Gold bullion and gold stocks are different asset classes that serve different purposes; the former is a currency that hedges against fiat currencies, while the latter is more risky and gives leverage to the metal, said Whitney George, president of Sprott Inc.
“The metal represents a currency and a hedge against this country and others mismanaging their currencies. It’s almost a bond surrogate. Certainly, it performs and provides the kind of insurance that you would get in a bond portfolio particularly when rates are so lower. It might even be the bond investor type that is looking at the actual commodity,” George said. “Miners are risky, they give you the leverage to the rise in prices so their earnings can grow exponentially in a rising gold price; 2 or 3 times the returns that you might get owning the physical metal.”
Even if gold prices were to stay the same, miners still have room to appreciate in value, George said.
“I don’t think the consensus forecast for earnings for these gold miners amongst the sell-side research I read bake in the current pricing for gold, I think most models long-term have prices falling back to $1,400 or something in that neighborhood. I think you’ll see positive earnings, I think you’ll see earnings revisions upwards, earnings surprises, all of the things that get general equity investors excited about stocks.”
On picking gold stocks, George said that there are a few metrics he would screen for.
“I like to look at things that are trading at 10, 12 times earnings, or free cash flow yield of somewhere between 5% to 10% at a senior mining company,” he said. “I have a broad rule, which is very simple, it’s part of the old Dupont Model where I measure assets divided by shareholder equity. Anything at 2 or higher is a no-go for me.”
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