Commodities, Features, Gold

Preparing for the next gold rush

Gold

Despite stagnate gold prices amid a cryptocurrency threat, Fat Tail Investment Research gold investments editor Brian Chu believes a market correction beckons and there’s never been more reason to stick with the investment mainstay.

The constant commotion that surrounds cryptocurrency and its wider fanfare has thrown the resolute gold market into the limelight.

Investment analysts see a future for cryptocurrency as a long-term store of wealth, which some believe could usurp gold’s position as a portfolio backbone.

Stagnating prices haven’t helped gold’s cause in 2021, yet the market is still trending at three-year, five-year and 10-year highs.

It’s been easy to forget that only a year ago, gold topped $US2000 ($2697) per ounce for the first time ever.

Gold hasn’t earned a reputation as an investment mainstay for nothing, and according to Fat Tail Investment Research gold investments editor Brian Chu, it’s important to not get carried away by the crypto euphoria.

“I believe that there is a lot of merit in investing in cryptocurrencies but as to the claim in the crypto camp that gold is finished, where the central banks are calling gold a ‘barbarous relic’ and that cryptocurrencies are going to replace gold, I politely and respectfully disagree,” Chu says.

“I want to point out to the people who are of the same viewpoint as me, who are invested in gold and are wondering, ‘Have we done anything wrong? Should we change sides? Should we abandon gold?’, I emphatically say no.”

Starting his investment journey during the 2013-14 gold bear market, Chu has accumulated enough funds to turn his investments into a full-time career.

Chu leveraged his investment success and capability to establish the Australian Gold Fund in August 2019, which he says is outperforming the ASX gold index by 15 to 20 per cent per annum.

He believes that despite gold’s current languor, the market will rebound as banks choose to step in.

“I will disclose that I have started investing in one cryptocurrency … but I am still predominantly invested in gold, and I will remain so because the central banks have begun to taper their currency supply,” Chu says.

“For example, the Reserve Bank of New Zealand, they raised interest rates (in October). So, the central banks are starting to act on trying to normalise the monetary and economic cycle.

“The talk of raising interest rates normally puts a dampener on gold but after the banks actually act on it, it is providing tailwinds for gold because as the economy faces higher interest rates, you’re going to see asset prices begin to pare back.”

Typically, when interest rates increase, greater economic stability is achieved in regulatory eyes, and stock prices begin to drop as businesses and consumers cut back on spending.

As investors turn their attention to safe havens, capricious markets such as crypto might then feel the pinch.

“Given that many asset markets have moved well ahead of themselves in valuation terms, and the VIX index (volatility index), which represents the level of confidence or fear in the market, is near 52-week lows, my suspicion is that people that are very bullish and exuberant in the market are going to be caught short in this tightening cycle,” Chu says.

“They’re going to start taking massive hits while the smart money is moving to safe havens and instead of cryptocurrency, which is often considered an exuberant asset market, I think gold and gold mining companies are going to be beneficiaries of this tightening cycle.”

While not ordinarily considered safe havens, Chu suggests some cryptocurrencies will offer similar attributes to a reliable asset class such as gold and could be relied upon in the instance of a market correction.

“There are certain cryptocurrencies that are very speculative and perform well in a bull market but there are also cryptocurrencies that are quite conservative and maintain their price in the market regardless of the market situation – those are also safe havens,” he says.

“I believe there will be funds that move out of exuberant and overheated asset markets into gold and some into the safer part of the cryptocurrency market.

“That’s why I hold to my quiet confidence in my gold investments, and I encourage other people to consider this perspective if they don’t want to be caught holding the bag in the upcoming market correction.”

At the base of the gold market are the gold mining companies which generate the resources to drive this particular asset class.

In Australia, the most successful gold mining companies work 10 steps ahead to ensure they have the foundations to not only weather market storms but capitalise on them.

“Some of the best run gold mining companies manage their balance sheet so well that in the soft part of the cycle, when everyone else is struggling to keep their lights on, these are the companies that are making offers to buy up and take over their competitors at a discount,” Chu says.

With the stagnating gold price, mid-tier gold mining companies Westgold Resources, Gold Road Resources and Ramelius Resources have gone tit for tat in two separate takeovers.

Between September and November, Westgold was watching Gascoyne Resources like a hawk, making two separate plays for the junior gold miner.

The company initially offered one Westgold share per four Gascoyne shares for a value of 44 cents per Gascoyne share, before raising its bid to three Westgold shares for every 11 Gascoyne shares, valuing Gascoyne at 53 cents per share.

Gascoyne remained defiant, rejecting Westgold’s first offer before proceeding with its original plan to merge with Firefly Resources, which shut the door on any Westgold incursion.

Gold Road and Ramelius Resources tussled for a takeover of Western Australia gold explorer Apollo Consolidated throughout October and November.

Ramelius won the battle and now holds a 96.7 per cent interest in all Apollo shares.

Chu runs two gold stock investment services through Fat Tail, including the entry-level Rock Stock Insider and Gold Stock Pro.

Rock Stock Insider is focussed on mining companies in the more established end of the mining life cycle.

As the gold market lull continues, Chu has advised his Rock Stock clients to start shuffling their portfolio.

“This is a very good time to stand your ground and allocate more of your stocks into gold mining companies now as the other sectors and other asset classes are starting to get to that exuberant bubble phase,” he says.

Chu’s Gold Stock Pro premium subscriber service is focussed on the more speculative junior gold mining companies.

“For my (Gold Stock Pro) investors, I made some recommendations of companies that managed to withstand this period of time and they’re actually in the black in the last six months,” he says.

“Typically, in a market that’s hitting the bottom and is about to turn towards a bull market, it’s the smaller companies that move along with the largest companies, and then it’s the middle companies that follow afterwards.”

While cryptocurrency is likely to remain a threat for gold, it’s not all doom and gloom for the investment doyen.

Languishing markets incite stress but there’s always a rush on the other side – you just need to know where and when to jump.

This article appeared in the December issue of Australian Resources & Investment. To learn about Chu’s publications at Fat Tail Investment Research, head to fattail.com.au.

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