x min read

Investors Transitioning into GOLD Stocks and Crypto as US Debt Spirals Out of Control

Investors Transitioning into GOLD Stocks and Crypto as US Debt Spirals Out of Control
Written by
Michael Sheikh
Published on
January 20, 2021
Copy URL
Share on LinkedIn
Share on Reddit
Share on Twitter/X
Share on Facebook

With President Biden officially taking the reins on January 20th, his immediate goal will be to implement a $1.9 trillion covid-relief stimulus plan (yes Trillion with a T) to assist in getting America back on its feet and healthy. Even though Americans would love to get an extra $1400 directly into their checking account or have the peace of mind that unemployment gets extended while looking for work they know someone needs to foot the bill.The vaccine has barely rolled out and another $416 billion was earmarked for more vaccines that will be readily available at little to no cost. These are some of the major perks of the relief bill itself. Passage of this soon to be voted upon package rests in the hands of a majority led democratic congress.As beautiful as it sounds to many, especially to those in need, there is an ugly price to pay for the massive amount of debt we have accumulated during the Covid-19 pandemic. The fear of inflation and an inevitable stock market correction has investors seeking a safe place for their assets. The age-old rule of thumb has always been precious metals such as gold and silver, but the younger affluent generation has found refuge in digital gold, also known as cryptocurrency with Bitcoin being the digital coin of choice.

As digital gold, BTC appeals to the cashless internet economy largely on account of its characteristics that include round-the-clock price transparency, and the lack of limits, interruptions or third-party oversight.” - Bloomberg.

Gold versus Bitcoin and the S&P 500

No doubt Bitcoin has outperformed the stock market and gold since the COVID-19 pandemic. As Bitcoin and other alternative crypto coins (known as “altcoins”) such as Ethereum, ChainLink and Ripple to name a few, have shown explosive growth, one may want to consider gold for the simple reason “crypto” may be overbought. The younger generation are turning to trading crypto at places like Coinbase, but high transaction fees have fueled the rise of new discount trading platforms like VOYAGER, who many say is the “Robinhood” of crypto. There is plenty of chatter in the investment world as to whether or not Bitcoin, which has gains of nearly 1000% from March of 2020’s crash to its recent all-time highs, is still in its infancy and could possibly have a pullback correction making gold the safer the asset to withstand a stock market crash due to inflation, a tech bubble pop or political unrest.Investors have also delved into Crypto currency stocks such as miners like Riot Blockchain (NASDAQ: RIOT), Marathon Patent Group (NASDAQ: MARA), BitFrontier Capital Holdings (OTCMKTS: BFCH), and Integrated Ventures (OTCMKTS: INTV) which move very much in the same fashion that gold mining stocks move with respect to the underlying commodity. Typically the commodity like gold moves first and once it is sustainable the junior miners would move. The recent move in bitcoin has been parabolic and for the most part the miners followed suit but cautiously until the latest up move which suggests that price in Bitcoin might stick for a while.

Gold and Bitcoin vs Stock Market Crash

Even in the most exuberant stock market rally, there is always the latent threat of a crash.Gold, the classic defensive safe haven asset, has been used to fortify investment portfolios against this threat for as long as the stock market has existed, but now a new breed of investors believe that bitcoin — or “digital gold” can provide similar protection.As bitcoin is only eleven years old, proving the asset’s value as a hedge against crashes is difficult, but we can still look back over the past decade to find out how bitcoin and gold have behaved as sudden turbulence has hit the stock market.

COVID-19 Crash, 2020

Stocks plummeted in early March 2020 as the coronavirus hit Italy and Iran hard and governments around the world weighed the cost of hitting pause on the economy.Gold initially dropped slightly as traders rushed to buy dollars, but then started to trend upwards as fear overwhelmed the markets.Bitcoin, meanwhile, dipped even deeper than the stock market. The leading crypto shed 50% of its value over 24 hours, before recovering over the next few weeks to reclaim its former highs before the S&P 500.

Global Downturn, 2018

Stocks took a tumble in December 2018 as a miasma of negative macroeconomic events overwhelmed the market. Fears of a U.S. government shutdown, and concerns about the direction of Fed policy, coincided with trade war worries to pull the S&P 500 down 15% over 20 days. Gold meanwhile pushed steadily upwards in classic safehaven style. Bitcoin however, also crashed with stocks, just like a risk-on asset.

Bitcoin vs Stock Market Crash

As the examples show, each significant stock market crash during the last decade has also been accompanied by a drop in the price of bitcoin. And in the recent crashes of March 2020 and December 2018, bitcoin has moved almost completely in lockstep with stocks.Some analysts suggest this correlation is because of the increased presence of institutions— trading on new professional platforms like CME and Bakkt—that treat bitcoin as a risky proposition and lump it in the same asset category as stocks. But while bitcoin might be gradually becoming more impacted by the movements of global markets, the price action is still primarily governed by sentiment, and internal technical developments like the halving.Ultimately, the ability of bitcoin to act as a hedge against stock market crashes has not yet been proven. Most portfolio managers therefore recommend the asset should be held not because it has an inverse correlation with stocks, but because it has no real correlation with other markets.

Gold vs Stock Market Crash

Gold is the battle-tested hedge against stock market volatility. It has protected investors against stock market crashes not just in the past decade—as the examples show—but over the past few centuries.This has been verified not just by my cursory glance over the past decade, but by an in-depth 2007 study from Trinity College. Researchers investigated whether the ability of gold to act as a hedge could be backed-up by its behaviour since 2000 in stock market crashes. By looking at the average accumulated return of a portfolio comprising gold and stocks for the period of 50 trading days after “an extreme negative stock return”, the study found that gold acts as a safehaven asset for stocks in the United States, in the United Kingdom and in Germany.“For 15 days after a crash, gold prices increased dramatically. Frightened investors panicked, sold their stocks and bought gold.” concludes the study. “After that, gold prices lost value against rebounding stock prices.As the researchers found, gold effectively acts as an insurance premium that will likely pay out when most needed. Though the price may fluctuate over the long term, during extreme market conditions it has historically risen — making gold a proven hedge against stock market crashes. Here are some GOLD STOCKS we like.

Top 6 Gold Plays We Like

When doing due diligence on gold exploration companies, you will find that any given company will be at one of a possibly 3 stages. These stages are Claims→ Lease→ Exploration. When a gold company just has “Claims'' it means they own the rights to mine the property but most likely they have yet to even scratch the surface. This is the beginning stage of it all almost comparable to a pharmaceutical company going into stage 1, there is a long path to go before actual revenue will be produced and a boatload of money needed to get to that end point. In mining, you first will need to dig holes to set samples, you will need expensive heavy machinery and most potential mines are unable to manned year-round due to freezing temperatures. Valuations for these companies are usually based on future potential and are priced at a deep discount to what they would be worth if they were at the exploration stage where they are mining gold out of the ground, processing it and converting the gold into cash.Middle of the road is “Leasing” where the company has drilled holes, studied the samples and have pinpointed where they want to explore. These companies are valued higher than a claim’s one, but not as high as an exploration company. Our first company we like is at this leasing stage.Cache Exploration (CSX: CAY) (OTCMKTS: CEXPF) $0.23 range ...has recently announced their drill program resulted in 98% recoverable gold. This means the gold is easily separated from other earth particles and is cost effective, as it saves an extra step during the recovery process. The company feels they have a major deposit on the property and has one of the highest-grade open pits in North America as samples showed the gold content to be 3-24 grams per ton. Most gold mining companies have 0.8 grams results compared to CEXPF’s 3g surface concentration. The company has only drilled 1% of the property and an upcoming drill project may reveal just how valuable the property is setting up the exit strategy where one of the “big boys” eats them up. This is an occurrence that happens often as gold exploration companies need to keep shareholders happy by accumulating new properties to maintain the longevity of the company. Cache Exploration is a potential target for one of the 4 gold companies mentioned next.Palayan Resources Inc. (OTCMKTS: PLYN) may be known for its gold resources in Kazakhstan but investors are more excited about its recent drill plans on its Silver Bow property in Nye County, Nevada. After the news of their Joint venture on December 7, 2020 with Provenance Gold Corp (CSE: PAU) for 49.5% interest in a 20 hole drill program, the stock started to grind higher with excellent volume. The drill program was delayed 2 weeks due to heavy rains but the stock tumbled over 40% on that news TODAY to close at $.58! The gold on the property is characterized as a strongly mineralized gold and silver system that is exposed on the surface for at least 500 meters before its goes under a shallow alluvial cover. Surface samples returned 293 g/t Au, 12.4 g.t Au, and 10.2 g/t Au. Drilling commences in mid-February and historical holes averaged 388 feet so its widely expected to be finished quickly.Franco Nevada (NYSE: FNV) Franco Nevada is one of the best-performing gold stocks in history. They gave investors approximately 400% returns since their IPO a decade ago, and dramatically outperformed the price of gold. This doesn’t even include their dividends:They’re a streaming/royalty company rather than a miner. This means that instead of owning mines, they finance other companies’ mines. Gold streaming/royalty companies pay money up front to help develop mines, and in return they get either a percentage of the profits from that mine, or they get to buy a certain amount of gold from that mine at a very low cost, like $400 per ounce. All three major gold streaming/royalty companies (Franco Nevada, Royal Gold, and Wheaton Precious Metals) have outperformed the price of gold and the gold mining index over the past decade. The business model of streaming/royalty companies is a lot safer than miners, because their break-even prices on gold are so low, at hundreds of dollars below mining AISC values. In addition, they don’t have the problem of overpaying for mines and acquisitions when the price of gold is high.There are two main downsides of streaming/royalty companies compared to miners. First, because they are safer, they are also less explosive when gold prices go up a lot. Second, because the business model is so good, there is a risk that too many players will crowd out the space and reduce forward returns.Franco Nevada is led by David Harquail, who has been the CEO since the company’s IPO, has overseen all this past outperformance, and has been a senior executive for many years when the business was private before that. Franco Nevada also happens to be completely debt-free.Sandstorm Gold (NYSE: SAND) Sandstorm Gold is a junior streaming/royalty company. They might be the next Franco Nevada in a decade. Compared to Franco Nevada, Sandstorm is riskier but with more upside potential, and like Franco Nevada, Sandstorm gold is completely debt-free. Sandstorm is earlier in its development process compared to major streamers like Franco Nevada, Royal Gold, and Wheaton Precious Metals. In other words, the three big ones are already getting a lot of cash from streaming/royalty deals they made years ago. Although they are still making new investments, they are in the “harvest stage”, enjoying results from investments long ago and hoping to continue that trend. Sandstorm, on the other hand, is earlier in the process, in the “planting stage”, so it has a lot more growth potential.In addition, Sandstorm holds a stake in the Hot Maden gold development project in Turkey. This is expected to be one of the most profitable mines in the world when it is in production, but Sandstorm is quite concentrated in it. If this mine turns out great, or gets derailed for some reason or another, it would have an outsized impact (positive or negative) on Sandstorm.Assuming flat gold prices, the Hot Maden mine is expected to nearly double Sandstorm’s cash flows when it comes online in 2022:Sandstorm was co-founded about a decade ago by two senior executives from Wheaton Precious Metals and is still run by them. That is what I like to see in a gold stock- leaders with long tenures and track records of success. The company funded its early growth by issuing a lot of new shares but going forward management does not expect to have to dilute the existing shares anymore.Barrick Corporation (NYSE: GOLD) Barrick has a more challenging history than the other three on this list, but it’s a turn-around story. On one hand, Barrick is now the largest gold producer in the world, with five out of the top ten mines in the world. Barrick enjoys assets with exceptionally low AISC, meaning it can survive periods of low gold prices that many other producers cannot. On the other hand, management has not been great historically. The company also has substantial debt, but at least management did pay that down quite well in recent years.However, Barrick and Randgold Resources merged at the start of 2019. Unlike Barrick, Randgold was historically exceptionally well-managed by its longtime CEO Mark Bristow for over two decades and outperformed most other gold miners. He’s a guy that knows how to manage a gold stock.Bristow is the new CEO of the combined company. In other words, the new Barrick is more like a continuation of Randgold than Barrick. Bristow has been a critic of Barrick’s management in the past, so now it is his chance to revitalize the company how he wants.There is some risk here, but as the largest gold producer in the world, with generally low AISC values, and a historically great CEO, I think it warrants a small position in a portfolio.B2Gold (NYSE: BTG) B2Gold is a relatively small gold mining stock, but one of the most promising ones in my opinion. The company was founded in 2007 by a group of executives from Bema Gold when Bema was acquired by another company. It’s still run by the co-founders, and their track record is strong. B2Gold over the past decade has built an increasingly diversified portfolio of mines with low AISC. They have relatively low debt as well.One of the extra potential upsides is that B2Gold could be acquired at a premium price by one of the larger gold producers. As a profitable company with a great portfolio, it is a desirable takeover target in an industry that needs some consolidation. Most of the major gold producers have not been expanding their reserves in recent years because gold prices have been in a bear market, meaning that in order to grow some of them may increasingly turn to acquisitions.


Disclosure: Insider Financial and its owners do not have a position in the stocks posted and have posted this article for free without editorial input. This article was written by a guest contributor and solely reflects his opinions.

Discover Hidden Gems

Don't miss the next big opportunity. Subscribe for timely alerts on potential market movers.