[With the price of Gold having reached unprecedented heights, this is leaving many investors wondering if it is too late to participate or how to best navigate the precious metals market. When gold hits all-time highs, it may suggest the opportunity has passed. But for seasoned gold investors, these peaks often signal the beginning of a new phase rather than the end of an opportunity.

While many investors instinctively think of physical gold, there is a $900 billion liquid, gold equities market encompassing everything from major gold producers to junior exploration companies. Interestingly, there seems to be extreme skepticism and debate whether the high price of gold will hold and for how long which may be disrupting normal patterns of these securities.

To better understand the nature, mechanics, and unique investment dynamics of the gold equities market, we were introduced to Greg Orrell, President of Orrell Capital Management and co-Portfolio Manager of the OCM Gold Fund which has won numerous Lipper awards for best Precious Metals Equity Fund over the years. With over 30 years of experience navigating the precious metals equity space, Greg can provide us with crucial investment insights as to why now might be an opportune time to consider gold equities, even as the metal trades at record levels, and how active management can make the difference between simply following gold's price and truly capitalizing on its potential through gold equity securities.]

 

Hortz: Can you please provide us with a brief overview of the gold equities market?

Orrell: When we talk about the gold equities market, we are talking about a $900 billion investment market that is primarily comprised of major gold producers, intermediate and junior gold producers, royalty streaming firms, and exploration and development companies. The valuation of the gold equities market has gone up dramatically over the last couple of years, but it is still a relatively small sector.

Hortz: What is the investment dynamic between these four major players in the gold industry? What do you look for in managing across these different sectors within this universe of stocks?

Orrell: Historically, money would actually move down through the sectors. When you start off in a gold bull market cycle, money would rush into the largest producers because they are obviously tied to having the most leverage on an earnings per share basis. That is where the institutional money would go. Then it would move to the intermediate and junior producers, and then it finds its way near the end down towards exploration and development companies. The royalty and streaming companies will tend to be more of a defensive play because they do not have as much torque on a leverage basis to the gold price, but they also do not have the operating inconsistencies that a lot of the producers have. So, what you will get as the gold price starts to go up, people will get more aggressive, and as that happens, the money starts to move down through the cycle.

Interestingly, what we have seen in this cycle is that the larger producers, like Newmont and Barrick Gold, have actually been laggards. Perception may be that investors have caught up to this top side of the market; maybe there is not as much growth on that side of the table. We have not seen any growth on the big percentage moves at the major producers level. So, where the money has been going is looking for more growth by moving towards the intermediates and the junior producers. That is really more symptomatic I think of a market that has been more aggressive overall.

The market still seems more focused on looking for companies that can supply growth, whether that is a junior producer or an intermediate. Look at it this way, for these lower tier producers, when the gold price is $1,000 an ounce and it goes to $1,500 there is a 50% increase in profits and a major increase in cash flows where they can find projects that meet their scale. If there is a 500,000 ounce a year producer, they can go out and find an additional 200,000 ounce a year producer or mine, and that will be 40% growth.

For larger gold producers, it is more difficult to find the larger Tier 1 scale mines to duplicate the growth numbers of intermediate and junior players. As the cycle matures, more money will go into exploration and discovery, but you have to factor in that it takes a long time for mines to go through that development cycle.

Hortz: How then do you look at the exploration and discovery companies? What is the nature of those types of companies?

Orrell: It is important to know the long development time involved. If a mine goes from discovery to production within eight years, that is a good result. Many new mines that are classified as being in desirable locations can take 10-15 years to bring a mine into full production. It is not something that, if the gold price goes up, that you are going to increase a lot of supply. There are not a lot of mines you can just turn on. You do not have a lot of new ounces that can come on stream. And that is part of the benefit of the gold market in that it is not as elastic as other industries.

There are life cycles to these companies. At the discovery phase, the stock goes up with the excitement of the discovery creating value from a moose pasture. Junior explorers tend to go down as they are going through studies to bring a project online - that is the quiet period. As they finally get their permits, they will start to uptick again. So, you have to understand where you are in those cycles and act accordingly.

One of the things that will happen in a bull market cycle is you will get more capital available to pursue projects. What we have seen over recent years is an industry that has been really starved of capital and that has not been able to push a lot of projects forward. Further, it is not that every jurisdiction wants to have a gold mine either. Another thing that you are dealing with is having to jump through the environmental permitting hurdles. This all adds to the long time to bring a mine from discovery to actually mining gold.

Hortz: How do you maneuver your stock portfolio across these gold sectors?

Orrell: We start with an allocation to each sub-sector and we will capture capital flows as it moves through the cycle. We may start off with a higher allocation to the major producers and then change that as time goes by. Our positions in the portfolio historically since 2020 have been 20% in the major producers, 25% in the intermediates, 20% in the junior producers, and then primary silver producers, exploration development, and royalty companies make up the balance.

If we believe that the gold market is turning down, and we have to be 85% invested per our prospectus, we will get more conservative by moving towards larger cap names, more royalty streamers, and defensive names. When the market turns down, the exploration development companies, the smaller cap names, are the ones that suffer the most. You do not want to get caught in those companies. That is where an active investment portfolio and experienced management come into play.

A key part of our investment philosophy is that we are also looking for value across this sector all the time. We want companies that are going to provide returns on a per share basis, growing production and reserves on a per share basis, and managements with a disciplined approach to return on capital. What happens in this business many times is that managements have in the past lost their discipline, and that discipline is per share metrics. You look at per share metrics as production per share, reserves per share, along with the earnings per share. You do not want a company that is just looking to grow for the sake of getting bigger. We have learned from past cycles and the question is, will they lose that discipline as the bull market cycle matures?

Hortz: With over 30years experience in the gold securities market, what is your perspective on the state of the current market with the price of gold and macroeconomic threats at historic levels?

Orrell: I believe in this market, the gold price has not really leveled off because there has not been any discipline in the monetary system. Gold reached $4,000 an ounce, but what has happened during this time is that cars have gone up, houses have gone up, there's been a debasement of currency, and until you get a discipline in government and in monetary affairs, you are not going to get the gold price to level off. It is a monetary discussion that one has when you start to ask if we have stability in our currency?

Historically monetary systems would last 40 to 50 years. If you go back and look at when Nixon closed the gold window, that was the end of a monetary system where the currency was linked to gold. Well, we are overdue for a new monetary system and how that plays out, we do not know yet. The Chinese have made the move to increase their gold holdings and trying to have gold linked to a payment system drawn for the Yuan. That is part of the equation that is out there now. The US has let the gold price go, and that is something that has not ever been done since I have been in this business since 1983. The Fed and the Treasury have always been there in the gold market.

To say exactly where the gold price is going to go is a tough one. Yes, we are at a high right now, but that is relative to what? Many metrics suggest gold assets are still historically undervalued relative to the general market and the gold price. If we were to look at the old ratios, it used to be the Dow/Gold ratio, and that is still at a high level. If I took the Dow and divided it by the gold price, the number is now around 11.5 to 12, but it is not near the 1980 number that was one to one. Also in the thirties, at the peak of the gold market, it was close to one-to-one. Looking at miners, we would look at the Dow, I mean the gold/XAU ratio, and historically that number used to be around five - it is now 14.5.

If you look at it from those ratios, gold is still cheap. Gold also has a 93% correlation to federal debt outstanding with the highest probability that it will continue to go up from here. So, this all indicates that the gold market still has a ways to go until the government can stabilize the growth of debt.

Hortz: As to putting gold market into perspective, I saw that you recently attended two major gold conferences in Colorado. What was the mood and topics trending there and any interesting takeaways you can share with us?

Orrell: One of the things that struck me was that I would have thought we would have seen more generalist investors. There was a level of enthusiasm amongst the miners and the major investors that were there, but we have seen more generalists show up in the past. Maybe it is the lack of understanding of some of these generalist investors of where the industry is relative to where they got burned on the last cycle. The industry is having to work their way out of that by regaining trust through having the discipline on how they can operate more productively both on a corporate level and also the discipline of capital.

There also seems to be a general disbelief in the price of gold and that it is going to stay at these levels. And that has to do with a provincial thinking that takes place. You have had some of the major gold ETFs until recently in net redemptions, even though the gold price had been going up dramatically. It showed a level of disbelief in the gold price and the gold market; a lack of understanding of why it was going up.

What I am seeing is that you are starting to get more people starting to believe and understand what is going on. And part of that is the political, economic, and geopolitical landscape is starting to become understood a bit more.

Hortz: What investment strategy are you pursuing at this juncture? Where can you find value in this market?

Orrell: Right now, I am looking at exploration and development companies with projects that have been neglected for years. Also, understanding the cycle of these companies, when exploration dollars are raised, there is a lag effect before that excitement really starts to hit the market. We are in that phase where the exploration dollars are being raised. And so, you have to be careful in that. The excitement will start to hit as exploration success comes into the sector and you will get another wave of movement in those companies. Then you can see some takeovers start to take place. We have not seen any takeovers of any consequence in this space yet. That is why there is value on a long-term basis in the exploration and development companies.

At $4,000 gold or even $3,500 gold, there has also been a reluctance in the market to really give miners their due on the multiples on cash flows and P/E’s since investors are wary that the gold price is going to stay there. So, instead of the miners historically being looked at into the future and discounting the future, it has been this lack of belief in the sector that has really transpired through this cycle so far. Also, years of capital deprivation in the sector have led to severe mis-valuations and for some companies to become incredibly balance sheet strong and be able to take full advantage of a rising gold price environment.

Adding to the margin expansion in a growing physical gold price environment is the low oil prices miners are enjoying. Diesel fuel can be one of the largest costs for extracting and processing ore, especially in areas where grid or hydropower are not plentiful. Thus, we believe the all-in sustaining costs of the sector should hold steady and help these mining companies produce record level margins.

Therefore, I believe there is still value in the producers with some upside potential as the market is going to value the ounces in the ground and you are also going to find value in selective exploration and development companies.

Hortz:  Any other thoughts or perspectives you can share for investors on best deployment of gold equity securities in an investment portfolio?

Orrell: My belief has always been that investors need to really be their own central bank and they need to have an allocation towards gold with the belief that the government's not necessarily going to be looking after their interests in terms of their purchasing power. If you have an allocation towards gold assets, you do not have to play offense a hundred percent of the time on this issue. Overall, investors certainly have benefited by having a gold diversification allocation in their portfolio.

 

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 Disclaimer: This interview is for informational purposes. Nothing contained herein constitutes investment advice or the recommendation of or the offer to sell or the solicitation of an offer to buy or invest in any specific investment product or service. Before investing you should carefully consider the investment’s objectives, risks, charges, and expenses. This and other information can be obtained through https://ocmgoldfund.com/literature-forms/   and/or contacting your investment advisor. Please read the prospectus and other investment documents carefully before you invest. Investing involves risk including the possible loss of principal.

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