Exploration companies to outperform in 2021 as inflation supercharges gold and silver - Crescat Capital
Kitco News has launched its 2021 Outlook, which offers the most comprehensive coverage of precious metals markets in the new year. Trillions of dollars were pumped into financial markets in 2020 and that won't come without consequences. Economists expect that investors will be Bracing For Inflation in 2021.
Although the precious metal sector is attracting new investor attention, the mining sector continues to underperform. The mining sector's value is well below what it was during the last bull market in gold and silver.
However, some market analysts think this trend this will change and investors won't be able to ignore the value being generated in 2021.
With that in mind, we decided to reach out to some mining experts and ask them how they would invest $10,000 in the mining sector and what themes they see playing out in 2021.
Expert: Tavi Costa
How would you invest $10,000 in the mining sector?
If I had an extra $10,000 to invest, I would diversify into 5-7 different precious metals junior exploration companies with well geographically positioned properties that have strong likelihood of finding high grade and economically viable gold and silver deposits and are also led by highly knowledgeable and geologically capable people.
What three companies do you like the most in 2021 and why?
What investments would you avoid next year?
US utilities. I believe we are entering a period of higher inflationary forces driven mostly by a supply shock in commodities. As fixed income proxies, these stocks should suffer from such environment. To put it simply, utilities are the epitome of defensive traps. These companies are true capital destroyers, bleeding free cash flow for decades, historically levered, and at near record valuations.
What do you think are going to be the big themes next year: M&A activity, earnings, exploration, record gold prices?
Given our strong views of how early we are in the precious metals cycle, we believe it’s time to focus on the exploration segment of this industry. With monetary dilution at an extreme, governments running massive fiscal deficits, unsustainable debt imbalances globally, and a suppressed interest rate environment, we think this creates a supercharged environment for precious metals. Meanwhile, there has been zero gold discoveries above two million ounces in the last three years because the whole industry underinvested in exploration for the last eight years. As investors feel the urge to seek capital protection, this is soon to be one of the largest supply/demand mismatches we have ever seen in the gold market.
What are your final comments on what you think 2021 is going to look like for investors.
Next year will likely mark the comeback of higher inflationary forces. While central banks are hamstrung to continue expanding the global monetary base to drive interest rates lower, we believe commodities are on the verge of a major supply shock. Aside from technological impacts, money velocity and demographics, depressed commodity prices are one of the key reasons why consumer prices haven’t gone higher. This could severely change the macro landscape by creating an inflationary environment while many risky financial assets like stocks and bonds are at record valuations. Note that the Bloomberg commodities index and the US 30-year inflation expectation are now re-testing a 12-year resistance line. If we see a breakout, this could be very significant for financial markets. In our view, given the level of monetary and fiscal imprudence worldwide, the case for owning hard assets and selling short historically overvalued assets has never been greater. Buying precious metals and selling high flying stocks, even short selling if you have the risk tolerance, is one way to be prudently positioned for the next year in our view.