Ignore the Gold Bugs — and Win

  • A foot in two worlds, and a confused brain
  • Two ideas from one chart
  • Plus, improve your risk profile this way…

You could call it a silent bull market. Gold in Aussie dollars just keeps powering along. It’s around $1,860 an ounce. That price offers very good margins for most producers that operate here.

But is it telling us anything about the world?

We can think of gold as a small bridge that lets us put each foot in two separate places.

One foot rests inside the global monetary system. Gold is a shelter from fiat money. The other is in a jeweller’s shop in Putian.

You probably haven’t heard of this place. It’s in the Chinese province of Fujian, on the other side of sea from Taiwan.

It’s a thriving area for goldsmiths in China. They operate in the physical market for jewellery and capitalise on the human love of adornment.

The Economist says that, unlike their thrifty parents, young, affluent Chinese think nothing of buying expensive gold trinkets as fashion accessories.

And the Chinese are the biggest gold buyers in the world.

Does the gold price tell us more about credit stress in the capital markets or the fact that Chinese consumers are buying more earrings and necklaces?

For now, I’d pick the latter over the former. The gold price in US dollars is modest. The Aussie boom is thanks to our fallen currency.

Plenty of people will tell you gold is going to US$5,000 an ounce. I’ve read predictions like this from gold bugs for years. Maybe it will happen one day.

I have better news. As a speculator, you don’t need to grapple with this question to make money…

Here’s why. Take a look at the recent numbers on exploration spending within the minerals sector.

What do you see?

A screenshot of a cell phone  Description automatically generated

Source: IMDEX

It says it right there on the right-hand side. Gold and copper make up over 70% of exploration budgets.

50% of exploration dollars are spent on gold.

You might not immediately see the significance of this. But to me, it highlights two things.

One is that other metals are underfunded. I’m more interested in these markets from a fundamental perspective. They’re more likely to suffer shortages at some point.

We can see the power of this effect in the iron ore market right now.

Brazilian firm Vale’s recent major accident has knocked 50 million tonnes of iron ore supply out of the market — and sent the price of iron ore up 30%.

Shareholders in Fortescue Metals [ASX:FMG] are up 50% on this alone.

That’s why it’s worth watching different, less coveted commodities. Supply is often consumed without an equivalent reinvestment to bring in future demand.

Or, as in the case of iron ore, something is lost due to unforeseen circumstances. This is why commodities boom and bust.

You can ride some big price spikes when this happens. The hard part is navigating the false starts, failed predictions and dead cat bounces that can trap you.

But this doesn’t mean you should avoid gold, either…

If you don’t drill, you don’t find. But when you do…

Let’s go back to that chart above.

If most of the exploration money is going on gold…we can expect explorers to hit a lot more gold than anything else.

One way to ride a big spike in the share market is to find a company that’s actively looking for gold…and finds lots of it.

Recently, I’ve used Bellevue Gold [ASX:BGL] several times as an example. It’s up 200% in the last six months because of this.

So if you’re interested in speculating, it makes sense to follow the companies that are investing in interesting gold projects with high potential for a strike.

It’s also a way to separate yourself from the dilemma above. I really have no idea whether the gold price going up in the short term is signalling a global monetary problem or more married couples in China and India.

But if any company strikes gold, you’re going to get a lift in the price, regardless.

You can also use this idea to improve the risk profile of an investment. For example, I happen to think oil should remain fairly strong this year, and possibly spike if certain cards fall one way.

But I don’t like betting completely on this one outcome. So I look for oil stocks that have another source of upside besides the price of crude alone.

If you really hit the jackpot, they might fire together at the same time.   


Callum Newman Signature

Callum Newman,
Editor, Profit Watch