Chris Lowe here. I’m sharing with you the video recording of the panel discussion on gold I hosted at the 2019 Legacy Investment Summit in Carlsbad, California. We took a deep dive into the different ways you can get exposure to a rising gold price.
The panel was called, “Your Roadmap to Profits as Gold Shoots Higher.” And it was an all-star line-up. On the stage with me were legendary natural resource investor Rick Rule, Bonner-Denning Letter co-author Dan Denning, our globetrotting geologist, Dave Forest, and gold industry insider E.B. Tucker.
As you’ll see in the video below, we went through the best ways you can get exposure – from gold coins and bars… to gold miners and royalty companies… to tax-advantaged trusts.
Chris (on the left) chairing the panel discussion on gold and precious metals investing at the Legacy Investment Summit last month. Click the image above to watch the full video…
Or read the edited transcript below…
Your Roadmap to Profits as Gold Shoots Higher
Panel discussion with Dan Denning, Dave Forest, Rick Rule, and E.B. Tucker
Chris Lowe: I want to start with you, Rick. You coined the phrase “You’re either a contrarian or a victim.” It’s a great way to look at cycles in the precious metals industry. Can you explain why we have these cycles in the first place?
Rick Rule: There are two cycles that you need to understand to survive and thrive in precious metals.
One is what I laughingly call the “confidence cycle.” When people have a lot of faith in the political system and the economy, the need to be in gold is low.
Gold has traditionally been a safe-haven asset. And people don’t feel the need for a safe haven when they’re feeling ebullient.
The second cycle that you need to understand is different. Gold and silver mining businesses are capital-intensive. And they amplify the gold cycle.
If the gold price were to go from $1,500 an ounce to $2,000 tomorrow, it would take the industry a couple of years to respond with higher production. It takes a long time to discover a deposit, to get permits, to build the mine, and so forth.
That means bull markets last longer than they should. So do bear markets.
When a mine has been built and the capital is stranded, people will produce gold even at a loss. They don’t want to cannibalize the capital that’s locked in the mine.
So there are two cycles to understand – the confidence cycle or the economic cycle… and the normal cycle associated with capital-intensive, cyclical businesses.
The other thing to know is that you’re never going to get it exactly right.
American financier Bernard Baruch famously said that the only guy who ever bought at the bottom and sold at the top was a liar. Getting in at the bottom involves overcoming your fear, which you can’t do. Selling at the top is very difficult, too.
Why? The price action justifies the narrative. And there’s recency bias. The most recent information you have is the most important information to you.
As a result, the idea that you’re going to buy at the bottom and sell at the top is an absolute non-starter.
So in this business, you just want to take a nice, fat slice out of the middle.
Chris Lowe: E.B. Tucker is the editor of our Strategic Investor advisory. He’s a connoisseur of these cycles.
E.B., you’re involved in a gold royalty company. You go to a lot of industry events and talk to a lot of people. Where were we at in the cycle when you realized that gold would be a good buy?
E.B. Tucker: Last December, I went on precious metals news network Kitco and called for $1,500 gold this year. It hit that in August. I thought it would have taken at least another 90 days.
Most of the financial success I’ve had has been based on observing anecdotal evidence. Everyone thinks you have to study graphs, charts, and numbers. Now, that’s part of it. But it’s also just about waking up and noticing what’s going on around you.
In 2013, I had a business managing client portfolios in gold and silver equities. In one day, gold fell by more than $100. I looked at my business partner and said, “We can’t be in this business. It’s impossible. I’m spending half the day on the phone acting as a therapist to the clients. I’m spending the other half trading around our positions in a panic. It’s not a real business right now.”
So we closed it. And I got into writing the newsletter.
The gold business went into the dark ages for several years. But I don’t think it was all bad.
There was a lot of waste at the top of the market. When gold shoots higher – say, to $1,800 or $1,900 an ounce – there will be executives who’ll go around saying, “We’ll do a project anywhere. We’ll do Mars… We’ll find the money and we’ll do it…” And people will give them the money.
I’ll give you an example…
At the top of the last bull market, two of the biggest gold companies in the world tried to develop a project on the top of a mountain… next to a glacier… straddling two South American countries. Billions of dollars were poured into that mountain. They were all wasted.
Then, last week, I was in Denver for the Gold Forum. It’s the world’s oldest and largest gathering of precious commodity equities. It’s attended by the world’s leading specialist precious metal investors as well as generalist institutional investors, private equity, and hedge funds. I was shocked by how conservative everyone was.
Sean Boyd runs Agnico-Eagle Mines (AEM). We own it in the Strategic Investor modelportfolio. It’s done spectacularly well this year. In fact, it’s already nearly hit its buy-up-to price. And I think it’ll continue to do well. It’s one of the best gold mining companies.
Boyd told the Wall Street Journal, “We’re not doing any projects that don’t make money at $1,200. We’re just not doing it. We’ve learned our lesson.”
So at the top of the market, they’re going to Mars. At the bottom of the market, they’re preparing for gold to drop 20%. What does that tell you?
It tells you that now is the time to think about where we are in the cycle.
The move in gold right now is only the beginning. Next, silver’s going to play a little catch-up. That’s happening as we speak.
Then next year, I think gold will take out its previous high of $1,900 an ounce. It’s already done that in almost every other currency except the U.S. dollar.
Until gold hits its previous high, people won’t be aware of what’s going on. The average asset manager has no gold stocks. He’s much more likely to be figuring out how to open a crypto wallet than he is to be buying gold.
You want to be involved in things as they’re moving through the awareness curve. Once everyone’s finally convinced themselves it’s a good idea, it’s too late.
Every fundamental reason why gold should move has been laid out in the last couple of years. Now, you’re going to start seeing things take off.
Chris Lowe: I want to turn to Dave Forest. Dave runs our International Speculator advisory. It’s focused on profiting in the next commodities boom.
Dave, you’re a geologist. You’ve been involved in getting gold out of the ground. And you’ve been involved in financing mines. About a year ago, when sentiment among gold investors was very low, you realised that insiders in the mining industry were starting to get excited.
Dave Forest: The first thing we picked up on about 18 months ago was that a lot of mergers and acquisitions were happening in the gold industry. All of a sudden, people on the front lines in the business were saying, “Hey, maybe we should buy those guys.”
They saw that the gold price was hitting record highs almost everywhere in the world – except in the U.S. The Canadian dollar price is at an all-time high now. The Australian dollar price… the Indian rupee price… the Indonesian rupiah price – they’ve all hit record highs.
The industry insiders were saying, “These mines are making a lot of money. But the stocks haven’t moved up much. Why don’t we consolidate?”
That led the move in the gold price by about six months. So that was a good leading indicator.
Chris Lowe: Is there still a lot of financing coming into the gold market? Are the insiders still putting their money to work?
Rick Rule: The most important source of financing right now for junior companies is larger mining companies. What you’re seeing is that 35% of the juniors that are getting financed now are funded by competitors and collaborators. Traditionally, that’s a healthy sign.
Dave Forest: I’d also add that it depends where in the world you look. I went to Hong Kong last fall with a gold project. We sat down to talk to some of the investors. I’m used to going through a 45-minute presentation and then waiting for people to get back to me.
We put the presentation in front of people. I started talking. And the investor just flipped through the document and said, “Yeah. I’ll take it. This is great. I’ll buy it.”
I said, “Don’t you want to hear about it?” He answered, “No. I’ll take it. Gold is good.”
There is a LOT of money coming into the gold market in certain parts of the world right now. When you see that kind of enthusiasm, it’s a signal it’s probably going to trickle through to the rest of the planet at some point.
Chris Lowe: So where are the mom-and-pop investors? Seeing them investing in the market is often a sign that we’re later on in the cycle, right?
Rick Rule: At Sprott [Rick’s firm], the moms and pops traditionally come into the market at the top. The downside they experienced in the last bear market was incredible.
The S&P/TSX Venture Composite Index, an index of junior gold miners, plunged by 87%. To say that it was a traumatic experience is an understatement.
Those people will be back because they’re narrative-oriented. But they won’t be back for a while.
What’s interesting to us at Sprott is that, for the first time in my life, the retail market is global. We’re getting enquires from everywhere.
The traditional gold bug, of course, looks like me – an old, fat, rich, bald white guy. But half of the enquiries now are from folks aged under 40. And one-quarter of them are women. I’ve never seen that before.
But it makes sense. The millennial investor is extremely narrative-oriented. And the gold narrative, when it’s supported by price action, is one of the strongest narratives on the planet. It makes absolute sense. But we hadn’t seen it until about six months ago.
Chris Lowe: Let’s turn to Dan Denning. Dan edits The Bonner-Denning Letter with Bill Bonner, one of the cofounders of Legacy Research.
Dan comes at this from a different angle. Dan, you’re not a geologist. You’re not a commodities guy. You’re a monetary guy. Since 1971, when Nixon cut the dollar loose from gold backing, the U.S. has been on a fiat monetary system. So now, we look at the price of gold as an inverse reflection of faith in the U.S. dollar. What’s your perspective on that?
Dan Denning: Gold is a price signal. It shows the relative confidence in the financial system. Long term, the gold price tends to rally as the financial system gets more and more fake, and people get wise to it. There’s evidence for this in charts that go back to the founding of the Federal Reserve.
Gold is the original bitcoin. It was the asset that people bought when they lost confidence in the financial system, the currency, or the stock market. We think it will become that again.
You can’t separate what’s happening in gold from what’s happening in the money system, and what’s happening in the business cycle.
The gold bull market began in 2000. In 2012, the European Union debt crisis fuelled a strong rally in the U.S. dollar. And this has muted the rally of the gold price in U.S. dollars.
But then, early in 2018, you started to see the gold price reassert itself. This says lots of interesting things about the financial system. To me, it says that it’s better to be out of that system. The system is bogus.
Chris Lowe: How unusual is it to have gold rallying when the dollar is so strong?
Rick Rule: It’s happened once before in my life, that I’m aware of.
In 2000, I had to write a letter to my customers – who were theoretically all gold bugs – saying there was a case for gold. Not the case for gold, a case for gold.
In 2000, gold was doing well against every currency in the world… except the U.S. dollar. Gold began to do well in U.S. dollar terms in 2001. Then the dollar rolled over in 2002.
The dollar is doing well today, but not because of any underlying strength in the U.S. economy. I would argue that part of our recovery is due to an extremely low cost of capital brought on by ultra-low interest rates.
If faith in the U.S. economy diminishes, gold does well.
Chris Lowe: We’ve discussed why gold is a good bet right now. It’s going to go higher.
When gold bullion prices go up, gold stocks tend to go higher. They tend to be a way to get higher returns. Dave, can you explain why that is?
Dave Forest: There’s a fundamental reason for that. First, many gold companies are producing gold at a cost of $1,200 an ounce right now. So, if gold is trading at $1,500, the profit is $300 an ounce.
If the gold price goes up by $300 – a 20% move – the company’s margin goes to $600. That’s a 100% increase in the margin. So the profits go up faster than the gold price itself. That’s the fundamental reason why it happens.
As the cycle goes on, psychology is a bigger driver. Gold has a particular effect on the psyche of investors. It’s been happening for millennia. There’s a thing called “gold fever.” I’ve seen it in the field. When they find gold, people go crazy. There’s just something about that glint of gold.
And it happens in the stocks, too. In the last gold bull market, between 2008 and 2011, there was a time when any company that found a gold flake somewhere went public. And shares were running up thousands of percent in a matter of weeks.
So there’s a fundamental reason. And there’s a psychological reason.
Chris Lowe: E.B., we’ve talked before about how to put together an ideal gold portfolio. You always tell people to make sure they buy physical gold before they buy gold stocks. Even though we know that the stocks give you higher returns. Why?
E.B. Tucker: When I ran the fund, we wouldn’t take money unless people had physical gold. You have to have that position first as a baseline. Then, and only then, can you look for the more speculative gains on offer in gold stocks. Physical gold is wealth insurance. It’s not really to make money, per se.
It’s a complicated market. Some gold stocks can go up a lot. But they usually go to zero. I’ve been around a long time now and I know too much. I don’t like investing in mining stocks at all. I know that can be controversial, considering the guys I’m sitting next to.
My largest personal investment is in a royalty business. I’m extremely excited about royalties.
Chris Lowe: What’s a royalty?
E.B. Tucker: It might be best for me to give you an example.
Let’s say ABC Mining Company produces 100,000 ounces of gold a year. And ABC Royalty Company has a 1% claim on that gold. By contractual agreement, the mining company has to deliver 1,000 ounces of physical gold to that royalty company.
And if the mining company goes bankrupt, the royalty company has the right to seize the mine on that property. So it’s the strongest claim you can have. It survives even the bankruptcy of the operator.
Think about it like this. If somebody asks you, “Can you make a half-court basketball shot to win a car?” You say, “Maybe.” I mean, give me a thousand shots, and I’ll probably make one.
But can you make a layup and win a car? Yeah. I can probably do that 99 times out of a hundred. That’s how I feel about the gold market. Royalties are the ultimate layup. Especially right now, because no one understands what royalty companies are.
Even people in the gold business don’t grasp what the real value is. I’ve been involved in institutional pitches in the business. People have no idea what a royalty is. It’s just right over their heads.
When you have a royalty, you have 1% or 2% claim on every ounce of gold that leaves a property.
Now, when an operator puts $100 million into a mine to open up the shaft, they’re not coming out of there. They’re going to keep going… and going… and going…
If they find more gold – and they probably will because the gold is usually not just in one little place – you get 1% of that, too. You pay nothing for the effort of continuing to look.
Every single dollar that gold moves increases the value of that royalty portfolio.
I think people will wake up and see that. You’re going to see dramatic returns with low risk.
Rick Rule: The royalty companies have the best operating margins in the precious metals business. Streaming companies, too. A streaming company is where you have the right to buy gold or silver at a fixed price, irrespective of what it costs the producer to produce it.
Royalty and streaming companies are the best businesses. They’re also the least capital-intensive businesses. You buy an economic interest, which means you’re not responsible for sustaining capital investments.
With the huge royalty companies, what you also find is that very large deposits – tier one deposits, of more than 5 million ounces – always yield surprises.
So if the deposit that you thought was 5 million ounces becomes a 6 million ounce deposit, which happens many more times than not, you get a bonus that requires no exploration expenditure. It requires no sustaining capital. They’re truly extraordinary businesses.
E.B. Tucker: Royal Gold (RGLD) is an interesting company. It was a cheap stock for almost 20 years. Then it bought 1% of Barrick Gold’s Cortez mine for $8 million. That $8 million investment has returned about $800 million in payments. And last week, Barrick Gold (GOLD) announced another expansion of a discovery on that property. Royal Gold will continue getting paid. It’s an amazing story.
Chris Lowe: So we’re saying that physical gold is a good place to start. And royalty companies are a good addition to your portfolio. Something to think about…
Rick Rule: I want to talk a little bit about physical gold ownership, if I may.
Over the years, I’ve talked to thousands of people about gold. There’s a whole bunch of ways to own physical gold. But I’m going to ask you, as a personal favour to me, to stay away from midnight gardening.
I’ve had two clients that bought physical gold and buried it somewhere. Then they told all kinds of people about it. And they tend to get visited by folks they wouldn’t normally invite over for lunch.
Don’t do this. If you don’t trust the bank, find some sort of non-bank storage facility. Do not take this stuff home.
And if you do take it home, don’t tell anybody. The important part of secrecy is… shut up!
I probably talk to a dozen people a week about their precious metals portfolio. They tell a complete stranger that they have a thousand ounces of silver in the bricks, or something like that. This is just trading one set of amorphous risks for a self-created, real risk. Don’t do it.
Chris Lowe: So if you’re not midnight gardening, what’s the best option for physical gold?
Rick Rule: It’s odd. I probably shouldn’t own any physical gold. I’m the largest shareholder of Sprott Inc (SPOXF). We’re a brand name for gold. If the gold price goes up, Sprott’s earnings go up, and my stock goes up.
But I own it anyway. It helps me sleep at night. It’s like cash. I’ve had periods in my life when I had a lot of cash, and periods when I didn’t have any cash. I was happier when I had more cash.
That’s how I feel about my gold, too.
I have some physical gold in a vault in Hong Kong Shanghai Bank in Vancouver.
But most of my gold is in our trusts – the Sprott Physical Gold Trust (PHYS) and the Sprott Physical Silver Trust (PSLV). They store the metals on your behalf in a vault at the Canadian Royal Mint. I can trade them with a click of a mouse. Gold’s heavy. This way, I don’t have to carry it to some vault somewhere.
These trusts are low-fee, too. Most important – as opposed to the ETFs – they’re taxable at the capital gains rate, rather than the (higher) income tax rate.
I’m a perverse patriot – one who believes in paying less tax. So for me, as a Californian, the idea that I’m taxed at the capital gains rate, as opposed to the collectibles or ordinary income tax rate, is important. Many people tell me that they don’t intend to declare their gold, which is probably foolish.
E.B. Tucker: My advice is to split it up. We used to tell clients to start out with gold coins. You can hold them… you can touch them… This is easy for people to do.
Then you might decide to buy a few bars. Then you move into the Sprott trusts.
So you have your gold set up in these three baskets. Then you can get rid of them as necessary.
Dan Denning: It pains me to disagree with you…
But I owned physical gold when I lived in Australia. I was kicked out of my custodial facility based on its own voluntary anti-money laundering regulations. And I had shaved! I didn’t look like a terrorist. I didn’t think I was putting out that vibe. But I don’t have a permanent address.
So they said, “You just don’t comply with our rules.” And I said, “This really undermines the point of having someone who promises to look after my valuables – when you tell me that I can’t even access them unless I close my account.”
Based on that experience, I now believe the virtue of taking possession of your gold is that you don’t have any counterparty risk. Unless you have some of it in your hot little hand… or in a safe… or somewhere you trust… the benefit of owning bullion is diminished.
That may be a radical view. But it’s a reflection of my lack of faith in the financial system.
Right now, gold is still fundamentally a defensive asset… even with all the price gains we’re talking about. It allows you to extract money from the financial system… hold it… preserve the value of your savings in retirement… and then re-liquefy it when the time is right.