Everyone has an opinion about Donald Trump. And, at least in my part of Canada, it’s not exactly positive.
Many of my friends think Trump is racist, misogynistic, and stupid–a man who’s just as likely to get us all killed in a nuclear war as he is to make any meaningful contributions to government. And those are the nice comments. Most of the rest are unfit for print.
Quite frankly, I find opinions like that too simplistic to take seriously. Trump is obviously doing a lot of things right. He’s defeated dozens of more established politicians to rise through the Republican Party ranks. And to think, he wasn’t even a politician four years ago. He publicly floated the idea of running in 2011, but then decided not to because it would conflict with taping of The Apprentice.
So while I likely wouldn’t support Trump if I had a vote, I can still marvel at the ability of a man to go from non-politician to serious contender for the most powerful office in the world in just a couple of years. Becoming a billionaire is impressive enough, never mind this.
At the end of the day, however, my opinion means nothing. Especially when it comes to investing. All that matters is how the market would perceive a Trump presidency. And if my friends are any indication, it would not take it well.
It’s easy to see the natural response to this. Investors would do the same thing they’ve done traditionally when macroeconomic issues make them scared. They’ll hide out in precious metals, preferably gold.
Will this actually happen if Trump gets elected?
The case for gold
Thus far in 2016, gold is up approximately US$150 per ounce, rising from US$1,060 to US$1,210. The yellow metal did flirt with US$1,300 at the end of April before selling off pretty aggressively throughout May.
This move also coincides with Donald Trump’s move up the polls. Is this a coincidence, or is the market on to something?
I think it’s more of the former. There have been a couple of reasons for gold rallying thus far in 2016, at least in my opinion. The first is simply a relief rally. After falling pretty much non-stop over the preceding five years, gold finally caught a break. The other and far more important reason was the decline in the U.S. Dollar. If you look at the price of gold in Canadian dollars or euros, you’ll find the rally less pronounced.
Ultimately, if we are going to see the price of gold surge because of a Trump presidency, we won’t see much of anything until shortly before the election. Right now it’s just too early to tell. But if polls do show Trump leading come October, don’t be surprised if we start to see gold head higher.
How to play this
If an investor believes a Donald Trump presidency is filled with scandal and politically incorrect news conferences, then taking a small position in a gold company isn’t the worst idea in the world.
But which one? I personally like Franco-Nevada Corp. (TSX: FNV)(NYSE: FNV), which isn’t even a gold producer. It’s a streaming company, which means it gets the rights to buy much of a mine’s production at rock-bottom prices in exchange for a cash payment up front.
It’s easy to see why investors like that model. Franco-Nevada doesn’t have to take any production risk, and only a minimal amount of commodity price risk. Even if gold is weak, it’ll still make money from its royalty deals. Franco-Nevada also pays investors a 1.4% dividend–a rarity for the sector.
An interesting gold producer is Yamana Gold Inc. (TSX: YRI)(NYSE: AUY). It has all-in sustaining costs of less than US$900 per ounce of production, which is among the lowest in the sector. The company has a relatively strong balance sheet and trades right around book value, even after more than doubling thus far in 2016.
Unlike many of its peers, Yamana was free cash flow positive at lower prices, which bodes pretty well for the future. Additionally, Yamana does have significant silver and copper production, which does offer some diversification.
