It’s one of the most frequently asked questions about gold.
“Is gold a good investment?”
I think if you can wrap your head around what the answer to this question means, you’ll be better prepared to be a real gold investor than 99% of the investing public.
As a Chartered Financial Analyst, before I can answer this question, I have to take a big step back and define terms – because frequently when main street investors talk about “investing” they mean something else.
They might even mean something antithetical to investing. I’m sure you’re familiar with people who will conflate “investing” with simply spending money on something they want.
Buying new shoes so you look nice is not an investment by any rational definition. Booking a cruise or a spa treatment is not an investment either.
Sometimes, even buying a stock is not an investment.
I’ll even go so far as to say that most of the time, buying most gold stocks is not an investment.
That’s because an investment – in my view – means taking an ownership stake in a business or venture that has a high degree of certainty of returning cash flow to you – either through dividends (as we frequently see with our Golden Portfolio royalty stocks) or through stock price appreciation based on buying Net Asset Value for a discount.
Most people, according to this admittedly narrow definition, are not investing. They’re speculating. And I don’t see anything wrong with speculation, so long as you understand what kind of risks you’re getting into, and use reasonable position sizing.
Consider that the average holding period for retail investors is something like 6 months – and it’s been falling for decades. If you’re only holding a stake in a business for 6 months, you’re not looking forward to cash flow from dividends, and you probably aren’t very concerned with net asset value.
You’re just hoping the price pops so you can sell it for a quick profit. Maybe you have a hunch for why that price pop might happen… but “hunch” is another word for speculation.
Speculating with 1-3% of your portfolio is one thing. We can all afford to lose that kind of tiny stake. But if you’re not evaluating a business and projecting cash flows like you would as a real owner, then you’re running the risk of speculating on most of your positions.
How do you know when to sell? What happens if the position drops by 40%? The answers to these kinds of questions should be baked into an investment thesis, based on real analysis – not a hunch. A hunch will have you selling out of your positions for any reason or no reason – especially if there’s a correction.
Back to the question at hand:
Is gold a good investment?
You might look at a gold chart going back 20 years and see that gold has outperformed stocks by a wide margin, with gold up 1,000% while the Dow Jones Industrial Average is only up 350%:
This chart might lead you to the conclusion that gold is a good investment. The problem is that – despite the metal’s outperformance – gold isn’t an investment at all.
Gold is a form of money. I happen to believe it’s simply the best form of money yet discovered. It has a 5,000 year history of preserving purchasing power. That doesn’t mean it’s an investment. Cash in your bank account isn’t an investment either – even though there are rare times when cash in the bank outperforms stocks.
As I’ve said many times, I think everyone should own gold. It doesn’t take much physical gold ownership to shore up your overall financial nest-egg. But gold doesn’t produce any cash flow. It doesn’t have any business operations or net asset value beyond its price.
Conversely, the reason I say most gold stocks are not investments either is because most of these businesses also don’t have cash flow, or even any assets to net out. The only way you can analyze many/most gold miners is as a speculation on what the market might think about the sector at some point in the future.
I happen to believe that the market will eventually start bidding up the price of even the worst, most speculative gold stocks out there. We’ll probably see a slew of fly-by-night operators creating new companies as fast as they can to take advantage of the boom.
In the meantime, I’m only focused on the very best businesses in the sector. I’m looking at legitimate companies, run by competent management teams with well known track records, developing high quality gold deposits and royalty businesses.
And then I buy them when they’re dirt-cheap relative to a realistic valuation.
These kinds of companies – even the very small, early-stage types – do have business operations to analyze and project the value of, over a period of years.
Right now, there are something in the neighborhood of 300-400 publicly traded gold companies. It’s impossible to know the “real” number, because many of the companies in the mix might not even own a single ounce of dirt, let alone a viable gold deposit. Some of them might own some patch of ground with some quantity of gold – there’s tiny amounts of gold everywhere though… most of it is not economic to mine. They might only be placeholders for some future explorer. They might just have gold in the name but operate in an entirely different business.
But in my portfolios, I’m focusing on the top few dozen companies. While the entire sector might jump 2x-3x in the coming years, I’m only looking at the best of the best companies that could jump 5X-10X based on fair value alone.
The best way to invest in gold then, is not to buy the physical metal, but to own companies with upside to the price of gold, and to buy these companies when they’re selling for a discount.
And right now, despite a healthy run-up for the sector, pretty much all of the companies in my portfolios are selling for discounts.
Now is the time to be a gold investor…
Best,
Garrett Goggin, CFA, CMT
Lead Analyst and Founder, Golden Portfolio