Description

What do you know about gold? Why is it an asset that we see as valuable? Why are people drawn to it in times of uncertainty? Gold is often touted as a hedge against inflation. So is an investment in Gold worth it? Max Belmont—a Senior Research Analyst with First Eagle Management—joins me in this episode to cover all things AU 79. 

You will want to hear this episode if you are interested in...

• What drew Max Belmont to Gold/precious metals [2:13] 
• How do you manage a precious metal? [4:04]
• What drives the profitability of a mining company? [9:54] 
• Factors to consider when investing in mine startups [17:09] 
• What happens to gold after it’s mined? [19:49] 
• Why would you want gold in your portfolio? [22:40] 
• The arguments for paper gold versus physical gold [30:07] 
• How to measure success as a gold portfolio manager [34:37] 
• Max shares his favorite mining research trip [36:37] 

How do you manage a precious metal?

Max’s job is researching gold mining entities. He reads quarterly and annual reports. He meets with management teams. He looks at earnings transcripts. He even goes and visits active mines. It is the pursuit to build a mosaic that validates or negates an investment thesis. Max focuses on understanding if a mining business is viable and what could go wrong. 

Max shares that since gold was discovered, all of the gold that’s ever been mined and sits in above-ground stock (jewelry, in banks, etc.) amounts to approximately 210,000 metric tons. All of the gold that has ever been mined fits in a cube the size of a tennis court. 

Gold doesn’t rust or tarnish. Gold is an asset that is dense and scarce. It’s always in limited supply. Gold is also becoming harder to mine. The gold industry is worth around 500 billion dollars. 

What drives the profitability of a mining company?

A gold miner cannot set the price of gold—the market sets it. The only thing that miners can do is work on their cost structure. A large part of their costs is on labor, consumables, and energy. The topline is impacted by how many ounces of gold the miner produces. That is a function of the throughput, the grade, and the recovery rate: 

• Throughput: This is how much you can dig up. One million tons? Two million?
• The grade: What is the grade of the gold deposit? Some areas of a mine have a higher grade than others. It’s different in underground mines versus open pits. 
• The recovery rate: Most mills can’t recover 100% of the gold; there is always a small loss that must be accounted for. If you were expecting one million ounces in a deposit, you might only recover 900,000. 

These factors all play into the cashflow generation of a miner. Listen to find out what else can impact their cost structure.

Why would you want gold in your portfolio?

Gold is a polarizing asset. People need to be educated on the investment class overall. Is it a commodity? Is it a currency? Is it just an element on the periodic table? 

In the book, “The Golden Constant: The English and American Experience 1560-2007” by Roy Jastram, he looks at the purchasing power of gold versus a fixed basket of goods from 1560–2007 in England. 

Throughout this time there were wars, currency devaluations, hyperinflationary environments, and more. After 1971, gold started trading freely. Throughout time, you could swap an ounce of gold for a certain amount of goods. Gold has always maintained its purchasing power.

Gold is a paradox. Why is it useful as an anchor to diversify your portfolio? It’s not a productive asset. It...