I recently interviewed Jeff Clark about using gold as an inflation hedge. Jeff asked why I never write about gold stocks. I own several – time to fess up!

Why don’t I write about gold stocks? I don’t recommend stocks, I know my limitations.

You can make a lot of money with gold stocks, but you better know what you are doing.

One of the top metals analysts is former Casey Research colleague Lobo Tiggre. He wrote for Casey under the pen-name Louis James.

One minute he would be traveling the world with his hardhat looking at explorers, then in the next, he would be in established mines looking at their economics. Lobo’s the real expert – and he agreed to an interview.

DENNIS: On behalf of our readers, thank you for taking the time for our education. Before we get into stocks, I want to discuss how gold is different.

Unlike most commodities, which are consumed, gold is primarily used as a store of wealth. When oil prices rise, demand slows – industry looks for other sources of energy. Sometimes can’t higher gold prices create additional demand? Lobo, am I correct?

LOBO: You’re partially right, Dennis. Gold is a safe-haven asset. It rises when people see rising risk (economic, political, or even on the personal safety risk). But the gold price is also seen as an indicator. Rapidly rising gold prices can act as a warning signal, creating more demand for gold.

In a gold mania, fundamentals can be overtaken by momentum, as happened in 1980 and 2011, but that’s rare.

Higher gold prices can cause increased demand for gold, but oddly enough, so can lower prices. In recent years when gold sold off in the West, instead of tanking after breaking below a “psychologically important price level,” it rebounded because the “sale” spurred a surge of buying in Asia.

There has been a massive transfer of physical gold from West to East over the last 10 years. Official Chinese reserves alone have doubled over this time, not including all the gold private individuals in China have socked away.

This win-win outlook should be very reassuring to gold investors. It tells us we should do well, whether safe-haven demand drives gold sharply upward or not.

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DENNIS: I look at mining companies in different categories.

The first is exploration companies, sometimes called junior mining companies. They may be boom or bust; if/when they find gold, the payoffs can be enormous.

The second group is the big boys, they have millions invested and harvest gold all over the world.

The third group doesn’t really mine, but rather provide capital for mining companies. In addition to interest income, they also receive royalties.

LOBO: Well, there’s no “official” or uniformly accepted way of categorizing mining companies, there are some small producers, however, your explanation is as good as any.

DENNIS: I know you have recommended junior mining companies that produced tremendous rewards. What do you look for?

LOBO: When I first started, solid people with great track records, highly prospective targets, and money to explore them, seemed worth a shot. Sometimes we got lucky and landed 1000% gains or better, but too often we did not. Even the very best explorers in the business routinely struck out. A general industry guideline is only one out of 300 discoveries ever becomes a mine. Many good geologists go through thousands of targets and may never make a significant discovery in their entire career.

Today, I am extremely selective with stringent criteria. I’ll speculate on early stage exploration – but only if the company has not only great people and targets, and either revenue of some kind of joint venture partners paying for all that super-high-risk work. I also look for more advanced exploration plays, in which the company has already made a discovery, and it looks to me like a real winner.

One of my favorite speculations is in the pre-production sweet spot. At this stage, there’s no exploration risk; the discovery has already been made. There’s technical risk, but only about 5% of first-time mine builders fail to build their mines.

I’ve seen companies appreciate over 800% from the time they started building their mine until the time they poured their first bar of gold or silver. Silvercorp (SVM) was an example of this sort of extraordinary gain when it built its first silver mine in China back in 2006.

A note of caution; while 95% of first-time mine builders succeed at building their mines, not all deliver positive share price results for investors. In the end, all experience extreme volatility along the way. Traditional stop losses would have been triggered in every case, sometimes causing the investor to sell at a loss.

The junior mining/exploration space should always be considered as a realm for speculators, not investors protecting a nest egg.

Personally, I try to invest the money I need cautiously and speculate only with money I can afford to lose.

DENNIS: What do you look for in the big mining companies?

LOBO: I start with the standard metrics: Price to Earnings Ratio (P/E), dividend yield, Earnings Per Share (EPS), Free Cash Flow (FCF) and such. I look for companies that manage to keep growing and delivering net income.

Operationally, growth is key. Mines are depleting assets. If a miner doesn’t have growth on tap, it’s going to shrink. You must discover or buy more, or you mine yourself out of business!

The tricky variable is political risk, which can change in an instant. Countries that are solidly pro-mining can go off the deep end for many reasons; an unfortunate election, a fiscal crisis, or a mine accident in some other part of the world. Generally, they increase taxes and regulations on once-profitable mines. It takes some work, but it’s essential to stay ahead of the curve on this.

Even the biggest mining companies can be extremely volatile. For example, In 2008 Teck Resources (TECK) dropped from about $50 per share to just over $3. While it was a market-wide crash – almost 94% is scary! In two years the stock rebounded to over $60 per share. The rout was an opportunity for the most courageous among us.

Gold stocks, even in the biggest and best companies in the world, are always going to be much more volatile than blue-chip stocks most investors are used to. Different strategies and risk tolerance are required.

DENNIS: The third group is royalty companies. What should an investor look for here?

LOBO: I love the royalty space. These companies get paid based on the top line of a miner’s production. Investor’s profit from the price of gold/silver without the risk of discovering and mining it. You can do well, but don’t expect the kind of extraordinary gains that a junior mining company many produce.

In addition to sound company metrics, I look for a good dividend and stock with a track record of rising by some multiple of the movements in gold prices. If gold goes up 1% or 2% in a week, I’d like to see the royalty company’s shares rise 4% to 10%. This happens – but again, it happens when gold drops as well.

If your only investment goal is to protect your nest egg, frankly, there isn’t a gold stock in the world for you. The prudent thing to do is to buy gold itself, which will hold some level of value no matter what happens.

DENNIS: Lobo, can you tell readers what you are doing and how they can find you?

LOBO: While I’m greatly appreciative of what Doug Casey taught me, I no longer work for Casey Research. In 2015, to avoid conflicts of interest company policy was changed. I couldn’t buy the stocks I wrote about; putting my money where my mouth was.

Today I foresee a major commodities boom; particularly precious metals. I want to participate. And my readers want me to be in the trenches, suffering and celebrating the consequences of my work alongside them.

I’ve started my own newsletter – www.IndependentSpeculator.com. We provide educational material for investors of all levels. Our monthly newsletter outlines the actual speculative investments I’m making. I post evidence of all my trades, including capital committed, prices bid, fees paid, everything. The goal is 100% transparency.

“Independent Speculator”, is what we are all about. I’m truly independent; none of the companies I write about pay me to do so. Investments are highly speculative and should only be considered by people with capital to allocate to speculation. My goal is to make money for my readers and myself.

DENNIS: Today you heard from a true expert. Lobo, thank you for your time.

NOTE: I have no financial arrangement with Lobo of any kind. I’m happy to promote his new venture in exchange for him sharing his expertise with our readers.

LOBO: My pleasure, Dennis.

Dennis here. I currently own stock in 3 mining companies and 2 royalty companies, all paying dividends. One is up 158%, and the other four are down about 60%. I hope I never have to sell my

Please don’t tell President Trump about this article – I don’t want to be the subject of an angry tweet from him!

But the future of transportation lies in China, whether we’re talking about conventional fossil-fuel vehicles or electric vehicles. Let me explain. . . . .

China is the world’s biggest automobile market, both in terms of supply and demand, having surpassed the U.S. almost a decade ago, in 2009. In 2017, China produced about 25 million passenger cars and four million commercial vehicles. It is the global driver of the demand side too with expected demand in 2020 to hit nearly 35 million vehicles.

Estimates are that, by 2020, there will be 200 million vehicles on China’s roads. That is less than one vehicle for every five people. In the U.S., there were 829 vehicles per 1,000 people in 2015. And many of these vehicles will be electric.

China already is the world’s largest electric vehicle market too. But before I tell you about that, let me first talk about the global future for electric vehicles.

The Electric Future for Automobiles

According to a report from the International Energy Agency (IEA) released on May 30, the global fleet of electric vehicles will likely more than triple to 13 million by the end of the decade from just 3.7 million in 2017. The IEA went on to say electric vehicle sales may soar 24% annually through 2030.

If that occurs, the IEA estimates that will lower demand for oil by 2.57 million barrels per day in 2030. There is a similar estimate from Bloomberg New Energy Finance (BNEF) that says electric vehicle adoption will lower oil demand in 2030 by 2.23 million barrels per day and by 7.3 million barrels a day by 2040.

And not surprisingly, electric vehicles are expected to account for just over a quarter of vehicles sold in China by 2030, up from 2.2 percent last year, according to the IEA’s estimates. More than half of global electric vehicle sales in 2017 were in China, followed by the U.S. The pace of sales has continued into 2018. . .for example, in April, almost 72,000 electric passenger cars were sold, up 136% from a year earlier and almost four times as many as were sold in the U.S.

The crucial point for the electric vehicle market will be when the growth in sales of electric vehicles accounts for all of the growth in the global vehicle market. Obviously, we are nowhere near that point at the moment.

But an indication as to when that will happen can be gleaned from looking at projections from BNEF. Their 2017 outlook said the crucial date would be sometime in 2026, but the 2018 outlook moved that date up by three years to 2023.

And the reason was China. . . . .

China’s Electric Future

China’s electric market is strongly supported by both the government and the citizenry. The government wants to have the country be the leaders in this new transportation technology while cutting its dependence on foreign oil imports. The average Chinese person likes electric vehicles because it will help alleviate the country’s massive pollution problem – it will be nice to walk around a major city like Beijing without having to wear a mask to keep out the air pollution.

Bloomberg New Energy Finance believes these policies will mean that sales of conventional automobiles in China will peak in 2020, two years ahead of the rest of the world. And their forecast for electric vehicles sales in China is something to think about for a minute. . .BNEF says of all the electric vehicles (including hybrids) between now and 2040, one out of every three will be sold in China!

That would not surprise me since China is already the most competitive electric vehicle market in the world with about 30 companies (including joint ventures) selling EVs in China currently, more than double the number here in the U.S.

Electric Vehicle Investments

So how can you play this boom in electric vehicles in China?

First, do NOT buy any of the three ETFs focused on electric vehicles: Global X Autonomous & Electric Vehicles ETF (DRIV), Innovation Shares NextGen Vehicles & Technology ETF (EKAR) and Kraneshares Electric Vehicles & Future Mobility ETF (KARS). All of these ETFs are loaded mainly with U.S. firms that have little exposure to the Chinese vehicle market.  

Instead, if you have even a slight tolerance for higher risk, I would rather own the current leaders in China in the sector. Both companies trade here in the U.S. in the over-the-counter market, but with a high degree of liquidity (lots of shares trade every day).

Related: The Hidden Beneficiary of the Electric Car Revolution

The first is the company that Warren Buffett invested $230 million into in 2008. That translates today to an 8.25% ownership stake in BYD (OTC: BYDYY). Since then, his investment has grown about fivefold.  Buffett is likely to make even more from his investment because BYD is sitting in an enviable position being both the world’s largest electric maker and biggest producer of electric car batteries.

While Tesla investors are breathlessly awaiting the company’s Gigafactory to crank up annual production of batteries to one gigawatt, BYD passed that mark about four years ago. BYD is bringing online an additional four gigawatts of battery-making capacity that makes its annual battery output 12 times larger than Tesla’s!

BYD will also benefit from those quotas for electric cars in the country. If companies don’t meet the requirements, they will be forced to buy credits from automakers that do. And preeminent among these will be BYD. Some estimates are that the company will earn over $2 billion from the sale of credits in just the first three years.

BYD’s stock is cheap at the moment, having fallen about 20% year-to-date (it’s still up 17% over the past year) because of stiff Chinese competition such as from the next company.

Related: 3 Electric Car Winners That Don’t Sell Electric Cars… Or Batteries Either

Another quality Chinese vehicle company is Geely Automobile Holdings (OTC: GELYY), which is also down 13% year-to-date, but is up 66% over the past year.

Geely has learned a lot about manufacturing quality automobiles from its sister company – the Swedish car company, Volvo. Both companies have the same mainland China parent.

Geely said it will increase the proportion of new energy vehicles it sells in 2018 by adding new energy versions of “most of its major models”. It also plans to launch more SUVs. And importantly, its target is that, by 2020, 90% of its vehicles will be electric.

Finally, how about the old American standard, General Motors (NYSE: GM)?

The company is delivering a million cars a year in China, its largest market. Its is setting records with sales of its Buick, Cadillac and Baojun brands. But GM knows the future in China is electric. . . . .

So CEO Mary Barra has set a goal that, by 2025, GM will offer a range of electrification technology in nearly all its models in China. GM plans to have 10 new-energy vehicles and annual sales of 150,000 units by 2020 in China across its Chevrolet, Buick and Cadillac brands. GM’s 2025 target is for 500,000 units.

To meet the new Chinese standards (and avoid paying companies like BYD), GM will rely more on vehicles like its E100, which it sells under the Baojun brand. It is ramping up production of this compact electric vehicle that it launched in July in conjunction with local partners.

And GM looks to be one of the leaders in autonomous vehicles worldwide too. It got a major vote of confidence from Softbank’s (OTC: SFTBY) $100 billion fund, which said it would invest $2.25 billion into GM’s self-driving car unit, Cruise Holdings. The investment values Cruise at $11.5 billion and will give Softbank a 19.6% stake in Cruise.

The SoftBank funding will be split into two parts, with $900 million provided at the closing of the transaction. The remaining $1.35 billion will be injected once the autonomous cars are ready to be deployed commercially. GM has said it will launch a commercial ride-hailing service in 2019 using the Cruise technology, and is viewed as having an edge over many of its rivals.

The founder of Softbank, Masayoshi Son, is no fool and I feel his investment into GM instead of say Tesla speaks volumes.

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