Mr. Market is Making a Profitable Gold Oversight

Mr. Market is Making a Profitable Gold Oversight by Nick Hodge – Outsider Club

Here’s something major the market is missing…

I came across it while doing some routine research this week.

The first headline that caught my eye was this:

Over $184 million sold at Ritchie Bros. Edmonton auction

Ritchie Bros. (TSX: RBA)(NYSE: RBA) is the world’s largest industrial auctioneer.Ritchie Bros. Auction

It holds auctions for cranes and skid loaders and backhoes and bulldozers. I used to love driving by the one near my house growing up as a kid and looking at the rows and rows of giant machines.

Now, $184 million in equipment sales at one auction in Edmonton is a serious number. But I still almost dismissed it as routine until I saw this:

Ritchie Bros. Holds Record-Breaking Auction in Toronto

That headline came two weeks after the first.

And the auction in Toronto, which fetched C$45 million in sales, was the third time in 12 months that the Toronto record was broken.

The articles I read attributed the Edmonton bump to “brewing confidence in the oil and gas sector” and the Toronto record to “considerable investment in infrastructure.”

On this information alone you might be able to do well as an investor.

Ritchie Bros.’ stock has pulled back of late from a high near $40 to the $30.65 it trades at today — a 25% haircut since December.

Ritchie Bros. Stock

I think that’s a bit of an overreaction to a Q1 earnings stumble that saw only a 6% dip in revenues, and some one-time charges for taxes and acquisitions.

Picking up these shares over the next few months — when they could get weaker during the summer slowdown — might not be a bad idea. Earnings are expected to pick back up in Q3 and Q4, and the consensus analyst price target on the stock is nearly 10% higher than it currently trades. And the stock yields 2.2% to boot.

But I think Ritchie Bros.’ recent large auction sales point to something much bigger, with much larger profit implications.

And I think the rest of the market is missing it.

While the articles about the auctions cited oil and gas and infrastructure as the reasons for the increases…

I think it may have something more to do with mining…

Exploration expenditures are finally ticking up after a years-long bear market. For example, in 2012 the global mining industry spent US$21.5 billion exploring for non-ferrous metals. Last year that number had dwindled all the way down to just US$7.2 billion.

Despite the four-year slump, for the past three consecutive quarters exploration companies have been able to raise money and conduct focused drilling campaigns, according to the latest World Exploration Trends report.

More importantly — and this is how I tied the Ritchie Bros. sales to mining — Canada was the most popular target for mining exploration with 14% of the global total. And drilling down even further, Ontario was responsible for 23% of that, the largest portion by far and the host province of recent record equipment sales in Toronto.

And for investors here’s the really important info: nearly half the exploration dollars are going to gold, the highest level since 2011.

As a reminder, that’s the year gold prices took off to above $1,800 per ounce.

It’s no coincidence exploration spending — and particularly gold exploration spending — is on the rise once more.

Gold has hit its magic number for this, meaning the time is right for gold prices to tick higher and investments to be made.

Again, I think most of the market is missing this. And I explain why here.

There are plenty of ways to play it, including with pure picks and shovels like Ritchie Bros. — where you are literally selling the picks and shovels.

But there are ways to invest in this gold phenomenon with more leverage and higher returns.

I outline my top 10 precious metals investments here.

Call it like you see it,

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Nick Hodge

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Jimmy is a managing editor for Outsider Club and the Investment Director of the personal finance advisory The Crow's Nest. You may also know him as the architect behind the wildly popular finance and investing website Wealth Wire, where he's brought readers the stories behind the mainstream financial news each and every day. For more on Jimmy, check out his editor's page.