For the kind of life-changing gains that let you retire early, clear away your debt, or travel the world, you need to look for opportunities where nobody else is. In 2018, that’s not the big tech stocks. It’s not even cryptocurrency.
And not just gold, but also gold miners.
That’s according to Money Morning Director of Research Matthew Warder.
He’s served as a top advisor to some of the gold industry’s biggest players.
Before he was the director of research, he provided insight for Wall Street banks, hedge funds, and deep-pocketed investors that was used to make billion-dollar investing decisions.
I had the pleasure to sit down with Matthew this week and talk about his outlook on the yellow metal – and why he thinks it should be in every speculative investor’s portfolio in 2018.
Gold Is a Necessity, Now More Than Ever
MONEY MORNING: Why do you think some people are averse to buying gold – and what are they missing?
MATTHEW WARDER: Well, I think that the initial thought that an average investor might have about gold is the idea that it doesn’t provide an inherent return (i.e. pay a dividend or interest) and therefore is an inferior investment to, say, the 10-year Treasury – which, as you may know, has an historical inverse relationship to the price of gold.
However, since it bottomed in 1982, the U.S. Treasury’s interest yield has declined from 15.6% to 2.1%, meaning that the bond itself has been in a bull market for about 35 years.
Now, the interest rate could certainly go lower (which would make the bond go higher), but certainly, after a 35-year run, the U.S. 10-year Treasury is closer to the end of that bull market than to the beginning. And if you recognize, as I mentioned, that gold trades inversely to the U.S. 10-year Treasury, then you also recognize that means that a gold bull market is closer to the beginning than to the end.
MONEY MORNING: Gold is certainly on the rise, but there’s another type of investment that is dominating the headlines lately: cryptocurrencies.
Why should investors own gold instead of alternative “currencies” like Bitcoin? What are the advantages of owning gold?
MATTHEW WARDER: First off, I think I should say that I’m a big believer in the blockchain technology that underpins cryptocurrencies – that kind of transparency would certainly be welcome in commodities markets, and in fact, it appears we’ll see it used in that fashion very soon.
That said, the driver of prices for both Bitcoin and gold is overall investment demand – and while the gold market has experienced downturns in that regard, cryptocurrencies haven’t yet, and we have literally no idea exactly how Bitcoin will behave when the market finally turns.
The same can’t be said of gold – it’s endured several bear markets over the years, and its subsequent recoveries have been relatively predictable. That kind of long history gives analysts like myself sufficient data to draw near-term and longer-term conclusions about the overall price trajectory.
So the biggest advantage gold has over Bitcoin is that it’s a proven store of value in a comparatively predictable market, whereas the biggest disadvantage gold has to bitcoin is that it is a less attractive speculative investment. But that suits me just fine, because I’d rather buy something I know is going to rise in value over time versus something I think might rise in value over time.
MONEY MORNING: You’re confident that we will see gold rise in value over time. Does that mean you think gold should be in every investor’s portfolio?
MATTHEW WARDER: The word “every” gives me some pause, because peoples’ appetites for risk are so widely dispersed, but I do think that every speculative portfolio should have some percentage exposure to commodities that absolutely includes gold and gold-related stocks.
The principal reasoning behind that right now is that gold prices clearly bottomed in late 2015, and we’re in the very early stages of a recovery – the question now is how high this market will go.
MONEY MORNING: So do you think the gold market will see gains similar to those of the 1970s’ – like Money Morning Resource Specialist Peter Krauth recently suggested?
MATTHEW WARDER: I’m certainly in agreement that gold prices are headed higher.
I’ve heard some analysts express concern about the rising interest rate environment being a hindrance, but I’m less concerned about that, given that in the decade of the 1970s that you just mentioned, both interest rates and gold prices rose in tandem. In fact, given gold’s recent price history, it’s my belief that the three proposed rate hikes this year simply give us a schedule on which to trade the market.
As to the magnitude of the current bull market, that will ultimately be dependent on the risks that our government and our economy face. At the federal level, we have in excess of $20 trillion in on-balance sheet liabilities, and well over $100 trillion in off-balance sheet liabilities. In essence, these are demands on the productive capacity of the U.S. economy – they’re calls – and calls that I think are excessive relative to the economy’s ability to service them.
Now, I understand nobody’s really worried about it at the moment, but the time will come when we begin to have difficulty servicing those liabilities.
At that point, the whole premise of confidence in the U.S. dollar/U.S. Treasuries/U.S. political system will increasingly be called into question, and that is likely to be very good for the gold market. And believe it or not, that process begins this year, as the U.S. Federal Reserve begins to unwind some of those holdings.
Does that mean that gold is going to skyrocket from its current $1,350 an ounce to $5,000 in the next six months? My answer would be, who cares about the timing? We know gold is going higher, we know it’s cheap relative to where the price has been, and we know it’s cheap because people have faith in a system that is much more challenged than many people realize.
MONEY MORNING: Not only are you an advocate for buying gold, but you’ve also previously spoken about investing in gold miners.
How does an investment in miners differ from an investment in gold or a gold-backed ETF (exchange-traded fund)?
MATTHEW WARDER: The first thing that I would mention is that the gold market is enormous – it’s one of the most widely traded commodities on the planet. And even when investors pour millions of dollars into it all at once – either into physical gold or a gold-backed ETF/ETN – it has a comparatively small impact on the price.
The market caps of gold mining companies, on the other hand, are tiny when juxtaposed with gold itself. When gold prices rise, they of course tend to rise alongside it, because higher gold prices mean higher revenue and higher margins. But because of their smaller size, when investors pour the same millions of dollars into these companies, share prices tend to outperform the underlying commodity by a wide margin – moving two, five, 10, even 100 or more times greater, depending on the overall size of the company.
MONEY MORNING: So what qualities should investors look for in miners?
MATTHEW WARDER: Well, as my colleague Rick Rule often says, “In the natural resource market, you are either a contrarian, or you will be a victim.” So what I tend to look for are essential commodities in areas or markets that have, for one reason or another, fallen out of favor and are in the early stages of turning from bear to bull – and gold would certainly fit all three of those criteria at the moment.
As to the mining companies themselves, I try to find opportunities to get in as close to the ground floor as possible – the earlier the better. And since developing a mine from exploration to first production is such a specific skill set, it is essential to have a management team that has not only been successful in the past, but most importantly has been successful at the task at hand. I would also prefer that management team to have a sizeable ownership percentage – some skin in the game, so to speak – because I believe that incentivizes success over time. As an investor friend of mine once said, “it’s very hard to get rich off of managers.”
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Source: Money Morning