One of my favorite investors that I love reading and following, Harris Kupperman, has offered up his thoughts on precious metals and his favorite mining stocks this week.
Harris is the founder of
Harris is one of my favorite follows and I find his opinions – especially on macro and commodities – to be extremely resourceful. I’m certain my readers will find the same. I was excited when he offered up his latest thoughts, published below (slightly edited for grammar, bold emphasis is QTR’s).
Please be sure to read both my and Harris’ disclaimers, located at the bottom of this post
On Playing Gold
Last year, I wrote Part 1 of The Great Macro Dreamscape (Part 2 is coming). To summarize, my view is that the coming decade will be the best of times if you can trade and profit from Global Macro, or the worst of times if you’re a peasant trying to survive the Global Macro. Since then, I’ve tried to envision the perfect asset for the coming storm on the horizon. What does well in chaos? What profits on fear? What asset will dramatically out-perform the toxic brew of fiscal, monetary, and governmental chaos that seems almost inevitable?
There are no perfect choices in this world—especially in the world I envision. However, I have millennia of history telling me that in times of crisis, people reach for precious metals to protect themselves—first slowly, then in a panic. Gold doesn’t rally against a dying currency, as much as the market cap of gold swells when denominated in that currency. Capital flees and effectively goes to sleep in the form of precious metals—until stability returns, and capital can be returned to the economy again.
Don’t get worried that this is another doom-porn blog post about gold. I wouldn’t do that to you. I see opportunity in chaos. Let others do the fear and despair part. I only want to win.
So, what wins when gold goes up? We all know that you can play futures, but financial leverage cuts both ways—besides, no one wants to get margin called on one of the inevitable pullbacks. Miners are a joke. They have no leverage to gold. Every pitch is the same, mostly ending in sorrow.
Royalty companies have become the instrument of choice, but Franco Nevada’s (FNV – USA) experience in Panama instructs us that the royalty companies take on the same jurisdictional risks as the miners. Eventually, everyone will realize that the royalty companies are just sophisticated Return-of-Capital “Ponzi Schemes,” masquerading as gold leverage. They raise capital at one multiple, invest it in an asset at a much lower multiple, harvesting the spread for shareholders. It works as long as the Ponzi economics continue to work, but it isn’t sustainable. If they can’t keep raising capital, the impairments will catch up with them and bury the scheme. In the increasingly volatile world I envision, there will be many more Panama-like situations, which will collapse the multiple and end these “Ponzi Schemes.” This isn’t my asset either.
Besides, while I think that gold goes dramatically higher, I don’t really want to play that aspect—it’s almost secondary in my mind. When I try and think it all through, the gold price is really just an indicator for the global level of fear, with a floor at the cost of production. I want to play the fear—the visceral and instinctual panic into metals and out of paper. I think that’s the better trade—especially as the elites find ways to cap the price of gold, or at least divert people’s attention from it.