Gold - An Investment Strategy

Gold has been dismissed by many as a relict of the past - an artifact of times when banking systems were not well developed and where there were few alternatives for people seeking security for their stashes during turbulent times.

In North America, especially, the literature is filled with such commentary.  It is there that people have never had the recent experience of war and other wealth destroying events such as famine, disease and other agents leading to social insecurity such as widespread corruption and the absence of the rule of law.

The simple fact is that the majority of the world's population holds a different view and regards gold as a store of value during hard times.  This view is starting also to take hold in North America.

Recent market instability has raised investors' interest in gold.  If you believe the supply/demand functions in the global market for gold (some people don't) this is reflected in the price of gold.

http://www.goldpriceoz.com/goldpricegraph/usd-gold-price-per-ounce-3-months-history.png

This increase has been reflected in the performance of the S&P TSE Gold Index

Gold-based equities in the Financial Log Book have performed nicely in recent months.

Company	Purchase Price/Date	Current Price 12/02/16	% Increase YTD	% Gain/Loss Since Purchase
Abitibi Royalties RZZ	2.57 2015-11-20	3.4	1.2	31.4
Silver Wheaton SLW	12.37 2007/09/04	21.15	23	71

Speculation in several other companies has been profitable.


Here is a list of companies on my radar screen.  It was developed as a result of looking for enterprises with characteristics noted later on in this commentary.

Asanko Gold
Franco Nevada
GoldQuest Mining
McEwan Mining
Premier Gold Mines
Pretium Resources
Oceana Gold
Integra Gold

The companies generally share the following characteristics:

• great management with a good track record
• operations in stable jurisdictions where the rule of law prevails
• lower all-in sustaining costs 
• good balance sheets and/or an ability to secure additional funding for development

I prefer companies with active operations and a income stream. Why?

• technical/operating risks are lower with the result that additional funding can be secured at lower rates
• in some instances, production can be ramped up relatively quickly to profit from higher prices during boom times

There are some exceptions to the above-noted generalities.  Asanko Gold is in a fairly stable African country but the upside potential warrants the additional risk of geopolitical uncertainty.  Pretium Resources is scheduled for production in 2017.  It is fully permitted and appears to have good access to funding.  Its main attraction is the size and quality of its high grade reserves and the prospect that they will be increased over time.

A host of other variables figure in my decisions:

• The possibility of a take-over.  Some companies are likely take-over candidates.  Small to mid-sized companies with significant reserves sometimes fall within the sights of larger entities seeking to replenish their reserves with less risk than greenfield exploration activities.  In this respect, I look for small mines (preferably under development) which are adjacent to larger ones.  Sometimes the attraction of reducing costs through the sharing of processing facilities leads larger companies to absorb their smaller brethren.  This is interesting:How Are North American Gold Miners Placed?
• I prefer companies which are located in established gold fields. The reasons: an established infrastructure which lowers costs, an established social fabric which facilitates regulatory approvals, community support and access to labour.

I like companies such as Franco-Nevada, a gold-focused royalty and streaming company.

Our business model is to grow the royalty portfolio with acquisitions of high quality, high margin assets limiting our downside exposure but retaining the full upside potential of higher commodity prices and/or new exploration discoveries.

The company has great management.  It is well worth viewing the most recent investor presentation: http://www.franco-nevada.com/wp-content/uploads/2016/02/Antapaccay-Precious-Metals-Stream.pdf

In these times when miners are desperate to secure financing, streaming/royalty companies are well-positioned to secure profitable contracts.

A position  in Franco Nevada was established on 2014-08-22. Since then, the price has increased by 23.9 percent (12/02/16).  I continue to hold this company.  The investor presentation outlines the company's interests - they warrant serious attention by investors seeking to invest in specific companies.

I have invested in most of the afore-mentioned companies from time to time and have taken profits as opposed to hanging on for more.  The only exception is with the royalty and streaming companies where I plan to hold on through what I sense will be a cyclical rebound in the precious metals market.  In essence my strategy involves:

• short-term speculative ventures and profit taking based on my sense of the market action
• longer-term investments in companies with proven revenue streams from a variety of mines located in stable jurisdictions

The result has almost negated the impact of declines in some holdings noted in the Financial Log Book.  

Note:  Other than generalized observations, I will not record this speculative activity in the Financial Log Book.