Last week I was in beautiful Colorado Springs attending the 35th annual Denver Gold Forum, where sentiment for all things gold was cautiously optimistic.
Many of the speakers and attendees were bullish on the physical metal, pointing to gold’s resilience in the face of a very strong U.S. dollar and multiyear-high yields. When the Federal Reserve begins to lower rates and the value of the greenback cools relative to other currencies, I believe it will really be dollar-denominated gold’s time to shine, as it is right now in many countries such as Argentina, Japan, China, South Africa and more.
Investment in gold and gold mining stocks is another thing altogether. Total known holdings in physical gold ETFs currently stand at just under 89 million ounces, down from around 106 million ounces in April 2023, according to Bloomberg data.
Investor appetite for junior gold miners—those that produce less than 1 million ounces a year, if at all—has also been muted, despite small-cap explorers and producers having greater operating leverage and earnings upside to rising gold prices. In the chart below, you can see that the MVIS Junior Gold Miners Index outperformed the seniors—sometimes greatly—when gold prices were ripping, though juniors also had lower lows when the yellow metal was under pressure.
Should shares of junior miners end 2023 in negative territory, it would mark the third straight year of lackluster returns and the longest losing streak since the gold bear market that persisted from 2011 through 2015. It’s important to note the high-risk, high-reward nature of the junior gold space. For the 20-year period, the juniors have averaged about 9% per year compared to around 4% for the seniors.
Many speakers at the conference were focused specifically on Canadian juniors, but challenges persist in other markets as well. The Johannesburg Stock Exchange (JSE), historically rooted in mining, is increasingly losing junior mining and exploration companies. Of the 39 mining companies listed on the JSE, only six were genuine precious metal exploration or development firms, starkly contrasting with over 2,000 listings on Canadian stock exchanges.
With the Fed potentially near the end of its rate-hiking cycle and the dollar poised to correct, now could be an opportune time to start considering an allocation to junior gold explorers and producers in anticipation of higher gold prices.
But how do you go about doing it?
Anticipate Before You Participate: The Lifecycle of a Mine
Investing in junior mining companies requires a deep understanding of the mine’s lifecycle. For that, we’ll turn to the Lassonde Curve. Named for my longtime friend and mentor, Pierre Lassonde, cofounder of Franco-Nevada, this metric illustrates seven distinct stages from early exploration to depletion, each offering unique risks and opportunities.
Initially, in the “Concept” stage, geologists use geochemical and sampling techniques to locate potential gold deposits and analyze drill cores for mineral content, which, if found in sufficient amounts, might hint at a viable mineral deposit. The second stage, “Discovery,” rewards early speculators, showing the potential for mining based on a significant presence of gold. This stage gives way to the “Feasibility” phase, where studies evaluate the deposit’s profitability prospects. Speculative investment peaks here due to lingering uncertainties.
The subsequent “Development” phase is a pivotal point where many mineral deposits can falter, with companies required to secure funding, develop a production blueprint and assemble an operational team. Successfully navigating this stage leads to the “Startup” stage, where the company starts processing ore, resulting in revenue generation. The concluding “Operations” stage, when gold is actively being dug out of the ground, has historically attracted even more institutional investors.
HOW YOU CAN PARTICIPATE
One of the best ways to get exposure to gold, I believe, is with our U.S. Global GO GOLD and Precious Metal Miners ETF (GOAU).
GOAU is unique for placing special emphasis on North American royalty and streaming companies, which we consider to be the “smart money” of the metals and mining space.
The three major players dominating the royalties space right now are Franco-Nevada, Wheaton Precious Metals and Royal Gold.
Together, these three companies account for 30 percent of GOAU’s holdings, making it distinct among its peers.
Along with the added potential benefits of royalty stocks, we’re able to be highly selective in the producers we invest in. Close to 90 percent of the fund’s portfolio consists of high-quality small or mid-cap stocks, screened for profitability, cash return on invested capital (CROIC) and other factors.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
Distributed by Quasar Distributors, LLC. U.S. Global Investors is the investment adviser to GOAU.
Investing involves risk, including the possible loss of principal. Shares of any ETF are bought and sold at market price (not NAV), may trade at a discount or premium to NAV and are not individually redeemed from the funds. Brokerage commissions will reduce returns. Because the funds concentrate their investments in specific industries, the funds may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries. The funds are non-diversified, meaning they may concentrate more of their assets in a smaller number of issuers than diversified funds.
The funds invest in foreign securities which involve greater volatility and political, economic and currency risks and differences in accounting methods. These risks are greater for investments in emerging markets. The funds may invest in the securities of smaller-capitalization companies, which may be more volatile than funds that invest in larger, more established companies. The performance of the funds may diverge from that of the index. Because the funds may employ a representative sampling strategy and may also invest in securities that are not included in the index, the funds may experience tracking error to a greater extent than funds that seek to replicate an index. The funds are not actively managed and may be affected by a general decline in market segments related to the index.
Gold, precious metals, and precious minerals funds may be susceptible to adverse economic, political, or regulatory developments due to concentrating in a single theme. The prices of gold, precious metals, and precious minerals are subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5% to 10% of your portfolio in these sectors.
The MVIS Junior Gold Miners Index covers the most liquid small-cap companies which are active in the gold/silver mining sector. The index is reviewed semi-annually, float market capitalization weighted, and the maximum component weight is 8%. The S&P 500 is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products.