Volatile Returns: Commodity Investing Through Miners

Investors consider gold and silver as safe haven investments. But the companies that produce gold and silver often offer volatile returns, creating opportunities for astute investors.

Volatility is a double-edged sword, particularly when it comes to commodity investing. During the good times, it can create skyrocketing returns. But during bad times, it can turn ugly.

Today’s infographic comes to us from Prospector Portal, and shows how investing in precious metals equities can outperform or underperform the broader metals market.

Capitalizing on Volatility: Timing Matters

Just like most investments, timing matters with commodities.

Due to the complex production processes of commodities, unexpected demand shocks are met with slower supply responses. This, along with other factors, creates commodity supercycles—extended periods of upswings and downswings in prices.

Investors must time their investments to take advantage of this volatility, and there are multiple ways to do so.

Three Ways to Invest in Commodities

There are three primary routes investors can take when it comes to investing in commodities.

Among these, commodity-related equities offer by far the most leverage to changes in prices. Let’s dive into how investors can use this leverage to their advantage with volatile metal prices.

The Fundamentals of Investing in Mining Equities

When it comes to commodity investing, targeting miners and mineral exploration companies presents fundamental benefits and drawbacks.

As metal prices rise, the performance of mining companies improves in several ways—while in deteriorating conditions, they do the opposite:

With the right timing, these ups and downs can create explosive opportunities.

Mining companies, especially explorers, use these price swings to their advantage and often produce market-beating returns during an upswing.

But how?

The Proof: How Mining Equities React to Metal Prices

Not only do price increases translate into higher profits for mining companies, but they can also change the outlook and value of exploration companies. As a result, investing in exploration companies can be a great way to gain exposure to changing prices.

That said, these types of companies can generate greater equity returns over a shorter period of time when prices are high, but they can also turn dramatically negative when prices are low.

Below, we compare how producers and exploration companies with a NI-43-101 compliant resource perform during bull and bear markets for precious metals.

All figures are in U.S. dollars unless otherwise stated.

During the bear market period, the price of gold declined by 2.66%, and despite engaging in exploration activity, most companies saw a slump in their share prices.

In particular, exploration companies, or juniors, took a heavier hit, with returns averaging -31.66%. But even during a bear market, a discovery can make all the difference—as was the case for producer Wesdome Gold Mines, generating a 109.95% return over 2018.

• Average returns for gold producers including Wesdome: 24.83%
• Average returns for gold producers excluding Wesdome: -17.65%

During the bull market period for gold, gold mining companies outperformed the price of gold, with juniors offering the highest equity returns averaging 153.43%. Gold producers outperformed the commodity market, the value of their equities increased 69.61%—less than half of that of exploration companies.

Silver: Bears vs Bulls

Similar to gold mining companies, performances of silver producers and explorers reflected the volatility in silver prices:

During the bear market period for silver, its price decreased by 9.8%. Explorers and producers both saw a dip in their share prices, with the equity of silver producers decreasing by 21.63%.

However, the discovery of a high-quality silver deposit again made the difference for SilverCrest Metals, which generated a 116.85% return over the year.

• Average returns for silver exploration companies including SilverCrest: 8.32%
• Average returns for silver exploration companies excluding SilverCrest: -27.86%

On the other hand, during the bull market period, the price of silver increased by 34.33%. Silver exploration companies surpassed the performance of the price of silver.

• Average returns for silver producers: 69.04%
• Average returns for silver exploration companies: 95.36%

The potential to generate massive returns and losses is evident in both cases for gold and silver.

The Investment Potential of Exploration

Mining equities tend to outperform underlying commodity prices during bull markets, while underperforming during bear markets.

For mining exploration companies, these effects are even more pronounced—exploration companies are high-risk but can offer high-reward when it comes to commodity investing.

To reap the rewards of volatile returns, you have to know the risks and catch the market at the right time.

Total Spend by U.S. Advertisers, Over 20 Years

With an advertising economy worth $239 billion in 2019, it’s safe to say that the U.S. is home to some of the biggest advertising spenders on the planet.

However, the COVID-19 pandemic has resulted in the major upheaval of advertising spend, and it is unlikely to recover for some time.

The graphic above uses data from Ad Age’s Leading National Advertisers 2020 which measures U.S. advertising spend each year, and ranks 100 national advertisers by their total spend in 2019.

Let’s take a look at the brands with the biggest budgets.

2019’s Biggest Advertising Spenders

Much of the top 10 biggest advertising spenders are in the telecommunications industry, but it is retail giant Amazon that tops the list with an advertising spend of almost $7 billion.

In fact, Amazon spent an eye-watering $21,000 per minute on advertising and promotion in 2019, making them undeniably the largest advertising spender in America.

Explore the 100 biggest advertisers in 2019 below:

The report offers several ways of looking at this data—for example, when looking at highest spend by medium, Procter & Gamble comes out on top for traditional media spend like broadcast and cable TV.

On the digital front, Expedia Group is the biggest spender on desktop search, while Amazon tops the list for internet display ads.

The Rise and Fall of Advertising Spend

Interestingly, changes in advertising spend tend to fall closely in step with broader economic growth. In fact, for every 1% increase in U.S. GDP, there is a 4.4% rise of advertising that occurs in tandem.

The same phenomenon can be seen among the biggest advertising spenders in the country. Since 2000, spend has seen both promising growth, and drastic declines. Unsurprisingly, the Great Recession resulted in the largest drop in spend ever recorded, and now it looks as though history may be repeating itself.

Total advertising spend in the U.S. is estimated this year to see a brutal decline of almost 13% and is unlikely to return to previous levels for a number of years.

The COVID-19 Gut Punch

To say that the global COVID-19 pandemic has impacted consumer behavior would be an understatement, and perhaps the most notable change is how they now consume content.

With more people staying safe indoors, there is less need for traditional media formats such as out-of-home advertising. As a result, online media is taking its place, as an increase in spend for this format shows.

But despite marketers trying to optimize their media strategy or stripping back their budget entirely, many governments across the world are ramping up their spend on advertising to promote public health messages—or in the case of the U.S., to canvass.

The Saving Grace?

Even though advertising spend is expected to nosedive by almost 13% in 2020, this figure excludes political advertising. When taking that into account, the decline becomes a slightly more manageable 7.6%

Moreover, according to industry research firm Kantar, advertising spend for the 2020 U.S. election is estimated to reach $7 billion—the same as Amazon’s 2019 spend—making it the most expensive election of all time.

Can political advertising be the key to the advertising industry bouncing back again?