Some reasons are cyclical, while others are completely unprecedented. Volatility, however, is a positive indicator for a few industries that historically outperform in times of uncertainty – both political and economic.
Here are a few reasons the markets have turned frothy, and the sector that you need to be looking into.
Causes of Volatility
Ironically, there’s a reliable cause of volatility that comes around every year at this time, known as tax-loss season. This is the time of year that investors sell off their losses to take advantage of the tax offset, then purchase other companies to ensure that their capital is deployed. This compounds downturns, creates rallies for hopeful companies, and sets the market ablaze.
Also, it’s 2020, of course, COVID-19 is a continuing reason for market volatility. Investors are worried that a second wave of the virus is going to cause a repeat of the market crash in March, while others are bullish that vaccine development will brush over this impact.
“Most people have come to terms with the fact that the vaccine will stop the next wave, but will have very little to do with the current wave.” – Jeffrey Sica, founder of Circle Squared Alternative Investments
Regardless of where you stand on the issue, the markets have made it clear that investor sentiment is split.
There’s also the issue of contentious U.S. stimulus discussions as President Trump transitions out of office and a new, pro-stimulus administration takes over. While a renewed stimulus package would put more dollars in the hands of Americans, it would also serve as an inflationary tool for the U.S. dollar… which is extremely important for the industry that we’re about to introduce.
What’s the Investment?!
Gold. Gold is a profitable hedge that we’ve been discussing for over a year and have listed is as an extremely relevant asset for 2020.
In fact, the precious metal has risen over 22% in 2020, as a result of the black swan that is the pandemic. We know, 22% isn’t that impressive, but increases of this magnitude in the commodity price represent higher multiples for companies in the sector.
But why is gold a good investment in times of uncertainty? Because of its ability to hedge against some major negative indicators (like inflation and political tension), the potential for positive gains, and the fact that it’s a diversification from the dollar.
Even notorious gold bear, Warren Buffet, has taken up a half-billion-dollar position in the gold producer, Barrick Gold, after rotating out of some large bank positions.
We have a more in-depth explanation about gold that you can find here, but there’s another question to address.
How Do You Turn this into Upside?
Admittedly, while gold is an incredible historic hedge, it’s hard to get that excited about a chunk of metal. As a group focused on high-potential, small-cap companies, we look beyond the commodity into the companies that it has the ability to transform.
That’s why we landed on junior gold exploration companies, the ones at the forefront of discovery and innovation in gold (and other precious metals).
Commodity-based multiples are felt on an exponential scale as you move to smaller companies within natural resources. If gold, the commodity, has experienced a 2x increase in price, large gold producers have become twice as effective without producing a single ounce more, thus increasing their price-to-earnings ratio. As you move into smaller companies, the multiples simply keep growing based on potential.
Junior exploration companies are the ones who go out into the wilderness and look for resources in the ground. These folks are focusing on turning dirt into dollars.
One junior gold exploration company that we’ve been looking into in Canada is called Gold Plus Mining Inc. (Canada: GPMI) (U.S.: GPMNF) (Europe: 1I3), which currently owns three properties throughout Canada’s most prolific gold regions and is in the process of acquiring a fourth, active project in Southern BC.
Disclaimer: Gold Plus Mining Inc. is a communications client of Edge Investments, and we own shares in the company.