PODCAST 186

Safe Dividend Investing

Greetings to listeners all around the world. Welcome to Safe Dividend Investing’s Podcast # 186, on September 19 of 2024.  

My name is Ian Duncan MacDonald. In today’s cast, I will be answering one interesting investment question. 

The objective of my books, my website and my podcasts are to show all those seeking financial independence how to become informed, confident, successful, self-directed investors

QUESTION #1

WHY INVEST IN GOLD?

I own no mining stocks but when I was a kid growing up in a large mining town in northern Canada, I remember my father telling me a story about a miner he worked with at Frood Mine. The miner, on his two week vacation every summer, would pitch a tent in the wilderness on the banks of the Vermillion River and pan for gold. He would acquire enough gold to motivate him to do it year after year. The very idea of being able to acquire wealth by swishing river dirt around in a pan has always intrigued me.

In the 1950s I remember being paid 33 cents an hour wiping down cars in a car wash, an ounce of gold then had a value of $35 US an ounce. Gold had been at that price since 1934.

From 1792 until 1834 it had remained at $19.75 when it was then raised to $20.67. It remained at that price until 1934 when it was raised to the $35. This was during the great depression. It stayed at $35 until 1972 when it was raised to $38 and then allowed to freely fluctuate in price on the world market.

The price on September 15 of 2024 was $2,578.24 per ounce, a record high. Yesterday it increased by $20.03. In the last 30 days it is up $100.67. Since 2004 its price has increased by 531.49%.

This growth excites those speculators  seeking the quick path to being rich, rich, rich. Unfortunately, when you look closely at gold prices over the last 20 years. You see that the price can fluctuate significantly.

No one can accurately predict the future share price of stocks or gold. Your gain in wealth from investing in gold depends upon when you bought it and whether you had the courage to keep owning it when the price drops by hundreds of dollars. For example, in 2004 it was at $342.10 an ounce, by 2011 it had reached $1,109.80.  In 2020 it reached a new high of $1,958 and then declined to $1,699 in 2022.

To realize a profit from owning physical gold you must sell it, with the hope that you will be able to buy it again at a lower price. This would be a speculative gamble.

Unlike a stock, you may be required to take physical possession of the gold after buying it. This could be in the form of coins or bars. You must consider where you can store this investment safely. It could incur a significant on-going storage fee. 

Gold is anonymous unlike stocks. It can be melted and reformatted. This makes its origin impossible to trace. The possibility of the theft of your gold can become a nagging concern.

Also, unlike a stock that you can buy and sell within seconds through a financial institution on the internet, you must now deal with the physical transfer of your investment from you, the seller, to the buyer. Time and distance can make the sale and safe transfer of gold complicated. There are a limited number of trusted institutions that handle gold transactions.

Of course, there is another way to invest in gold. That is to invest in the shares of gold mining companies. The mining company that employed my father was classified as a nickel/copper mining company however they also separated out gold, platinum and iron when processing their ore.

There are 1,352 gold mining companies in the world. The three largest publicly traded gold mining companies are Newmont Corporation, Barrick Gold and Agnico Eagle Mines. While they are primarily gold mining companies, they are also miners of other metals. 

All three of these stocks are traded on both the Toronto and New York stock exchanges. Could your gains in their gold share prices match the 531% gain in the price of physical gold over the last twenty years?  

Newmont, the largest gold producer of the three is a recent entity created from a merger of mining companies in 2019. Its share price climbed since then from $43.40 to a high of $105.90 in 2022. Its current price is now down to $73.00. 

Barrick Gold has been around for decades. In 2004 its share price was $24.98 It is now at $28.31. In 2015 it was at a low of $8.57.

Agnico Eagle Mines in 2004 was trading at $17.06. It rose to a high of $79.43 in 2010 and then fell to $26.18 in 2014. The current price is $113.07. This is a gain of 610% over the last 20 years which beats the increase in the price of physical gold that only increased by 531% over the same 20 years. 

In addition, Agnico has been paying a quarterly dividend over the last 20 years which has ranged from 8 cents to its current 40 cents. While the dividend yield percent is only 1.92% it does indicate consistent profits and increases the payback even more for holding on to this stock for 20 years.

The other two mining companies have also been paying dividends. Newmont dividend yield was 1.85% and Barrick Gold’s was 1.97%. Of the three companies, Newmont, the largest producer, appears to be the weakest with an operating margin of minus 7.19% and a price to earnings ratio of zero.

 Barrick appears to be the strongest with an operating margin of 28.96 and a price to earnings ratio of 24.2x.

 Agnico, with the best gain in share price, also had the highest price to earnings ratio of 67.7. This could be an indication of it being overpriced. Its operating margin was 19.15% which is significantly lower than Barrick Gold’s 28.96%. 

Barrick Gold’s book value of $18.06 compared to its current price of $28.31 indicated it was the financially strongest of the three stocks.

When I scored these three stocks using the IDM stock scoring software Agnico Eagle Mines scored 60. Barrick Gold scored 54 and Newmont scored 40.

These three large gold mining companies are an exception in gold mining. Most new gold mining companies are speculative penny stocks with values under $5.00. The following three examples appeared when I searched for IPO or Initial Placement Orders for gold mining companies.

The first one to appear was Oceana Gold Corporation, a Vancouver based gold mining company. Its share costs $3.85. The stock does not trade on either the Toronto or the New York Stock Exchange. It trades on the OTC or Over The Counter Stock or Pink Securities Exchange. 

All Broker/dealers trading on an OTC exchange must be registered with the Securities Exchange Commission and the Financial Industry Regulatory Authority. This is supposed to protect investors from unethical and illegal practices. However, the reason companies list on an OTC is to avoid the high costs associated with listing on the Toronto or New York Exchanges and to also avoid their rigid disclosure and legal requirements which provide greater protection to investors. Stocks traded on the OTC are speculative and their value can be questionable.

What surprised me was that Oceana is paying a dividend yield of 0.07% despite having a price-to-earnings ratio of 603.4 to one. Such a high ratio can be an indication of an overvalued stock. 

Oceana also reported an operating margin of 7.13% and a book value of $3.33. This is remarkable since it is only 50 cents less than its share price. It may explain why 9 stock analysts are recommending it as a buy. 

One of the analysts projected a future share price of $5.08. That would be a 32% increase in share price over its current price. It is not that far-fetched a gain since it did hit $5.20 in July of 2016. This projected gain must have excited speculators because they traded 2,145,592 shares of Oceana on Friday. 

The second penny stock was Navarre Minerals Limited. It is an Australian gold mining company also traded Over the Counter. First listed in February of 2022 at thirteen cents, its financial health now at one cent is closer to what I often see with penny stocks. The stock’s book value was six cents. No shares were reported to be currently or historically traded. No analysts gave recommendations. Its operating margin was minus 15.48%.

The third penny stock was Zodiac Gold Incorporated, another Vancouver penny stock. It is also traded Over the Counter. Zodiac operates mines in Africa and was listed in January of 2024 at thirteen cents and rose to fourteen and a half cents. A share is now at nine and a half cents. 

Despite having an operating margin of zero, a price-to-earnings of minus 2.8x, a book value of one cent, with no analyst recommendations, Zodiac still managed to trade 40,500 shares on Friday.

The IDM stock score for Oceana was 38., Navarre was 13 and Zodiac was at 5 which is the lowest score I have ever calculated out of the thousands I have scored. I avoid stocks that score under 50. 

What I think I have illustrated is that everything that glitters is not gold. As for any stock you may be considering buying, use the IDM stock scoring software to objectively rate the strength of any gold stock.

For thousands of years gold has held an elevated status among metals. In times of war and economic turmoil, the wealthy have converted paper money to gold to help protect their fortunes threatened by inflation and political turmoil. Gold does not rust or disintegrate if it is hidden in a hole in the ground. Unfortunately, Gold also pays no dividends or interest.

Fear of a cloudy future is one reason that gold becomes in demand and the price increases. Does the fact that gold has now reached a new record high indicate many investors see a threat of imminent danger from the turmoil taking place in the Ukraine and Israel?

Crypto currency is promoted as a safer more accessible refuge from turmoil than gold. However, what happens to your cryptocurrency if internet communication comes under attack and ceases to function? This and the presence of cyber criminals and crypto fraud makes the old-fashioned physical presence of gold reassuringly safer. It is not about to disappear in a nano second. Access to what you have invested in gold stocks could also disappear if access to your stocks electronically disappeared.

While an electronic dark age does not appear probable, there is some logic in being overly cautious and having a small amount of your wealth invested in physical gold. 

Am I going to invest in physical gold? Probably not. I am an optimist who believes that the twenty financially strong companies I invest in will survive and continue to pay their high dividends and show ever increasing growth in share value as they have done for many, many decades. 

THE END