James Woodburn:
Hi. James Woodburn here, Group Publisher at Port Phillip Publishing and Fat Tail Media. Thanks for joining us. Well, you don’t need me to tell you things are a bit surreal right now, like we’re all playing supporting roles in a big budget disaster movie.
Extraordinary times, and they mean asking some extraordinary questions. Is the world going to have another Great Depression? Will stock markets take decades to recover? How do we recover from something on this scale?
With something this massive going on in the world, isn’t it pointless to be talking about investing at all?
Obviously, we don’t have all the answers, but we arranged this round table briefing to at least brainstorm a few solutions, which brings us to gold. Could gold be the only investment to go up for months or maybe years, or is it just another asset to sell alongside everything else?
In the past few weeks, we’ve seen evidence of both arguments.
James Woodburn:
That’s why earlier today, [we spoke to] Greg Canavan and Dan Denning, together with Shae Russell who knows more about gold and gold stocks than anyone I know.
Again, I know missing out on a historic gold bull market might seem like the least of your worries right now, but it’s investors who stay calm and rational, and make the right decisions while everyone else is terrified, that will come out of this thing better off.
James Woodburn:
We are going to talk gold. Gold was in a bull market before the pandemic. We’re now going to talk about what happens next. It’s a conundrum, because gold is seen as the ultimate safe haven, but it also tends to get temporarily dumped for cash along with everything else during panics.
What’s the long-term view and what’s a smart strategy? As our experts explain, there’s an opportunity hiding in the middle of this disaster, a potentially big one.
James Woodburn:
For the last week, I took my publisher’s prerogative [to] stop the press on every single daily e-letter in order to focus your attention on this opportunity. Every day we wake up, this thing just gets worse and worse.
Every day we wake up, it also looks more and more like we’re going into a gold bull market that resembles 1971 to 1980, as you can see here.
Towards the end of this run, gold entered what Shae calls a mania phase. It’s the point at which every man and his dog piled into gold and gold stocks. In the 1970s, this was caused by macroeconomic shocks and geopolitical panics.
We believe that same movie is replaying right now and that if you make the right moves now, you could see big potential gains while the wider market gaps down repeatedly.
James Woodburn:
Now of course, the simplest way to play this is to buy some gold bullion. We encourage everyone to do that if you haven’t already, but that’s not why we’re here today. We’re here to talk about how to potentially make many, many times more returns than buying physical gold alone. The idea behind this is pretty simple.
Very soon during this gold bull market, you could see gold mining stocks diverge from the wider market. You want to own the right ones before that happens. To talk about this in more detail is Greg Canavan and Dan Denning, with gold expert Shae Russell.
Greg Canavan:
Good day, everyone. My name is Greg Canavan and today I’m with once again Shae Russell and Dan Denning. You’ve heard from us a bit this week and we’re going to finish up with a conversation today, obviously about the markets again. There’s been continued volatility in US markets overnight.
The Dow, the S&P 500, the NASDAQ all fell somewhere in the region of 12 to 13%. Gold stocks, after effectively collapsing for a couple of days, the main indices rallied 20% overnight. The VIX index reached its highest point in history, certainly a couple of notches above what we saw back in 2008, so there’s a huge amount of volatility.
Greg Canavan:
The good news is the Aussie market’s opened [higher] this morning. We’re recording this about 11:00am Tuesday morning. The Aussie markets opened up about 1.5%. I guess that raises the question, ‘Have we seen capitulation selling on the Aussie market? Did we see capitulation selling in the US overnight?’ We’re here to talk about all that, plus plenty more today. Get comfortable. Sit down and listen in and we’ll kick things off. Dan, I’ll start with you. You’re obviously from the US. What do you think is the feeling over there? We’re obviously seeing a lot of this panic now in the stock market. Society is panicking, lockdowns, all that stuff. What’s your feeling about what’s going on?
Dan Denning:
I think there’s two things and they’ve collided. It’s like in Ghostbusters, when they cross the streams. You’re never supposed to cross the streams. The first thing that happened didn’t surprise me. I think we talked about it last week, but I sent a note out to the US readers. There was a bubble. There was a lot of leverage in the system and in the stock market, everywhere around the world, there was a premium on growth in momentum and that didn’t deflate in the last three weeks. It popped ... The surprising part is, I wasn’t surprised; that should’ve happened. No one saw that the catalyst would be a virus that originated in China. I think the speed of everything has shocked people.
Greg Canavan:
Absolutely. No one's seen that before. Right? This is completely straight line down.
Dan Denning:
Yeah, well it's ... People talk about Black Thursday and Black Monday, and I think we're just going to refer to this from now on as Black March.
Greg Canavan:
Yeah.
Dan Denning:
The question is, what I wrote in the e-letters today was, ‘Where do you go from here?’ I think the distinction is between a cyclical bear market and a secular bear market. A cyclical bear market would just correct the excesses that were in the system already. That’s what we’ve had. In a normal situation, then you’d see a bottoming process. It might take months, it might take weeks, but generally the bigger the move, the bigger the bear market, the longer it takes to recover.
Dan Denning:
This has happened so fast that I think the recovery could come more quickly. Now you have the second factor, which is if globally, a week ago we were talking about China and a supply shock and now we’re talking about six months of lockdown in Europe, the United States and Australia, the stock market doesn’t know what to do with that, because we don’t know who wins and who loses in the interim.
Dan Denning:
Everyone loses. I think that’s what you saw in the US overnight. As you pointed out, Australia had the worst day in 33 years yesterday. Despite this 13% decline on the Dow and the S&P, the market opens up 1.5%. I think as investors, that’s the challenge now to say, ‘Okay, not what happened last week, but what does the next six months, nine months look like in the real economy? Can we match that up with what we’re trying to do, as an investor?’
Greg Canavan:
Well, I guess that’s the interesting question for me, and maybe Shae can chime in here as well. This sharp slowdown, it’s effectively ... Money moves around the economy. That’s how the economies work. People go to work, they travel, they fill up their car, they consume goods and services. These goods and services move around the world. While that’s happening, money is flowing around to facilitate that movement. Right now, with a lockdown and people staying home from work, not going out, that has just frozen everything up.
Greg Canavan:
We’ve used this analogy before, but back in 2008 things froze up because the global banking system was insolvent. Now things are freezing up purely out of fear, warranted in some cases because we’re just not sure how this virus plays out and the threat that it has on the community, but the money has just stopped flowing.
I guess the question is, ‘How do you fix that from a short-term perspective?’
There’s a recalibration from high growth and expensive stocks down to a more sensible level. This is something that the stock market has never really had to deal with before. Shuttering, maybe apart from World War One when I think the stock markets actually closed for a certain amount of time...
Greg Canavan:
It raises the question, ‘What’s the central bank and government response?’ Because they’re trying to fulfil or trying to fill that vacuum of money that stopped moving through economic activity and they’re trying to get that going.
How does that look? Do you think that will put a floor under markets or do you think this uncertainty will continue the selling for weeks to come?
Shae Russell:
Before I get to that, I’m just going to touch on the Aussie market rising this morning and I didn’t mention this in our earlier conversation, but one of the advantages Australia had yesterday was being able to process the Chinese economic data first before the US did. We had manufacturing come through, falling in double digits, and with retail sales, and there was several...
Greg Canavan:
This is the Chinese data?
Shae Russell:
The Chinese data, yeah. We had the ability to process that yesterday, which is why we had that, the worst day in 33 years. I’m not surprised to see the market ... That’s not true. I did say I was surprised to see the market bounced this morning.
I think I said to you, both of you, that I had to check twice because I thought I was wrong. Now that I’ve had the chance to think about it, it’s really about picking yourself up after a fall, isn’t it?
Shae Russell:
We’ve had all this bad news come through and it’s a case of, ‘Okay, do we dust ourselves off and try and walk again?’ I’d like to think that’s what we’re starting to see, that we’re processing the fear, and from here, this week is really going to be, ‘Is the fear going to play out forever?’ No, not forever, but is the fear going to be prolonged?
Shae Russell:
If so, okay. Now is the time to navigate it. We’ve done the crying. We’ve done the screaming. How can we work with the information that we’ve got? I believe we’re waiting for later this week to confirm whether Glenn Stevens is going to create a bond-buying program. The fact that we’ve had the ability to chew on this news will mean that it won’t come as a shock when it comes through.
Shae Russell:
I think for investors, what we’re going to need to start doing is take time in assessing the news, which means staying away from headlines, pretty much any headline in any mainstream paper, but also to take the opportunity to adjust to the new normal and say, ‘All right, the fear’s out of the market. How can we use this and start to move forward, ahead?’
Dan Denning:
I'm not sure the fear is out yet though, but I-
Shae Russell:
Not completely out.
Dan Denning:
Well, I think you're quite right.
Greg Canavan:
I think the question is, ‘Is the fear priced in?’ That comes back to what you were saying with headlines. My view is, I look at headlines, not for the information content, but to see how the market reacts to those headlines.
If you’re seeing continued bad news and the market is starting to not react to that bad news, and it’s starting to rally a little bit on that bad news, then you can start to get a bit more comfort that perhaps the worst is priced in because you’re seeing continued bad news come into the market and stocks are not responding to it.
Dan Denning:
I guess that’s what I meant too; that’s what seems to me to have happened ... We initially talked a couple of weeks ago about focusing on the central bank response to what was happening and also focusing on government policy in terms of spending. What could they do? It seems to me the market’s reaction was absolutely nothing.
If the Fed can cut rates by one full percentage point in an advanced meeting on the night before the US market opens and then announce $700 billion in QE and you get a 13% fall, the markets are saying the answer to this problem is not cheaper money. Now, there is a problem with overnight funding.
There’s a problem in the US Treasury market. There’s a problem in the corporate bond market, but that is a completely separate problem to a public health problem. I think that this is the first time this myth of central bank infallibility has been also popped. People said, ‘Well, what is that going to do?’
Dan Denning:
What is lowering the cost of borrowing going to do to solve this public health problem? The stock market I think said nothing, so I didn’t do anything, and now the focus is on, ‘Okay, what’s going to happen in the real economy?’
Dan Denning:
Maybe the fear has [subsided to some extent]. Fear is exhausting. We were talking about it off camera. You do see this in bear markets, that there’s these vicious rips higher where people think that’s it. Hopefully it is, but in the meantime, this is still a process of price discovery, I think, which really should favour investors who are working hard, because in the liquidity and momentum market, it doesn’t really matter how hard you work. You just have to buy the biggest stuff that’s moving the fastest. That, I think, ended this week.
Greg Canavan:
Absolutely. Before we get onto potentially some stocks and sectors that might be looking attractive in this market, I want to go back to your question about the cyclical versus secular market. In 2008 or ’09, I think, we had a roughly 50% major stock market decline from the peak in October, November 2007 through to the bottom in March 2009.
Dan Denning:
That's right.
Greg Canavan:
We've had a 30% fall in roughly a month.
Dan Denning:
Right.
Greg Canavan:
To what extent does that timeframe ... I guess I’m asking, is a 30% fall in a month just as bad as a 50% fall over, say, 18 months?
We’ve compressed a lot of fear and bad news into a very short space of time. Is there an argument to say that, I know a lot of people are thinking, ‘Well, bear markets run for, I think on average a bear market is 14 months’, but the faster the fall, the shorter the bear market.
We haven’t had a faster fall than this in history, I don’t think.
Dan Denning:
Yeah.
Greg Canavan:
Does that mean this bear market will be shorter?
Dan Denning:
Shae, I'll let you answer it.
Shae Russell:
I reckon we're rewriting the rule book. You know, you don't often get to live through history, and I think that's what we're seeing. I'm not convinced that the bottom of the market is in yet. I still think there is a couple more whacks to come. I wouldn't be surprised if the recovery is as vicious and exciting as the falls have been. I don't know what you see, Dan.
Dan Denning:
I agree that ... You mentioned it last time — we talked [about the fact] that the word ‘unprecedented’ is used often, but this, this truly is.
Greg Canavan:
We can use it pretty comfortably.
Dan Denning:
I think that’s also testament to what happened after 2009 and really in response to the financial crisis, [where] you had several things happen. Interest rates came way down, so leverage was reintroduced into the market.
Then lots of automation: Program trading, program buying, and an explosion in exchange traded funds and passive investing.
In my view, there was a lot of, there’s a lot of money at risk that was taking more risks than it was aware of, which has exacerbated the speed of the fall.
The question is, ‘Will it go further?’
Dan Denning:
Well, the research that I looked at last week showed that there’s plenty of bear markets that are between 20-40%.There’s been eight of them in the US in the post-war era. As I said, the recovery takes a little bit longer, but as an investor, you just have to not crystallise the loss, if that’s possible. In time, we’ll make up for it. The big ones are the ones that are larger than 40%, and there’s only been three of them. The most recent one was in 2008-2009.
Dan Denning:
My argument to my readers was that would’ve been a larger bear market, but we probably would have recovered from it more quickly had the Fed not intervened and that’s … They’ve made this market and this decline more precipitous because of 10 years of intervention.
I couldn’t tell you. I wish I could tell you what the bottom was, but I will just tell you that for the first time, really, I would say really for the first time in four or five years, I woke up this weekend, in particularly today, and said, ‘I’ve got to dust off the old stock screens and start looking.’ Because if liquidity and momentum is no longer driving the market, then we can do our homework and there’s probably going to be well-run companies who you can measure and who you can buy at cheap prices.
Greg Canavan:
Before we get to those sectors ... We're not going to talk specific stocks. We're obviously just talking general advice and generally today. To go back on the secular argument, there is a school of thought that this whole virus issue.
Greg Canavan:
This whole virus issue has raised the question of global supply chains, globalisation. What are the longer-term ramifications going to be? [Are] countries going to try and bring manufacturing back to their home nations? What effect will that have on cost bases? So, there’s a lot [of] bigger questions that’ll play out. And I think one of the things that [you need to remember] when we’re talking about markets [is that] sometimes we’re at risk of some [people] maybe trivialising the falls and the potential for the bounce-back without thinking of the wider ramifications for what the ... what could happen in the real economy.
Greg Canavan:
So I know you’ve obviously been talking about this with your readers. What’s your view on what will happen with the whole globalisation experiment that has really sort of picked up since World War Two and the effect that that will have on that moment and going forward?
Dan Denning:
I’ll try to keep that one short. Because I think that’s a fascinating one. And Shae brought it up this morning as well. But I think what you’ll see is rather than economic nationalism being embraced by so-called populists who ... or outsiders, it might become a bipartisan belief among the political establishment.
Greg Canavan:
Because this trend was already on the way, wasn't it?
Dan Denning:
Yeah. I think so. I think people were reacting negatively to being left out of globalisation. So asset owners enjoyed a beautiful bull market.
[The] greatest bull market, a lovely bull market. But quite seriously, people who make things for a living, the manufacturing base of the English-speaking countries — Australia, New Zealand, the UK, the US — that got lost and those people were unhappy.
But now you have, so you might have an emerging political consensus that the economic benefits to private companies of offshoring because of labour costs are not more important than the political stability of a middle class who has a job.
Dan Denning:
So it might be more expensive and it might not make sense for Australia to make cars. I’m not saying that, but I think it will cause a re-evaluation of how dependent you are on key industries whose supply you don’t control. Medicine, food, key technical materials — you can’t be good at everything. Especially in a country like the UK, or Australia where there’s 24 million people, but there are world-class industries in Australia that are super competitive. But I think Shae’s right that, that if there isn’t a reconsideration of the benefits of globalisation now, then we will never have one. But that may be what happens right now.
Shae Russell:
I know I said in a private email thread amongst everybody in the company just recently that I believe the next decade could see the re-homing of manufacturing in Australia. And that’s a silly prediction to make based on how globalized and how much we’ve offshored everything that we do. But I wouldn’t be surprised if we start having high-tech facilities bringing home manufacturing skills in Australia. We’re witnessing it now with railroads and the railroads industry — the government has stepped in to essentially prop that up.
Shae Russell:
And there are reasons for that, that I could go into in another video because we ... I risk getting off on a tangent there, but we’ve already ... we already create, we already grow our own food. We already have a fair meat supply. We export something like two thirds of our produce. We have medical manufacturing facilities here. I wouldn’t be surprised if economic nationalism becomes a big thing going on over the next five years. And also, too, I think again, there’s a risk of going off on a tangent here that I think socialism and the rise of a universal wage is also going to be an offshoot of this because of how the virus is impacting the casualised workforce as well.
Shae Russell:
Now these are all bigger things coming out of it, but I wouldn’t be surprised if they become true things that are a reaction to this virus and also globalisation as well.
Greg Canavan:
Well, just on your earlier point, if the government wants to bring back manufacturing jobs into Australia, it’s going to have to provide massive tax breaks to do so. I mean, we just aren’t competitive and the whole reason why we offshored a lot of that stuff in the first place is because people just, your cost base is too high. That comes back to, speaking of going off on tangents, that comes back to massively high land value. So your whole cost base and high energy costs. So the cost of [the] power industry and the cost of location, those two input costs are very high in Australia.
Greg Canavan:
So whether [or] how that comes back, whether that comes back through higher wages, that’s got to come through productivity. Otherwise, that will create inflation. So there are a whole bunch of other issues that come with that. I mean, I agree. I think that’s going to be looked at, but how [will] governments pull that off when they’ve already got budgetary pressures? And in saying that, the Aussie government is sitting probably the best out of most of the other governments in terms of their fiscal position. I guess what makes it risky for Australia is that household sector debt is so high.
Greg Canavan:
So what will international lenders, how will international lenders, look at Australia? If they say, ‘Okay, we’re lending a lot of money to the household sector’, that’s fine because your government’s got their finances in order. If the government’s finances start to blow out as well that’s when ... I mean the Aussie dollar is already what?
Shae Russell:
61 cents this morning.
Dan Denning:
Yeah, but that might solve your problem. So rather than policy response, what you get is you get refugees from Silicon Valley or people who don’t want to live in California anymore and the private sector says, ‘It’s not so much a question of replicating centralised industrial production systems because that’s basically what Japan did after the war of Korea and then China. The next big breakthrough is localising manufacturing using nanotechnology, using...’ Now, that’s beyond my expertise. I know you guys have Sam Volkering, and Ryan [Dinse] focus on that sort of thing.
Dan Denning:
But that could get a huge boost from this because it will require some innovation. It will require some things that we can’t do. But from a policy point of view, it might require tax breaks or it might require visa laws being changed. So instead of highly skilled software people going to California, they come here. Those are all possibilities here. But it’s going to be a combination of private sector companies who have the innovations — and Australia has plenty of those — and the correct policies to allow those companies to do stuff that’s not currently being done.
Greg Canavan:
Let’s move on to some stock or stock central ideas ... I was just looking early this morning. The Dow, after falling 13% overnight, is now down 32% for this move. And that’s just effectively been a straight line move over three weeks. So that’s just insane. The S&P 500 is down 30%. So I mean, look, these aren’t huge falls in terms of massive secular bear markets, but in terms of the speed of the fall. And there’s a couple of stocks that I’ve been looking at, or a lot of stocks that I’ve been looking at, that have fallen 60, 70% and are showing real signs of value.
Greg Canavan:
So, look, I know your area is gold and we’ll get onto that in a moment. Dan, I know you were speaking about sectors that you’d be looking at. What sort of sectors do you think are starting to look attractive now from a longer-term buying [perspective]?
Dan Denning:
Well, surprisingly, I have five of them, but I would preface that with a word about risk, and I hadn’t really defined what I meant by secular, that a typical bear market is a grinding psychological affair in which an entire asset class is discredited for a generation among investors. And you couldn’t give it away at the bottom of a bear market. People just don’t have anything to do with it. And I think that’s a genuine risk here with the demographic setup in the US and Australia — that there’s so many people close to retirement, that this is such a shock, that it forces a reconsideration of whether equities... but separate discussion.
Dan Denning:
So as long as you’re aware that a real secular bear market can last years and not go anywhere, just go up and down and be range-bound for years, but we’re looking anyway. So what I looked at is biotech, [which] I think will get a really strong look, partly because this was all kicked off by a virus, but people are going to start ... capital might be a lot more interested in funding biotech companies. Telecoms will get a big boost just in the short term because so many people are working from home and they own the networks, whether it’s the Wi-Fi or broadband or the undersea cables that Shae mentioned.
Dan Denning:
Utilities are also interesting, partly because [of] income. We’ve been so focused on capital gains for the last, really the last 20 years. I look today, ExxonMobil aftermarket was up 2%. Exxon pays a 10% dividend and the oil price was under $30, so there’s a whole separate set of risks. But I would look at utilities, railroads, transports, and I would say you have to look at oil and energy because regardless of how long this recovery takes in the real economy or how much GDP shrinks in the next two quarters ... we still need energy and energy is cheap right now, which is a real tailwind for certain companies in...
Dan Denning:
But you’d have to look at these companies. So I’m looking at it from a sector point of view. You really have to start looking at it at a balance sheet level, looking at their liabilities, looking at debt, their access to debt, their cost, their credit lines, things like ... So I would look not only at the oil and energy stocks that are going to survive a price war between the Saudis and the Russians, but also there’s companies where their costs, one of their big costs, has just declined dramatically. So you’d have to do your homework. But that’s where I’m starting right now.
Greg Canavan:
Absolutely.
Shae Russell:
Before you jump in, Greg, on that, energy costs are crucial for miners. So falling oil prices is going to be good for gold miners lowering their costs in the long run.
Greg Canavan:
It’s a good point. And the issue that I wanted to raise is that in the very short term, you’re going to see company balance sheets and this is why ... your point is important. Company balance sheets are going to come under pressure from reduced cash flows. So [for] companies with perhaps too much debt to service ... [if] cash flows are dropping in the short term, they’re at real risk. So there might be equity raisings that you hadn’t planned.
Greg Canavan:
They might have to refinance their debt at more onerous terms. I mean, we’re just not quite sure how this very short-term [situation] is going to play out. That’s producing opportunities. But you do need to look at those balance sheets to make sure that you’re not buying into a ‘too high a risk’ situation, given that risks are prevalent everywhere right now. The other thing that I would mention to listeners, just as a general sort of comment about how to look for value in the market, [is that] one of the things that I’ve found [to be] a really good barometer for value is looking for stocks with high return on equities and high return on equity and low price earnings ratios.
Greg Canavan:
A return on equity tells you how profitable a company is. So if a company’s got anywhere from, say, 15, 20% [or] higher, it suggests that it’s a well-managed company. It’s got a very strong competitive position, generates strong cash flows, so all these things combine to produce a good return on equity. If at the same time the price earnings ratio is quite low — and when I say low, maybe 13 times or 12 times or less — those combinations are actually a good sign of value. So if you’re out there looking for stocks and you like looking at valuation parameters, then that’s a good tip for me. All right. Let’s talk about what perhaps is I think one of the standout opportunities in the market right now, [which] is the gold sector.
Greg Canavan:
I’m going to get to some stats in a minute. The reason I think that, and I think we’d probably all agree on this, is that at some point all the money that’s getting put into the market by central banks and by governments through fiscal stimulus, at the moment that’s being hoarded in a panic type situation. So the cash is going into the market. People aren’t spending, they’re just sitting on the cash. Once this panic phase finishes — and whether that’s one month, two months or six months, we don’t know that — that cash will go back into the market.
Greg Canavan:
So for mine, gold is a standout recipient of that cash because people will automatically think there is so much stimulus going through the economy [that] surely fear currencies are going to be at risk. The age-old method of protecting your wealth is gold. That hasn’t happened right now. And it doesn’t tend to do so in a panic market. I think we’ve seen the gold price in US dollar terms fall 12% over the past couple of weeks. So let’s talk a bit about the gold price, Shae. This is something that obviously you focus on quite a lot. Have you got any ideas or explanations for why we’re told gold is the safe haven, it’s the place to be in times of turmoil, yet it too has fallen? What’s the story behind that?
Shae Russell:
Well, for starters, I'm not surprised it's fallen and I've been right-
Greg Canavan:
Actually you did mention [in] the last chat we had that you thought gold would fall down.
Shae Russell:
I did. It’s nice when you make a bold call publicly and then the markets go back you up. The one thing that did catch me off guard with the gold price fall, though, is the straight line down. I’m not surprised the fall was happening. I did anticipate it, but it really was just a jump-off-a-cliff dive. And the reason why I was predicting the falls, quite simply, [is because there was a] massive rally at the start of the year leading into the gold price. So a retracement was always going to happen. Now you’ll notice I’m calling it a retracement, not a correction or a crash like we are [seeing] in stocks.
Shae Russell:
Now, that’s because I believe we are looking at two different things ... I know you guys — we’re going to talk about the paper market versus the physical markets, [but] I’m going to stick to the physical market for the moment. I’m not surprised it’s happened. I think it’s going to go even lower. So as we’re currently sitting at around $1,500 per ounce, don’t rule out it trying to dip well back into the $1,400s. But I would just like to point out for investors that doesn’t mean the gold bull market’s over and no, I’m not just a raging gold bull. It’s just a pullback in the price. The heat needed to come out of the market.
Shae Russell:
From what I’m hearing, by the people I talk to, there’s still insane volumes for gold. It’s only increasing. Silver, the price of silver fell overnight. I know the volumes are, people are trying to get their hands on silver at the same time. Even though we think it should be rising, it’s really just a dash for cash. I know margin calls were happening in the US last week and basically I believe we’re seeing people sell out of anything they can to meet their obligations on the other side.
Greg Canavan:
Well, for some perspective, in 2008, from March 2008 until October 2008, the gold bullion price fell 30% and that was at a time once again of great turmoil, panic. And this brings us to the conversation of what really drives the gold price. Is it physical demand or is it the paper markets, which is the COMEX in London or the futures market in the US? I had a conversation with the CEO of the Perth Mint six months ago about this, and his view was that it’s ... it depends. Sometimes the paper price drives the gold price. Sometimes it’s the physical demand.
Greg Canavan:
So I think it’s interchangeable and I don’t know what your view is on this, Dan, but I’ve been following the futures’ positioning of traders over the past three or four months and they have been at record high levels. So at some point, I was looking for a pullback, and I was looking for a pullback when prices were a bit lower and they just kept going higher and higher. At some point, the panic selling that you’ve seen in all the other markets is going to flow into a highly leveraged market such as futures trading. So from my perspective, this is a bit of a clean-out of the speculators in the gold futures market, which, as you said, probably sets this up for a nice buying opportunity. Whether that pullback continues for another two, three weeks [is unknown]. In 2008, it went for eight months or so.
Shae Russell:
March to October, really.
Greg Canavan:
Yeah.
Dan Denning:
Well, it doesn’t surprise me. I mean, it’s a deflation of a giant financial asset bubble, and gold has been used in lots of different strategies to participate in that bubble. And as Shae pointed out, if ... you sell what you can sell when there’s a ... when you’re trying to meet a margin call or you need to raise cash. So I mentioned it last time we talked, but on that pyramid, John Exter’s pyramid of liquidity, you’ve got cash, government bonds, and at the bottom is gold. So that selling pressure, I think, showed up last week ... [What] is interesting about it now is that it seems to me there’s two prices. There’s the price that you’re going to pay a bullion dealer for an ounce of gold or a kilo or whatever you’re going to buy.
Dan Denning:
And the demand, as we all know from the people we talk to in the industry, is off the charts. The demand hasn’t been this strong since 2008 and yet you have something else playing out in the paper market, which is muddying the price signal. But I think that’s where, when you talk about companies, it makes it a bit easier because from the top down point of view, you’re saying, ‘My risk here is that we’re wrong about what’s happening.’ What we think is happening is a wall of money is coming from low interest rates, from fiscal stimulus, and that all things being equal in the past, that has meant...
Dan Denning:
That all things being equal, in the past that has meant a rising gold price. And in this case, maybe a rising gold price in all currencies, gold against paper money. So, that’s the rationale behind saying, ‘Okay, well what do we do?’ So, my own view, at least personally, is I’m quite comfortable owning bullion for as long as it takes, which could be a long time. But I don’t follow the gold stocks, so it was interesting to see what happened last week though, and that’s probably what we should try and get to the bottom of. At a time when a lot of us thought that the stocks would start taking off because of this big-picture argument, a lot of the stocks absolutely crashed last week.
Dan Denning:
Without getting into the details, we’ve talked about it privately and, you know, we’re not forensic accountants, but it looks like there were several exchange-traded funds who tracked gold indices and they were leveraged exchange-traded funds. So, when they got margin called, they had to sell the underlying stocks. And there were a lot of Australian stocks in those funds.
So, when I look at that, I thought, ‘Oh my gosh — not only do I think the gold price is going up, but I also think that the stocks took an unusual dive, not related to the gold price, but related to leverage in the financial markets.’ So, the setup is compelling. The risk is very high, but the setup is compelling.
Greg Canavan:
Well, let’s look at some stats. In March 2008 to October 2008, as I said, the gold price fell 30%. GDX, which is a good barometer of gold companies, fell 70% at that time.
Now, in the past three weeks, we’ve seen the gold price fall 12% and GDX is down 50%. In the Aussie market, the Aussie dollar gold price has fallen 5% from its peak, yet the ASX gold index is down 35%. Now, that’s recovered a bit today.
I’ve seen gold stocks move up this morning, but we’re seeing huge moves in the actual gold stocks relative to the underlying metal they’re selling. So, either they’re telling you that the gold price is going down in the future, or they are getting towards, obviously, as you said, [a situation where] there’s risk involved in buying these smaller gold stocks that are exposed to a volatile asset price. But surely, there’s got to be some pretty good value emerging in the gold sector about now.
Shae Russell:
Look, I certainly do, and I don’t think the gold stocks are an indicator telling us that there’s further falls to come in the gold price. Because at the end of the day, there is increasing demand for the metal. So, if we just backtrack to ETFs, for example, last month, gold-backed ETFs saw their highest monthly influence in six months.
Now they are buying every scrap of gold that they can get. So, any gold that’s on the open market isn’t going to waste. It’s been bought up. And even though we’ve seen the gold price tank, we’re still seeing demand increase, and eventually that sentiment is going to filter back through to gold stocks once the fear sort of subsides.
Shae Russell:
The important thing to remember, too, especially in the Aussie market — it’s less relevant to the North American markets — is that a lot of our gold miners are very profitable gold miners, and there’s developers and obviously smaller explorers that will sort of follow that tailwind up once investors cotton on that big gold miners have seen their share price halve in the last month, three weeks. They’re halving when you’ve got companies that are making significant profit margins on the basis of what it costs to get the gold out of the ground versus what they sell it for on the market. So, I think investors are going to catch on to that and there are some incredible compelling opportunities in that market.
Greg Canavan:
Well, I know you look at a lot of the smaller stocks, or you look at the range of them. But just to give you one example of one of the gold stocks that I watch, it’s got a return on equity of 20%, so it’s quite a profitable miner. And without getting too technical, its price-to-book ratio is one and a half times. So effectively, you’re getting a yield on that business. If you were to buy the whole business, your yield on that is around 14, 15% compared to, I mean, what are the options in the equity market? You can go and buy a Telstra or a Woolworths, so the business yields about 4 or 5% because they’re defensive stocks.
Greg Canavan:
I mean, gold stocks are undoubtedly more risky than those types of ventures, but that’s quite a wide difference between that. Bond yields are 1%, and yet you can go and buy a gold miner with a business yield of 14, 15%. This is a solid miner. This is not a tiny stock that we’re talking about, but it just gives you an example of some of the value. And if the value is there at the bigger end of the market, then I imagine it must be huge at the smaller end of the market. And you were mentioning earlier, you’re looking at potentially some of these smaller guys getting some takeover offers. Is that starting to happen now?
Shae Russell:
Yeah. Look, I certainly am. I said this has been an ongoing thing for the past 18 months. And even with the selloff that we've seen, I haven't changed my tune. It's definitely going to happen. So, just yesterday as the broader Aussie market was tanking 10%, one of the smaller gold miners rallied 40% because a takeover was announced. That's going to continue happening. And it's something that I'm very interested in looking at is, there's a lot of smaller miners who are now going to struggle to raise capital in this market. Nobody's going to want to touch them, but they're great assets.
Shae Russell:
There’s still gold in the ground to get out, and a lot of them have done the hard work. So I wouldn’t be surprised to see these big, cashed up [miners start acquiring smaller companies]. And I’m not joking when I say cashed up; a couple of the major producers in Australia are sitting on $1 billion in cash. They’re primed for takeover targets, and basically between the margin of what the Aussie dollar gold price is and what they’re selling it for, they’re going to become more profitable, which means they can go out and buy these guys that have done the hard work of finding the gold, and there [are] some very compelling opportunities there. Right now, some of the stocks have been sawed off by 50, 60, 70%. They’re scary numbers.
Greg Canavan:
Yet, the Aussie dollar gold price is 5% off all-time highs.
Shae Russell:
Yeah, I know.
Dan Denning:
This is kind of baffling now, and I’ve been out of this game for a long time. So, this is what I ask when I look at that is, [in] 2008, once the price fall was done in the stocks, so the bullion move came first, [the] gold price started going up and then the stocks kind of catapulted.
But not all of them did that. So, why? Like when you look at [it], as investors [we] say, ‘Well, if you make gold, and the gold price goes up, why isn’t the stock going up?’
Shae Russell:
Not all of them were making gold. So, that doesn’t help. That’s partly why the share price tanks. The other thing too that I want to point out, some of them tank too because they couldn’t get access to credit, or they couldn’t raise capital. Now, you can have great projects, but if there’s no money to get them out of the ground or to get them going or get the gold on the road, the share price is going to tank. So, while I do look at the smaller sector of the market, there’s a couple of other opportunities that are going to be in the developers’ [sight] that have got lines of credit open. And as we’re seeing right now, we could be looking at banks tightening lending. They’re not going to want to lend to the risky market. So, if we’ve got developers that have got not only lines of credit but that aren’t fully drawn down where they can also hedge their ounces coming out of the ground, they’re going to be compelling opportunities this time around.
Shae Russell:
I mean, of course, nothing’s a given — everything’s got to fall into place. But there are companies out there that are doing that, and Australia especially, over the North American market, is quite primed for that setup. And it’s because miners got hard hit in 2008 in Australia.
There was a lot of badly run companies that were running margins too tight on the gold price. I’d like to think that those risks from then have paid off and managers understand the risks — not necessarily understand the risks more this time; they’ve prepared for them more this time.
Greg Canavan:
We went through a pretty bad bear market from, what was it? 2012 through to 2015, where a lot of Aussie miners really struggled. The good miners actually did really well out of that. The US majors retreated from Australia, and I know companies like Northern Star and Evolution, they picked up some assets on the cheap around the bottom there in 2014, 2015. I was going to ask you, when you go through a bull market, you tend to get a lot of gold stocks getting listed, a lot of money flowing into the sector on the promise of finding gold. So now, we’ve gone and we’ve had this considerable pullback. What’s your process for going and sifting through those ones to say, ‘Okay, well there’s a lot of garbage that came out in the bull market. How do I go about finding those ones that are more primed to benefit from the upturn when we get it?’
Dan Denning:
Can I also just add a question to that? Are you doing this because you want a quality company that has a great yield, or because you think something’s about to go to the Moon?
Shae Russell:
Actually-
Dan Denning:
Because to me, that’s the part that’s interesting. But I understand the business part too. It’s just, which is more interesting to you right now?
Shae Russell:
Both for different reasons though. So, we’ve got companies that I think are going to offer a great yield and that’s because they’ve got their lines of credit sorted, they’ve got their cash sorted, and they’ve got some great management and partners.
Greg Canavan:
But, if you want to yield, you go and buy something else, don't you?
Shae Russell:
Yeah, that's a good point.
Greg Canavan:
You don't buy a gold miner for the yield.
Shae Russell:
But if you’re one of the speculative ones, which I guess is sort of my bread and butter, so it’s sort of hard to deviate from them, I’m looking for companies that I know are looking in highly prospective areas …
I’d like to call it the Victorian gold mining renaissance right now. We’ve got the Victorian government that’s just whacked the tax on the industry in Victoria without consulting the gold miners and asking what they felt.
That’s actually a bullish sign. Even with the selloff that we’re seeing, they know that there’s a lot of gold about to come out of the ground. So, that is a great reason for me to say, ‘Well, what’s happening in that area?’ Now, we’ve got one of arguably the best gold mines in the world right now, [which] is Kirkland with their Fosterville mine out in Bendigo. That’s sort of creating new precedents for gold miners in Victoria about what could be done there.
Shae Russell:
So, it’s sort of about following an even balance of pet projects that are in hotspots that are near big guys, who are interested in acquiring up neighbouring sites, as well as the other side. The more balanced side is looking at it going, ‘Okay, what projects have got access to funding? What projects have got great teams on board and can drive their projects further?’ So, it’s not about going all in. I like to reiterate that when I’m fielding text messages from friends and former colleagues, [asking] ‘When do I dive in?’ is not the answer. It’s about being selective and a), knowing where to look, but knowing-
Greg Canavan:
Getting your shopping list ready.
Shae Russell:
Yeah, and knowing how to qualify it too. So, just because these huge opportunities have sold off today, that doesn't make it a buy tomorrow. So, it's about qualifying what I've got on my list and I've got hundreds on my list right now.
Greg Canavan:
And understanding the risk. I mean, these things are risky investments. They can go up thousands of percent, and they all also can blow up.
Shae Russell:
Yeah, and then they can absolutely tank, and it happened in 2008 with some highly speculative companies. And it was because everything didn’t line up for them. So, you know, it’s that horrible risk-reward trade-off. High-, high-risk companies. But you could pick them up at the time just as they’re about to be explosive.
Greg Canavan:
So, with that in mind, what's your plan for this month's newsletter?
Dan Denning:
Yeah, hang on.
Shae Russell:
I will be honest, I am looking for the ones that are going to bounce out of this rut in the short term. I believe there’s some good short-term trading opportunities. If the market decides to start levelling out, [I’ll be asking], ‘Okay, what’s the short-term trading opportunities?’ Versus ‘Where are the companies lining their ducks up, getting all their paperwork lined up? Have they got institutional investors on board before this happened and has that come through?’ So, it’s not an ‘all hands in’ [scenario]. We want to play the table, and that’s basically the strategy for the next, I would say, six months. It’s not even a month-long strategy. It’s a very significant [mindset of], ‘Let’s be smart, take the information we’ve got and, slowly, let’s play the table, not the hand.’
Greg Canavan:
Well, I think it’s a good point, and it probably reflects the way I’m looking at the stock market as well. And the conversation we’ve had today is about, ‘Are there opportunities opening up?’ And I think the answer is definitely yes. But as you said, you don’t want to just dive in and go all into the market at the moment. There are just so many unknowns that you need to be a little bit cautious. But I certainly think having a bit of a game plan over the next three to six months, having a look at a bunch of stocks that you’re interested in buying, maybe start buying them in portions of maybe a little bit now, another little bit in a couple of months’ time, [is a good approach]. Look for the market to bottom. Look for those signals that you often try to find. You know, whether we’re at a bottom, are they capitulation selling?
Greg Canavan:
I think that to me that that has happened. We’ve seen capitulation selling on a number of occasions. Whether we get a little bit of buying now and we get another down move, depending on how, I guess, bad this virus and this lockdown gets, and that’s just an unknowable at this stage. All right guys. I think we’ll leave it there for today. Thanks very much for joining us and thank you very much for listening. I hope you have got a lot out of today’s conversation. If you’re interested in the kind of stocks that Shae’s looking at and going to be talking about in the coming months, please stick around for a message from our publisher coming up. Thanks very much and we’ll talk to you again soon.
James Woodburn:
Well, I hope you’ve enjoyed this conversation. At the very least, I hope it was a welcome diversion from all the scary headlines. These are worrying and hard-to-read times. The natural reaction is to do what many people are doing around the globe — hunker down, isolate yourself, border your windows and shut up shop. But we can’t do that with our minds or our money. We don’t know where the bottom will be in the market or when it will happen, but history tells us one asset shines in times like these. As Agora founder Bill Bonner recently wrote, ‘We’re sitting on gold, and we’re going to sit tight until the price goes so high you can buy the Dow for five ounces or less.’
James Woodburn:
Now to us, the opportunity in gold and to certain gold stocks is clear as day, but which stock should you be looking at?
Do you buy them now or do you wait for them to get even cheaper after more market selling?
Is it really possible for any stock, even a gold stock, to go up hundreds or even thousands of percent in a nightmare market like this?
As you’ll see, if you click the link below, the answer is absolutely yes. Certain gold stocks did exactly that in the granddaddy gold bull market in the 1970s and that era has a whole bunch of similarities to what’s unfolding right now, but you need to pick the right stocks and buy at the right levels.
You need to understand the risks, too.
Click on the link below and Shae will show you exactly how to do this and the gold stocks she has on her watch list right now.