Today we’ll begin by tipping my hat to the team at Longwave Capital. They put out some very handy research on the market.
Their latest note takes a peek at the Aussie small-cap gold market…and they like what they see.
You have to be around the market a good while to see why.
10 years ago, gold stocks had a battle for survival on their hands.
The Aussie dollar gold price was a modest $1,400 per ounce, leading to poor margins, and the sector was carrying heavy debts.
Fast-forward to 2023 and the Aussie gold sector is in rude health. Gold, generally speaking, has been on an uptrend since about 2015.
Many of the bigger companies have net cash on their books.
Most importantly, right now, Aussie gold is trading at a cracking price of around $2,950.
The team at Longwave say that small-cap gold margins are now 200% above where they were in 2015.
Now, whither gold itself?
I touched base with our gold expert here at Fat Tail, Brian Chu, who told me that gold is consolidating after a nice run toward $2,000 an ounce a few months back.
Can it go higher from here?
You bet it can.
Take a look at this recent tweet from banking expert Richard Werner:
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| Source: X (Twitter) |
You mightn’t have heard of Richard Werner. He was one of the few economists warning of a big inflation coming as early as 2020.
He was able to do that because he tracks the credit creation of the Western banking system and has done so for 30 years.
Richard is also independent and not bought and paid for by some corporation or on the government payroll.
That liquidity is still washing around the world today. And there is simply no other way it goes anywhere but higher.
How so?
Western deficits!
The West likes to think of itself as the ‘rich’ world.
However, a huge proportion of spending in the economy today comes from the government sector.
Governments are able to do this in excess of their tax revenues from borrowed money.
The accumulated deficits of past years are already there.
These debt overhangs need to be serviced via interest payments.
We’ve already seen a shimmer of this in Victoria with Chairman Dan cancelling the Commonwealth Games.
But it’s the projected Western deficits up ahead that are the real worry. Already in 2023, the US deficit will be $1.3 trillion.
It will go higher from here, as the baby boomers age and the US keeps feeding its military industrial complex.
Who is going to buy all this debt?
Former big Treasury holders China and Japan are looking ropey as a reliable source of capital in the years ahead. The US public can only finance so much.
And the slow obliteration of oil is going to knock out the foundation of the ‘petrodollar’ that’s underpinned the US since 1973.
This is all to say the Fed doesn’t have a hope of staying out of the bond market for any length of time. They are the buyer of the last resort.
This, to me, gives the gold price an upward bias from here.
It won’t be a smooth line up.
But it’s not hard to see higher gold prices in 2024, 2025, 2026, and the years beyond.
Look at the run since 1994 here for Aussie investors:
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| Source: Thomson Reuters Datastream |
How to play this?
One idea — Brian’s idea — is to use this market to accumulate gold stocks.
They’re not running ‘hot’ at the moment. The momentum traders are currently elsewhere.
But, with the view above in mind, there’s lots of potential value.
One thing I like about Brian’s approach is he is a conviction investor.
For example, he is prepared to hold through long periods of weakness or dull activity with the idea gold stocks could explode at some point.
As we see, back in 2014 and 2022, gold stocks were duds.
In 2018 and 2020, they were rock stars.
You see, these things go in cycles when you stay in the market for years and years.
What’s juicy about today goes back to what the team at Longwave capital are saying.
The gold companies are MUCH better placed, generally, than they have been in years gone by.
That gives them a sturdiness and a base to launch off should the next big gold rally come.
It might be one you don’t want to miss.
Go here to see more from Brian on the potential slingshot forming in the Aussie gold market.
Best wishes,
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Callum Newman,
Editor, Money Morning
