June 28th, 2022 | 11:47 CEST
What comes after inflation: BYD, Desert Gold, Barrick Gold
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"[...] Our projects are at the initial, high reward exploration stage. [...]" Humphrey Hale, CEO, Managing Geologist, Carnavale Resources Ltd.
BYD: Almost everything is right here, but...
BYD's stock has made a comeback in recent weeks and has even surged to new highs. The reason: the Company has a versatile position, builds competitive e-cars and is also well represented on the market with batteries, chips and accessories related to the energy transition. Instead of jumping on the bandwagon, however, investors could also focus on the risks right now. The G7 summit showed that the world is increasingly splitting into two camps. Since the Russian invasion of Ukraine, the democracies are taking a closer look again at potential trading partners. They do not want to be blackmailed and are becoming increasingly independent regarding future technology. Companies like BYD could suffer more from this in the future.
The sustainability trend is also likely to favour products from Europe that offer transparent supply chains, including ESG certification in the long term. Although Europe and the USA are nowhere near this stage, the future is being traded on the stock market. Whether investors can still see the BYD share as it was before February 24 is questionable. There is much to suggest that more risk must be priced in for stocks from China in the long term.
Gold price: What is decisive is what comes next
A considerable amount of risk is already priced into the gold market. Companies such as the producer Barrick Gold or the promising gold prospector Desert Gold, which operates in Mali, are currently trading below their highs. At the same time, historical comparisons show that the precious metal is currently not in a bad position. When inflation threatened the world economy in the 1970s, gold also behaved hesitantly and could not keep up with inflation. It was not until the second half of the 1970s that the precious metal made a liberating move and multiplied within a short period of time from 1976 onwards. The current situation with gold prices could therefore mean the calm before the storm.
Gold is not so much a hedge against inflation as an insurance against what may come from inflation. As a result of inflation, the interest rate turnaround has already begun. Inflation and the turnaround in interest rates are weighing on the economy and pose the risk of conjuring up stagflation. In this case, economic output falls while prices gallop. As a result, government debt could also become an issue again. That is, if the refinancing of governments becomes more expensive and tax revenues gradually dry up. Such tensions have always been a good environment for the gold price in the past. Examples include the second half of the 1970s, the sovereign debt crisis in 2011, and the outbreak of the Corona pandemic in 2020.
Growth stocks like Desert Gold with potential
While companies, such as Barrick Gold, that offer working production are valued close to their actual potential, the situation is quite different for smaller companies such as Desert Gold. At Desert Gold, the deposits are still dormant in the ground. Although they are accounted for according to common mining standards, and there is further potential, the stock is considered significantly undervalued.
One of the reasons for this is the market, which traditionally values gold miners at a discount. For long-term investors, this means the option of leverage on the gold price. Both on a company level and due to the lower valuation of the actual deposits, Desert Gold holds potential. The only disruptive factor is that exploration companies have to finance their search for deposits, which requires capital increases on the domestic stock exchange from time to time. Investors who can deal with the cyclical nature of this form of corporate financing and trade stocks like Desert Gold in tranches can build up long-term positions, especially today.
While stocks like BYD are currently ambitiously valued, despite global growth concerns, gold stocks are trading below their highs. Smaller stocks in particular are battered and have recently lost significant ground. Although there are also financing risks and the associated dilution of shareholdings after the issue of new share certificates, this is offset by a massive undervaluation and a generally large leverage to the gold price in the event of a precious metal comeback.
Conflict of interest
Pursuant to §85 of the German Securities Trading Act (WpHG), we point out that Apaton Finance GmbH as well as partners, authors or employees of Apaton Finance GmbH (hereinafter referred to as "Relevant Persons") may hold shares or other financial instruments of the aforementioned companies in the future or may bet on rising or falling prices and thus a conflict of interest may arise in the future. The Relevant Persons reserve the right to buy or sell shares or other financial instruments of the Company at any time (hereinafter each a "Transaction"). Transactions may, under certain circumstances, influence the respective price of the shares or other financial instruments of the Company.
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