Precious metals aren’t just hedges, but rather opportunities for significant upside
Miami, Florida, August 25, 2020 – Due to the unprecedented crisis that is the novel coronavirus pandemic, investors are scrambling for the best sector in which to protect their money. In this free-for-all new normal, some picks have generated surprisingly positive returns, including gold and silver stocks. Typically, conservative investors avoid this market due to its historical volatility. However, for the risk-tolerant, it may be time to throw out conventional thinking.
As you know, gold recently printed all-time intraday highs. Though the yellow metal gave up some gains last Friday, the precious metals have generated sizable returns this year. A contentious market in the best of times, some are downplaying the bullishness as unsustainable exuberance. However, there’s another way to look at gold and silver stocks – as an indictment against the old guard.
Mentioned by the Wall Street Journal, a weak dollar has bolstered momentum in gold bullion. Currently, deteriorating relations between the U.S. and China – in which the two nations shut down each other’s consulate offices – pose substantial worries. Another WSJ report noted that prior to this latest flare-up, economic ties helped soothe tensions. Now, businesses have less influence on this perhaps most critical geopolitical relationship.
But you don’t have to look too far to appreciate the case for gold stocks to buy. Because of the panic associated with the pandemic, which at least partially contributed to the present social unrest, gun sales have skyrocketed. Really, this was a no-brainer. During emergencies, people instinctively realize that the police may not be able to respond immediately. Thus, they have taken matters into their own hands.
Beyond the fear and doom-and-gloom events, gold responds cyclically to major societal paradigm shifts. If you compare average annual returns of gold versus the Dow Jones since 1970, you’ll recognize – perhaps to your shock – that gold performs slightly better than the Dow. By my calculations, it’s 10% versus 8.3% in favor of gold.
However, the returns aren’t balanced across the years; as I just mentioned, they’re cyclical. On average, gold and stocks share an inverse relationship – as one goes up, the other goes down and vice versa. In the 2010s decade, the Dow bested the return of gold bullion by a margin of 11.7% to 4.5%.
If history is any guide, gold and more specifically gold stocks should outperform the Dow. Fundamentally, it’s not difficult to accept this forecast. We’ve already nuked trillions into a flailing coronavirus recovery strategy. As well, rising permanent job losses may continue to haunt our nation for years to come. This crisis is begging for investors to make the rotation into precious metals.
And given this powerful backdrop, investors likely have a higher probability of scoring huge gains among small-cap gold and silver stocks. Though still risky because of their volatility, these smaller names may benefit from a “rising tide lifts all boats” dynamic.
Further, for the intrepid investor, these small caps offer ample technical opportunities. To establish this case, I will rely on scatter plot charts for the below gold and silver stocks, specifically analyzing the relationship between the target stock price and its derivative (month-over-month percentage change).
Without further ado, let’s take a look at four names that have crossed my radar screen:
Gold Resource Corporation (GORO)
Featuring a niche following on social media, Gold Resource Corporation (NYSE AMERICAN: GORO) has bounced back from its March doldrums. However, what makes GORO stand out from other speculative gold stocks is that on a year-to-date basis, it’s still in negative territory. That implies, so long as bullishness continues in the space, that GORO has much more upside remaining.
Fundamentally, Gold Resource enjoys relative insulation from the present geopolitical situation. The company has mining units in two locations: Nevada and Oaxaca, Mexico. These represent a mixture of producing mines, exploration ventures and reserves.
Notably, Gold Resource enjoys a very high Altman Z-Score (8.72), a common gauge of financial distress. In this case, the higher the number, the better. As well, GORO stock is backed by a comparatively strong cash-to-debt ratio.
Running a scatter plot analysis of GORO, this year’s price action (labeled as large-sized triangles to distinguish from the other years’ data points) is mostly concentrated nominally between $3 to $4.50. However, I believe that the majority concentration of price action will shift higher to another threshold.
Galiano Gold (GAU)
Though one of the riskier names among gold stocks to buy, Galiano Gold (NYSE AMERICAN: GAU) has some intriguing attributes for those who have the iron stomach for extreme volatility. Galiano’s main fame to claim is its Asanko Gold Mine, located in Ghana. According to the company’s website, Galiano and Gold Fields Ltd (NYSE: GFI) “both have a 45% economic interest in the mine, with the Government of Ghana holding the remaining 10%. Galiano is the manager and operator.”
Further, in Galiano’s second quarter of 2020 earnings report, the mining outfit reported a record quarterly gold production of 69,026 ounces. Better yet, the production is based off an all-in sustaining cost (AISC) of $1,067 per ounce. Given where many analysts believe gold prices are headed, this is a very positive development.
On the scatter plot, GAU stock features significant upside potential. The price action here is not well defined, meaning that shares are liable to go anywhere. With the positive backdrop for gold stocks, bulls are anticipating strong moves higher. Of course, the opposite is also true with stocks that have failed to find a stable support line.
Avino Silver & Gold Mines (ASM)
If you thought that gold miners were volatile, silver stocks will be quick to teach you some harsh lessons. The “number two” of precious metals, silver miners nevertheless attract serious attention from speculators due to its profitability potential. If you’re looking for a small-cap silver stock with a huge upside pathway, you should check out Avino Silver & Gold Mines (NYSE AMERICAN: ASM).
The idea here is to go contrarian on upcoming bad news associated with the pandemic. Due to COVID-19-induced shutdowns, Avino saw severe reductions in quarterly metals production for Q2: silver equivalent production fell 56% to 158,286 ounces, copper was down 54% to 459,767 pounds, and gold dropped 50% to 404 ounces.
At the same time, pandemic-related disruptions are known commodities. Thus, it’s possible that once the weak hands are shaken out of the markets, ASM stock could fly.
Essentially, this is what Avino’s scatter plot analysis reveals: to put it simply, ASM stock is a fast mover. Shares have been moving from one price threshold to another incredibly robust fashion.
Comstock Mining (LODE)
Easily the most speculative idea among this list of gold and silver stocks to buy, you don’t want to spend any money that you can’t afford to lose on Comstock Mining (NYSE AMERICAN: LODE). Historically, shares have been all over the map. Long-term stakeholders – or what few are remaining – have seen their position lose a shocking amount of value.
So, why consider LODE stock? First, Comstock has a strong presence on social media. Ordinarily, this wouldn’t be a cause to engage a stock. Yet we’re living in the new normal. In this ecosystem, millions of Americans are stuck at home with nothing to do. Like it or not, many have chosen to speculate on penny stocks.
As far as risky trades go, this isn’t completely crazy for the second reason to consider Comstock: the astoundingly bullish backdrop for precious metals. According to BofA Securities analyst Michael Jalonen, silver prices could hit $50 an ounce within the next 18 months. If so, that would bode very well for even risky silver stocks like LODE.
In producing its scatter plot, I had to deploy the logarithmic scale due to the vast price swings. Unfortunately, negative figures cannot be represented on the logarithmic scale.
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