I made the analysis of many gold miners in October 2018. And then look at the cost price, their leverage and their exposure to gold. If you want to have exposure to gold miners, if gold prices go up, they should give you much more leverage. If gold prices go down.
Gold miners
There is much more downside possible. So for example, all gold miners really spiked up 100-150% over the last few months. [Inaudible] gold was a company that I sold and then it shoot up even more from the 70-80% I made on it. So that's thanks to gold prices, if gold prices revert this thing might revert to the lows that we have seen just 5-6 months ago. Be careful about that. So now in my table, I wrote that if gold reaches $2,000, for example, Evolution Mining should have a price of $6. When I wrote that in October 2018, the price was 2.1 dollars, 2.2 dollars.
Now gold is just 1500 and the stock has really spiked up more than doubled since then. So a lot of future expectations about gold might be already baked into the current higher prices. So my point is that you have to really be careful how to balance this if we go to Ray Dalio he says yes, investing goals have portfolio exposure in gold, but then he's always about balancing a risk in a portfolio.
The higher gold prices go, the higher is the risk, the lower gold prices go. You have to always be a contrarian you have to buy when others are selling and sell when others are buying. So those that bought at 1000 those should now sell at those exuberant investors there are now buying like crazy as we have seen in the ETF, gold prices and demand for gold ounces is going up.
Gold prices
And whether gold will spike to 5000, 10,000, 2000 depends and you have to keep in mind the timing. 2011, everybody was expecting gold to continue it didn't for the next five years it went just down. And that's something you have to be prepared, especially over the long term.
So I'm trying to give you the long term perspective here on gold so that you can be ready if I buy gold now for gold exposure, am I ready to see it down five years for from now? Am I ready to trade those 10% changes, 15% changes in gold prices? When it goes up, I sell a little bit when it goes down, I buy a little more and then by doing that you can have a yield on that gold you can actually lock in a trading yield on the gold. So that's a perspective when some rational investors try to look and kept gold portfolio exposure.
If you want more ups and downs then you have miners that gold goes up 20-30% miners go up 100%. We have seen lately over the last few months, but vice versa is also possible. Now, I have portfolio exposure I bought two miners last year I still have I think [inaudible] gold, it's a good dividend, low cost minor, whatever happens it will be still a good business, so I'm buying businesses.
Conclusion
I made a video about Verdanta, I think it was a month ago now the stock price even cheaper now. It is a commodities miner so if we have inflation gold prices will go up. But also other commodities might go up and stay up also the same with gold. Nobody's looking at commodities everybody's exuberant about gold. But again, if you want to buy what others are not buying, you might want to look at zinc, copper miners. Vedanta is just one part of my portfolio. So please enjoy the video about Vedanta. If you want to check more about things I that I do more about my research etc. About my book, please check svencarlin.com.
I'm looking forward to comments, I know there will be a lot of angry comments. Yes, gold will spike up, gold might spike up gold might not spike up. Even Peter Schiff chef was wrong in 2011 to 2015 now he's doing good. But then he can be again wrong or right so be careful about that. It's about predicting the future predicting the behaviour of humans, central banks etc. We cannot do that we can look at the fundamentals at the risk reward and then apply to our portfolio. Thank you. Don't forget to subscribe if you like this long term risk reward approach to investing. I'll see you in the next video.
