Why We Think Gold Companies Can Go 10X In The Coming Boom…
Notes From the Field By Simon Black
With a current annual budget deficit of $1.6 TRILLION – set to hit $2 trillion by the time the fiscal year ends in September – the US Federal Government is putting drunken sailors everywhere to shame.
At the end of the 2019 fiscal year (just before Covid-1984 hit), the US national debt was $22.7 trillion. Today, it’s nearly 50% greater: $32.7 trillion. And it keeps growing each year.
Just yesterday, our founder, Simon Black, explained that most of the US national debt was accumulated over the past ~15 years, when interest rates were super low. The Treasury Department got accustomed to being able to borrow for less than 1%.
In fact, as late as August 2021, the average interest rate that the US government was paying on its national debt was just 1.45%.
But now interest rates are MUCH higher. The government is now paying an average interest rate of 2.8%, almost twice as high as just two years ago.
The national debt is so high, though, that even 2.8% is too expensive for the US government.
This fiscal year (which ends on September 30, 2023), the Treasury expects to spend a whopping $864 billion just paying interest on the national debt. Again, that’s with an average rate of just 2.8%.
The real problem for the federal government is that roughly 75% of the debt will mature over the next five years. And as their current debt comes due, they’ll pay it back by issuing NEW debt at a HIGHER interest rate.
This means that the government’s average interest rate that it pays on the national debt could rise to 5% over the next five years.
Including all the new debt they project to accumulate over that period of time, this means that the government would have to spend $2 TRILLION of taxpayer money, each year, just to pay interest.
And frankly, paying an average 5% interest on the national debt is still pretty low given US financial history.
The average rate was 5% as recently as 2007. In 2001 it was nearly 7%. And throughout much of the 1980s, rates were in the double digits. So forecasting a 5% average interest rate on the national debt within five years is totally reasonable.
Remember too that, in addition to paying interest, “mandatory” spending on entitlement programs like Social Security and Medicare will hit $3 trillion in a few years.
This means that Social Security, Medicare, and Interest on National Debt could soon exceed 100% of the US government’s tax revenue.
This looming fiscal crisis will fast become a mainstream issue. And politicians will predictably react by raising your taxes sky high to pay for their incompetence.
Simon anticipates the Federal Reserve to try to bail out the government… by slashing interest rates back to 0% and printing trillions of dollars to buy US Treasury bonds.
The consequence, of course, will likely be more inflation.
Why buying gold – and gaining portfolio exposure to it – makes a lot of sense in 2023
As longtime readers of Sovereign Man will know, all of the above is exceptionally bullish for gold.
Now, gold can be a lot of things. It can be a great asset protection tool. It can be a great speculation. It can be a great way to pass on wealth to your kids.
But gold also has a 5,000 year track record as a reliable hedge against inflation and a range of systemic risks.
Most people suffer to some degree from normalcy bias; this is the belief that tomorrow will be very similar to today. Yet the past few years have shown that the world can become radically different… overnight.
And it is precisely during these kinds of Black Swan events and sudden system shocks that physical gold can be an invaluable asset. This is one of the reasons why gold predictably went through the roof during the pandemic.
Yet now that the dust has settled on the pandemic, few people are thinking about buying gold.
In fact, gold prices have remained pretty flat since 2022. An even better example is that many gold-related businesses (including mining companies) are currently trading at ludicrously cheap levels.
But when you consider the obvious risk of a major financial crisis in the US over the next five years, you don’t need to be a gold bug to appreciate gold’s significant potential upside…
It should also be noted that central banks were extremely active buyers of the metal in 2022, buying at a speed not seen since 1967. (Central banks’ purchasing behaviors are a key driver of gold price increases.)
Karl Bagga, the editor of our investment newsletter The 4th Pillar, (which is focused on real assets) believes that we are in the early stages of a significant bull market for gold.
Simon agrees. In fact, he’s argued a few times why gold could trade at $5,000+ in the coming years, up from around $1,900 per ounce today.
How YOU Can Cash In On The Coming “Gold Rush”…
Many investors who consider investing in gold automatically buy into an ETF (exchange-traded fund). Simon has written before that these gold ETFs carry substantial hidden risk which most investors won’t notice… unless they do what Simon does, and actually read all the legal disclosures.
That’s why, at Sovereign Man, we far prefer owning physical gold over ETFs. But more on that another time.
Rising gold prices also present tremendous upside for mining companies and related businesses, including:
Mining royalty companies
Mining financial services providers
Gold millers and refiners
Mining services companies
As well as technology and service providers for mining and complementary sectors…
These are the exact kinds of companies that regularly feature in the page of The 4th Pillar (4P), our real asset focused investment letter.
One of the recently featured companies from Karl’s research in The 4th Pillar is a gold-related business that specializes in drilling, site work, and processing.
It’s a “picks and shovels” business rather than a mine itself. So the company makes money from a gold mining boom, but without the same downside risk.
The business has been performing exceptionally well, has very little debt, and is generating record revenue with very strong profitability. And yet, with a price-to-earnings ratio (PE) of just 4.5, the stock is incredibly cheap right now.
Another example from Karl’s research is a gold ore processor; this is a company that purchases raw gold (i.e. rock ore) from small miners, processes it in bulk, then sells the processed gold to a large refiner.
Being an ore processor will position them for enormous gains in the coming gold boom; their business – already very profitable – will likely grow even more dramatically over the next few years, resulting in a big win for investors.
In the meantime, the company is already paying its investors a healthy dividend. Plus, they have zero debt and tons of cash on the balance sheet. Yet it also currently trades at a laughable 5.5x valuation.
The Bottom Line
Gold miners and gold production companies offer excellent opportunities to make serious profits from the coming boom in gold prices. And that opportunity exists right now because, for whatever reason, investors are largely ignoring the entire sector.
That’s probably not going to last.
Simon Black & Sovereign Man Editorial Team