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The Fed rocks the markets
Last Thursday, Fed Chairman Jerome Powell rocked the markets with a hawkish outlook.
“It is appropriate in my opinion to go a little faster,” Powell said during a meeting with the IMF. “I also think there’s something to the idea of front loading.”
The Dow Jones reacted with predictable gloom. By Friday afternoon, the index had lost nearly a thousand points – its biggest one-day drop since February 2020.
Those “buying the dip” were also caught off guard: Markets fell another 1.5% the following Monday.
Bottom line: Recession fears leave investors with few places to hide.
One equity sector, however, is still doing well:
Since the beginning of the year, the VanEck Gold Miners ETF (NYSEARC:GDX) increased by 10%. Canadian gold company Osisko Mining (OTCMKTS:OBNNF) has increased by 45% since it was recommended in The Moonshot Investor last fall. Recommended Lightening gold (OTCMKTS:AUXXF) did almost as well.
As markets continue their wild swings, many mid-cap gold companies are offering “recession insurance” to portfolios while leaving the door open for bigger gains.
Mr. Powell signaled that the Fed had finally woken up to inflation. Investors should not ignore the signs.
Moonshots of gold mining
Gold has always been a tricky investment. The metal does not produce dividends or profits, making supernormal growth virtually impossible. Since 1930, gold has lagged US stocks by 4.8% per year; investors would have done better to buy Treasury bonds.
And companies that mine gold often don’t fare any better.
Shares in Newmont (NYSE:NMS), the world’s largest gold producer, have tracked the broader stock market by a massive margin since 1990. $10,000 invested in NEM is worth just $19,000 today, compared to $119,600 in the S&P500 hint. Mining companies usually face high capital investments, which reduces the chances of landing a Moonshot winner.
But gold has been an undeniably strong source of downside protection. During the financial crisis of 2008, the shiny metal broke through the $1,000 mark as stocks went in the opposite direction.
And on occasion, some miners offer massive returns. Expiry small businesses like Asante Gold Corporation (OTCMKTS:ASGOF) and Goldfinch (OTCMKTS:EEYMF) have increased by 2,000% in the last year thanks to unexpected discoveries. When you buy a miner at a low price, a big find can send the stock up 2x…5x…10x overnight.
In other words, picking the right mid-cap gold miners can be both “recession insurance” and “moonshot hardware.”
Choose the right gold digger
To be clear, investors should exercise caution around gold. Newmont’s 5% return on invested capital is just below its cost of capital of 5.3%. From a business perspective, it’s a bit like watching a slow swimmer being pushed downstream by a slightly faster current.
Small miners are also even more prone to disasters. Last year, a subsidiary of the Canadian company Centerra Gold (NYSE:CGAU) was forced to declare bankruptcy after the Kyrgyz government took control of a mine. Putting all your eggs in one basket from the former Soviet state apparently has some downsides.
But picking the right miners can yield splendid returns, as recommendations from Osisko Mining and Allegiant Gold have shown.
My favorite strategy for identifying these Moonshots is the Insider track — which measures and tracks insider buying. Since many gold mining executives are (or have access to) former geologists, they can often identify promising dig sites long before official drill results are released.
These exchanges are perfectly legal if they are made on instinct. And by tracking those kinds of deals, my Insider Track strategy identified companies like Osisko before they announced major discoveries.
There is also an element of value investing at play here. Companies with lower production costs like Barrick Gold (NYSE:GOLD) tend to outperform their competitors over the long term and I am constantly on the lookout for companies with high ore grades. When you produce a commodity as fungible as gold, cost control becomes an important differentiator.
Two insider track winners
As gold continued its Fed-induced rise, insiders took shares in mid-cap gold companies. This week, two new miners join the Moonshot list.
Skeena Resources (SKE)
Mid-cap miner Skeena Resources (NYSE:SKE) is a surprisingly low-risk bet on the future of Canada’s gold mining industry.
The company owns the Eskay Creek site, a mine closed by Barrick Gold in 2008 due to declining production. Low gold values in the 2010s meant there was little reason to restart production.
Today’s high prices have changed the calculations. With spot prices nearing $2,000 an ounce, old mines are now getting a second life. And because the Eskay Creek site has a long history of production, geologists have a much better idea than usual of the site’s mineral content.
Insiders took note.
Over the past month, five insiders have purchased significant stakes in the company. On Friday, CEO Walter Coles added another CAD 376,000 to his holdings.
Although gold prices will undoubtedly fluctuate, an investment in Skeena Resources is a safer bet than most.
Dakota Gold (DC)
Dakota Gold (NYSEAMERICAN:CC) tells a similar story back home, south of the Canadian border.
The company owns 42,000 acres in South Dakota’s Homestake Formation, a gold-producing region since the late 1800s. And with rising gold prices, many of these older sites are becoming attractive again.
Two weeks ago, the company announced that it was expanding its drilling program in Richmond Hill, an area already known for its commercially viable deposits. Phase 1 drilling results could be ready within a few weeks.
But insiders are not waiting for official conclusions.
Since mid-April, the CEO of the company and a reference shareholder have increased their stake. Together, they now own 20% of the company.
With DC shares down 50% since their IPO, ordinary investors might also want to join in. Dakota Gold may not be the cheapest miner in the world, but it is a miner with a much lower risk profile than most.
When Insider Track investments fail
In January, netflix (NASDAQ:NFLX) CEO Reed Hastings used a 20% drop in the stock price to double down on his NFLX holdings. He would eventually spend $20 million to buy stock.
But sometimes insiders also make mistakes.
Last week, the streaming giant announced its first-ever subscriber loss for the quarter. Shares cratered 40%, leaving Mr Hastings with a loss of $9 million on his investment.
Just like car seat belts and airbags, the Insider track strategy always needs a second source of security to work. Blindly following what others are doing is a recipe for disaster.
In some cases, the “buy” signs are apparent. The low correlation between gold and equities makes mid-cap gold companies particularly attractive. And some biotech drugs show more promise than others.
But other times, things are less clear. Small cap company Jones Soda (OTCMKTS:JSDA) has a long history of insider buying, but has failed to expand much beyond its home market. And many microcap stocks are bought and sold by insiders trying to fool unsuspecting investors.
The Insider Track strategy gives regular investors a slight advantage. But remember that finding Moonshots is still a challenge.
PS Do you want to know more about cryptocurrencies? Penny shares? Option ? Drop me a note at firstname.lastname@example.org or connect with me on LinkedIn and let me know what you’d like to see.
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As of the date of publication, Tom Yeung had (neither directly nor indirectly) any position in the securities mentioned in this article.
Tom Yeung, CFA, is a Registered Investment Advisor on a mission to simplify the world of investing.