If Gold is an interest, do not overlook the junior producers, which are lagging this year

Finding a good stock among the junior Goldminers could be the motherlode. Some of the major wealth management firms would advise you to look elsewhere. I disagree.

The Morgan Stanley Wealth Management had the following commentary on Gold and Goldminers this week that I edited for simplification.

So far in this tumultuous year, exposure to gold has mostly served investors well. Under the surface, however, depending on how investors owned the yellow metal—via either bullion (GLD in green in the following graph), large-cap miners (GDX in red) or junior miners (GDXJ in blue) —the experience may have been a bumpy one. With a variety of exchange-traded funds (ETFs) available for all three types, it’s important for investors to understand their differences and how those dissimilarities have affected recent performance.

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The following notes from Morgan Stanley are aligned with my own except the final remark about the Fed.

Though they have rallied recently, junior miners—companies roughly $2 billion or less in market capitalization—still have negative returns for the year to date. In addition to more closely shadowing small-cap stocks, which have lagged large caps meaningfully in 2020, junior gold miner indexes are typically more geographically diverse than their larger-cap peers. Some tend to have less US exposure and greater allocations to countries such as Australia, Russia, and (South) Africa, all of which have hampered the junior indexes and ETFs at times this year. Additionally, junior miner indexes tend to tilt more strongly toward exploration companies, which are riskier than more diversified operations and can increase beta. As gold spot prices flirt with record highs, investors may be revisiting or considering allocations. Indeed, Susan Bates, Morgan Stanley & Co.’s global commodity strategist, has a positive outlook for the precious metal this year. She expects global monetary easing to support prices well after the economic impact from COVID-19 has waned. However, her forecast of $1,725 per ounce for the first quarter of 2021 is only slightly above the current spot price of $1,703 (as of May 11). Importantly, Bates projects a longer-term price decline, as witnessed in 2013, once widespread Quantitative Easing is retracted. As such, we suggest investors take a diversified approach to gold. In the near term, we believe mining-focused ETFs could outperform if they participate in cyclical momentum. That said, while we are likely beholden to central bank easing for now, when this support is eventually withdrawn, we’d expect the historically less volatile bullion-backed ETFs to have less severe drawdowns than their mining peers

My underlying thesis is that the Fed and other major central banks of the world will have to substantially increase their support from present levels, and later withdraw that support in a correlated fashion. Moreover, withdrawal of money supply has always been easier said than done. Therefore, I believe that the price of Gold is going to exceed 2000, perhaps by a lot, in 2021, and that the smaller Goldminers (those with a market cap of $300 million to $2 billion) will surpass the performance of the larger-cap group. Moreover, the larger-cap companies will become predators and soon be offering 20-30% premiums to acquire the best quality smaller miners. Typically, with each announced deal, the dilution to the larger-cap shareholders is disappointing, which drops the share prices.


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