Beware shares exposed to Australian retail.
That’s the clue from the latest announcement from department store David Jones.
They’re cutting 120 staff ‘amid some of the worst trading conditions in a decade’.
You know the usual litany of reasons behind this — weak wages and high debts being at the top of the list.
Does this mean you have to avoid the share market?
Not at all. There are hundreds of stocks totally divorced from the general economy or a subsector like retail.
And there is one standout area of the market that’s flying right now.
I can put my hand right out and say I didn’t see this coming…
It’s the gold sector.
Yep — gold in Aussie dollars just keeps holding above $2,000 an ounce. Some of these miners are literally minting money.
Here’s a chart of the Aussie gold index currently…
We’ve made some good calls here at Profit Watch this year. But I didn’t expect the power of this move.
That’s not to say I’ve avoided gold completely.
I have a gold explorer on the buy list for my Small Cap Alpha service.
But its success will be determined by finding gold — not cashing in on the high prices right now. That’s a very important distinction.
Here’s why I say that. Most of the stocks I focus on are small-cap stocks.
The majority of them don’t make money. That’s because they invest their cash into growing their business.
The market knows this and is quite happy to drive the share price up, as long as the growth outlook keeps getting stronger.
You can get some terrific spikes in a short amount of time investing around this dynamic.
However, there is a limit to how high a share can go — and stay there — based off potential and news flow alone.
Stocks that can trend up for a long time are usually growing their earnings.
That means they’re making more money and the market can keep marking up the improvement.
That’s what’s driving the gold stocks right now. But not all of them!
Where opportunity still lies
It’s the bigger producers like Northern Star Resources [ASX:NST] and Evolution Mining [ASX:EVN] that are killing it right now.
This stands to reason. They are producing a lot of ounces, which converts to cash.
But the ‘heat’ in the gold sector doesn’t seem to be translating to the gold explorers and small-producing gold stocks — yet.
However, think of the dynamic brewing here. The bigger gold stocks are making a motza of cash.
This is giving them enormous firepower to go and buy up promising projects to add to their operations.
It’s not as if they’ve just started making money, either.
Aussie gold miners have enjoyed strong margins for quite some time now.
That’s history now. The question is whether the rally can keep going?
I didn’t pick this rally, so I’m not going to presume to tell you where it goes next.
I reached out to my friend and colleague, Greg Canavan, for his thoughts.
Greg has analysed the gold market for nearly 20 years now.
My desk used to be next to his back in 2012. He was as passionate about gold back then as he is now.
Greg has been calling this rally up the whole time. It hasn’t been a theoretical exercise, either.
A couple of his gold recommendations have smashed it out of the park.
My suspicion is that core gold producers (like the two I mentioned above) are fully priced right now. They will go where the Aussie gold price goes.
We’ll have to see on that. But I always prefer to have more than one source of upside for any stock.
That way, you’re not risking money on one outcome only. And if two catalysts can come in, you’re laughing.
Insights from a 20-year veteran
Here’s what Greg told me when I pressed him for an update on the gold sector right now:
‘You’re right that the established producers are stretched right now. They’re producing plenty of gold at low cost and the market is re-rating them higher given the surge in profitability that will surely follow.
‘If you’re looking for new opportunities, though, you have to look to the explorers or emerging producers. That’s where the value is. The market is yet to take a punt on many of these second-tier plays.
‘But that is in the process of changing. Capital is starting to flow into this — up until now — neglected part of the gold sector.
‘It’s high risk and volatile, of course, but I think you’ll see some spectacular gains here during this bull market.’
Note that this has nothing to do with GDP, wages, housing or the politicians in Canberra. That is to say, the usual fodder for mainstream news.
More on these market opportunities next week. Until then!