PETER HAMBRO: How to buy gold at a discount

At the current gold price of $2,733/Oz, just one ‘Large Bar’ of 400 Troy Ounce will cost you $1 million, or £840,000.

In the 1960s, the late Jocelyn Hambro, chairman of his family bank, hosted the late Majesty Queen Elizabeth II and the Duke of Edinburgh for lunch in the bank’s famous dining room.

Wanting a talking point that might intrigue the royal couple, he arranged for Mocatta & Goldsmid, then the bank’s wholly owned subsidiary and a bullion dealer since 1684, to make a pile of gold, silver, platinum and cash. worth £1 million.

When Their Majesties were led into the vaults, deep beneath Bishopsgate in the City of London, to inspect these astonishing riches, it was an impressive sight.

In those distant days, a 400 Troy Ounce Large Bar would have cost $14,000 or £5,000 to buy – say $35 or £12.5 per ounce.

Wouldn’t it be great if you could still buy gold at these kinds of prices?

Well, that’s actually possible!

Not, of course, in the form of shiny bricks that are so dense and heavy that they are difficult to pick up with one hand, or the toffee-shaped 10 Tola bars that are so popular in the Gulf and in India.

To buy this super cheap gold, you have to buy it locally; where Mother Nature had kindly said so, as the Earth’s crust cooled and the grains of gold were trapped in the epithermal quartz veins and granite rocks.

Does this mean you should pick up your rock hammer and trudge through jungles, swamps or blizzards?

Certainly not! The gold mining companies whose shares trade on the world’s stock exchanges can be valued by measuring their published resources and reserve ounces of gold, and the stock exchanges have specific ways in which these can be measured and published. The Canadian 43-101 method and the Australian JORC are the most widely accepted.

The total cost of mining the gold – AISC as it is known – gives a good indication of how difficult it is for a specific company to reach the shining bar position.

The skill and reputation of management is another crucial factor in determining the relative value of a particular gold deposit and perhaps most importantly is the political risk inherent in the location of the mine.

The price of gold has skyrocketed in the past year

When we look at reserves and resources, we need to think about these risks.

As a rough guide, reserves have an 85 percent chance of becoming actual gold bars, while inferred resources only have a 10 percent chance.

That’s why gold-in-the-ground – GITG – trades at a discount to the published gold price.

The table below provides a snapshot of five major gold mining companies, ranked by the best value of their gold in the ground.

Newmont, with 226 million ounces across all categories, likely only has 120.6 million ounces of GITG. But by buying the stock, you are buying gold that will likely be delivered many years from now at a 20 percent discount.

Small exploration companies offer different opportunities because they are typically valued on less scientific standards.

The late, great Julian Baring, one of the absolute best gold fund managers of his generation and sadly missed by the mining industry due to his innate understanding of the risks and rewards available, had a simpler valuation mechanism on his Psion calculator.

He measured ‘reserve ounces, soon to be discovered ounces’ and the ‘blah-blah ounces’, and the owner’s ‘cut of the jib’. This evaluation was much faster than going through the table and was probably more successful, but it rested on the same basic principles.

He was concerned about the small exploration companies – which are usually the breeding ground for the big boys – where immediate potential is important.

The successful smaller player will typically be bought out at a premium by a large mining company that does not want to engage in grassroots exploration. Julian called them ‘Lobster Pots’ – easy to get in and hard to get out. But the good lobsters are eaten.

Drilling and testing can be expensive, especially in difficult terrain, and this is a factor when deciding where to invest.

Having the money to drill monster holes so that the geological and mining experts can turn ‘about to discover’ gold into reality is where big opportunities lie for investors and what Julian specialized in.

To significantly move the price of shares in a major producer requires a sudden increase in production, which is difficult to achieve, or a reduction in costs, which is even more difficult.

While for a small explorer, doubling the reserve and resources is relatively easy for the owner of an exploration area that has been scantly explored, drilling targets have been identified and only core drilling and analysis needs to be carried out.

Choosing the right one is key. London and the AIM market were key in Julian’s day, but Toronto and its Venture Exchange now wear the crown. It’s easy to do business there.

But keep your wits about you and remember what Mark Twain said: “A mine is a hole in the ground with a liar next to it.”

Peter Hambro has more than 40 years of experience in the precious metals market and gold mining. He co-owns several private gold exploration properties in South America and is chairman and shareholder of Canadian gold exploration company XAU Resources.

DIY INVESTMENT PLATFORMS

A.J. Bell

A.J. Bell

Easy investing and ready-made portfolios

Hargreaves Lansdown

Hargreaves Lansdown

Free fund trading and investment ideas

interactive investor

interactive investor

Invest for a fixed amount from € 4.99 per month

Sax

Sax

Get £200 back in trading fees

Trade 212

Trade 212

Free trading and no account fees

Affiliate links: If you purchase a product, This is Money may earn a commission. These deals have been chosen by our editors because we believe they are worth highlighting. This does not affect our editorial independence.

Compare the best investment account for you