Friday Haymaker
In The Ring - August 25th, 2023
Golden Opportunity or Value Trap?
“Gold is money. Everything else is credit.” -J.P. Morgan, the man.
“The modern mind dislikes gold because it blurts out unpleasant truths.” -Joseph Schumpeter
Champions
One of the recurring and totally valid criticisms of investing in gold is that it doesn’t generate any cash flow. Fortunately, there is a way around that objection. Moreover, if gold does have the quantum leap many of its long suffering loyal adherents expect, this manner of attaining exposure to it should dramatically outperform bullion itself.
In our August 4th Haymaker edition, I cautiously suggested investigating ETFs that invest in the smaller (aka, junior) gold miners. These tend to be the ultimate high-octane play for bullion bulls. However, the dividend yield on those is next to nothing. This is largely due to the development stage nature of most of these diminutive enterprises. In other words, they tend to consume rather than distribute their profits — if there are any.
On the other hand, the blue-chip miners are attempting to rip a page out of the big oil and gas producers’ playbook. The latter have learned from their over-expansion mistakes of a decade ago. Rather than plowing hundreds of billions into projects with (at best) modest return prospects, the leading energy exploration and production companies are returning much of their lush cash flow to shareholders. While they definitely continue to invest in new resource development, the lion’s share of their free cash flow — the excess over capital spending — is being used to pay down debt, increase dividends, and opportunistically (like on the recurring corrections) repurchase their shares. Further, they are keeping a very tight rein on “cap ex”. That’s a key reason I expect oil and gas prices to trend higher for most of this decade — with copious amounts of volatility along the way.
Not yet a paid Haymaker subscriber? Complete the brief survey linked below and we’ll set you up with a 90-day trial at no cost.
To enhance their growth rates, the Super Majors, as the largest oil and gas companies are known, have been engaged in acquisitions of their smaller competitors. As has happened in the past, this is one of those times when it is cheaper to add new reserve on the floor of the New York Stock Exchange than it is to drill for fossil fuels. (The exception to that is, perhaps, in the highest-grade plays, usually residing within Texas’ Permian Basin).