It takes hard work and perseverance to succeed in the mining industry. Glen McKay, the chairman of the board of directors and founder of leading explosives manufacturer, Newfoundland Hard-Rok Inc, has both these qualities, starting his career as a deckhand in the fishing industry in Newfoundland and Labrador before leading businesses in a range of industries, including finance, construction and, yes, mining.
“Motivation and determination are essential attributes of any successful entrepreneur,” Glen McKay explained in a recent interview. “These are attributes that can be unlocked only from inside a person, not by external influences. A desire to learn and cultivating the ability to be insightful are necessary in assessing business opportunities.”
Newfoundland Hard-Rok Inc.
In 1985, McKay became the Dupont Explosives distributor in Newfoundland and Labrador and used the Newfoundland Hard-Rok division of his company MRO Supplies Ltd. to operate the explosives business. In 1987 Newfoundland Hard-Rok Inc. was incorporated as a separate entity by McKay, who then sold part of it to two employees of MRO Supplies Ltd., Carl Foss and Keith Phelan, who were then looking after the explosives division of the company. The drilling, blasting and explosives company has grown since then. In 1994 Newfoundland Hard-Rok Inc. built an ANFO manufacturing plant near Corner Brook, NL and acquired a fleet of hard rock drilling rigs. In May of 2009, Newfoundland Hard-Rok Inc. commissioned its newly constructed, state of the art Bulk Emulsion explosives manufacturing facility west of Corner Brook. It is now the premier supplier of explosives and drilling blasting services in the region.
Newfoundland Hard-Rok Inc. formed wholly owned subsidiary Dyno Nobel Labrador Inc. in 2004, and wholly owned subsidiary Dyno Nobel Baffin Island Inc. in 2013, with McKay serving as the Chair of the Board of Directors of Newfoundland Hard-Rok Inc. and managing the company’s finances and administration.
Dyno Nobel Labrador Inc. was awarded the contract from Vale (formerly Voisey’s Bay Nickel Company) in 2005 to design, build and operate a bulk emulsion (blasting agent) manufacturing plant supplying the needs of the open pit mine at Voisey’s Bay. Recently, Dyno Nobel Labrador Inc. was awarded an additional second contract for the underground delivery of loading equipment and related services at the mine. Vale’s mine site is in Northern Labrador along the coast near the community of Nain. The mine primarily produces nickel ore with some copper and cobalt and is accessible via air and sea only.
As Newfoundland and Labrador Premier Dwight Ball explains, a five-year construction project at Voisey’s Bay will extend the mine’s life by 15 years. Once operational, Ball estimates the underground mine will create an additional 1,700 jobs both at the mine and at the Long Harbour, NL, processing plant. The mining operation in northeastern Labrador opened in 2005 and currently employs about 500 people, Canadian Press reported.
Dyno Nobel Baffin Island Inc. is a wholly owned subsidiary of Newfoundland Hard-Rok Inc. and was formed in 2013 to service the Baffinland Iron Mines, Mary River Project. Dyno Nobel Baffin Island Inc. has been awarded a multi-year contract to supply explosives for the construction and mining phases. A state of the art modular emulsion manufacturing plant was constructed on site in 2014. The operations involve the manufacturing of bulk emulsion, loading, and firing the blast holes. The Mary River Mine is in the remote northern part of Baffin Island within the Arctic Circle. This remote cold location poses many challenges to shipping and logistics, equipment operation and working outdoors.
Cornerstone Capital Resources
But Dyno Nobel Labrador Inc was not Glen McKay’s first foray into the mining industry. In 1997, he co-founded Cornerstone Capital Resources Inc, a mineral exploration company best known for its Cascabel copper-gold project in Ecuador, which was acquired in 2011 during his tenure. While McKay was with Cornerstone, he served as president, chief executive officer and vice chair. He still owns shares in the company and keeps a close eye on its activities.
On July 13, 2018, Cornerstone released an update on the exploration program at its Cascabel copper-gold porphyry joint venture exploration project in northern Ecuador, in which the company has a 15% interest financed through to completion of a feasibility study. Cornerstone has several other projects in Ecuador and Chile.
“The Cascabel project increases in size with each round of drilling and an aggressive drilling campaign continues,” McKay posted onLinkedIn. “I think that they are probably 18-24 months away from a feasibility study, but I also expect that one of the majors will buy out the current owners (SolGold and Cornerstone) before then.”
SolGold owns the other 85% of Cascabel and is funding 100% of the exploration as the operator of the project. Cornerstone is spinning off its assets (except for its interest in Cascabel, shares of SolGold and the joint venture with the Ecuadorian state mining company) into a new company called Cornerstone Exploration, which will own several drill ready projects in Ecuador and Chile. Cornerstone will be re-named Cascabel Gold & Copper.
Apex Construction
That’s not the end of McKay’s entrepreneurial resume. In 1987, he provided the capital for Apex Construction Specialties Inc, which grew to become the largest supplier of commercial construction products in Newfoundland and Labrador. McKay remained as a shareholder and board member until the company was sold in 2017.
In his 40 years of business experience, McKay has learned a lot about people. In his own businesses, he looked for self motivated, bright, hard-workers who had the ability to be a part of a team. The simple but effective premise is that if you really value your people, they in turn will increase the value of your business.
Although precious metals have not rebounded too strongly yet, the long awaited summer rally could be underway (at least in Gold). Gold is oversold and its sentiment is overly bearish. But it is holding important support in the low $1200s. Silver has begun to rally after breaking down from a triangle consolidation. The gold stocks held up well during recent carnage in the metals but are struggling around very important support levels. The nature of their potential rebound is important as they try and maintain current support.
In recent days Gold has bounced from strong monthly support at $1200-$1210/oz. As the chart shows, that level was monthly support in early 2016 as well as the middle of 2017. It is the key support level between Gold and roughly $1140/oz. Look for this support to hold at least into September.
On the sentiment front, last week Gold’s net speculative position hit 13.9% (as a percentage of open interest) which is a +2-year low. Friday’s report may show a reading close to 10%. Within the context of a downtrend, this is the kind of sentiment (sub 15%) that can be deemed as extreme. Pair that with the strong monthly support at $1200-$1210 and its likely Gold holds this level for at least a few months.
Turning to the gold stocks, while they have held up well in recent months, the technicals suggest some potential trouble if they do not rebound soon.
The HUI Gold Bugs Index which contains only gold miners (no royalty companies) is losing key support within a descending triangle pattern. The pattern projects to a downside target of 149. Upon a close below 163 (which is less than 3% away from current levels), the HUI would hit a 2.5-year low and not have good support until 140.
GDX, meanwhile is showing less weakness but is vulnerable to a decline if it loses support at $21. If that break comes to fruition then GDX has a measured downside target of roughly $16.50-$17.00.
Even though the miners have struggled and Gold has not rallied much in recent days, the path of least resistance for the remainder of the summer should be higher. Gold should continue to hold support in the low $1200s and eventually rally back to $1260 perhaps. While the gold stocks are struggling to hold above support, I’m not sure there is enough selling pressure at the moment to drive them lower.
The dollar and the US stock market may be starting their next major legs down today. Please click here now. Double-click to enlarge this ominous US dollar versus Japanese yen chart.
Central banks around the world are ramping up their tightening. Back in 2013-2014 when I predicted quantitative tightening and relentless rate hikes were imminent, almost nobody believed me.
I promised that this tightening cycle would be like no other because of the enormous size of the QE money balls in Japan, Europe, and America. The tightening action is moving the money balls out of the deflationary government bonds asset class and into the inflationary fractional reserve banking system.
Powell just raised rates again and is poised to launch another increase in quantitative tightening. He’s also beginning to change the spread between the Fed funds rate and the excess reserves rate that banks get paid to keep money at the Fed.Going forward, I expect him to put much more pressure on banks to move money out of the Fed. This is highly inflationary action.
Please click here now. Double-click to enlarge. The US stock market looks like a technical train wreck.
For the stock market, one mainstream money manager just referred to the global tightening cycle in play as akin to a sports team losing their goalie!
It’s obvious that the stock market is doomed. Powell appears determined to push through another rate hike in either August or September. Maybe the market staggers sideways or slightly higher until then, but the US stock market train is headed towards a global central bank tightening cliff. It’s going to go right over that cliff and implode, and tariffs are just icing on the cake.
Please click here now. Double-click to enlarge this interesting T-bond chart. Stock market money managers usually buy bonds when they panic, and that’s starting to happen now.
This time they are jumping from the fire to the fry pan. They believe the Fed will blink and stop hiking. In contrast, I predict the hiking will be accelerated, with a possible half point hike coming in December as inflation continues to rise.
Because of the widening spread between the Fed funds and excess reserve rates, banks will become more aggressive about moving money out of the Fed.Ultimately, the money managers will panic-sell bonds and buy gold as they see the stock market melting but inflation getting even stronger.
The bottom line is that Powell’s tightening actions to date have not done enough damage to the bond market to kill it as a safe haven for stock market investors. That will change fairly soon.
Please click here now. Double-click to enlarge this GDX chart. Gold stocks continue to meander sideways in my important $23 to $21 accumulation zone.
Many individual miners have started to trade independently of the ETFs and mine stock indexes, and are staging fabulous rallies. There are always some outperformers in a sideways market, but the large number of them staging these rallies now is quite impressive.
Note the strong volume bar that occurred on Friday. Gold stocks are in very strong hands now at a time where some possible “game changing” news is coming for bullion.
On that note, please click here now. India and China are the biggest markets for physical gold, and price discovery on the COMEX and LBMA ultimately relates to changes in demand there versus mine and scrap supply.
When Narendra Modi got elected as India’s prime minister, he put Arun Jaitley in charge of the finance department. This was disappointing, because Jaitley’s actions and words have been very negative for gold, and the finance ministry has the power to set the gold import duty.
Jaitley has a long history of health issues, and he just had a kidney transplant. Piyush Goyal has been appointed as “interim” finance minister. He’s pro-gold and fought against the import duty. There are rumours that his appointment may become permanent.
If that happens, I think gold investors around the world are going to watch the import duty tapered to zero just like American QE was tapered to zero.
Please click here now. Double-click to enlarge this spectacular long-term gold price chart. The Indian finance ministry is the main driver of the global gold price doldrums that have been in play for the past seven years.
It’s unknown if Goyal takes charge of the finance ministry on a permanent basis, but if he does, that is likely the catalyst that launches a massive and sustained rise in Indian gold demand. That demand will be enough to drive gold in an Elliott C wave advance to at least $1650, and probably $2000!
If “Royal Goyal” has charge of India’s finance ministry at the same time as Powell is joined by the ECB and then Japan in a giant effort to roll the QE money balls into the fractional reserve banking system, gold will likely surge to $3000 – $5000 very quickly.
When gold began its “eight-bagger” advance from the $250 area in 1999, few people anticipated the upside potential. The highest price targets coming from mainstream analysts were in the $400 area. Most of them thought gold was going to stay in the doldrums for decades, while the stock market would never decline in a material way. They had no clue what was coming!
Please click here now. Double-click to enlarge. I believe the potential for another eight-bagger is much stronger now than it was in 1998. This quarterly bar chart shows gold making an epic bull wedge breakout.
All that’s technically in play right now is a pullback from the breakout zone and that’s very healthy. Note the rise in volume from 1998-2002. That came ahead of the runaway action in the price. The exact same thing is happening now. Gold and silver investors should have absolute confidence in their holdings… and look to eagerly accumulate more!
Stewart Thomson is no longer an investment advisor. The information provided by Stewart and Graceland Updates is for general information purposes only. Before taking any action on any investment, it is imperative that you consult with multiple properly licensed, experienced and qualified investment advisors and get numerous opinions before taking any action. Your minimum risk on any investment in the world is: 100% loss of all your money. You may be taking or preparing to take leveraged positions in investments and not know it, exposing yourself to unlimited risks. This is highly concerning if you are an investor in any derivatives products. There is an approx $700 trillion OTC Derivatives Iceberg with a tiny portion written off officially. The bottom line:
Are You Prepared?
Fed week is exciting for some. Gold bulls and bugs alike hope the Fed will do something or say something that will trigger a huge move in precious metals. It doesn’t work like that. The Fed follows the market, which for the Fed Funds rate (FFR) is the 2-year yield. The 2-year yield has been screaming higher over the past 12 months and it implies at least another two rate hikes in the future. That’s not good for precious metals and could be partly why (among other reasons) Gold and gold stocks have lost their 200-day moving averages. Whatever the reason, the short-term technicals are negative and there is risk of increased selling before a potential rebound in July.
First, let’s take a look at Gold and gold against the equity market. As we can see from the chart, Gold in June has failed twice at its 200-day moving average. That is different from 2017 when each time Gold lost its 200-day moving average, it made a V rebound back above it.
Gold & Gold/Stocks
Gold’s weakness against the broad equity market is another concern. At the bottom of the chart we plot Gold against the NYSE, a broad stock market index. The ratio recently failed at its downtrending 200-day moving average and is also threatening a move to new lows for essentially the first time since 2015. (The December 2017 break was not sustained to the downside).
Elsewhere, the miners have spent the second quarter wrestling with their 200-day moving averages. GDX failed at its 200-dma twice in the past month, including last week. Meanwhile, GDXJ has shown a tiny bit more strength but essentially has wrestled with its 200-dma since April. The silver stocks (SIL) have been weaker as they have not traded above their 200-dma since January and could have started to breakdown on Friday by closing at 3-month low.
GDX, GDXJ, & SIL
The immediate outlook for precious metals is negative as the price action suggests but current bearish sentiment implies a rebound is on the horizon. The summer could be playing out as we anticipated three weeks ago. An immediate move lower could push Gold to strong support around $1260 and that would put sentiment indicators into truly extreme territory. From there, it is critical that the sector recaptures 200-day moving averages. Given our recent cautious views, we have narrowed our focus to a smaller group of companies capable of performing well in this environment. To follow our guidance and learn our favorite juniors for the next 6 to 12 months, consider learning about our premium service.
A negative divergence between gold and silver occurred in May 2011. Now, the opposite situation is in play; a positive divergence is occurring.
Please click here now. Double-click to enlarge this daily gold chart.
Gold made a minor trend low at the start of May, and another one a few weeks later.
Please click here now. Double-click to enlarge. Silver also made a minor trend low in early May, but then diverged with gold. Silver began a making a series of higher highs and higher lows.
It’s true that intermediate trend rallies in precious metals tend to end with silver outperforming gold, but it’s also true that major trending moves tend to begin with the type of divergence that is happening now.
Inflationary pressures are building around the world. Please click here now. This type of situation is likely to be resolved not with lower fuel costs, but with higher wages.
Wage pressures are growing everywhere. Silver is like a blood hound, sniffing the catalysts of inflation before they move the prices of almost everything significantly higher.
Please click here now. Double-click to enlarge this sugar chart. It looks very similar to silver.
Please click here now. When inflation began to show signs of appearing in the mid 1960s, sugar began to rise. It spiked dramatically in the early 1970s.
The rise in Chinese and Indian wages is the biggest inflationary catalyst in the world. It’s relentless and powered by a population of three billion people.
There are about eight times as many people in China and India as there are in the United States, and the GDP growth rates are vastly higher. India grows at 6% in a recession, while America grows at 3% in a boom. India is headed for 10% GDP growth, and wages and prices are going to rise in a similar way.
The income growth coming out of China and India is an inflationary tidal wave and global tariffs simply add gasoline to the fire.
What mainstream economists in the West don’t seem to understand is that US interest rates are far below rates in China and India. Powell’s rate hikes create short term turmoil in emerging markets, but that’s just short-term noise in a big inflationary picture.
The United States needs vastly higher interest rates to stop the Chindian tidal wave and that is not going to be happening.
One of my subscribers notes that in Japan there are now more adult diapers sold than baby diapers. I expect the same thing to happen in America fairly quickly. By demographics definition, the US population is not ready for the inflationary freight train that is coming, and cannot get ready.
Please click here now. Sanctions are deflationary. Military spending is deflationary because it doesn’t boost money velocity the way money moving around in the global economy does. Peace in Korea will reduce military spending and the money will be used elsewhere.
North Korea is a small country, but Trump has already stated he wants Russia back in the G8. An end to sanctions in North Korea opens the door to ending them against Russia, and that opens the door to ending them against Iran.
The bottom line is that everything that is happening in the world right now, and I mean everything… is significant fuel for higher inflation that modest rate hikes in America are powerless to stop.
Please click here now. Double-click to enlarge this Northern Star chart. For many years I’ve urged gold stock investors to get involved with the stocks in my vital “Thunder Down Under” Australian gold stocks portfolio.
Most of them are trading well above their 2016 highs, and many are above their 2011 highs. Investors who listened and took action have greatly prospered.
The good news: The gold bull era that is being created by income growth in China and India is going to make most of the precious metal mining stocks that trade on North American stock exchanges look just like Northern Star.
Please click here now. Double-click to enlarge. The overall technical picture for GDX and North American miners continues to get more positive by the day.
The entire $23 – $18 price range is a buy zone that will likely be looked back on as one of the greatest buying opportunities in the history of financial markets.
Regardless of the upside potential for inflation-oriented investments, gold and silver stock investors should be totally comfortable with the current price action. A Chindian income growth wind is gently blowing the sails of the Western gold community’s boats. Enjoy the breeze, because it’s not going away!
Special Offer For Website Readers: Please send me an Email to freereports4@gracelandupdates.com and I’ll send you my free “Junior Gold Stock Power Boats!” report. I highlight eight junior gold (and silver) stocks that look like high-powered race boats. These stocks are ready to give investors outrageously positive price performance in both the short and long term! I include hardcore buy and sell point for each stock.
Stewart Thomson is no longer an investment advisor. The information provided by Stewart and Graceland Updates is for general information purposes only. Before taking any action on any investment, it is imperative that you consult with multiple properly licensed, experienced and qualified investment advisors and get numerous opinions before taking any action. Your minimum risk on any investment in the world is: 100% loss of all your money. You may be taking or preparing to take leveraged positions in investments and not know it, exposing yourself to unlimited risks. This is highly concerning if you are an investor in any derivatives products. There is an approx $700 trillion OTC Derivatives Iceberg with a tiny portion written off officially. The bottom line:
Are You Prepared?
Last week index score: 45.96
This week: 35.42
Zinc One Resources (TSX-V: Z) reported the final drill results from the high-grade zinc discovery in the Mina Chica zone of its Bongará zinc project in north-central Peru.
The Oreninc Index fell in the week ending June 8th, 2018 to 35.42 from 45.96 a week ago as financings decreased, and broker action stayed away.
Gold spent the week flirting again with the US$1,300/oz level in the run up to the G7 summit in Canada, with US president Donald Trumplooking to pick a fight with anyone that would pay him attention as he also prepares for a summit meeting with North Korean leader Kim Jong-un. Despite the trade sabre-rattling, those watching the precious metals space are waiting for the outcome of the US Federal Reserve Market Committee (FOMC) meeting this coming week and any indications related to further interest rate increases.
Financings and broker activity continue to be sparse as Oreninc’s Kai Hoffmann showed at the 121 Mining Investment Conference in New York last week, as interest in the mining sector continues in a funk.
On to the money: total fund raises announced halved to C$50.8 million, a two-week low, which included no brokered financings and no bought deal financings. The average offer size fell to C$2.0 million, an eleven-week low whilst the number of financings fell to 25, a two-week low.
Gold closed up at US$1,298/oz from US$1,293/oz a week ago. Gold is now down 0.36% this year. The US dollar index closed down a tad at 93.53 from 94.15 a week ago. The van Eck managed GDXJ closed down a smidge at US$32.78 from US$32.80. The index is down 3.96% so far in 2018. The US Global Go Gold ETF increased to US$12.95 from US$12.71 a week ago. It is now down 0.46% so far in 2018. The HUI Arca Gold BUGS Index closed down at 178.83 from 179.15 last week. The SPDR GLD ETF continued to sell off and closed its inventory down at 828.76 tonnes from at 836.42 tonnes a week ago.
In other commodities, silver closed up at US$16.78/oz from US$16.41/oz a week ago. Copper’s gain accelerated as it closed up at US$3.30/lb from US$3.09/lb last week. Oil continued to lose ground as it closed down slightly at US$65.74 a barrel from US$65.81 a barrel a week ago.
The Dow Jones Industrial Average saw a strong rebound to close up at 25,316 from 24,635 last week. Canada’s S&P/TSX Composite Index also saw a winning week to close up at 16,202 from 16,043 the previous week. The S&P/TSX Venture Composite Index also closed up at 775.22 from 765.94 last week.
Summary:
Number of financings decreased to 25, a two-week low.
One brokered financing was announced this week for C$8.0m, a one-week high.
No bought-deal financings were announced this week, a one-week low.
Total dollars nearly halved to C$50.8, a two-week low.
Average offer size dropped to C$2.0m, an eleven-week low.
Financing Highlights
Nouveau Monde Graphite (TSX-V: NOU) opened an C$8.0 million private placement @ C$0.30 with Eight Capital and Haywood Securities as co-lead agents.
Syndicate including Canaccord Genuity and Desjardins Securities.
Each unit comprised of one share and half a warrant exercisable @ C$0.40 for two years.
Net proceeds for capital allocations related to Nouveau Monde’s graphite demonstration plant in Saint-Michel-des-Saints.
Major Financing Openings:
Nouveau Monde Graphite (TSX-V: NOU) opened a C$ 8 million offering underwritten by a syndicate led by Eight Capital on a best effortsbasis. Each unit includes half a warrant that expires in 24 months.
MGX Minerals (CSE: XMG) opened a C$ 7.01 million offering on a best efforts basis. Each unit includes a warrant that expires in 36 months. The deal is expected to close on or about June 18th.
GoviEx Uranium (TSX-V: GXU) opened a C$ 6.06 million offering on a best efforts basis. Each unit includes a warrant that expires in 36 months.
Golden Dawn Minerals (TSX-V: GOM) opened a C$ 5.4 million offering on a best efforts basis. Each unit includes a warrant that expires in 36 months.
Major Financing Closings:
Troilus Gold (TSX-V: TLG) closed a C$ 10.01 million offering underwritten by a syndicate led by GMP Securities on a bought deal basis.
Almaden Minerals (TSX: AMM) closed a C$ 9.44 million offering underwritten by a syndicate led by Sprott Capital Partners on a best efforts basis. Each unit included half a warrant that expires in 48 months.
GoviEx Uranium (CSE: GXU) closed a C$ 6.06 million offering on a best efforts basis. Each unit included a warrant that expires in 36 months.
Troilus Gold (TSX-V: TLG) closed a C$ 5.75 million offering on a best efforts basis.
Company News
Zinc One Resources (TSX-V:Z) reported the final drill results from the high-grade zinc discovery in the Mina Chica zone of its Bongará zinc project in north-central Peru.
High-grade zinc mineralization is about 200m long and 120m wide.
Highlights included 21m @ 27.5% Zn in hole MCH-18-041.
Analysis
With a new high-grade zinc discovery, this phase of drilling has been very successful, adds to the potential of the project, even though the size potential of the Mina Chica zone will have to wait for a future drilling programme. And with only a small portion of the 6km mineralized trend tested, there is a lot more exploration (and results) to come in the future.
About Oreinc.com:
Oreninc.com is North America’s leading provider of relevant financing information in the junior commodities space. Since 2011, the company has been keeping track of financings in the junior mining as well as oil and gas space. Logging all relevant deal and company information into its proprietary database, called the Oreninc Deal Log, Oreninc quickly became the go-to website in the mining financing space for investors, analysts, fund managers and company executives alike.
The Oreninc Deal Log keeps track of over 1,400 companies, bringing transparency to an otherwise impenetrable jungle of information. The goal is to increase the visibility of transactions and to show financings activity in a digestible format. Through its daily logging activities, Oreninc is in a position to pinpoint momentum changes in the markets, identify which commodities are trending and which projects are currently receiving funding.
Early summer is the weakest time of the year seasonally for gold, silver, and their miners’ stocks. With traders’ attention diverted to vacations and summer fun, their precious-metals interest and investment demand wane considerably. Thus this entire sector, and often the markets in general, suffer a seasonal lull this time of year. But these summer doldrums offer the best seasonal buying opportunities of the year.
This doldrums term is very apt for gold’s summer predicament. It describes a zone in the world’s oceans surrounding the equator. There hot air is constantly rising, creating long-lived low-pressure areas. They are often calm, with little or no prevailing winds. History is full of accounts of sailing ships getting trapped in this zone for days or even weeks, unable to make any headway. The doldrums were murder on ships’ morale.
Crews had no idea when the winds would pick up again, while they continued burning through their precious stores of food and drink. Without moving air, the stifling heat and humidity were suffocating on these ships long before air conditioning. Misery and boredom were extreme, leading to fights breaking out and occasional mutinies. Being trapped in the doldrums was viewed with dread, it was a very trying experience.
Gold investors can somewhat relate. Like clockwork nearly every summer, gold starts drifting listlessly sideways. It often can’t make significant progress no matter what the trends looked like heading into June, July, and August. As the days and weeks slowly pass, sentiment deteriorates markedly. Patience is gradually exhausted, supplanted with deep frustration. Plenty of traders capitulate, abandoning ship.
Thus after decades of trading gold, silver, and their miners’ stocks, I’ve come to call this time of year the summer doldrums. Junes and Julies in particular are usually desolate sentiment wastelands for precious metals, totally devoid of recurring seasonal demand surges. Unlike the rest of the year, these summer months simply lack any major income-cycle or cultural drivers of outsized gold investment demand.
The vast majority of the world’s investors and speculators live in the northern hemisphere, so markets take a back seat to the great joys of summer. Traders take advantage of the long sunny days and kids being out of school to go on extended vacations, hang out with friends, and enjoy life. And when they aren’t paying much attention to the markets, naturally they aren’t allocating much new capital to gold.
Given gold’s dull summer action historically, it’s never wise to expect too much from it this time of year. Summer rallies can happen, but they aren’t common. So expectations need to be tempered, especially in June and July. That early-1990s Gin Blossoms song “Hey Jealousy” comes to mind, declaring “If you don’t expect too much from me, you might not be let down.” The markets are ultimately an expectations game.
Quantifying gold’s summer seasonal tendencies during bull markets requires all relevant years’ price action to be recast in perfectly-comparable percentage terms. That’s accomplished by individually indexing each calendar year’s gold price to its last close before market summers, which is May’s final trading day. That’s set at 100 and then all gold-price action that summer is calculated off that common indexed baseline.
So gold trading at an indexed level of 105 simply means it has rallied 5% from May’s final close, while 95 shows it’s down 5%. This methodology renders all bull-market-year gold summers in like terms. That’s critical since gold’s price range has been so vast, from $257 in April 2001 to $1894 in August 2011. That span encompassed gold’s last secular bull, which enjoyed a colossal 638.2% gain over those 10.4 years!
So 2001 to 2011 were certainly bull years. 2012 was technically one too, despite gold suffering a major correction following that powerful bull run. At worst that year, gold fell 18.8% from its 2011 peak. That was not quite enough to enter formal bear territory at a 20% drop. But 2013 to 2015 were definitely brutal bear years, which need to be excluded since gold behaves very differently in bull and bear markets.
In early 2013 the Fed’s wildly-unprecedented open-ended QE3 campaign ramped to full speed, radically distorting the markets. Stock markets levitated on the Fed’s implied backstopping, slaughtering demand for alternative investments led by gold. In Q2’13 alone, gold plummeted by 22.8% which proved its worst quarter in an astounding 93 years! Gold’s bear continued until the Fed’s initial rate hike of this cycle in 2015.
The day after that first rate hike in 9.5 years in mid-December 2015, gold plunged to a major 6.1-year secular low. Then it surged out of that irrational rate-hike scare, formally crossing the +20% new-bull threshold in early March 2016. Ever since, gold has remained in this young bull. At worst in December 2016 after gold was crushed on the post-election Trumphoria stock-market surge, it had only corrected 17.3%.
So the bull-market years for gold in modern history ran from 2001 to 2012, skipped the intervening bear-market years of 2013 to 2015, and resumed in 2016 to 2018. Thus these are the years most relevant to understanding gold’s typical summer-doldrums performance, which is necessary for managing your own expectations this time of year. This spilled-spaghetti mess of a chart is actually simple and easy to understand.
The yellow lines show gold’s individual-year summer price action indexed from each May’s final close for all years from 2001 to 2012 and 2016 to 2017. Together they establish gold’s summer trading range. All those bull-market years’ individual indexes are then averaged together in the red line, revealing gold’s central summer tendency. Finally the indexed current-year gold action for 2018 is superimposed in blue.t
While there are outlier years, gold generally drifts listlessly in the summer doldrums much like a sailing ship trapped near the equator. The center-mass drift trend is crystal-clear in this chart. The vast majority of the time in June, July, and August, gold simply meanders between +/-5% from May’s final close. This year that equates to a probable summer range between $1233 and $1363. Gold tends to stay well within trend.
Understanding gold’s typical behavior this time of year is very important for traders. Sentiment isn’t only determined by outcome, but by the interplay between outcome and expectations. If gold rallies 5% but you expected 10% gains, you will be disappointed and grow discouraged and bearish. But if gold rallies that same 5% and you expected no gains, you’ll be excited and get optimistic and bullish. Expectations are key.
History has proven it’s wise not to expect too much from gold in these lazy market summers, particularly June and July. Occasionally gold still manages to stage a big summer rally, which is a bonus. But most of the time gold doesn’t veer materially from its usual summer-drift trading range, where it’s often adrift like a classic tall ship. With range breakouts either way rare, there’s usually little to get excited about.
In this chart I labeled some of the outlying years where gold burst out of its usual summer-drift trend, both to the upside and downside. But these exciting summers are unusual, and can’t be expected very often. Most of the time gold grinds sideways on balance not far from its May close. Traders not armed with this critical knowledge often wax bearish during gold’s summer doldrums and exit in frustration, a grave mistake.
Gold’s summer-doldrums lull marks the best time of the year seasonally to deploy capital, to buy low at a time when few others are willing. Gold enjoys powerful seasonal rallies that start in Augusts and run until the following Mays! These are fueled by outsized investment demand driven by a series of major income-cycle and cultural factors from around the world. Summer is when investors should be bullish, not bearish.
The red average indexed line above encompassing 2001 to 2012 and 2016 to 2017 reveals gold’s true underlying summer trend in bull-market years. Technically gold’s major seasonal low arrives relatively early in summers, mid-June. On average through all these modern bull-market years, gold slumped 1.0% between May’s close and that summer nadir. But that’s probably still too early to deploy capital.
Check out the yellow indexed lines in this chart. They tend to cluster closer to flat-lined in mid-June than through all of July. The only reason gold’s seasonal low appears in mid-June mathematically is a single extreme-outlier year, 2006. Gold’s spring seasonal rally was epic that year, gold rocketed 33.4% higher to a dazzling new bull high of $720 in just 2.0 months between mid-March and mid-May! That was incredible.
Extreme euphoria had catapulted gold an astounding 38.9% above its 200-day moving average, radically overbought by any standard. That was way too far too fast to be sustainable, so after that gold had to pay the piper in a sharp mean-reversion overshoot. So over the next month or so into mid-June, gold’s overheated price plummeted 21.9%! That crazy outlier is the only reason gold’s major summer low isn’t in July.
There were 14 bull-market years from 2001 to 2012 and 2016 to 2017. That’s a big-enough sample to smooth out the trend, but not large enough to prevent extreme deviations from skewing it a bit. Gold’s true major summer seasonal low is really closer to early-to-mid July. After that month’s opening holiday week in the States to celebrate Independence Day, investment capital inflows usually start ramping back up.
On average in these modern bull-market years, gold slipped 0.2% in Junes before rallying 0.9% in Julies. After that first lazy summer week in July, gold tends to gradually start clawing its way higher again. But this is so subtle that Julies often still feel summer-doldrumsy. By the final trading day in Julies, gold is still only 0.7% higher than its May close kicking off summers. That’s too small to restore damaged sentiment.
Since gold exited May 2018 at $1298, an average 0.7% rally by July’s end would put it at $1307. That’s hardly enough to generate excitement after two psychologically-grating months of drifting. But the best times to deploy any investment capital is when no one else wants to so prices are low. Gold’s summer doldrums come to swift ends in Augusts, which saw hefty average gains of 2.2% in these bull-market years!
And that’s just the start of gold’s major autumn seasonal rally, which has averaged strong 6.6% gains between mid-Junes and late Septembers. That’s driven by Asian gold demand coming back online, first post-harvest-surplus buying and later Indian-wedding-season buying. June is the worst of gold’s summer doldrums, and the first half of July is when to buy back in. It’s important to be fully deployed before August.
These gold summer doldrums driven by investors pulling back from the markets to enjoy their vacation season don’t exist in a vacuum. Gold’s fortunes drive the entire precious-metals complex, including both silver and the stocks of the gold and silver miners. These are effectively leveraged plays on gold, so the summer doldrums in them mirror and exaggerate gold’s own. Check out this same chart type applied to silver.
Since silver is much more volatile than gold, naturally its summer-doldrums-drift trading range is wider. The great majority of the time, silver meanders between +/-10% from its final May close. That came in at $16.39 this year, implying a summer-2018 silver trading range between $14.75 and $18.03. While silver suffered that extreme June-2006 selling anomaly too, its major seasonal low arrives a couple weeks after gold’s.
On average in these same modern bull-market years of 2001 to 2012 and 2016 to 2017, silver dropped 4.2% between May’s close and late June. That’s much deeper than gold’s 1.0% seasonal slump, which isn’t surprising given silver’s leverage to gold. Silver’s summer performances are also much lumpier than gold’s. Junes see average silver losses of 3.3%, but those are more than made back in strong rebounds in Julies.
Silver’s big 4.1% average rally in Julies amplifies gold’s gains by an impressive 4.6x. But unfortunately silver hasn’t been able to maintain that seasonal momentum, with Augusts averaging a slight decline of 0.3%. Overall from the end of May to the end of August, silver’s summer-doldrums performance tends to be flat. Silver just averaged a 0.4% full-summer gain, way behind gold’s 2.9% through June, July, and August.
That means silver sentiment this time of year is often worse than gold’s, which is already plenty bearish. The summer doldrums are more challenging for silver than gold. Being in the newsletter business for a couple decades now, I’ve heard from countless discouraged investors over the summers. While I haven’t tracked this, it sure feels like silver investors have been disproportionately represented in this feedback.
Since gold is silver’s primary driver, this white metal is stuck in the same dull drifting boat as gold in the market summers. Silver usually amplifies whatever is happening in gold, both good and bad. But again the brunt of silver’s summer weakness is borne in Junes. Fully expecting this seasonal weakness and rolling with the punches helps prevent being disheartened, which in turn can lead to irrationally selling low.
The gold miners’ stocks are also hostage to gold’s summer doldrums. This last chart applies this same analysis to the flagship HUI gold-stock index, which is closely mirrored by that leading GDX VanEck Vectors Gold Miners ETF. The major gold stocks tend to leverage gold’s gains and losses by 2x to 3x, so it’s not surprising that the HUI’s summer-doldrums-drift trading range is also twice as wide as gold’s own.
The gold miners’ stocks share silver’s center-mass summer drift running +/-10% from May’s close. This year the HUI entered the summer doldrums at 180.1, implying a June, July, and August trading range of 162.1 to 198.1. While gold stocks’ GDX ETF is too new to do long-term seasonal analysis, in GDX terms this summer range translates to $20.11 to $24.57 this year. That’s based off a May 31st close of $22.34.
Like gold, the gold stocks’ major summer seasonal low arrives in mid-June. On average in these modern bull-market years of 2001 to 2012 and 2016 to 2017, by then the HUI had slid 2.3% from its May close. Then gold stocks tended to more than fully rebound by the end of June, making for an average 0.8% gain that month. But there’s no follow-through in July, where the gold stocks averaged a modest 0.2% loss.
Overall between the end of May and the end of July, which encompasses the dark heart of the summer doldrums, the HUI averaged a trivial 0.6% gain. Again two solid months of grinding sideways on balance is hard for traders to stomach, especially if they’re not aware of the summer-doldrums drift. The key to surviving it with minimum psychological angst is to fully expect it. Managing expectations in markets is essential!
But also like gold, the big payoff for weathering the gold-stock summer starts in August. With gold’s major autumn rally getting underway, the gold stocks as measured by the HUI amplify it with strong average gains of 4.2% in Augusts! And that’s only the start of gold stocks’ parallel autumn rally with gold’s, which has averaged 10.5% gains from late Julies to late Septembers. Gold-stock upside resumes in late summers.
Like everything in life, withstanding the precious-metals summer doldrums is much less challenging if you know they’re coming. While outlying years happen, they aren’t common. So the only safe bet to make is expecting gold, silver, and the stocks of their miners to languish in Junes and Julies. Then when these drifts again come to pass, you won’t be surprised and won’t get too bearish. That will protect you from selling low.
This summer actually has a pretty interesting setup for gold that’s more bullish than usual. Gold’s short-term price moves are dominated by speculators’ gold-futures trading. These guys have been selling like crazy since late April in response to a major short-squeeze rally in the US dollar. That’s left their gold-futures long positions exceptionally low entering this summer, which is very unusual and quite bullish.
With total spec longs near the bottom of their past-year trading range, that sizable gold-futures selling that can hit in summers is likely already exhausted. The usual summer-doldrums gold-futures dump was effectively pulled forward, short-circuiting gold’s spring rally. That means gold is much more likely than usual to see mean-reversion futures buying in the coming weeks, especially after next week’s big FOMC meeting.
The Fed is universally expected to hike rates for the 7th time in this cycle on June 13th. That is one of the every-other FOMC meetings also accompanied by the newest dot-plot federal-funds-rate forecast by top Fed officials. And afterwards the Fed’s new chairman Jerome Powell will hold a press conference. If any of this is less hawkish on more rate hikes than traders expect, speculators could aggressively buy gold futures.
Another counter-seasonal bullish factor for gold is today’s radical gold underinvestment coupled with these hyper-complacent bubble-valued stock markets. Whenever the inevitable next major stock selloff arrives, which could be this summer, gold investment demand will surge. Stock selloffs are great for gold since it tends to rally when stocks weaken. That makes gold the ultimate portfolio diversifier during such times.
And with the Fed both relentlessly ratcheting up interest rates and accelerating its young quantitative-tightening campaign to start to unwind QE, the stock markets are facing mounting headwinds. The extreme central-bank liquidity that drove them so high is being reversed, a dangerous omen. Gold investment demand will start returning to favor in a big way whenever they decisively roll over, even if it happens this summer.
Smart contrarians who want to buy low realize gold’s summer doldrums are a gift. They offer the best seasonal buying opportunities of the year in gold, silver, and their miners’ stocks. This is not the time to disengage, but to do your research and get deployed in great gold and silver stocks at bargain-basement prices. They are wildly undervalued and basing today, ready to scream higher when gold sentiment turns.
We’ve been hard at work at Zeal in recent weeks preparing for these great summer buying opportunities. I’ve been researching the latest fundamentals of the world’s best gold and silver miners to make a shopping list for the summer-doldrums lows. These coming trades will easily have the potential to double before next summer as the precious-metals sector mean reverts higher. Buying low is the key to big gains later.
Now is the time to get ready, so we share our research and trades via acclaimed weekly and monthly newsletters. They draw on my vast experience, knowledge, wisdom, and ongoing research to explain what’s going on in the markets, why, and how to trade them with specific stocks. As of the end of Q1, all 998 newsletter stock trades recommended since 2001 have averaged stellar annualized realized gains of +19.4%! For just $12 an issue, you too can learn to think, trade, and thrive like contrarians. Subscribe today!
The bottom line is gold, silver, and their miners’ stocks usually drift listlessly during market summers. As investors shift their focus from markets to vacations, capital inflows wane. Junes and Julies in particular are simply devoid of the big recurring gold-investment-demand surges seen during much of the rest of the year, leaving them weak. Investors need to expect lackluster sideways action on balance this time of year.
Gold’s summer doldrums shouldn’t be a psychological burden, as they are a great opportunity to buy low before major autumn rallies. Those tend to be stealthily born in early-to-mid Julies before accelerating in Augusts. So investors must do their research homework in early summers, in order to be ready to deploy capital in mid summers before sizable late-summer rallies. Summer doldrums should be embraced, not dreaded.
In the West, gold has rallied decently during five of the past seven recessions. I’ve suggested that the current situation in America is something like 1965 – 1970, when inflation began a long and strong up cycle.
That’s partly why I’m adamant that it’s the best time in American history to own a portfolio (a global portfolio) of companies involved in precious metals mining and jewellery.
The other reason that I’m excited about these stocks is that in the East, when people get richer, they buy gold. They are now getting a lot richer, and a lot faster.
Simply put, deflation is out, and inflation is in. It’s really that simple, and investors around the world need to get positioned right now to ensure they get maximum financial benefit.
Please click here now. With their statements and analysis, Morgan Stanley moves “thunder cash” in the institutional investor community.
Their top US equity man, Mike “Mr. Big” Wilson, predicts that while US markets are a clear short-term buy, valuations peaked in 2017, and prices will peak in 2018.
I’m in 100% agreement with Mike. Tactically, I’ve urged investors who are not afraid of price chasing to buy some bank stocks, energy stocks, and growth stocks. Gamblers can buy call options.
That’s how to play the final months of upside fun in the US stock market, but investors must be seriously prepared for years of inflationary bear market horror to follow this blow-off top.
I’ve predicted that only the most astute stock pickers will survive being invested in the US stock market from 2019 forwards. In the coming inflationary inferno, index and ETF investors will essentially be turned into tumbleweed, burning in a financial desert.
When will the inferno begin? Well, I think it happens in the upcoming September – October US stock market “crash season”, and by year-end at the latest. I expect gold to go ballistic as that happens, because it will be an inflation-oriented meltdown, and that means institutional thunder-buying takes place in the metals.
Please click here now. Double-click to enlarge this GDX chart. In terms of time, I think gold stocks will initially surge higher for two to three years as the stock market falls.
Most of the gains should be sustained due to an imminent drop in US and Chinese gold mining production. Canadian, Australian, and Russian miners should be the clear leaders in what I call the gold bull era.
Note the diamond pattern in play on that GDX chart. A drift down from it now would put GDX at my key buy area of $21 just in time for the Fed’s next rate hike. That hike will put another major nail in the US stock market valuations coffin. It will be followed at the end of June with another ramp-up in QT.
Many investors who failed to buy the stock market in 2008-2010 and are buying now are trying to convince themselves that the Fed will back off from more hikes and QT. This is very childish thinking. Those engaged in it will soon learn the hard way that the Fed doesn’t care about their silly stock market price chase.
On a demographics note: In my professional opinion, about 60% of the Western gold community is now composed of younger “smart money” investors. They have been invested in the US stock and bond markets and are becoming very concerned (and rightly so) about the growing risk that inflation will cause a severe bear market in these traditional asset classes.
This new breed of gold bug has more patience than the “old guard” gold fear trade investors. The old guard focused more on financial system risk and government debt that threatened to create a kind of “parabolic moment” of vertical price rise for precious metals. The transition from deflation to insidious inflation is an enormous process that requires investor patience, but it is now well underway.
Please click here now. Double-click to enlarge this beautiful silver chart. The silver price has been consolidating the rally from the summer of 2017 in a nice symmetrical triangle pattern. Silver is highly correlated to gold, but during periods of inflation there is also a significant correlation with sugar.
That’s because the average “man/woman on the street” tends to see gold as too high-priced to buy. Silver’s lower price is more enticing, and they can relate to an ounce of silver rising like the price of a pound of sugar rises.
Please click here now. Double-click to enlarge. Sugar is arguably even better than money velocity as an inflation indicator.
Investors should watch for a two-month close over the blue downtrend line. That must be followed by a two-week close over sixteen cents a pound. That price action is likely to indicate that inflation is becoming a firestorm for the stock market and will function as a green light for most gold stocks to blast higher.
Note the peak in the summer of 2016 for sugar. That functioned as a red light for gold stock investors. The next signal will be a green one and investors need to get prepared now.
In contrast to the hyperinflation envisioned by older gold bugs who focused on bank and financial system risk, the type of inflation that is coming now is more like the inflation of 1966 -1975, on an even bigger scale because of rampant Chindian income growth. It’s insidious.
This inflation will last for a hundred years and likely for much longer, not just for a decade or two like in the 1970s. It’s a process akin to millions of solid gold termites invading the US stock and bond market house. No bug spray works, so the institutional investors inside the house will all leave.
The bottom line: If you can’t fight a gold bug invasion, you have to join it. Gold stocks will rise thousands of percentage points higher as investors begin to understand what is happening. The inflation is imminent, and investors must get prepared!
Thanks!
Stewart Thomson
Graceland Updates
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Written between 4am-7am. 5-6 issues per week. Emailed at aprox 9am daily.
Stewart Thomson is no longer an investment advisor. The information provided by Stewart and Graceland Updates is for general information purposes only. Before taking any action on any investment, it is imperative that you consult with multiple properly licensed, experienced and qualified investment advisors and get numerous opinions before taking any action. Your minimum risk on any investment in the world is: 100% loss of all your money. You may be taking or preparing to take leveraged positions in investments and not know it, exposing yourself to unlimited risks. This is highly concerning if you are an investor in any derivatives products. There is an approx $700 trillion OTC Derivatives Iceberg with a tiny portion written off officially. The bottom line:
Are You Prepared?
Despite the insistence of some, precious metals have not been in a bull market. After a big pop at the start of 2016, the sector has trended lower. Sure, Gold has traded up towards a major breakout but Silver and the gold stocks have trended lower. When the US Dollar corrected significantly, the stock market outperformed precious metals. Does that sound like a Gold bull market to you? The moribund performance has left us wondering what could turn the tide. A quick study of Fed history with the context of current conditions is very instructive as to when Gold could begin a true bull market.
Fundamentally speaking, we know that Gold performs best when real rates are declining or will soon begin declining. That usually entails either accelerating inflation (surpassing the increase in nominal rates) or falling rates amid stable inflation. At this juncture we are leaning towards the latter as the eventual catalyst for Gold.
We were curious how Fed policy and policy changes impacted precious metals so we decided to plot the Fed Funds rate (above) along with gold stocks (middle) and Gold (bottom). We used the gold stocks (Barron’s Gold Mining Index) because they have a longer history than Gold. The vertical lines in blue mark lows in the BGMI that coincided with peaks in the Fed Funds rate (FFR) while the vertical lines in red mark lows in the BGMI that coincided with a bottom in the FFR.
Fed Funds Rate, Gold Stocks & Gold
Outside of the highly inflationary 1970s, the best bull markets in gold stocks began around the time the Fed Funds rate peaked (or in other words when the Fed ended its rate hikes). Lows in 1993, 1999 and 2016 coincided with the start of a new hiking cycle. However, unlike the lows in 1972 and 1976, inflation did not accelerate enough to drive more than a rebound.
Does that signal that gold stocks (and precious metals at large) need an end to the rate hikes?
The period from 1999 to 2001 is very instructive as there are several similarities between 1999-2000 and 2016-2017.
Like 1999, 2016 followed a nasty bear market in Gold and hard assets.
Also, the 1999 bottom in precious metals and commodities occurred around the time the Fed began a new cycle of rate hikes. Sound familiar to 2016?
As the Fed continued to hike into 2000, Gold and gold stocks trailed off but commodities were able to make higher highs until the very end of 2000. Commodities have not been quite as strong this time but they have outperformed precious metals which have trailed off since the initial rebound.
Gold and gold stocks ultimately bottomed and began spectacular rebounds around the time the Fed moved from a pause in rate hikes to rate cuts at the very start of 2001.
Unless there is an acceleration in inflation, the turning point for precious metals figures to be around the time the Fed ends its rate hikes. That would likely coincide with Gold regaining outperformance against the stock market, which we have noted as Gold’s missing link (from an intermarket perspective). Weakness in the economy and stock market would lead to an end to the rate hikes and then rate cuts. That would be the time Gold and gold stocks begin a major move higher. In the meantime we continue to focus on and accumulate the juniors that have 300% to 500% return potential. To follow our guidance and learn our favorite juniors for the balance of 2018, consider learning more about our service.
The next Fed rate hike is only about two weeks away, and another ramp-up in monthly quantitative tightening is scheduled for the end of June.
Investors are generally quite positive about the economy, but they don’t have much cash to invest. Most citizens of the Western world have meagre savings, a lot of debt, and inflation threatens to make matters worse for them. A lot worse.
Please click here now. With each passing month, more institutional money managers and influential analysts voice major concerns about inflation being the catalyst that ends the US equities bull market.
Please click here now. Double-click to enlarge. The Dow has gone nowhere since Powell became Fed chair, and I expect it to go nowhere throughout his tenure. That’s the best-case scenario. I shouldn’t mention the worst-case, because almost nobody believes that the Dow can crash in inflationary inferno. That’s not only the worst-case scenario, it’s by far the most likely one.
Investors could buy very light positions in the buy zone I’ve highlighted on this Dow chart, and sell them in my sell zone, but sand in the bull market hourglass is running out fast. It’s really a trade for gamblers. Serious investors need to be lightening up here. In my US stock market portfolios, I’m at about 30% cash, and it’s rising.
Central bank tightening is a global theme and barely out of the starting gate. It’s happening against the background of rising US government debt, corporate debt, citizen debt, and inflationary tax cuts.
Citizens and governments are generally euphoric, as they were in 2007, 1999, and 1929. The difference between now and previous peaks in euphoria is that the average citizen doesn’t have much cash to spend this time. It’s gone.
Please click here now. Double-click to enlarge. Since oil made its low in 2016, energy and tech stocks have received significant mainstream media attention.
Oil is in a danger zone now. At a bare minimum, a supposedly healthy correction is overdue. Trump wants oil lower and federal election campaigning has started in India. Indian currency and bond markets are being ravaged by high oil prices and global central bank tightening. Modi just flew to Russia and met with Putin. His meeting marked the top in oil.
I think the sell-off in oil could become more significant than most investors are prepared for, but once it’s over the arrival of significant global inflation will drive oil towards $200 a barrel.
By this time next year, gold should be challenging the $1500 area, and perhaps trading as high as $1650 – $1750. On that note, please click here now. Luis Oganes is an institutional heavyweight. He’s on the inside. When he speaks, gold bugs need to drop what they are doing and pay attention. He’s not only predicting gold will be at $1700 next year, but has the potential to surpass that juicy target price!
Few investors realize that the major mining stocks that I hold in my www.gudividends.comportfolio are up an average of 150% from that 2016 oil market low. They have blown away technology and energy stocks, and left the global stock market indexes even further behind.
Most importantly, as inflation transitions from an institutional investor concern to an outright wrecking ball, I expect this fabulous performance of the giant base metal miners to continue, with gold and silver miners shooting past all market sectors to become the ultimate market darlings.
Please click here now. Double-click to enlarge. The dollar is again in freefall against the yen, and that suggests the dollar will soon be taken to the woodshed by gold.
Investing champions like Ray Dalio are working hard to make investors understand that gold is not simply a fear trade hedge. Instead, it is the ultimate portfolio returns enhancer in good times as well as bad.
Having said that, as inflation becomes a massive theme in 2019, investors can give gold any label they want. That won’t matter. What matters is that institutional money managers will be buying it with both hands…and with three if they had an extra hand!
Please click here now. Double-click to enlarge. There’s nothing more glorious than a great gold price rally, and a big one is getting underway now.
Note the technical perfection being showcased by the “queen of assets” on this short-term chart. A symmetrical inverse head and shoulders bottom breakout was followed by a picture-perfect pullback to the neckline, and now, as I predicted, the queen of assets is following the yen and beating on the dollar like King Kong beating on a tin can.
My next target is $1327, and I think gold can now reach up and touch that price with very little effort. It’s a great place for short term profit booking and it should happen ahead of the key June 13 Fed meet. After that pause and likely right shoulder low, gold should blast through $1375, and make a medium-term beeline towards $1450.
Please click here now. China just launched an important physical metals trading platform yesterday. Attention all silver bugs: Trading begins with base metals, but will quickly expand to include… silver bullion!
I’ve referred to a future dominated by China and India being the gold and silver “bull era”. A key part of that thesis involves COMEX price discovery for gold and silver becoming vastly more related to physical demand versus physical supply.
Price discovery has been dominated in the past by Western hedge funds gambling on gold-irrelevant nonsense from “Fed speakers” and “gold doesn’t pay interest” mainstream media propaganda. Bull era price discovery is already happening with gold, and silver is next on deck. Investors can write that down and take it to the bank. The silver bullion bank!
Please click here now. Double-click to enlarge this superb GDX chart. Many of the component stocks are in roaring uptrends. GDX itself has been coiling sideways since mid-April in a bullish drift. That should be resolved with a significant rally that stuns most analysts with its intensity.
The financial system and QE-oriented gold fear trade is alive but on the back burner. There’s a new generation of gold bugs in the Western gold community who understand that inflation is coming and will be here to stay. The love trade and the inflation trade will form the backbone of the bull era. Eager investors around the world who know this is true are now aggressively accumulating portfolios of gold stocks, in preparation for decades of upside fun!
Thanks!
Cheers
St
Stewart Thomson
Graceland Updates
Stewart Thomson is a retired Merrill Lynch broker. Stewart writes the Graceland Updates daily between 4am-7am. They are sent out around 8am-9am. The newsletter is attractively priced and the format is a unique numbered point form. Giving clarity of each point and saving valuable reading time.
Risks, Disclaimers, Legal
Stewart Thomson is no longer an investment advisor. The information provided by Stewart and Graceland Updates is for general information purposes only. Before taking any action on any investment, it is imperative that you consult with multiple properly licensed, experienced and qualified investment advisors and get numerous opinions before taking any action. Your minimum risk on any investment in the world is: 100% loss of all your money. You may be taking or preparing to take leveraged positions in investments and not know it, exposing yourself to unlimited risks. This is highly concerning if you are an investor in any derivatives products. There is an approx $700 trillion OTC Derivatives Iceberg with a tiny portion written off officially. The bottom line:
Are You Prepared?
Over the last month, I’ve received numerous questions pertaining to the direction of the gold price. The fact is, I don’t have a crystal ball and, while I believe we will see higher gold prices in the future, I have no idea when, and really, I don’t care.
Why? Simply, I don’t invest in junior mining companies because I believe the price of gold is going to go up. I believe you invest in junior mining companies because you see value creation via discovery, or you see a clear path in the development of a project into a future mine.
There are many ways to make money in the junior resource sector, but for me, it’s a process which is linked to finding quality – the best people, who pick the best projects and execute well thought-out plans to achieve a specific goal.
In particular, discovery pays in any part of the market cycle and, therefore, while the risks associated with exploration are HUGE, I think it’s prudent to invest in the highest quality gold exploration companies the market has to offer.
Today, I would like to bring your attention to Klondike Gold Corp., a gold exploration company that is cashed up and ready to execute a 5000m drill program in the heart of the Yukon.
Let’s take a look!
Klondike Gold Corp. (KG: TSXV)
MCap – $24 million (at the time of writing)
Shares – 95 million
Fully Diluted – 120 million
Cash – $7 million
Ownership:
Frank Giustra – 14%
Eric Sprott – 13%
Key Investors – 10%
Insiders – 11%
NOTE: As you can see from the ownership breakdown, Klondike is tightly held by a small number of hands. Specifically, Canadian billionaires, Frank Giustra and Eric Sprott, who collectively control almost a third of the company’s outstanding shares and, I think, speaks to the upside potential that is seen in Klondike Gold and its district sized land package in the heart of the Yukon.
Klondike Gold’s Leadership
Klondike Gold Corp. is led by CEO, Peter Tallman, who is a geologist by trade and has over 35 years of experience in the mining industry.
During a conversation with Tallman, he related his start in the mining sector back to when he was in his early teens and helped build a log cabin just south of Algonquin Park, located in central Ontario. The key to this experience didn’t have anything to do with building or geology, but was important because Tallman became an avid and skilled canoeist, which would later be a key component in him attaining his first geology job outside of university.
After completing his geology degree at the University of Western Ontario, Tallman’s first job was with Selco (later BP-Selco), where he was hired to prospect for diamonds in northern Ontario. A key prerequisite for this job was proficient canoeing skills, which Tallman had in spades, and so he got his start in the mining business. Additionally, with Selco, he moved to Newfoundland where, while working in a remote corner of the province, chipped the discovery outcrop of what later became the Hope Brook gold mine.
Tallman has worked for a number of different companies in senior roles, over the course of his career, including Noranda Exploration, Prime Equities International (Murray Pezim), and Messina Minerals, just to name a few. Each of these experiences over the course of the last 35+ years has prepared Tallman well for leading Klondike Gold in their mission to discover an economic gold deposit in the Klondike.
The Klondike team is rounded out by CFO, Jessica Van Den Akker, and Board of Director members, Gordon Keep (CEO of Fiore Management & Advisory Corp.), John Pallot, Steve Brunelle and Tara Christie. The team has recently expanded the team with the addition of Ian Perry, VP Exploration who has extensive experience managing advanced exploration projects towards development stage.
Yukon
As the company name suggests, Klondike Gold is focused on gold exploration in Canada’s Yukon Territory. For those who may not be familiar with Canada’s geography, the Yukon is located north of British Columbia and it shares its western border with Alaska.
Klondike Gold Regional Claim Map
Klondike Gold owns 100% of its 2,942 contiguous claims, totaling 557 square kilometers, which sit in close proximity to Dawson City. Dawson City was built to support gold miners during the Klondike Gold Rush of the 1890s and hosts the major infrastructure needed for the exploration and development of mining projects, such as an airport, access to supplies and electrical infrastructure.
13th in the World for Mining Investment Attractiveness – Fraser Institute Ranking
The Yukon is a premier jurisdiction for mining and attained a score of 79.67, or 13th in the world, for mining investment attractiveness, according to the Fraser Institute’s 2018 rankings. The Fraser Institute uses a number of criteria in evaluating a jurisdiction, such as political stability, mining law, taxation and, arguably the most important, mineral potential.
The Yukon has well developed infrastructure, including more than 4,800km of all-weather roads, airports, power, Internet and cell phone service. Additionally, for companies that require international export of their concentrates, deep sea ocean ports are accessible across the Yukon’s western border in Alaska.
Yukon Mining Alliance
Uniquely, to my knowledge, many of the junior and major mining companies with projects in the Yukon have formed the Yukon Mining Alliance (YMA) with the Yukon Provincial Government and the Canadian Northern Economic Development Agency.
The YMA’s mandate is to,
“promote Yukon’s competitive advantages as a top mineral investment jurisdiction and its member companies and their Yukon-based project.” ~ YMA
In my opinion, this is a huge advantage of investing in companies with projects in the Yukon, as clearly, the marketing and promotion of mining within the Territory’s borders is a major priority. Bottom line, narrative plays a big role in the success of junior mining companies, and with the added help of the YMA, Yukon-based companies have a distinct advantage working together to promote the Yukon mining jurisdiction narrative.
Personally, I have seen the YMA presence at a couple of the top mining conferences in Canada, such as PDAC and Cambridge’s Vancouver Resource Investment Conference (VRIC). The YMA is putting the Yukon on the map for interested resource investors which, I believe, will pay off in spades as we move into the next leg of the bull market.
Klondike Gold Rush
The Klondike Gold Rush began in August of 1896, as three prospectors, George Carmack, Jim Mason and Dawson Charlie, discovered gold in what they referred to as “Rabbit” Creek, or what is now referred to as Bonanza Creek. With the discovery and the rush to stake their claim, word quickly spread of their discovery, and so spurred a historic gold rush in Canada’s Yukon Territory and the United States’ Alaska.
It’s estimated that the Klondike Gold Rush attracted 100,000 people from all walks of life, testing their luck against the odds to find their fortune. Many of the new American prospectors found their way north via ships boarded in Seattle. Former ports, such as Dyea, Alaska, were accessible at high tide and allowed prospectors to begin the lengthy trip north toward the center of the Gold Rush, Dawson City, which is roughly 700km north.
Unfortunately, for the vast majority of newly minted prospectors, their aspiration of discovering a fortune never happened; if it wasn’t the weather and the long trip to the prospective gold claims, it was the exorbitant costs that came with exploring and living in the north. In many of the articles I read while researching the Klondike Gold Rush, many estimated costs being 10 times higher than what many of the people would have experienced in their former lives, living in Toronto, New York or Chicago.
The Klondike Gold Rush is estimated to have produced $29 million in gold over its 3 year span. Additionally, the Yukon Geological Survey estimates that a total of 20 million ounces of gold has been extracted from the Klondike goldfields since 1896. Gold mining can be credited with spurring the development of much of Canada’s and America’s northern most territories and states. In my opinion, the Yukon holds tremendous mineral potential and will only increase its prestige within the mining community.
Tr’ondëk Hwëch’in First Nation
Klondike Gold’s claims lie within the Tr’ondëk Hwëch’in First Nation lands, which are in the Dawson City area. To note, Goldcorp’s Coffee Gold Project, which was acquired from Kaminak Gold Corp, and sits 130km south of Dawson City, is also within the Tr’ondëk Hwëch’in First Nation lands.
Tr’ondëk Hwëch’in First Nation is based in Dawson City and consists of roughly 1,100 Hän-speaking people. The First Nation is governed by an elected Chief and four councillors, who take direction from the Elder’s Council, a group of Tr’ondëk Hwëch’in people, aged 55 and over. The governing body oversees all agreements affecting the First Nation, including finance, health, social programs, housing and natural resources.
In recent news, the Tr’ondëk Hwëch’in First Nation signed a collaboration agreement with Goldcorp over the development of their Coffee Gold Project. In my opinion, the success of this negotiation was imperative to any of the mining companies exploring or developing within the Tr’ondëk Hwëch’in lands, giving each company a glimpse of what a future deal with them might look like, if they are able to discover an economic deposit or move forward with the development of what they already have.
Klondike Gold Project
As stated earlier, the Klondike has a rich history in gold mining, as 20 million ounces of placer gold have been mined there. The question that Tallman and his team at Klondike Gold are trying to answer is, where did the placer gold come from? When this question is finally answered, there’s a good possibility that the discovery of an economic gold deposit will follow soon thereafter.
Thus, since taking the helm of Klondike Gold, Tallman has set out to determine if the fault system, which he identified in his original desktop review of the company, plays a role in controlling gold mineralization. Specifically, in our discussion of the property, Tallman refers to the Rabbit Creek Thrust Fault, which stretches roughly 55 km from the Lone Star target to the Gold Run target.
Tallman believes that this is a very important fault and, ultimately, is the key driver in the gold mineralizing event. As you can see in the image above, secondary fault systems, which Tallman refers to as horse tail faults, have been identified around the outer limits of the Rabbit Creek Thrust Fault, and are the areas of focus for Klondike’s upcoming drill program.
What I found most interesting about our conversation regarding the geology of the targets is how they resemble Goldcorp’s, formerly Kaminak Gold’s, Coffee Gold Project geology. Examining a few of Klondike’s slides from their latest Corporate Presentation, they outline the similarities in geological structures.
Klondike Gold Corporation Presentation – Slide 16
In my opinion, the identification of these similarities is a HUGE plus for Tallman and his team, as they are using the knowledge and processes laid out by Kaminak to influence their plans for exploration on their Lone Star and Gold Run targets. Not only does this make the exploration more efficient, but also speaks to the potential of what Klondike may have in terms of gold mineralization.
While it’s important to understand downside risk before investing in a junior mining company, it’s also very important to understand the upside potential. Therefore, I think it’s safe to say that the upside potential for Klondike can be found in a comparison to the Coffee Gold Project, which has 2.16 million ounces of gold reserves (Proven and Probable) and an additional 2 million ounces of gold resources (Indicated and Inferred). To note, Goldcorp paid Kaminak roughly $100/oz in ground for Coffee. Given Klondike’s current MCAP, the upside potential looks very good.
2018 Exploration
Klondike’s plan for its 2018 exploration program has three main components:
Airborne Mapping – Complete 2500 to 3000 line kilometers of airborne surveys across the entire 557 square kilometer property. In my discussion with Tallman, he stated a few times how inadequate the old government geological maps of the property are. Accurate maps of the property are integral for efficient drill target gathering.
Soil Sampling – Groundtruth Exploration has been hired to complete 5000 soil samples and complete the ortho-photographic modelling footage via drone. Airborne mapping overlain with soil sampling data will help the Klondike team narrow down their focus for the diamond drill program.
Drill Program – 50 to 70 holes will be drilled for an estimated total of 5000 meters. This is a preliminary drilling budget, which Tallman suggests could be expanded, depending on results. Drilling on Klondike’s Lone Star target should begin very soon, with drilling on the Nugget and Gold Run targets to follow.
PUSH: Watch for drill results in the weeks ahead, as Klondike should have steady news flow of drill results over the next couple of months.
Metallurgical Work
Additionally, Tallman mentioned that they will be drilling a few holes of HQ core, which has a diameter of 96mm, which is almost 20mm larger than that standard NQ or CHD 76 core which is typically used in exploration drilling. Why the larger core size? Klondike will be using the larger core sample for the beginnings of a metallurgical study, which should shed some light onto economic viability of the Klondike mineralization.
Concluding Remarks
In my opinion, Klondike Gold has the basis for success when it comes to gold exploration:
Experienced management team which is supported by smart money, via billionaire investors, Frank Giustra and Eric Sprott.
District scale land package of 557 square kilometers with the premier mining jurisdiction that is the Yukon. NOTE: The Yukon ranks 13th in the world in mining investment attractiveness as per the Fraser Institute’s 2018 Survey.
The Klondike Goldfields have produced 20 million ounces of placer gold over their history.
Extensive 2018 exploration program, which includes airborne mapping, soil samplings and a 5000m drill program. High news flow throughout the summer.
Exploration program is supported by a robust plan which is rooted in the geological similarities between Klondike’s target geology and Goldcorp’s 4 Moz Coffee Gold Project, which is just south of Dawson City.
CASH – $7 million
Gold exploration is a risky endeavour, one that is fraught with more failure than success. In Klondike Gold’s case, failure is a very real possibility, however, I believe with the strengths outlined above, Klondike has positioned themselves to have the best possible probability of success in discovering economic gold as we as investors could hope. Therefore, I’m a buyer of Klondike Gold and am looking forward to a summer of what I think will be good news flow and share price appreciation!
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Until next time,
Brian Leni P.Eng
Founder – Junior Stock Review
Disclaimer: The following is not an investment recommendation, it is an investment idea. I am not a certified investment professional, nor do I know you and your individual investment needs. Please perform your own due diligence to decide whether this is a company and sector that is best suited for your personal investment criteria. I do own shares in Klondike Gold Corp. All Klondike Gold Corp. analytics were taken from their website and press release. Klondike Gold Corp. is a Sponsor of Junior Stock Review.
Northern Empire – The Sterling Gold Project Site Visit
On April 6th, I had the opportunity to visit Northern Empire’s Sterling Gold Project, located north-west of Las Vegas, Nevada. My visit was great and really gave me a good perspective of the Sterling Gold Project’s scale and its potential for further resource expansion.
In particular, the Crown Block stood out as having great exploration potential, as not only is this area a focus for Northern Empire, but also has drawn a lot of attention from Corvus Gold, whose Mother Lode Open Pit is completely surrounded by Northern Empire.
In all, I left the site visit very optimistic that Northern Empire’s 2018 drill program should shed a lot of light onto the Sterling Gold Project’s potential and am eagerly awaiting news flow!
Las Vegas
After landing in Vegas, I hopped in an Uber to get to my hotel. As this was my first visit to the area, I was mesmerized by the bright lights, massive celebrity advertisements and sheer size of the Las Vegas Strip.
View from the bridge connecting the Bellagio and Ballys
Las Vegas truly is the center of the universe when it comes to marketing, because the corporations that reside here clearly understand human behaviour and how to manipulate it. Everything about the strip is designed to put a smile on your face while simultaneously extracting the maximum amount of money from your wallet.
Along the strip, a Starbuck’s tall Americano is $5.50 USD, a tall can (493ml) of domestic beer $10.00 USD, and a ‘big gulp’ slushy with rum or tequila will run you $30 USD. These prices remind me of those typically reserved for sporting events or concerts, which may be a good comparison for the confines of the Vegas Strip.
A view of New York New York from my hotel parking lot
While my comments here may seem negative to some, they aren’t meant to be. I have a high regard for the marketing expertise that has created this ‘wonderland.’
View of the Bellagio
Bottom-line, even if you aren’t a gambler, Las Vegas is a place that everyone should visit at some point in their lives. It truly is unique in terms of what it has to offer.
Sterling Gold Project
The day of the site visit started early, as we met in the lobby of the hotel at about 6:30 am. I, however, hadn’t adjusted to the 3 hour time change and was up some time before. One thing about starting your day at 4 am in Vegas is that you aren’t alone. That said, I’m sure most of the people I encountered at that time of the morning had yet to go to bed!
From our hotel, it was about a 2 hour drive up the I95 to the Sterling Gold Project. Given the size of our group, we split up into 3 vehicles. In the SUV with me was Executive Chairman, Doug Hurst, and The National Investor newsletter Editor/Publisher, Chris Temple. Both men are very experienced in the mining and investment worlds and shared several, great anecdotal stories about their experiences and lessons they’ve learned from the sector.
Drones and Area 51
Roughly half way to our destination, we drove past a U.S. Air Force base which, famously or infamously, is the site of at least a portion of the U.S. drone fleet.
A drone flying in the Sterling Gold Project Vicinity
One of the most intriguing, yet mysterious, sites along the way was Area 51. Of course, you can’t actually see Area 51, but many of the businesses along the highway have names inspired by this mysterious U.S. Air Force base. I’m by no means an expert on the lore surrounding Area 51, but after spending the day at the Sterling Gold Project, you very quickly become aware of a U.S. military presence.
2 (small) Helicopters in the distance
Walker Lane Trend
The Walker Lane Trend extends north-west from Las Vegas to Reno, running parallel to the Nevada and California state borders. While not as famous as the Carlin or Battle Mountain-Eureka Trends in the northern portion of the state, the Walker Lane Trend has a very rich gold mining history.
It’s estimated that 50 million ounces of gold have been discovered within the Walker Lane Trend, with the Comstock Lode Mine located near Reno being, arguably, the most famous. Additionally, the Round Mountain and Bullfrog Mines are other examples of gold producing mines within the trend.
Interestingly, Barrick’s past producing 2.3 million ounce Bullfrog Open Pit Gold Mine can be seen from Northern Empire’s Crown Block. I was able to snap a photo, while standing at the top of the Secret Pass Open Pit – see below.
View from the Secret Pass Open Pit – Barrick’s Bullfrog Mine
Satellite Image of the Crown Block
As you can see in the satellite image above, the Bullfrog Detachment Fault and the Fluorspar Canyon Detachment Fault run in a similar east-west fashion, and lay host to the past producing open pit mines. Also, the Faults divide the tertiary volcanic rocks in the north and the sedimentary rocks in the south.
Sterling Mine
The site visit began at Northern Empire’s permitted Sterling Mine, which is in the southern region of the property. After completing our site safety orientation and collecting our PPE, we hit the road, making our first stop at the heap leach pads.
Sterling’s Main Entrance Road, Looking away from the Sterling Mine
Sterling’s Main Entrance Road, Looking at the Sterling Mine
Currently, there’s one active leach pad; at the time of our visit, it was being turned over by the bulldozer featured in the photo below. The ore is mixed on the pad to help oxygenate the pile and break up any fluid channels that formed over the last cycle. Ultimately, this leads to higher recoveries in the processing plant. These are simple smart things that the Company does to improve efficiency show the respect that they treat shareholder capital. Also to note, the existing facilities and processing plant appear to be in great shape, which is a real plus when it comes time to begin production.
Active Leach Pad
We then moved into the Sterling Mine open pit area, more specifically up onto the Water Tank Hill, which gives a great vantage point for viewing all three open pits.
Northern Empire CEO, Mike Allen, on Top of Water Tank Hill
While standing on Water Tank Hill, CEO, Mike Allen, took the opportunity to explain how they will attempt to expand the Sterling Mine resource. As explained in my introductory article, the company will follow up on recent high-grade drill holes that sit on the pit shell edge, as seen in the satellite photo below.
Sterling Gold Project Mineralization – Core Shack
Next, we headed back to the main offices for lunch and a look at the core shack. As with all Carlin-Style gold, the core doesn’t possess any eye-catching visible flakes or nuggets, but instead it is the orange oxidized material (the more broken up the better) which should catch your eye, as it is gold bearing. The samples, however, were still very interesting as the fluorite and calcite mineralization found on the property can be seen in the core samples. In the photo below, for instance, the purple mineral is fluorite.
Core Sample with Purple Mineral Fluorite
In fact, the Sterling property boundaries not only surround Corvus Gold’s Mother Lode Project, but also historic fluorite and mercury mines, which can be seen in the property map below. Interestingly, it was mentioned during the visit that the fluorite mine was hampered by gold contamination, what a wonderful issue to have!
Sterling Gold Project
Sterling Mine Site Manager Chuck Stevens , who worked previously in the Sterling underground mine, showed me a few excellent calcite samples in his office and, additionally, pointed out the massive calcite sample sitting outside the geologist’s office trailer. Also, Executive Chairman, Doug Hurst, pointed out a couple of cinder cones which lie just east of the property; another example of the geological diversity of the property and its surrounding area. The immediate area around Northern Empire’s Sterling Project features fluorite, decorative rock, precious metals and marble mines demonstrating both the endowment of the area, the impact of mining on the local economy, and the ability to permit both large and small mines effectively.
NOTE: A Cinder Cone is formed by volcanic eruptions of mafic / intermediate lavas, which collect to build a cone around a volcanic vent. On the east side of I95, on your way up to the Sterling Gold Project from Las Vegas, a cinder cone is currently being mined for decorative stone used in landscaping.
The Crown Block
Yours truly with the Secret Pass Open Pit in the background
Heading back out onto the I95, we then headed north toward the town of Beatty, to the Crown Block. As you will remember from my introductory article, the Crown Block is made up of 4 main targets: Daisy, Secret Pass, Shear Zone and SNA, all of which are located along the Fluorspar Canyon Detachment Fault.
Our first two stops were at Daisy and Secret Pass deposits, where Senior Geologist, Ron Kieckbusch, and Exploration Manager, Rich Histed, discussed the geology of the area, the work they completed in 2017, and where they were headed in 2018.
Geology of Crown Block
South of the fluorspar detachment fault, mapping has defined an asymmetric fold-thrust belt in the sediment package, with a northwest vergence and northeast plunge likely of Mississippian age (327-290 Ma).
It’s my understanding that the folding of the sediment package generated perpendicular faults, which were later made larger during a caldera collapse. For those who aren’t familiar, a caldera is a large volcanic crater, which can be formed by either an explosive volcanic eruption or the collapse of surface rock into an empty magma chamber. The now larger faults become easier conduits for fluid flow, thus explaining the mineralizing event.
Geological Mapping and Geochemical Sampling
Currently, 30% of the 141 square-kilometer property package has been geologically mapped and geochemically sampled, with the Crown Block being the primary focus. Mapping and sampling is a very efficient and cheap way of acquiring drill targets. In total, 580 rock chip samples have been taken, returning grades within a range of undetectable to a high of 13.85 g/t gold, and 34 samples returned greater than a 1.0 g/t gold.
As stated, the mapping and sampling within the Crown Block has identified new exploration targets, which were noted in the April 25th news release and can be found in the image above.
Road Zone – located north of the Daisy Deposit and features several up-dip surface samples of greater than 1.0 g/t gold, which indicates potential for shallow mineralization.
Gold Ace Fault – located south and up-dip of the Daisy Deposit and features a large undrilled area of high-grade surface samples, including a high of 13.85 g/t gold.
Crowell Extension – located east of the Daisy Deposit and features reported gold grades of up to 7.0 g/t from the historic Crowell fluorite mine. The Crowell Extension target has a strike length of roughly 800 meters.
Radio Tower – Anomalous surface geochemistry to the south of the Secret Pass pit indicate a possible target at depth.
Secret Pass East – As the name suggests, this target lays on the under-explored eastern portion of the large Secret Pass Deposit. Surface sampling has returned up to 5.0 g/t gold and represents a potential strike length of roughly 1200 meters.
Ronko Jasperoids – Located south of the SNA, undrilled Jasperoids returned sample values of up to 2.0 g/t at surface. Jasperoids are excellent host rocks for mineralization and represent a strike length of roughly 500 meters.
Range Front Fault Zone – Range front fault systems have, historically, laid host to many of the largest Carlin-Style gold deposits in Nevada. The range front fault, which runs along the eastern portion of the land package, is sizeable and untested, which has the potential to host a large deposit. Historic sampling returned values upwards of 5.0 g/t gold at surface on secondary structures. It should be noted that range front structures host 3 deposits on the eastern side of the Bare Mountain Range; Motherlode, SNA and the 144 Zone.
In my opinion, there is a TON of potential here, as Northern Empire begins to expand and fill the gaps between these historic deposits. As seen in the image above, it looks like one big shallow gold system, with good grade. In the gold mining world, it doesn’t get much better!
With the identification of these high prospective targets, Northern Empire is expanding their current drill program to 18,000 meters and have already begun the permitting process for a larger 50,000 meter program, which will focus on expanding the Crown Block resource and testing these new regional targets.
Exploration Drill Results – Daisy and Secret Pass
Step-out drill results from the Daisy and Secret Pass, released May 2nd, not only returned good grades and widths, but confirm that both deposits are open for expansion. The results are highlighted by,
The highlighted D18-001 step-out hole encountered mineralization 53.35 meters down the hole, which was shallower than expected. Additionally, mineralization was encountered at the base of the Cararra formation, which suggests that there is a possibility for further mineralization to be discovered lower in the stratigraphic sequence. In all, the drill results confirm that the Daisy Deposit remains open up-dip for further expansion. Please see the news release for complete details.
Secret Pass Drilling
The highlighted SP18-017 drill hole stepped out 200m west from the known Secret Pass Deposit and 196.9 meters deep encountered mineralization grading 0.95 g/t gold over 38.1 meters. To note, this hole was terminated before losing mineralization. Northern Empire states within the news release that they intend on re-drilling the hole to better understand the full extent of what has been discovered. This step-out is a great result as it confirms that the Secret Pass Deposit mineralization is open to the west.
Corvus Gold
The last stop of the day was at the SNA Deposit, in the north-east corner of the property. As we approached the SNA Deposit, we first drove past Corvus Gold’s Mother Lode Open Pit, which is completely encompassed by Northern Empire’s Crown Block.
Corvus Gold’s Mother Lode Open Pit
For those who are not familiar, the Mother Lode Deposit has been a major focus for Corvus over the last year, with 10,000m of drilling in 2017 and another 13,000m of drilling planned for the first half of 2018. For those that may not be familiar, Corvus has a MCAP around $300 million, which is largely based on the drilling success at Mother Lode. I find this interesting as a Northern Empire shareholder, because I’m intrigued by the amount of drilling that’s occurring around the existing open pit and, specifically, how that mineralization may extend out toward, or connecting to, the SNA Deposit.
Examining the satellite image below, you can see the concentration of Corvus drill holes not only in the vicinity of the open pit but, more importantly, along the claim boundary.
This is a fairly obvious observation, one that didn’t get past Northern Empire management; while viewing the SNA Deposit during our visit, drilling was taking place along the Corvus claim boundary. In news released April 17th, Northern Empire confirmed that the Mother Lode mineralization does extend south towards the SNA deposit and have drilled significant gold grades from structures which cut favourable host rock for Carlin-type gold mineralization beneath the historic Telluride Mercury Mine.
Northern Empire Drilling beside Mother Lode Open Pit
Concluding Remarks
As I’ve said in the past, site visits are an excellent way for you to bring your due diligence to the next level, and nothing beats seeing the property and interacting with the people in person. My visit to the Sterling Gold Project was no different, as it gave me a better view of the upside potential of the property and the type of people managing the company.
Just to recap, here’s a list of what I see as the strengths for Northern Empire:
Good management team with extensive experience exploring and developing gold projects in Nevada.
The Fraser Institute ranks Nevada 3rd in the world for Mining Investment Attractiveness.
Northern Empire is in possession of all the necessary production permits to restart the Sterling Mine.
The Sterling Mine potential production scenario should be low-cost, as the Carlin Style gold mineralization will be mined from an open pit and is amenable to heap-leaching.
Exploration Potential – The Crown Block, especially, holds a lot of resource expansion potential as it appears all of the existing deposits have the potential to be larger; potentially, one large, shallow and good grade gold system.
18,000 meter drill program underway and a larger 50,000 meter drill program on the horizon as it is currently being permitted!
Existing inferred global resource of 985,000 ounces of gold at 1.29 g/t.
CASH – $16 million!!
I believe there’s a lot of upside potential for Northern Empire if they’re able to execute their plan of expanding the resource at both the Sterling Mine and the Crown Block. I look forward to good news flow over the coming months as this story really begins to come together on the back of their 18,000m drill program.
Don’t want to miss a new investment idea, interview or financial product review? Become a Junior Stock Review VIP now – it’s FREE!
Until next time,
Brian Leni P.Eng
Founder – Junior Stock Review
Disclaimer: The following is not an investment recommendation, it is an investment idea. I am not a certified investment professional, nor do I know you and your individual investment needs. Please perform your own due diligence to decide whether this is a company and sector that is best suited for your personal investment criteria. I do own shares in Northern Empire Resources. All Northern Empire Resources’ analytics were taken from their website and press release. Northern Empire Resources is a Sponsor of Junior Stock Review.
Mr. Wonderful, Kevin O’Leary, and Frank Holmes recently took different side the gold (bullion) vs. gold stocks. Gold and gold stocks are two different asset classes and saying which one is better. One is a commodity (Gold) and the other is equity (Gold Stocks). It’s like comparing multiple championships winning athletes, Sydney Crosby (NHL), Lebron James (NBA), and Tom Brady (Football) and saying one of these players is the best athlete of all-time. Gold and gold stocks offer two different purposes for an investor’s portfolio.
WHY OWN GOLD BULLION?
You own gold in bullion form and keep it in storage as an insurance policyfor your other financial assets. It acts as a counterbalance against other assets in your portfolio. Investors flock to gold as a “safe-haven” asset, just like cash because they aren’t willing to take on risk. Gold is like a cash position in your portfolio, you don’t get paid to own it. Think of Gold as another currency (cash position) that you have exposure too, and you can use it as a counterbalance against your riskier assets. If gold isn’t important, then why do Central Banks own it on their balance sheet? For investors, it’s a way of being your own Central Bank.
“I have a 5% weighting in gold. The GLD and physical bullion. Which I store and pay for the storage. The value of the commodity is whatever it is every day. Kevin O’Leary (Kitco)
Kevin O’Leary isn’t the only one who has gold as a counterbalance in their portfolio. Here is what Ray Dalio of Bridgewater thinks about gold:
“We can also say that if… things go badly, it would seem that gold (more than other safe haven assets like the dollar, yen, and treasuries) would benefit, so if you don’t have 5% – 10% of your assets in gold as a hedge, we’d suggest that you relook at this.” – Ray Dalio
Egyptian billionaire Naguib Sawiris investing half his net worth in gold
“And people also tend to go to gold during crises and we are full of crises right now. Look at the Middle East and the rest of the world and Mr. Trump doesn’t help.” (Marketwatch)
JP Morgan
“Underweight equities, long duration, long gold, and long the yen as Fed policy slows the economy and real rates collapse.” JP Morgan via ZH
GOLD TRADING LIKE A COMMODITY
After the dollar-gold window was broken in the 1970’s gold trades more like a commodity because it isn’t pegged to the US dollar. That is why gold, has better matched the cycle of the commodity booms since that time. Will it be treated again likebefore? We think that “Yes, gold will more than likely be pegged in some form to a currency at some point in the future”. Will it be more like past gold standards? Maybe, history repeats, just not exactly the same as before. It could be in a digital format because that is the way the world is going. We aren’t sure. But we follow the worldview that there are cycles and history repeats. We think that the mantra, “This could never happen” means it can happen again and probably will happen, just in a different twist. Everything has a time when it gets center stage. Gold standards will come, and then they will go. For now gold trades more like a commodity.
GOLD STOCKS AND CYCLE
When O’Leary says gold miners are horrible investments is a bit of hype and bluster.
O’Leary:“The history of mining has been abysmal… I don’t need to have a manager in the middle screwing up his capital cost allowance, not controlling his costs. (Kitco)
This is like saying all technology stocks are profitable like Apple.
The gold sector has one major commonality with every other sector. They are all cyclical! The question is, what cycle do they follow? Gold mining stocks and gold are part of the larger commodity cycle. If you understand the cycle, you understand that there is a time to buy and a time to sell. Gold miners generate an incredible amount of free cash flow once the sector has bottomed. Why? Management teams are forced to really look at their costs and focus on generating profits because investors demand it. Just like after the Dotcom bust, investors started to demand revenue, not just user growth. Let me say that again…Revenue! Profits were demanded as well.
Kevin O’Leary is right when he says “More and more investors are thinking the way I do. They are thinking about return of capital.”
But you are seeing it some darling tech stocks right now, focusing exclusively on growth with disregard for profits.
Look at Wayfair, an e-commerce company sells home goods online. Revenues have increased by more than 4X, yet $0 in profits over the past three years.
During the last gold peak, investors demanded growth in terms of ounces at all cost from management, and in the bottom, investors reversed course and realized profits are essential for survival. You know its approaching a top when its ounces at all costs. The technology sector has recently been like this, companies like Tesla(TSLA), Wayfair (W), where it has been growth at all costs. As the tech cycle turns, investors will demand profits from these companies, not just customer growth on Wayfair and auto deliveries from Tesla. This is a 100% guarantee because investors will get spooked when the cycle turns and expect profits. Right now, investors have been rewarding gold miners for delivering on production and showing profitability. In 2017, gold miners delivered record dividends. Gold miners are set to show strong revenues in 2018 because of the continued elevated gold price above $1,300.
“Tesla will be profitable & cash flow+ in Q3 & Q4, so obv no need to raise money,” tweeted Musk
OTHER WAYS TO INVEST THAN ROYALTY STOCKS & GOLD MINERS?
But there is more than one way to play the gold sector. I am always amazed, when I speak with portfolio managers and receive emails, they always bring up explorers, producers, and royalty stocks to invest in stocks. Seek where the profits are, and you will find the gold. Look at Apple, it generates the most profits in the cell-phone industry over the past 8 years, its revenue grew incredibly over that same time-period. So why not repeat the same process in the gold sector?
We think there is a better way to think about investing in gold & silver stocks, and commodity stocks in general. Does the company generate a percentage of their sales related to gold and silver? It opens you up to many different companies with exposure to other commodities or other industries. Seek companies that are growing revenue, but still, give you exposure to gold and silver.
We can see the day when companies that derive a percentage of their revenue from precious metals will be added to ETFs.
Mining Services
Major Drilling
KGHM
Swick Services
Financial Services
Sprott
GoldMoney
Canaccord Genuity
CME Group
Commodities Trading
Glencore
Refining & Distribution
Johnson Matthey
Umicore SA
Some of these companies are directly involved in operating mines, by providing useful services to the mining industry. While still being able to get exposure to the gold and silver. The additional value is you may be getting exposure to multiple commodities and in some case entirely different industries outside of mining that are growing.
YOU NEED REVENUE GROWTH
Frank Holmes taking a more factor-based approach, with one-factor, focused on revenue growth. This factor is important because revenue growth attracts investor money.
. “The royalty companies have done well and those stocks that basically show better revenue per share, reserves per share, production per share, they far outperform.”Holmes.
And if the company can grow revenue per share and/or cash flow per share this help share prices higher. Would you invest in a company that isn’t growing its revenue? This is why royalty stocks attract investors because they are able to grow revenue consistently over longer periods than the miners. The ability to add cash flowing royalties every year is like adding a new mine but a lot faster than a miner can.
Gold miners’ revenues are tied primarily to two items: 1. Production and 2. Gold Price. Investors are willing to pay up for anticipated growth in production because a new mine is starting up or an existing mine is ramping up for further production. Investors are not willing to pay up for growth, they will sell. The higher the expected growth potential, the higher the anticipated returns. But, watch out if the company slips up. Investors will punish the share price like we recently saw with Pretium Resources and New Gold.When the commodity price is falling faster than the production growth, this will take down all stocks in the sectors. This is why it’s important to focus on higher quality companies, with low AISC or have high operating margins. It minimizes your risks on the downside because they can maintain dividends, and their revenue is less impacted.
You can see why royalty and streaming companies like Franco-Nevada and Royal Gold are so popular because they offer fairly consistent revenue per share and cashflow per share growth relative to gold miners.
PROTECTION & GROWTH
Gold and gold stocks provide investors with two very different sets of risks and opportunities to protect and grow their wealth. You own gold primarily as an insurance policy against your portfolio and the financial system. You own gold stocks as a way to potentially increase your wealth by focusing on growth, management ownership and catalysts. Two different asset classes that are part of the overall portfolio. By understanding the cycle that they both follow, you can enjoy the ups and take money off the table when the crowd is all in.
Written by Paul Farrugia, BCom. Paul is the President & CEO of First Macro Capital. He helps his readers identify mining stocks to hold for the long-term. He provides a checklist to find winning gold and silver miner stocks and any commodity producer.
Disclaimer:
The information contained herein is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. It is not designed to meet your financial situation – we are not investment advisors, nor do we give personalized investment advice. The opinions expressed herein are those of the publisher and are subject to change without notice. It may become outdated, and there is no obligation to update any such information.
Investments recommended in our publications, blog posts, emails, online communications, or any online contents published by any party of First Macro Capital and its affiliated companies should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company in question. You should not make any decision based solely on what you read here.
First Macro Capital writers and publications do not take compensation in any form for covering those securities or commodities. First Macro Capital employees and agents of First Macro Capital and its affiliated companies own some of the stocks mentioned in this article, prior to the writing of this article.
Gold failed to breakout in the spring and recently lost weekly support at $1310. Meanwhile, the gold stocks have held up well in recent weeks (considering Gold) but still have much to prove. Silver couldn’t rally much when its net speculative position was at an all time low. The question now is where do things go from here. The price action is not bullish but with a Fed hike looming and negative sentiment, Gold could be poised to snapback after testing lower levels.
The technicals for Gold show a strong confluence of support at $1265 to $1270. It has traded as low as $1281 in recent days. Trendlines and long-term moving averages coalesce at $1265 to $1270. On the weekly chart, $1265 stands out as a key level. A little bit more selling could bring Gold down to key support.
Gold with Sentiment Indicators
The sentiment indicators (shown at the bottom of the above chart) are encouraging and would be more so with a test of that aforementioned support. The net speculative position as of last Tuesday hit 22.7% of open interest, which is one of the lowest readings of the past two years. The daily sentiment index hit only 10% bulls last week. It’s 21-day average is 32% bulls and if that fell below 30% it would mark a 9-month low.
Turning to the miners, we find a sector that continues to be wedged in between support and resistance. GDXJ has trendline and lateral support in the $31s with key resistance in the low $34s. GDX has immediate support at $22 and strong support at $21 while initial resistance is at $23. If Gold is to have another chance to breakout in the months ahead then GDX and GDXJ need to surpass their April highs.
GDXJ, GDX Daily Bar Charts
While we are concerned about Gold for the remainder of 2018, it could be setting up for a summer rally and especially if it drops to strong support around $1265. Sentiment would reach even more encouraging levels and that coupled with strong technical support could produce a rebound. In the meantime we continue to focus on and accumulate the juniors that have 300% to 500% return potential over the next 12 to 18 months. To follow our guidance and learn our favorite juniors for the balance of 2018, consider learning more about our premium service.
The major gold miners’ stocks are still largely grinding sideways, mired in a bearish sentiment wasteland. Traders tend to assume low stock prices must be righteous, reflecting weak fundamentals rather than poor psychology. But once a quarter earnings seasons’ bright fundamental sunlight parts the obscuring fogs of popular sentiment. The gold miners’ just-reported Q1’18 results prove they remain deeply undervalued.
Four times a year publicly-traded companies release treasure troves of valuable information in the form of quarterly reports. Companies trading in the States are required to file 10-Qs with the US Securities and Exchange Commission by 45 calendar days after quarter-ends. Canadian companies have similar requirements. In other countries with half-year reporting, many companies still partially report quarterly.
The definitive list of major gold-mining stocks to analyze comes from the world’s most-popular gold-stock investment vehicle, the GDX VanEck Vectors Gold Miners ETF. Its composition and performance are similar to the benchmark HUI gold-stock index. GDX utterly dominates this sector, with no meaningful competition. This week GDX’s net assets are 25.7x larger than the next-biggest 1x-long major-gold-miners ETF!
GDX is effectively the gold-mining industry’s blue-chip index, including the biggest and best publicly-traded gold miners from around the globe. GDX inclusion is not only prestigious, but grants gold miners better access to the vast pools of stock-market capital. As ETF investing continues to rise, capital inflows into leading sector ETFs require their managers to buy more shares in underlying component companies.
GDX’s component list this week ran 49 “Gold Miners” long. While the great majority of GDX stocks do fit that bill, it also contains gold-royalty companies and major silver miners. All the world’s big primary gold miners publicly traded in major markets are included. Every quarter I look into the latest operating and financial results of the top 34 GDX companies, which is just an arbitrary number fitting neatly into these tables.
That’s a commanding sample, as GDX’s 34 largest components now account for a whopping 92.1% of its total weighting! These elite miners dominate world gold mine production, which ran 770.0 metric tons in Q1’18 according to the World Gold Council’s recently-released Q1 Gold Demand Trends report. The top 34 GDX gold miners reported collectively mining 286.5t of gold last quarter, nearly 3/8ths of the world’s total!
Most of these top 34 GDX gold miners trade in the US and Canada where comprehensive quarterly reporting is required by regulators. But some trade in Australia and the UK, where companies just need to report in half-year increments. Fortunately those gold miners do still tend to issue production reports without financial statements each quarter. There are still wide variations in reporting styles and data offered.
Every quarter I wade through a ton of data from these elite gold miners’ latest results and dump it into a big spreadsheet for analysis. The highlights make it into these tables. Blank fields mean a company had not reported that data for Q1’18 as of this Wednesday. Looking at the major gold miners’ latest results in aggregate offers valuable insights on this industry’s current fundamental health unrivaled anywhere else.
The first couple columns of these tables show each GDX component’s symbol and weighting within this ETF as of this week. While most of these stocks trade on US exchanges, some symbols are listings from companies’ primary foreign stock exchanges. That’s followed by each gold miner’s Q1’18 production in ounces, which is mostly in pure-gold terms. That excludes byproduct metals often present in gold ore.
These are mostly silver and base metals like copper, which are valuable. They are sold to offset some of the considerable costs of gold mining, lowering per-ounce costs and thus raising overall profitability. In cases where companies didn’t separate out gold and lumped all production into gold-equivalent ounces, these GEOs are included instead. Then production’s absolute year-over-year change from Q1’17 is shown.
Next comes gold miners’ most-important fundamental data for investors, cash costs and all-in sustaining costs per ounce mined. The latter directly drives profitability which ultimately determines stock prices. These key costs are also followed by YoY changes. Last but not least the annual changes are shown in operating cash flows generated, hard GAAP earnings, sales, and cash on hand with a couple exceptions.
Percentage changes aren’t relevant or meaningful if data shifted from positive to negative or vice versa, or if derived from two negative numbers. So in those cases I included raw underlying data rather than weird or misleading percentage changes. This whole dataset together offers a fantastic high-level read on how the major gold miners are faring fundamentally as an industry. And that was really well in Q1’18!
As I waded through all these gold miners’ new 10-Qs or their foreign equivalents this week, the biggest surprise was production. The whole business of gold mining is digging up and selling gold, so naturally production is the mothers’ milk of this industry. Companies are always striving to grow their production, which boosts their cash generation and thus expansion opportunities available by finding or buying other mines.
These elite gold miners certainly had every incentive to boost their production in Q1, since its average gold price surged 8.9% YoY to $1329. Investors are always looking for rising production too, seeing it as signs of good management and strong fundamental health. Since gold stocks suffering flagging production are often punished with selling, the major gold miners really hate reporting it. Yet Q1’18 was stuffed with declines!
This wasn’t readily apparent to casual observers, as the major gold miners carefully tailor their quarterly-results press releases to accentuate the positive and intentionally mask the negative. Yet if you look at the YoY changes in gold production above, fully 21 of the 33 top GDX companies reporting it suffered steep average declines of 9.6%! This lower production was so universal and widespread it looks to be systemic.
Overall these top 34 GDX companies mined 9.2m ounces of gold in Q1’18, which was down a sharp 4.6% YoY. This was actually contrary to the industry trend too. The World Gold Council’s new read on Q1’s fundamentals showed global gold mine production actually rising 1.4% YoY! Yet the top 10 GDX stocks commanding 60.3% of this ETF’s total weighting all saw gold declines averaging a major 7.4% YoY.
Most of these top gold miners had explanations, which were often excluded from press releases. I found them deep in quarterly regulatory filings most investors will never bother looking into. Mine sequencing leading to lower ore grades, individual-mine technical challenges, and slowing production at older mines were mostly to blame. This wasn’t a one-off dip though, as Q4’17’s GDX-top-34 production also fell 2.0% YoY.
Investors choosing to buy GDX instead of individual gold stocks with superior fundamentals must realize the lion’s share of their investments are flowing into giant gold miners with slowing production. As long as this proves true, their stocks have far-less appreciation potential than their smaller peers still able to grow production. What the top major gold miners are experiencing is increasingly validating peak-gold theses.
Gold deposits economically viable to mine are very rare in the natural world, and the low-hanging fruit has largely been harvested. It is growing ever more expensive to explore for gold, in far-less-hospitable places. Then even after new deposits are discovered, it takes up to a decade to jump through all the Draconian regulatory hoops necessary to secure permitting. And only then can mine construction finally start.
That takes additional years and hundreds of millions if not billions of dollars per gold mine. But because gold-mining stocks have been deeply out of favor most of the time since 2013, capital has been heavily constrained. When banks are bearish on gold prices, they aren’t willing to lend to gold miners except with onerous terms. And when investors aren’t buying gold stocks, issuing new shares low is heavily dilutive.
The large gold miners used to rely greatly on the smaller junior gold miners to explore and replenish the gold-production pipeline. But juniors have been devastated since 2013, starved of capital. Not only were investors completely uninterested with general stock markets levitating, but the rise of ETFs has funneled most investment inflows into a handful of larger-market-cap juniors while the rest see little meaningful buying.
So even the world’s biggest and best gold miners are struggling to grow production. While that isn’t good for those individual miners, it’s super-bullish for gold. The less gold mined, the more gold supply will fail to keep pace with demand. That will result in higher gold prices, making gold mining more profitable in the future. Some analysts even think peak gold has been reached, that world mine production will decline indefinitely.
There are strong fundamental arguments in favor of peak-gold theories. But regardless of where overall global gold production heads in coming years, the major gold miners able to grow their own production will fare the best. They’ll attract in relatively-more investor capital, bidding their stocks to premium prices compared to peers that can’t grow production. Stock picking is more important than ever in this ETF world!
With major gold miners’ production sharply lower, their costs of mining should be proportionally higher. Gold-mining costs are largely fixed during mine-planning stages, when engineers and geologists decide which ore to mine, how to dig to it, and how to process it. The actual mining generally requires the same levels of infrastructure, equipment, and employees quarter after quarter. Little changes in throughput terms.
The mills processing the gold-bearing ore and inevitable accompanying waste rock have hard limits to tonnages they can chew through. When richer ore is processed, more ounces of gold are produced to spread the big fixed costs across. But when mine managers have to dig through lower-grade ore, either on the way to higher-grade stuff later or in depleting mines, fewer ounces of gold must bear the full cost burden.
But interestingly this often-ironclad inverse relationship between gold production and per-ounce costs did not really play out in Q1’18. Costs rose, but nowhere near as much as the lower gold production implied they would. The major gold miners are getting more efficient. They could’ve also chosen to sequence lower-grade ore into their mills because higher prevailing gold prices would offset some of the production declines.
There are two major ways to measure gold-mining costs, classic cash costs per ounce and the superior all-in sustaining costs per ounce. Both are useful metrics. Cash costs are the acid test of gold-miner survivability in lower-gold-price environments, revealing the worst-case gold levels necessary to keep the mines running. All-in sustaining costs show where gold needs to trade to maintain current mining tempos indefinitely.
Cash costs naturally encompass all cash expenses necessary to produce each ounce of gold, including all direct production costs, mine-level administration, smelting, refining, transport, regulatory, royalty, and tax expenses. In Q1’18, these top 34 GDX-component gold miners that reported cash costs averaged $667 per ounce. They indeed surged a sharp 7.1% YoY, the result of fixed costs spread across lower production.
These industry-wide cash costs are the gold-price pain point where miners’ viability and survivability is in jeopardy. Seeing gold anywhere near those levels again is exceedingly unlikely. The last time gold hit $667 was 10.7 years ago in August 2007, before trillions of dollars of central-bank money printing after 2008’s stock panic. Provocatively the HUI gold-stock index was near 320 then, 80% higher than today’s levels!
Way more important than cash costs are the far-superior all-in sustaining costs. They were introduced by the World Gold Council in June 2013 to give investors a much-better understanding of what it really costs to maintain gold mines as ongoing concerns. AISCs include all direct cash costs, but then add on everything else that is necessary to maintain and replenish operations at current gold-production levels.
These additional expenses include exploration for new gold to mine to replace depleting deposits, mine-development and construction expenses, remediation, and mine reclamation. They also include the corporate-level administration expenses necessary to oversee gold mines. All-in sustaining costs are the most-important gold-mining cost metric by far for investors, revealing gold miners’ true operating profitability.
With the top 34 GDX gold miners’ production down 4.6% YoY in Q1, I would’ve bet their AISCs would’ve risen a proportional 4% to 5%. Yet their cost control was outstanding, as these elite gold miners reported average AISCs up just 0.7% YoY to $884 per ounce! That’s roughly in line with the quarterly trend from 2017 seeing $878, $867, $868, and $858 averages running from Q1 to Q4. Costs are really being contained.
The major gold miners have to manage costs exceptionally well to maintain AISCs while production is also slowing. This argues against the popular complaint that gold miners’ managements are doing poor jobs. Because gold-stock prices are so darned low, traders again assume the miners must be plagued with serious fundamental problems. But it’s relentlessly-bearish herd sentiment suppressing gold-stock prices.
Flat AISCs combined with sharply-higher gold prices led to exploding operating profitability among the major gold miners last quarter! That certainly isn’t being reflected in their stock prices. In Q1’17, gold averaged just $1220 against $878 average AISCs. That yielded per-ounce profits of $342. But this past year saw gold surge 8.9% to that $1329 quarterly average in Q1’18 while AISCs only climbed 0.7% to $884.
That drove fat operating margins of $445 per ounce, exploding 30.2% higher YoY! That works out to excellent 3.4x upside profits leverage to gold! In any other stock-market sector such massive earnings growth would be crowed about from the rooftops and capital would flood in. But that wasn’t enough to blow away the darkening bearish pall over gold stocks. GDX’s average share price still fell 3.0% YoY in Q1’18!
Gold-stock profits as measured by the difference between average gold prices and average AISCs even surged 6.3% quarter-on-quarter from Q4’17. There is a vast fundamental disconnect between the left-for-dead gold-stock prices and gold miners’ strong operational performances. This bearish-sentiment-driven anomaly is very extreme and won’t last forever. Investors will rush back in when they discover the value.
The major gold miners’ fundamental health is reflected in their operating-cash-flow generation. These top 34 GDX gold miners reporting OCFs for last quarter collectively produced $3355m. That’s up 3.9% YoY despite their 4.6% lower gold production, mostly due to that sizable 8.9% average-gold-price rally. Most of these elite gold miners saw big annual growth in cash generated from operations, a very-bullish sign.
As long as OCFs remain massively positive, the gold mines are generating much more cash than they cost to run. That gives the gold miners the capital necessary to expand existing operations and buy new deposits and mines. Given how ridiculously low gold-stock prices are today, you’d think the gold miners are hemorrhaging cash like crazy. But the opposite is true, showing how silly this bearish herd sentiment is.
These top GDX gold miners’ actual GAAP profits didn’t look as good, plunging 48.5% YoY to $855m in Q1. While that was a huge improvement over Q4’17’s $266m loss, it still seems incongruent with those flat all-in sustaining costs and growing operating cash flows. Of the 25 of these top GDX components reporting earnings in Q1, just 3 had losses. The only big ones came from Royal Gold and Yamana Gold.
Royal Gold’s $154m loss was the result of a gigantic $239m impairment charge in its interests in gold royalties. That came from Barrick Gold’s big Pascua-Lama project, which straddles the border between Chile and Argentina. In Q1 Barrick decided the current economic and geopolitical environment made the Chilean side of this project not worthy of further investment. Chile’s government is harassing Barrick on it.
Yamana Gold’s $161m loss was largely from a $103m impairment of a majority investment it made in a smaller gold company. When a third company agreed to acquire all the shares of that smaller miner in Q1, Yamana had to write off its loss. These two impairments alone battered overall GDX GAAP profits $342m lower! Without them, the top 34 GDX gold miners’ earnings would’ve slid a much-smaller 27.9% YoY.
It doesn’t take many of these non-cash charges to greatly alter the collective GAAP earnings of the elite gold miners. And there’s a third huge one to consider. Back in Q1’17, Barrick Gold recorded a colossal $1125m non-cash gain reversing previous impairment charges on a gold project after Goldcorp agreed to buy a quarter of it. That really inflated overall GDX GAAP profits in the comparable quarter a year ago.
Just excluding that huge Q1’17 impairment reversal and that pair of Q1’18 impairment charges radically changes the profits picture. Again those were non-cash and had nothing to do with operations. That yields Q1’18 GAAP profits of $1197m for these top 34 GDX gold miners, a staggering $123% higher than Q1’17’s if its Barrick impairment-reversal gain hadn’t happened! The major gold miners are faring really well.
These surging accounting earnings are evident in the classic trailing-twelve-month price-to-earnings ratios of these top gold miners as well. They aren’t included in these tables, but averaged 37.3x in Q1’18 for the 24 of these companies that had net earnings over the past year. While that’s not an accurate reflection of true valuations due to non-cash things flushed through income statements, it was still 28% lower.
On the sales front these top 34 GDX gold miners’ revenues climbed 1.5% YoY to $10.6b in Q1’18. That reflects the combination of higher gold selling prices with lower gold production. Actual sales growth was probably better, as 26 top-34 GDX companies reported sales in Q1’18 compared to 28 in Q1’17. GDX saw three new companies climb into the ranks of its top 34 over this past year, highlighted in light blue above.
Two of these are the great low-cost Australian gold miners Regis Resources and St Barbara Limited. They report in half-year increments, and gave no revenues data for Q1 which was an interim quarter for both. The companies they knocked out of the top 34 had reported sales a year earlier. So the sales growth in the elite major gold miners was really good considering their sharply-lower gold production.
Finally these top 34 GDX gold miners’ cash on their balance sheets fell 4.2% YoY to $12.7b. That’s a big number for this small contrarian sector, meaning these companies have lots of capital firepower available to expand existing operations or buy gold mines from other companies. The more cash on hand the gold miners have, the more flexibility and resilience they have to grow their businesses and weather challenges.
So overall the major gold miners’ fundamentals looked really strong in Q1’18, a stark contrast to the miserable sentiment plaguing this sector. Gold stocks’ vexing consolidation since early 2017 isn’t the result of operational struggles, but purely bearish psychology. That will soon shift as stock markets inevitably roll over and gold surges, making the beaten-down gold stocks a coiled spring overdue to soar dramatically.
While investors and speculators alike can certainly play gold stocks’ coming powerful uplegs with the major ETFs like GDX, the best gains by far will be won in individual gold stocks with superior fundamentals. Their upside will far exceed the ETFs, which are burdened by over-diversification and underperforming stocks. A carefully-handpicked portfolio of elite gold and silver miners will generate much-greater wealth creation.
At Zeal we’ve literally spent tens of thousands of hours researching individual gold stocks and markets, so we can better decide what to trade and when. As of the end of Q4, this has resulted in 983 stock trades recommended in real-time to our newsletter subscribers since 2001. Fighting the crowd to buy low and sell high is very profitable, as all these trades averaged stellar annualized realized gains of +20.2%!
The key to this success is staying informed and being contrarian. That means buying low before others figure it out, before undervalued gold stocks soar much higher. An easy way to keep abreast is through our acclaimed weekly and monthly newsletters. They draw on my vast experience, knowledge, wisdom, and ongoing research to explain what’s going on in the markets, why, and how to trade them with specific stocks. For only $12 per issue, you can learn to think, trade, and thrive like contrarians. Subscribe today, and get deployed in the great gold and silver stocks in our full trading books!
The bottom line is the major gold miners’ fundamentals are really strong based on their recently-reported Q1’18 results. While production declined fairly sharply, the miners still held the line on all-in sustaining costs. That fueled fat operating profits and strong cash flows. And many of the elite gold miners have forecast improving production throughout 2018 on higher-grade ores, which will push profits even higher.
Yet gold stocks are priced today as if gold was half or less of current levels, which is truly fundamentally-absurd! They are the last super-undervalued sector in these euphoric, overvalued stock markets. When gold investment demand resumes on weakening stock markets and pushes gold higher, capital will flood back into the forgotten gold miners. That buying will catapult them back to far-higher fundamentally-righteous prices.
Last week we discussed the fundamentals of Gold, which do not appear bullish at the moment. Real rates (and yields) are rising and investment demand for Gold is flat. That in itself is a temporary but big missing link. However, we are referring to the missing link in the context of intermarket analysis. Gold is an asset that performs best when its outperforming its competitors. That’s true of any asset but especially Gold because it traditionally has been a counter-investment or an anti-investment. While Gold is firmly outperforming Bonds and showing strength against global currencies, it remains neutral to weak against global equities.
First, let’s take a look at Gold relative to foreign currencies (FC) and Bonds. At its 2016 peak, Gold/FC had already retraced the majority of its bear market. Last week Gold/FC managed to close at an 8-month high even as the US$ index rebounded. Gold has performed even better against Bonds and that includes dividends. A few months ago Gold relative to the major Bond ETFs (TLT and IEF) made a 3-year high. Those ratios remain above rising 200-day moving averages.
Gold vs. foreign currencies, TLT, IEF
It’s important for Gold to outperform foreign currencies because if Gold is only rising because of a weak US Dollar that represents a bear market in the dollar rather than a bull market in Gold.
Gold’s outperformance against Bonds is significant because Bonds represent an enormous capital market and Bonds are in some ways the antithesis of Gold.
Unfortunately, Gold has not been able to breakout in nominal terms and from an intermarket perspective, that is because of the strength in the stock market. The ratios below show that Gold relative to global equities is trading not too far above the 2015 lows. If these ratios retested their 2015 lows they’d be trading around 10-year lows!
Gold vs. global equities
Gold appears to have lost the 200-day moving average relative to global equity markets but if it can maintain its outperformance against Bonds and foreign currencies then it will be setup for a powerful move when it can break to the upside relative to equities. The negative is that change does not appear imminent but the positive is when it happens Gold should begin a major leg higher. In the meantime, we continue to focus on and accumulate the juniors that have 300% to 500% return potential over the next 12 to 18 months. To follow our guidance and learn our favorite juniors for the balance of 2018, consider learning more about our premium service.
The mega-cap stocks that dominate the US markets are just wrapping up a truly-extraordinary earnings season. Naturally this first quarter under Republicans’ new corporate tax cuts fueled surging profits. But sales were up big too, which is no mean feat for massive companies. With sustained growth at this torrid pace impossible, peak-earnings fears are mounting. And valuations stayed extremely expensive exiting Q1.
Four times a year publicly-traded companies release treasure troves of valuable information in the form of quarterly reports. Required by the US Securities and Exchange Commission, these 10-Qs contain the best fundamental data available to investors and speculators. They dispel all the sentimental distortions inevitably surrounding prevailing stock-price levels, revealing the underlying hard fundamental realities.
The deadline for filing 10-Qs for “large accelerated filers” is 40 days after fiscal quarter-ends. The SEC defines this as companies with market capitalizations over $700m. That currently includes every single stock in the flagship S&P 500 stock index, which includes the biggest and best American companies. As Q1’18 ended, the smallest SPX stock had a market cap of $2.1b which was 1/410th the size of leader Apple.
The middle of this week marked 39 days since the end of calendar Q1, so almost all of the big US stocks of the S&P 500 have reported. The exceptions are companies running fiscal quarters out of sync with calendar quarters. Walmart, Home Depot, and Cisco have fiscal quarters ending in April instead of the usual March, so their “Q1” results weren’t out yet as of this Wednesday. They’ll arrive in the coming weeks.
The S&P 500 (SPX) is the world’s most-important stock index by far, weighting the best US companies by market capitalization. So not surprisingly the world’s largest and most-important ETF is the SPY SPDR S&P 500 ETF which tracks the SPX. This week it had net assets of a staggering $256.7b! The iShares Core S&P 500 ETF and Vanguard S&P 500 ETF also track the SPX with $149.9b and $88.5b of net assets.
The vast majority of investors own the big US stocks of the SPX, as they are the top holdings of nearly all investment funds. So if you are in the US markets at all, including with retirement capital, the fortunes of the big US stocks are very important for your overall wealth. Thus once a quarter after earnings season it’s essential to check in to see how they are faring fundamentally. Their results also portend stock-price trends.
Unfortunately my small financial-research company lacks the manpower to analyze all 500 SPX stocks in SPY each quarter. Support our business with enough newsletter subscriptions, and I would gladly hire the people necessary to do it. For now we’re digging into the top 34 SPX/SPY components ranked by market capitalization. That’s an arbitrary number that fits neatly into the tables below, but a commanding sample.
As of the end of Q1’18 on March 29th, these 34 companies accounted for a staggering 41.7% of the total weighting in SPY and the SPX itself! These are the mightiest of American companies, the widely-held mega-cap stocks everyone knows and loves. For comparison, it took the bottom 426 SPX companies to match its top 34 stocks’ weighting. The entire stock markets greatly depend on how the big US stocks are doing.
Every quarter I wade through the 10-Q SEC filings of these top SPX companies for a ton of fundamental data I dump into a spreadsheet for analysis. The highlights make it into these tables below. They start with each company’s symbol, weighting in the SPX and SPY, and market cap as of the final trading day of Q1’18. That’s followed by the year-over-year change in each company’s market capitalization, a critical metric.
Major US corporations have been engaged in a wildly-unprecedented stock-buyback binge ever since the Fed forced interest rates to deep artificial lows during 2008’s stock panic. Thus the appreciation in their share prices also reflects shrinking shares outstanding. Looking at market-cap changes instead of just underlying share-price changes effectively normalizes out stock buybacks, offering purer views of value.
That’s followed by quarterly sales along with their YoY changes. Top-line revenues are one of the best indicators of businesses’ health. While profits can be easily manipulated quarter-to-quarter by playing with all kinds of accounting estimates, sales are tougher to artificially inflate. Ultimately sales growth is necessary for companies to expand, as bottom-line earnings growth driven by cost-cutting is inherently limited.
Operating cash flows are also important, showing how much capital companies’ businesses are actually generating. Using cash to make more cash is a core tenet of capitalism. While most of these elite US companies reported Q1’18 OCFs as they should, some obscured quarterly results by lumping them in with the past 6 or 9 months. So these tables only include Q1 operating cash flows if specifically reported.
Next are the actual hard quarterly earnings that must be reported to the SEC under Generally Accepted Accounting Principles. Late in bull markets, companies tend to use fake pro-forma earnings to downplay real GAAP results. These are derided as EBS earnings, Everything but the Bad Stuff! Companies often arbitrarily ignore certain expenses on a pro-forma basis to artificially boost their profits, which is very misleading.
While we’re also collecting the earnings-per-share data Wall Street loves, it’s more important to consider total profits. Stock buybacks are executed to manipulate EPS higher, because the shares-outstanding denominator of its calculation shrinks as shares are repurchased. Raw profits are a cleaner measure, again effectively neutralizing the impacts of stock buybacks. They better reflect underlying business performance.
Finally the trailing-twelve-month price-to-earnings ratio as of the end of Q1’18 is noted. TTM P/Es look at the last four reported quarters of actual GAAP profits compared to prevailing stock prices. They are the gold-standard metric for valuations. Wall Street often intentionally obscures these hard P/Es by using the fictional forward P/Es instead, which are literally mere guesses about future profits that often prove far too optimistic.
As expected given the largest corporate tax cuts in US history going live, the big US stocks generally reported spectacular Q1’18 results. Sales, OCFs, and earnings surged dramatically! But much of this tax-cut windfall was anticipated, as valuations remained dangerously high at the end of last quarter. It’s hard to imagine such blistering growth of such enormous mega-cap companies being able to persist for long.
Not surprisingly the S&P 500’s top-constituent list was little changed over the past year. Most of these elite American companies investors love only grew larger. Three stocks did claw their way into the top 34 since Q1’17, and their symbols are highlighted in light blue. Boeing, AbbVie, and DowDuPont saw their stocks soar enough to help knock out GE, IBM, and Altria from the ranks of the top 34 big US stocks.
From the ends of Q1’17 to Q1’18, the SPX itself powered 11.8% higher. This past year was one of great anticipation and euphoria for the expected big corporate tax cuts coming soon. These top 34 SPY stocks outperformed the markets considerably, with big average market-cap gains of 14.6% YoY. More capital inflows concentrating in fewer stocks highlights the increasing narrowness and riskiness of these toppy markets.
As bull markets mature, the breadth of their advances increasingly narrows. Investors flock into the best-performing stocks to chase their superior gains. Thus decreasing numbers of market-darling stocks are wielding outsized influence on overall stock-market fortunes. They shoulder more of the burden, which is a double-edged sword. When selling erupts in these leaders for any reason, it hits the broader markets hard.
Ominously the universally-adored and -owned mega-cap tech stocks still dominated the SPX at the end of Q1. That was despite the SPX suffering its first correction in 2.0 years, a sharp-yet-shallow plunge of 10.2% in just 9 trading days. That started to crack this past year’s extraordinary tech-stock euphoria, but that selloff was too short to really change psychology. So investors still love the leading technology stocks.
Apple, Alphabet, Amazon, and Microsoft tower over the rest of the top SPY stocks, alone accounting for 1/8th of the entire SPX’s weighting! Facebook wasn’t far behind at 6th after Warren Buffett’s Berkshire Hathaway. In Q1’18 these top 5 tech stocks indeed seemed to earn their keep, with average results far better than the other big US companies. They reported incredible average top-line sales growth of 29.8% YoY!
At 30% annual revenues growth, sales will double about every 2.6 years. That’s never sustainable for long even in far-smaller companies, and is economically impossible at the size and scale of the mega-cap techs. Despite their awesome and amazing success, these 5 US companies aren’t going to take over the entire US economy. This past year was an extreme outlying anomaly that inevitably has to mean revert.
Never before have stock markets relentlessly powered higher to seemingly-endless new record closes with the lowest volatility ever witnessed. Especially with the stock markets literally trading at bubble valuations all year. Never before have the entire American business and investment communities been able to spend over a year eagerly anticipating the biggest corporate tax cuts in US history. 2017 wasn’t normal!
I’ve been blessed to spend decades studying the markets full-time, all day every day. And certainly one of the most stunning revelations is how broadly and deeply stock-market fortunes affect nearly everything else in the entire economy! Record-high stock markets breed epic levels of optimism about the future and thus abnormally-high levels of spending, both from businesses and individuals. That greatly boosts sales.
These mega-cap tech stocks had the great fortune of riding that big-tax-cuts-coming-soon wave of stock-market euphoria. Americans eager to splurge flocked to buy Apple’s latest iPhones and iPads, which are great but expensive products. If the stock markets had ground lower breeding pessimism, that big Apple upgrade cycle would’ve lengthened as people made do with older devices with almost the same functionality.
Businesses rushed to capitalize on the gold rush of surging consumer spending, advertising heavily on both Alphabet and Facebook. They also rushed to expand their online operations by leasing cloud servers and services from Amazon, Microsoft, and Alphabet. What will happen to this huge business spending to market and grow as stock markets roll over and consumers and companies pull in their horns?
The sheer levels of spending over this past totally-unique year that fueled such incredible sales growth aren’t sustainable. Both consumers and businesses racked up huge new debt to fuel their euphoric buying binges. They won’t keep stacking on debt with interest rates rising and the once-in-a-lifetime extreme optimism on big tax cuts soon fading. The mega-cap tech stocks, and all big US stocks, face slowing sales.
The real shock is not that sales ballooned so dramatically in such a perfect year for bullish sentiment, but that Wall Street is arguing such growth is the new norm. These top 34 SPX companies that had reported Q1 results as of this Wednesday had $789.0b of revenues. Those would double about every 5.3 years even at Q1’s average 14.0% YoY growth rate. These 34 companies can’t gobble up the entire world economy!
These big US stocks’ operating cashflows in Q1 highlight the unsustainability of these results. The 24 top SPY components reporting Q1 OCFs saw incredible average gains of 52.5% YoY. There’s just no way giant mature companies can keep expanding their businesses’ cash generation at such blistering rates. OCFs leverage revenues both ways, so naturally sharply-rising sales are going to catapult OCFs higher.
Of course profits also amplify sales, so the corporate profits of these top 34 US companies surged even more dramatically in Q1. They averaged gargantuan growth of 45.9% YoY! While not sustainable, that’s a reasonable 3.3x the increase in sales. The total earnings of the 31 of these 34 giant companies that had reported as of the middle of this week ran a colossal $116.0b, making for profit margins of about 1/7th.
While those are big profits, surprisingly they only grew 3.4% quarter-on-quarter from Q4’17. Remember that quarter was the last under the old higher-corporate-tax regime. Given all the corporate-tax-cut hype leading into Q1’18 which was again the tax cuts’ maiden quarter, you’d think corporate profits would’ve surged far more than 3.4% QoQ. But that gain is somewhat understated given big adjustments on Q4’17 results.
In my recent essay on big US stocks’ Q4’17, I discussed how nearly all of these elite companies had to make significant-to-huge earnings adjustments to account for the new Tax Cuts and Jobs Act of 2017. With corporate tax rates being slashed, the values of existing deferred tax assets and liabilities on many corporate balance sheets changed dramatically. These differences had to be flushed through Q4 income statements.
Basically companies that had overpaid or underpaid their taxes in the past had to adjust for new lower corporate tax rates going forward. The absolute value of all these adjustments for the top 34 US stocks was a mind-boggling $209.2b in Q4’17, dwarfing actual GAAP profits of $112.2b! But interestingly it was a wash overall, with positive profits boosts and negative profits hits evening out to a net gain of just $2.7b.
Without those big one-time corporate-tax-cut earnings adjustments, overall top-34-SPY-company profits were up 6.0% QoQ in Q1’18. That’s big, not still not as hefty as stock-market euphoria seemed to imply was coming. When corporate-sales growth inevitably stalls, so will profits growth. If revenues actually start to shrink, earnings will decline at several times that rate. So the peak-earnings fears are righteous!
Since it’s hard to imagine a better year psychologically for driving big spending than 2017, odds are the corporate-sales environment will mean revert lower with stock-market fortunes and sentiment. And if that indeed proves true, corporate profits have hit or are hitting their high-water mark for a long time to come. We really may not see such crazy earnings growth again until the next secular stock bull tops years into the future.
The SPX-leading market-darling tech stocks Alphabet, Amazon, Microsoft, and Facebook rely heavily on business spending. Last year was a banner year for business confidence on the coming huge tax cuts, leading to giant leaps in spending for online advertising and back-office data services. When the next recession inevitably arrives with the overdue stock bear, much of that euphoric spending will wither and reverse.
On the valuation front, these big US stocks were frightfully expensive exiting Q1’18. They sported scary average trailing-twelve-month price-to-earnings ratios of 46.0x. That’s closing in on double the classic bubble threshold of 28x! Over the past century and a quarter or so, the average fair-value valuation for the stock markets was half that at 14x. So there’s no doubt these stock markets are exceedingly expensive.
Since these TTM P/E ratios came from the end of Q1 before its big surge in earnings, we can attempt to adjust for that. With these top 34 SPX companies’ profits up 6.0% QoQ excluding tax-cut adjustments, we can generously assume valuations fell 10%. But even if that is somehow 20%, the big US stocks’ average P/Es are still well into bubble territory at 36.8x. Traders have anticipated tax-cut profits for over a year.
Thus the big corporate tax cuts’ earnings boost has long since been more than fully priced in. But maybe offsetting these extreme overvaluations a bit is those big TCJA adjustments in Q4. One reason the P/Es of Alphabet and Microsoft are so high is they took colossal $9.9b and $13.8b hits to earnings in Q4’17 to account for lower corporate taxes going forward. These are one-time distortions not reflective of ongoing operations.
But on the other hand, other top US companies had massive profits boosts in Q4 that artificially lowered their own P/Es. Chief among them is Berkshire Hathaway, which enjoyed a gargantuan $29.1b boost to profits in Q4 due to that one-off TCJA adjustment. So its TTM P/E collapsed from 26.4x at the end of Q4 to 10.8x at the end of Q1. The unique Q4 earnings impacts of the tax cuts distorted various P/Es in both directions.
Seeing 33 of these top 34 SPX companies report big one-time profits adjustments in Q4’17 is surely unprecedented in all of history. These won’t roll off of trailing-twelve-month P/E-ratio calculations until the Q4’18 results come out early next year. So unfortunately we are going to suffer distorted P/Es through all of 2018. But since the overall TCJA adjustment was largely flat, the P/E skew should largely cancel out too.
One of the most-bullish arguments for stock markets going forward is large US companies are taking their higher profits from the corporate tax cuts and plowing them into stock buybacks. So Wall Street is salivating at that pushing stock markets to new record highs. Recent developments with mighty Apple, the king of stock buybacks, demand caution on that bullish thesis. Stock buybacks can’t overcome selloffs.
In its Q1’18 results recently reported on May 1st, Apple added a staggering $100b to its record stock-buyback campaign taking it to $310b total. Last quarter alone, Apple spent an all-time-record-for-the-entire-stock-markets $22.8b buying back its own shares! Nevertheless Apple’s stock still slipped 0.9% lower in Q1 because of the SPX correction. Even relatively-mild selling overpowered epic stock buybacks!
If Q1’18 is indeed as good as it gets or darned close, these bubble-valued stock markets are in serious trouble as sales growth mean reverts dramatically lower. That will be leveraged several times or so in earnings. Seeing the top 34 SPY companies’ sales up an average of 14.0% YoY, and the 5 mega-cap tech stocks’ sales skyrocketing 29.8% YoY, can’t be sustainable. This cycle’s peak earnings is likely really here.
That greatly ups the odds that a new bear market is awakening. Thanks to extreme central-bank easing led by the Fed’s radically-unprecedented 7-year-long zero-interest-rate-policy, the SPX’s bull ballooned to freakish proportions. As of late January’s peak, it had extended to a monster 324.6% gain over 8.9 years! That was nearly the second-largest and easily the second-longest stock bull in all of US history.
The powerful stock-market melt-up over the past year to many new all-time highs was a typical late-bull sentiment thing amplified by big-tax-cut-soon-hope euphoria. That extreme optimism greatly boosted corporate sales and profits, but nowhere near enough to rescue valuations from bubble extremes. As psychology mean reverts to neutral then overshoots to bearish, earnings won’t protect stocks from getting mauled.
Despite the recent mild correction, these stock markets remain exceedingly overvalued and dangerous. The big US stocks’ Q1’18 fundamentals prove corporate earnings still remain too low to justify such lofty stock prices. That’s terrifying in 2018 where the Fed and ECB will collectively remove $950b of liquidity compared to last year! Regardless of valuations, this alone would plunge these stock markets into a new bear.
Investors really need to lighten up on their stock-heavy portfolios, or put stop losses in place, to protect themselves from the coming central-bank-tightening-triggered valuation mean reversion in the form of a major new stock bear. Cash is king in bear markets, as its buying power grows. Investors who hold cash during a 50% bear market can double their stock holdings at the bottom by buying back their stocks at half-price!
SPY put options can also be used to hedge downside risks. They are still relatively cheap now with complacency rampant, but their prices will surge quickly when stocks start selling off materially again. Even better than cash and SPY puts is gold, the anti-stock trade. Gold is a rare asset that tends to move counter to stock markets, leading to soaring investment demand for portfolio diversification when stocks fall.
Gold surged nearly 30% higher in the first half of 2016 in a new bull run that was initially sparked by the last major correction in stock markets early that year. If the stock markets indeed roll over into a new bear in 2018, gold’s coming gains should be much greater. And they will be dwarfed by those of the best gold miners’ stocks, whose profits leverage gold’s gains. Gold stocks skyrocketed 182% higher in 2016’s first half!
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The bottom line is the big US stocks’ latest quarterly results proved amazingly good. Sales and profits both rocketed higher as extreme stock-market optimism and big-corporate-tax-cut hopes fueled massive spending. But that was still nowhere near enough to justify stocks’ bubble valuations, portending way-weaker stock markets ahead. That will sap last year’s exceptional confidence and erode results going forward.
As businesses and consumers pull in their horns and stop borrowing to spend big in this new rising-rate environment, revenues and earnings growth will stall and reverse. That’s what happens after euphoric bull-market tops. That will fuel stock selling dragging the markets lower, which will further weigh on both sentiment and spending. So there’s a very-good chance we are seeing peak earnings in this bull-bear cycle.
Ask some gold bugs why Gold has not broken out yet and you will probably get the usual answers. Some will say it’s due to manipulation or price suppression. Others will mention the current rally in the US Dollar (while neglecting that the previous decline in the greenback was unable to take Gold to a new high). Few would say the fundamentals are not in place. No one can know for certain but Gold’s fundamentals have not improved over the past year and are not where they need to be to support a breakout.
The vast majority of history shows us that Gold is inversely correlated to real interest rates (or real yields). It makes perfect sense because Gold has been money for thousands of years. When real rates decline, the real return on money in the bank or in a treasury bill or note decreases. Gold benefits. The corollary is also true. Rising real interest rates indicate stronger real return on money invested in the aforementioned instruments. That’s negative for Gold.
Real interest rates have actually strengthened for nearly 18 months, as the chart below shows. Gold has performed well during that period because of weakness in the US Dollar as well as some anticipation of an escalation in long-term yields.
Given the rise in real interest rates, it is not a surprise that investment demand for Gold has been weak. Gold bugs frequently trumpet strong demand from China and how tight the physical Gold market is but in reality, investment demand is what drives bull markets. Investment demand tends to respond to or follow negative and/or declining real interest rates.
One way of measuring investment demand in real time is by following the amount of Gold held in the GLD trust. As we can see below, investment demand (by this metric) confirmed the rebound in Gold in the first half of 2016. However, it has essentially been flat over the past 18 months as Gold rebounded from the low $1100s all the way to $1360.
Gold & Tons in GLD Trust
So if Gold’s fundamentals are not bullish and investment demand is flat, what conditions need to change that would benefit Gold?
Obviously, Gold needs declining real interest rates. It needs some combination of an acceleration in inflation and a pause or slowdown in short-term yields including the Fed Funds rate. Inflation has risen in recent quarters but short-term yields have risen faster as evidenced by the increase in real interest rates (shown in our first chart).
Weeks ago Gold was sniffing a breakout as long-term bond yields, such as the 10-year and 30-year yield were also threatening a breakout. An upside break in long-term yields would be significant for Gold as it would signal an increase in inflation expectations and pressure the balance sheets of both an over-indebted corporate sector as well as a government already running the largest non-recessionary, peacetime budget deficit in history. However, bond yields have yet to breakout even as the masses have positioned for such. In other words, Bonds could be ripe for a counter-trend rally which means yields would be ripe for a counter-trend decline.
An upside breakout in bond yields could also potentially lead to a new uptrend in the Gold to Stocks ratio. It could cause issues in the economy and stock market which would in turn, benefit Gold. While Gold is in a new uptrend relative to Bonds (not shown) and is currently firming against foreign currencies, it has not been able to sustain strength relative to the equity market. From an intermarket perspective this is the link that has been missing to put Gold in a real bull market.
Gold, Gold/Foreign Currencies, Gold/Equities
It would not be a surprise to see Gold correct lower as fundamentals are not currently bullish and the US Dollar (the weakness of which supported Gold throughout 2017) is rebounding with potentially more upside. Although inflation is increasing, it has not increased fast enough to counteract the rise in short-term yields. A future breakout in long-term yields could be the missing catalyst for Gold as it would cause issues in the economy and stock market and lead to softer Fed policy. Until then, traders and investors would be wise to focus on the junior miners that can add value to their projects in the meantime. To follow our guidance and learn our favorite juniors for the next six months, consider learning more about our premium service.
Please click here now. Double-click to enlarge this daily gold chart. Gold has traded in a drifting rectangle pattern for most of this year.
Please click here now. Double-click to enlarge this important weekly gold chart.
The rectangle pattern on the daily chart is part of a huge weekly chart base pattern. That has been forming for about five years.
Note the enormous increase in trading volume over the past two years. This is extremely positive technical action.
Trump appears ready to make an announcement concerning US government relations with Iran today. That could re-open the oil-for-gold trade in Turkey and other countries.
It’s unlikely that anyone in China really cares very much about what the US government announces today, tomorrow, or in the future, and rightly so.
In another five years it’s unlikely that anyone in India will care what the US government does either.
This is the beginning of what I call the China and India oriented “gold bull era”. It’s an era that is rekindling respect amongst global money managers for gold as the ultimate asset and portfolio returns enhancement tool.
I’m adamant that the correct minimum amount of gold that should be held in a stock and bond portfolio to maximize returns is 20%. The ideal portfolio may be 30% bonds, 30% stocks, 30% gold, and 10% blockchain.
Regardless, long term precious metals investors should ignore short term market noise and focus on the big weekly chart base pattern for gold. Note the price targets of $1500 and $1750.
That’s where to book some profits and/or buy put options in expectation of a significant pullback in the price.
Please click here now. Double-click to enlarge this dollar-yen chart. Another bear market rally for the dollar is nearing completion. That bodes well for a gold price surge towards my first target at $1500.
Most analysts claim the dollar is rallying because of rate hikes, but the cold truth is that the dollar has collapsed after almost every recent rate hike.
I’m projecting this trend will continue and likely accelerate. Please click here now. If investors are racing to buy US bonds to get higher rates, why does this T-bond chart look like something the cat dragged in?
Many investors are indeed buying bonds because of rate hikes, but the Fed’s QT program is countering their buying. All the mainstream media hype about higher rates and the dollar has produced nothing more than wet noodle rallies for both bonds and the dollar.
It’s just a matter of time before more rate hikes and QT from Jay Powell push the T-bond under my 142 “line in the sand” zone.
When that price zone fails, panic amongst institutional money managers could begin. That could usher in a substantial new leg down for the US stock market.
“Some investors and institutions may not be well positioned for a rise in interest rates, even one that markets broadly anticipate, and, of course, future economic conditions may surprise us, as they often do.” – Jay Powell, US Fed Chair, May 7, 2018.
I believe the surprising economic conditions that Jay alludes to in that statement are going to be surprisingly inflationary.
On that note, please click here now. Double-click to enlarge this GDX chart.
Many Western gold mining stocks are trading at 1998 prices, and a large part of the problem relates to the deflationary collapse in US money velocity that began in 1995.
A new era of inflation is beginning in the West. That is going to turn gold stocks into the kind of safe haven that bullion functioned as during the previous 1995 – 2014 deflationary era.
GDX is trading in a tight rough range between $21 and $23.25. All inflation and bull era enthusiasts should be buyers of GDX and component stocks in this range. Use put options to manage emotional jitters.
Aggressive traders can buy a two-day close above $23.25 with an initial target of $25, and this is likely the beginning of a much longer-term move that should see GDX rise to new all-time highs as gold reaches $1750.
Stewart Thomson is no longer an investment advisor. The information provided by Stewart and Graceland Updates is for general information purposes only. Before taking any action on any investment, it is imperative that you consult with multiple properly licensed, experienced and qualified investment advisors and get numerous opinions before taking any action. Your minimum risk on any investment in the world is: 100% loss of all your money. You may be taking or preparing to take leveraged positions in investments and not know it, exposing yourself to unlimited risks. This is highly concerning if you are an investor in any derivatives products. There is an approx $700 trillion OTC Derivatives Iceberg with a tiny portion written off officially. The bottom line:
Are You Prepared?
Gold was enjoying a solid spring rally until a couple weeks ago, nearing major upside breakouts. But its nice advance has crumbled since, really weighing on sentiment. Gold fell victim to a rare major short squeeze in US Dollar Index futures. The surging USDX motivated gold-futures speculators to flee rather aggressively. But this will likely prove a short-lived anomaly, after which gold’s assault on highs will recommence.
Gold’s seasonally-atypical weakness over the past couple weeks is very important for speculators and investors to understand. It had nothing at all to do with fundamentals, but was completely driven by the hyper-leveraged gold-futures traders. These guys have long been fixated on the US dollar’s fortunes, looking to its benchmark US Dollar Index for trading cues. That can slave gold’s price to the dollar at times.
Six weeks ago, gold slumped to a major seasonal low of $1310 the day before the universally-expected 6th Fed rate hike of this cycle. The gold-futures traders fervently believe Fed rate hikes are very bearish for gold, so they usually sell leading into FOMC meetings with potential hikes. This has happened before every Fed rate hike of this cycle. The theory is higher US rates boost foreign investment demand for US dollars.
The ironic thing is modern history proves the opposite! Fed-rate-hike cycles are bearish for the US dollar and bullish for gold. The last cycle ran from June 2004 to June 2006, where the Fed hiked 17 times in a row for 425 basis points. Despite those aggressive and relentless rate hikes, the USDX still slipped 3.8% lower over that exact span while gold rocketed 49.6% higher! Clearly futures specs’ theory is sorely lacking.
The Fed’s current rate-hike cycle out of extreme zero-interest-rate-policy lows got launched in December 2015. Gold was hammered to a 6.1-year secular low leading into it, as futures specs were absolutely certain higher rates were bearish for gold and bullish for the USDX. Yet again they were proven dead wrong, wrong, wrong! As of the middle of this week, gold is up 23.0% since then while the USDX fell 5.5%.
You’d think after some market thesis fails to work over and over again for decades, traders would try something else. But not futures speculators, they are a stubborn lot. So leading into every likely Fed rate hike, they bid up the USDX and dump gold. Then immediately after those rate hikes the dollar fails to surge and gold doesn’t plunge, so they reverse those excessive trades driving the dollar down and gold up.
So like clockwork after the Fed’s latest rate hike in late March, gold started rallying as gold-futures specs bought back in. Gold enjoys a strong seasonal spring rally in April and May, which I discussed in depth last week. By mid-April, that propelled gold within spitting distance of a major bull-market breakout. Gold regained its $1365 bull-to-date high from July 2016 on an intraday basis on April 11th, but failed to push through.
Ironically futures speculators’ irrational obsession with the Fed was again to blame. That day the FOMC released the minutes from its March 21st rate-hiking meeting. Traders interpreted them as hawkish, so the USDX was bought and gold was sold. For 24 trading days in row between mid-March to mid-April, gold simply did the opposite of whatever the USDX did on every single day but one. The dollar ruled gold.
Gold managed to hover near $1350 multi-year-horizontal-resistance breakout territory for another week after those Fed minutes. But that started changing on April 19th. That day the USDX rallied 0.3%, which was actually its biggest up day in a couple weeks. USDX-futures speculators were excited because the yields on benchmark US 10-year Treasury notes crested 2.9%. Higher yields are great for the dollar, right?
For decades I’ve closely followed speculators’ collective gold-futures positions every week in the famous Commitments of Traders reports published by the CFTC. I discuss them and their implications for gold’s near-term price action in every weekly newsletter. But I haven’t had the time to dig deeply into USDX futures. The analysts who traffic in that realm said USDX short positions were the largest seen in several years.
The leverage inherent in currency speculation is extreme beyond belief. Since major currencies tend to move slowly, the margin requirements equate to maximum leverage of 50x, 100x, or even 200x! That compares to the decades-old legal limit in the stock markets of 2x. At 50x, 100x, or 200x, mere 2.0%, 1.0%, or 0.5% currency moves against traders’ positions would wipe out 100% of their capital risked. It’s crazy!
So when currency speculators are wrong, they have to exit positions fast or risk getting obliterated. The traders short USDX futures had no choice but to buy. The more long USDX futures they bought to offset and close their shorts, the faster the dollar rallied. That forced still more traders to buy to cover even if they were running more-conservative leverage. This self-reinforcing dynamic feeds on itself, fueling short squeezes.
As the USDX buying mounted, the dollar’s rally accelerated in subsequent days. Traders continued to use 10-year Treasury yields as a fundamental excuse for their purely technical trading, as within a week they crossed the psychologically-heavy 3% threshold to 3.03%. That was the highest seen since the very end of 2013! The USDX rallied 0.3%, 0.5%, and 0.7% in the initial few trading days of that buying to cover.
It had already become the biggest dollar short squeeze since soon after Trump won the election in late 2016. That heavy futures buying forced the USDX to surge 1.5% in those first 3 trading days. Although that sounds trivial, at 50x, 100x, or 200x leverage it hammers speculators to catastrophic 75%, 150%, or 300% losses! I wonder how these guys can sleep at night bearing such ridiculous and unforgiving levels of risk.
Gold-futures speculators run extreme leverage too, but much less than currency traders. This week a single gold-futures contract controlling 100 troy ounces of gold worth $130,500 only required speculators to keep $3100 cash margins in their accounts. That equates to 42.1x maximum leverage! For traders running at the edge, every 1% adverse move in gold would wipe out an insane 42% of their capital risked.
So these guys nervously watch gold on a minute-by-minute basis. And in a fascinating confirmation that gold is indeed a currency, they look to the US dollar for their trading cues. They started selling their gold-futures positions as the dollar started rallying. That drove gold 0.2%, 0.7%, and 0.9% lower in the first 3 trading days of that USDX short squeeze that ignited on April 19th, forcing gold down 1.9% overall to $1324.
Our lone chart this week looks at gold during this current Fed-rate-hike cycle superimposed on the long and short positions large and small speculators hold in gold futures. Again these are published once a week in those Commitments of Traders reports. All 6 Fed rate hikes of this cycle are also highlighted, to show how gold is bludgeoned lower leading into them which spawns strong rebound buying in their wakes.
While the weekly CoTs are current to each Tuesday, they are released late Friday afternoons. Thus the newest-available CoT when this essay was published covers the week ending April 24th. That includes those initial few trading days of that USDX-futures short squeeze. And it’s very illuminating, showing why gold was pummeled back down from major-breakout levels and its strong spring rally was short-circuited.
For pre-dollar-rally baselines, on Tuesday April 17th speculators held 284.2k long and 98.9k short gold-futures contracts. These were running 27% and 15% up into their own past-year trading ranges. Thus these traders had the capital firepower and room to still do about 3/4ths and 6/7ths of their near-term long buying and short selling. Of course buying gold-futures longs is bullish for gold, while shorting is bearish.
When gold-futures shorts are low, there’s always the risk speculators will aggressively sell on the right catalyst coming along. That forces gold’s price lower. And this unlikely dollar short squeeze erupting out of the blue proved that triggering event. On seeing the USDX surge, the gold-futures specs were quick to start jettisoning longs and ramping shorts. Thus gold fell 1.2% on the 1.4% USDX rally over that CoT week.
The magnitude of this initial gold-futures selling became evident in the next CoT report current to April 24th. During that CoT week, specs sold 7.9k gold-futures long contracts while adding another 15.6k on the short side. That made for big total CoT-week selling equivalent to 73.0 metric tons of gold. That is simply far too much for normal buying to absorb. Thus the only possible outcome was a lower gold price.
Just this week, the World Gold Council released its latest Gold Demand Trends report for Q1’18. That’s the definitive source for world gold fundamental supply-and-demand data. In Q1, global gold investment demand averaged 22.1t per week. So heavy gold-futures selling easily overwhelms that. Gold always falls when the futures specs get on a selling kick. They flood the market with too much short-term supply.
That dollar-short-squeeze reaction left specs’ collective long and short gold-futures positions running up 22% and 30% into their past-year trading ranges. So these traders still had room to do about 4/5ths of their likely near-term long buying, but expended a significant chunk of their shorting firepower. That left total spec shorts at a 12-CoT-week high of 114.5k contracts. The higher spec shorts, the more bullish gold gets.
Short positions in futures are bullish because they necessitate proportional near-term buying. In selling short, speculators essentially borrow futures from other traders to sell. The specs are legally obligated to buy back those contracts relatively soon to close out those trades and repay those effective debts. So futures shorts are guaranteed near-future buying, whether they are in the USDX, gold, or anything else.
This essay was penned and proofed Thursday, and then published Friday morning. The newest CoT data current to this Tuesday May 1st won’t come out until late Friday afternoon about 4 hours after this essay went live. So while I can’t wait to see the latest CoT, I can only speculate about it at this point. During this latest CoT week, the USDX-futures short squeeze continued which drove more spec gold-futures selling.
The dollar rally actually accelerated in this newest CoT week ending Tuesday, as shown by the sharp 1.9% rally in the USDX. Thus gold’s CoT-week selloff also grew to 2.0%. That was 2/3rds larger than the prior CoT week’s 1.2%. So odds are the gold-futures selling ballooned significantly in this latest CoT week. That implies another 35k to 40k gold-futures contracts were dumped, with the majority likely on the short side.
Assuming the prior week’s spec gold-futures-selling mix of 1/3rd long and 2/3rds short holds, total spec longs could’ve dropped another 12.9k contracts while shorts could’ve soared 25.8k. If that proves true, total spec longs and shorts could have been running near 14% and 54% up into their past-year trading ranges as of this Tuesday. That would mean the majority of the likely gold-futures shorting is already done!
While I don’t have the USDX-futures data and background to analyze in depth, odds are the USDX is in a similar opposite place. I suspect the majority of the dollar short covering has already run its course. That paves the way for this sharp dollar rally to at least peter out and probably reverse. Trade-war fears are going to flare again soon as the distraction of stocks’ Q1 earnings season passes, which is bearish for the dollar.
If you look at the chart above, the green line shows specs’ total gold-futures long contracts. Note even a CoT week ago that was trading below bull-market support. There is big room for these traders to flood into gold on the long side when the USDX inevitably stalls or reverses. They likely now have the capital firepower to do about 6/7ths of their potential near-term buying! That portends big gold upside in coming weeks.
While gold’s strong seasonal spring rally was interrupted by this surprise USDX-futures short squeeze, I doubt it was killed. Gold was driven to a new seasonal low of $1304 this week, under its previous $1310 of mid-March. Thus all the usual spring-rally buying in April and May will likely be compressed into this month alone! That means gold could enjoy a major mean-reversion bounce rally in the coming weeks.
During the 10 trading days as of the middle of this week since the dollar’s sharp rally started, gold has moved inversely proportionally to the USDX on every trading day but one. 8 of these trading days of the past couple weeks saw the dollar rally, and gold’s biggest losses of 0.9% both occurred on the dollar’s best up days of 0.7%. Gold’s down days were all about the same size as the dollar’s up days, mirror images.
But in the 2 trading days of the past couple weeks when the USDX retreated modestly, gold surged way out of proportion to the dollar’s weakness. These trivial 0.2% and 0.1% USDX slides allowed gold to rally a relatively-outsized 0.6% and 0.5%! Gold wants to rally, and will likely quickly surge back up near major-breakout levels soon after this dollar-rally pressure abates. And that’s likely going to prove very soon.
The mounting US/China trade war has been pushed out of the financial-media spotlight by Q1 corporate earnings, which have soared on the big corporate tax cut. But earnings season is winding down just as major trade-war deadlines are looming for the US to implement recent tariff announcements. The dollar looks far less attractive to foreign investors if tariff threats become reality, their capital will seek refuge elsewhere.
And though the extreme leverage inherent in gold futures enables their speculators to wield outsized influence on short-term price action, investors’ capital massively dwarfs the speculators’. So when investors’ vast funds start bidding on gold again, likely on the next major stock-market selloff driving demand for prudent portfolio diversification, gold-futures specs’ influence will be overwhelmed and drowned out.
Add in strong spring seasonals to all this, and gold has a fantastic foundation for a strong rebound rally. Speculators’ low gold-futures longs are very bullish, as they will rush to buy back in to ride any upside momentum in gold. Speculators’ mounting gold-futures shorts are increasingly bullish, as these will have to be covered and closed by buying offsetting longs. And investors’ super-low gold allocations are wildly-bullish.
So odds are gold’s atypical counter-seasonal drop in the last couple weeks driven by the surprise USDX short squeeze will soon reverse hard. It won’t take much buying to drive gold back up near those major bull breakout levels around $1365. And gold powering higher again will quickly turn sentiment around, with buying begetting more buying. The dollar depressing gold prices leaves this metal more bullish, not less so.
While investors can ride gold’s coming mean-reversion rebound in physical bullion itself or shares in the leading GLD SPDR Gold Shares gold ETF, far-better gains will be won in the stocks of its leading miners. They are already radically undervalued at today’s prevailing gold prices, and their profits tend to amplify underlying gold gains by 2x to 3x. This small contrarian sector’s upside is vast, dwarfing everything else.
With gold still so near a major bull-market breakout, it’s ironic gold stocks remain so deeply out of favor. Between our weekly and monthly newsletters, we have 30 open gold-stock and silver-stock trades added in the past year. As of this week near gold’s lows, fully 25 had average unrealized gains of 18%. One gold miner added in late November is already up 95%! The 5 other trades had average unrealized losses of just 5%.
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The bottom line is gold’s recent weakness is the result of a rare major short squeeze in US Dollar Index futures. The resulting dollar rally spooked gold-futures speculators, who rushed to sell to avoid getting slaughtered by their extreme leverage. While that short-circuited gold’s spring rally, this anomaly won’t last. Gold-futures speculators and gold investors are far too bearish and under-allocated, with big room to buy.
The USDX short covering is likely running out of steam, which will clear the way for gold’s big seasonal spring rally to resume. All that delayed buying will likely be compressed into May, and drive gold back up near recent major-bull-breakout levels. Any dollar/gold reversals will force gold-futures specs to quickly buy to cover their ballooning shorts. The resulting rally will entice in long-side traders, then gold is off to the races.
The Oreninc Index fell in the week ending April 27th, 2018 to 37.75 from an updated 45.59 a week ago as the number of deals fell despite some broker action returning.
A calmer and less volatile week all round with the presidents of North and South Korea meeting for the first time in decades, thawing tensions over the north’s nuclear ambitions, whilst in the US, president Donald Trump eased his position on sanctions against Russian aluminium producer Rusal. Maybe spring is in the air and the world is feeling more positive.
Another range-bound week for gold, this time ending in negative territory as the US dollar strengthened, although there are signs that gold stocks are starting to strengthen.
On to the money: total fund raises announced more than quadrupled to C$96.3 million, a four-week high, which included one brokered financing, a four-week low, and one bought deal financing, also a four-week low. The average offer size also more than quadrupled to C$4.8 million, a four-week high. However, the number of financings decreased to 20, a four-week low.
Gold closed down at US$1,324/oz from US$1,336/oz a week ago. Gold is now up 1.63% this year. Meanwhile, the US dollar index continued to strengthen and closed up at 91.54 from 90.31 a week ago. The van Eck managed GDXJ gave up ground and closed down at US$33.03 from US$33.49 last week. The index is down 3.22% so far in 2018. The US Global Go Gold ETF also fell to close down at US$12.99 from US$13.04 a week ago. It is down 0.12% so far in 2018. The HUI Arca Gold BUGS Index closed down at 182.04 from 184.18 last week. The SPDR GLD ETF saw a growth week as its inventory grew to 871.20 from 865.89 tonnes where it had been for nine-days straight.
In other commodities, silver’s recent growth spurt deflated and closed down at US$16.51/oz from US$17.11/oz a week ago. Copper also gave up a lot of ground as it closed down at US$3.06/lb from US$3.15/lb last week. Oil consolidated despite a slight loss on the week to close down at US$68.10 a barrel from US$68.40 a barrel a week ago.
The Dow Jones Industrial Average lost some ground and closed down at 24,311 from 24,462 last week. Canada’s S&P/TSX Composite Index put in a strong growth week as mining stocks showed growth to close at 15,668 from 15,484 the previous week. The S&P/TSX Venture Composite Index closed down at 783.76 from 804.96 last week.
Summary:
Number of financings decreased to 20, a three-week low.
One brokered financing was announced this week for C$15m a three-week low.
One bought-deal financing was announced this week for C$15m, a three-week low.
Total dollars nearly doubled to C$96.3m, a three-week high.
Average offer size grew to C$4.8m, a three-week high.
Financing Highlights
SilverCrest Metals (TSX-V: SIL) announced a C$15 million bought deal financing
Syndicate of underwriters led by PI Financial and Cormark Securities for 7.1 million shares @ C$2.10.
15% over-allotment Option.
Net proceeds will be used to continue exploration and drilling to deliver an updated resource estimate and maiden Preliminary Economic Assessment for the Las Chispas project in Sonora. Mexico.
Major Financing Openings:
Africa Energy (TSX-V: AFE) opened a C$57.98 million offering on a best efforts basis. The deal is expected to close on or about May 4, 2018.
Silvercrest Metals (TSX-V: SIL) opened a C$15 million offering underwritten by a syndicate led by PI Financial on a bought deal basis. The deal is expected to close on or about May 18, 2018.
Pacton Gold (TSX-V: PAC) opened a C$4 million offering on a best efforts basis. Each unit includes a warrant that expires in 36 months. The deal is expected to close on or about May 22, 2018.
Max Resource (TSX-V: MXR) opened a C$3.75 million offering on a best efforts basis. Each unit includes half a warrant that expires in 24 months.
Major Financing Closings:
Nemaska Lithium (TSX-V: NMX) closed a C$99.08 million offering on a best efforts basis.
Trilogy Metals (TSX-V: TMQ) closed a C$31.48 million offering underwritten by a syndicate led by Cantor Fitzgerald Canada on a bought deal basis.
Stina Resources (TSX-V: SQA) closed a C$12.5 million offering on a best efforts basis. Each unit included half a warrant that expires in 36 months.
Ashanti Gold (TSX-V: AGZ) closed a C$2.64 million offering on a best efforts basis.
Company News
Prospero Silver (TSX-V: PSL) provide an update on planned exploration work on its Mexican projects for 2018.
The key objective is to complete first-pass, proof-of-concept drill testing of three projects in the Altiplano belt of northern Mexico: Bermudez, Buenavista and Trias. Neither Trias or Bermudez have been drilled before.
About 6,000m of diamond drilling is planned.
A 4th hole for Pachuca SE project may be drilled once drilling is complete at the projects above.
Analysis
Having recently announced a fund raise, the work plan shows that Prospero will continue to drill test the targets it has identified via its geological hypothesis for discovering large, blind silver deposits. Whilst the news release did not explicitly state that its strategic partner Fortuna Silver (TSX:FVI) would co-fund this exploration program, that seems likely given the technical success of the 2017 exploration program and that Fortuna has yet to select a project to joint-venture under its strategic agreement with Prospero.
ORENINC MINING DEAL CLUB Access to high-quality, pre-vetted financing opportunities www.miningdealclub.com
MEET US AT THE INTERNATIONAL MINING INVESTMENT CONFERENCE MAY 15-16, 2018, VANCOUVER, CANADA Oreninc Presentation: Tuesday, May 15th, 1:00 – 1:20pm
A time-tested mantra for the US stock market is, “Sell in May and go away.”
The depth of a stock market sell-off that begins in May depends on where the United States economy sits in the business cycle. In the early stages of the cycle, sell-offs that begin in May are great buying opportunities.
As the business cycle peaks, the US stock market has a nasty habit of not just losing upside momentum in May, but suffering a horrific crash in September or October.
Tomorrow is the next FOMC meeting and there’s clearly a new sheriff in central bank town.
I refer to Ben Bernanke as Dr. Jeckyll and Jay Powell as Mr. Hyde. The bottom line is that Powell is proceeding with aggressive rate hikes and quantitative tightening (QT).
With the Fed now deploying a major hiking cycle while the business cycle is in a late stage, the more appropriate mantra for 2018 could be, “Sell in May or get blown away!”
Please click here now. Double-click to enlarge. Note the price zone on this Dow chart that I’ve defined as a key line in the sand for the US stock market.
Some Fed speakers have talked about the potential for the central bank to become more aggressive, given the inflationary implication of tax cuts coming at this late stage of the business cycle. If Powell himself makes any such statement this week it could create an institutional investor panic. That would likely send the Dow tumbling under my line in the sand zone.
Please click here now. Stock market investors who bought only in recent years should give serious consideration to the use of put options as a strategy to mitigate the fast-growing risks that the US central bank is putting on their table.
My personal stock market focus is China and India, and to a lesser degree South Korea and Japan. These markets can crash along with the US market, but they are poised to recover more quickly and offer vastly more long-term upside potential than US markets.
Most neocons think that North Korea’s Kim responded to Trump threatening him. I don’t believe Kim or most North Koreans are threatened by Trump at all. Trump did show Kim that if North Korea wants to spew endless war mongering propaganda about America, he can do so too. He simply showed Kim how silly and outdated this propaganda is for the modern era.
Peace on the Korean peninsula is coming not because of silly “hawk talk” from Trump but because North Korea’s government is ready to make economic deals and move away from pure communism. Trump has likely offered significant economic carrots to Kim in return for dialing back its nuclear weapons programs.
“Some big investors see warning signs ahead for markets but are holding their positions. Egyptian billionaire Naguib Sawiris is taking action: He’s put half of his $5.7 billion net worth into gold.” – Bloomberg News, May 1, 2018.
Please click here now. Sawiris is arguably one of the world’s biggest gold stock investors. He’s a master investor with a target of $1700 to $1800 for bullion.
Sawiris wants to see more hardcore business owners on the boards of gold mining companies. His opinion is that there are too many miners and bankers on these boards, and to really succeed in what I call the “gold bull era”, more businessmen are needed. I agree!
Please click here now. Double-click to enlarge. Sawiris is one of the largest shareholders in Australia’s Evolution Mining stock, and it’s pretty clear he’s riding a winning horse. Evolution is the number two gold producer in Australia now and it’s magnificently poised to prosper in the China and India oriented gold bull era.
I have a long-term target of $100 a share for Evolution. Investors can be comfortable paying as much as $10 for this fabulous company. In the $5 to $3 area, I’m an eager buyer on every 25cents dip and an eager seller of a third of what I buy on rallies that carry the stock 50cents higher than my buy price.
I cover Evolution (and other key Aussie miners) on my junior miners site at www.gracelandjuniors.com It’s a key component of my extensive “Thunder Down Under” portfolio.
Please click here now. Double-click to enlarge. Gold bullion is performing exactly as I’ve projected it would over the past couple of weeks. Excitingly, it’s now entering my key $1310 to $1280 buy zone.
Investors who took my recommendation to buy put options in the $1370 area should begin booking juicy profits on those options now. Book more profits on more options on any deeper weakness under $1300 ahead of this Friday’s jobs report release.
I don’t expect any serious upside gold price fireworks to occur until the Fed’s June meeting is complete. That will almost certainly see Powell oversee another rate hike and a ramp-up of QT. That should shock US stock and bond markets and blast gold higher. Having said that, gold is oversold now. In the days following the jobs report, a decent move higher is likely in the cards for gold price enthusiasts.
Please click here now. Double-click to enlarge. For the past few years, key Chinese gold jewellery stocks and Aussie miners have soared higher while GDX and most Western miners have languished. I think that’s about to change, with GDX set to join the upside fun, regardless of what happens to bullion in the medium term.
Yesterday’s high-volume day should be noted. Days where volume spikes tend to suggest a minor trend rally or decline is almost finished. Some GDX components (like Barrick) have soared higher while bullion has swooned. That hasn’t happened in a meaningful way since the heady inflationary days of the 1960s and 1970s. The inflation that will be created by launching tax cuts in the late stage of the business cycle is only beginning, and investors need to get positioned in gold stocks now to benefit.
Investors should focus any buying of protective put options more on bullion than gold stocks. Regardless, gold bullion is poised for good second half of the year performance, and gold stocks are poised for a great one!
We’ve all heard the seemingly shocking or outrageous price targets for Gold. So it’s not new.
But this time from a non gold pusher. Someone with credibility in the larger financial world and a track record to boot.
Gundlach’s comment was included in every piece of Gold literature that recently crossed my desk. No doubt, if Gold starts breaking to the upside, Gundlach’s quote will be used by aggressive marketers and publishers. But I digress.
According to ZeroHedge, Gundlach said that based on classic chart reading, there is an “explosive, potential energy” of a huge “head and shoulders bottom” base, signaling a move of $1000/oz.
But there’s one problem.
I like Jeff Gundlach. He’s way smarter and way more successful than me.
But there’s no technical basis for $1000/oz upside in Gold.
The measured upside target from the recent years of consolidation projects to $1700/oz. Upon a break above $1375/oz, the target becomes $1700/oz, with a pit stop likely around $1550/oz.
The next strong technical targets, following $1700 are $1800 and $1900, the all-time high.
The biggest moves (in nominal terms) in most markets occur after breakouts to new all time highs.
As you can see, Gold is one of the best examples of this. Look at how Gold surged after 1971, 1978 and 2009.
Gold Weekly Line Chart
The potential breakout through $1375/oz would be the most significant one since 2005 when Gold took out +20 year resistance to make a new multi-decade high. Sure, the breakouts in 2008 and 2009 were quite significant but Gold’s bull market was already well established.
Circling back to Gundlach’s target, I don’t see anything technically that points to $2,375 being a strong target. The strongest targets are $1700, $1800 and $1900. The most significant upside move would likely be a retest of the all time high. That is roughly $525/oz of upside.
But upside of $1000/oz sounds better and makes for better headlines than $525/oz of upside. In other words, it will get picked up by media outlets. (Think of Jim Rickards $10,000 target which has been given quite a bit of coverage on mainstream outlets).
My guess is Gundlach thinks Gold is going to break to the upside and his $1000/oz upside call is a way for him to get credit for calling the breakout while remaining front and center in the media.
At present, Gold is trying to recover after failing to make a weekly close above $1350/oz for five consecutive weeks. The good news is the gold stocks have held up quite well and so too has Gold priced against foreign currencies. If these conditions persist during weakness in Gold then it suggests Gold would have another chance to breakout sooner rather than later. In anticipation of that breakout, we have been accumulating the juniors with 300% to 500% upside potential over the next 18-24 months. To follow our guidance and learn our favorite juniors, consider learning more about our premium service.
The gold miners’ stocks have mostly been consolidating low this year, exacerbating bearish sentiment. Even with gold grinding higher in a solid uptrend and nearing a major upside breakout, the gold stocks just can’t get any love. But that may be about to change, with gold and its miners’ stocks in the midst of their spring rally. Strong seasonal tailwinds make May one of the best months of the year in gold-stock bulls.
Gold-stock performance is highly seasonal, which certainly sounds odd. The gold miners produce and sell their metal at relatively-constant rates year-round, so the temporal journey through calendar months should be irrelevant. Based on these miners’ revenues, there’s little reason investors should favor them more at certain times of the year than others. Yet history proves that’s exactly what happens in this sector.
Seasonality is the tendency for prices to exhibit recurring patterns at certain times during the calendar year. While seasonality doesn’t drive price action, it quantifies annually-repeating behavior driven by sentiment, technicals, and fundamentals. We humans are creatures of habit and herd, which naturally colors our trading decisions. The calendar year’s passage affects the timing and intensity of buying and selling.
Gold stocks exhibit strong seasonality because their price action mirrors that of their dominant primary driver, gold. Gold’s seasonality generally isn’t driven by supply fluctuations like grown commodities experience, as its mined supply remains fairly steady all year long. Instead gold’s major seasonality is demand-driven, with global investment demand varying dramatically depending on the time within the calendar year.
This gold-demand seasonality is well-known and heavily studied. The seasonal gold year starts in late July as Asian farmers begin reaping their harvests. They plow some of their surplus income into gold. That’s followed by the famous Indian wedding season in autumn, with its heavy gold buying for brides’ dowries. That culture believes festival-season weddings have greater odds of yielding long, successful marriages.
After that comes the Western holiday season, where gold jewelry demand surges for Christmas gifts for wives, girlfriends, daughters, and mothers. Following year-end, Western investment demand balloons after bonuses and tax calculations as investors figure out how much surplus income the prior year generated for investment. Then Chinese New Year gold buying flares up after that heading into February.
These understandable cultural factors drive surges of outsized gold demand between summer and late winter. But interestingly there is one more gold-demand spike in spring. Over the years I’ve seen a variety of theses explaining this April-and-May seasonal gold rally, but nothing definitive like for the rest of the year’s gold seasonality. As silly as it sounds, I suspect spring itself is the reason for this demand surge.
Sentiment exceedingly influences investing, which requires optimism for the future. Investors won’t risk deploying their scarce capital unless they believe it will grow. And the glorious expanding sunshine and warming temperatures of spring naturally breed optimism. The vast majority of the world’s investors are far enough into the northern hemisphere that spring has a major impact. This seasonality extends to stocks too.
Since it’s gold’s own demand-driven seasonality that fuels the gold stocks’ seasonality, that’s logically the best place to start to understand what’s likely coming. Price action is very different between bull and bear years, and gold is absolutely in a young bull market. After being crushed to a 6.1-year secular low in mid-December 2015 on the Fed’s first rate hike of this cycle, gold powered 29.9% higher over the next 6.7 months.
Crossing the +20% threshold in early March 2016 confirmed a new bull market was underway. Gold corrected after that sharp initial upleg, but normal healthy selling was greatly exacerbated following Trump’s surprise election win. Investors fled gold to chase the taxphoria stock-market surge. Gold’s correction cascaded to monstrous proportions, hitting -17.3% in mid-December. But that was shy of a new bear’s -20%.
Gold’s last mighty bull market ran from April 2001 to August 2011, where it soared 638.2% higher! And while gold consolidated high in 2012, that was technically a bull year too since gold just slid 18.8% at worst from its bull-market peak. Gold didn’t enter formal bear-market territory at -20% until April 2013, thanks to the crazy stock-market levitation driven by extreme distortions from the Fed’s QE3 bond monetizations.
So the bull-market years for gold in modern history ran from 2001 to 2012, skipped the intervening bear-market years of 2013 to 2015, and resumed in 2016 to 2017. Thus these are the years most relevant to understanding gold’s typical seasonal performance throughout the calendar year. We’re interested in bull-market seasonality, because gold remains in its young bull today and bear-market action is quite dissimilar.
This chart averages the individually-indexed full-year gold performances in those bull-market years from 2001 to 2012 and 2016 to 2017. 2018 isn’t included yet since it remains a work in progress. This chart distills out gold’s bull-market seasonal tendencies in like percentage terms. Quantifying gold’s bull-market seasonal tendencies requires all relevant years’ price action to be recast to be perfectly comparable.
That’s accomplished by individually indexing each calendar year’s gold price action to its final close of the preceding year, which is recast at 100. Then all gold price action of the following year is calculated off that common indexed baseline, normalizing all years regardless of price levels. So gold trading at an indexed level of 105 simply means it has rallied 5% from the prior year’s close, while 95 shows it’s down 5%.
This methodology renders all bull-market-year gold performances in like percentage terms. That’s critical since gold’s price range has been so vast, from $257 in April 2001 to $1894 in August 2011. Finally each calendar year’s individually-indexed gold prices are averaged together to arrive at this illuminating gold-bull seasonality. Gold has always tended to enjoy strong rallies in the spring months of April and May.
During these modern bull-market years from 2001 to 2012 and 2016 to 2017, gold’s spring rally tended to start in mid-March on average. From that major seasonal low following the winter rally, gold often starts grinding higher before its gains accelerate through April and most of May. This spring rally has generally run its course by late May. Across the 14 bull years in this study, gold averaged nice spring rallies of 3.7%.
This spring rally unfolds rapidly, with an average duration of just 2.2 months. That makes it the smallest and shortest of gold’s three major seasonal rallies, falling way behind the champion 9.5% winter rally that precedes it and strong 6.6% autumn rally that follows the summer doldrums. Nevertheless, it is still well worth trading. 3.7% gains still really make a difference, and naturally about half of years exceed this average.
This year gold’s spring-rally bottoming came on March 20th, when gold closed at $1310 the day before the Fed was universally expected to hike for the 6th time in this cycle. That was March’s 14th trading day this year, right in line with gold’s average seasonal low on March’s 10th trading day. And so far gold has largely followed the spring-rally seasonal pattern since, gradually grinding higher from late March to mid-April.
Climbing the typical 3.7% from that spring low into May’s spring-rally topping would propel gold to $1358. That’s right on the verge of being a major decisive breakout from the horizontal $1350 resistance line that gold-futures speculators watch like hawks. And it isn’t far from new bull-market highs above July 2016’s $1365 bull-to-date peak. As I wrote last week, this spring rally really ups the odds gold is nearing a bull breakout!
And given its performance in April, gold ought to see a bigger May rally than usual this year. On average in these 14 modern bull-market years, gold climbed 1.8% in Aprils then another 1.3% into its late-May spring-rally toppings. But as of the middle of this week, gold was actually down 0.1% month-to-date in April. That’s poor performance by April standards, setting up this May for a strong mean-reversion rally.
Historically this spring-rally April-May span is often self-equalizing. If gold materially underperforms or outperforms its seasonal averages in April, its May performances tend to mean revert and overshoot in the opposite direction. Back in 2009 for example, gold fell 3.4% in April but then blasted 10.0% higher in May! In 2016 gold surged 5.1% in April before dropping 6.1% in May. Weak Aprils often lead to strong Mays.
If gold is bid too aggressively in April, the resulting excitement entices in and exhausts all available near-term buying before the summer doldrums. That certainly hasn’t happened this year. Gold rallied into mid-April, but reversed sharply on a strong short-covering rally in US Dollar Index futures. Thus gold has largely drifted sideways on balance this month. So the usual spring buying likely hasn’t even started yet!
That leaves traders with full capital firepower to flood back in in May, likely as the sharp USDX rally runs out of steam. The delayed spring-rally gold buying this year can all be compressed into May, which really increases the odds of outsized gains. While nothing is guaranteed in seasonals since they merely use multi-year averages to reveal trend tendencies, strong Mays are definitely more likely following weak Aprils.
And as goes gold, so go gold stocks. Gold stocks also exhibit strong seasonality, which is of course the direct result of gold’s own seasonality. Since gold-mining costs are largely fixed when mines are being planned, fluctuations in gold’s price flow directly into amplified moves in gold-mining profits. Higher gold prices drive much-higher earnings for the gold miners, which attract in more investors to bid up stock prices.
The ironclad historical relationship between the price of gold, gold-mining profitability, and therefore the gold-stock price levels is exceedingly important to understand. If you need to get up to speed, I wrote an essay looking at gold-stock price levels relative to gold early last month. Fundamentally gold stocks are leveraged plays on gold. Thus they really outperform in the spring due to gold’s strong seasonal rally.
This next chart applies this same bull-market-seasonality methodology used on gold directly to the gold stocks. It looks at the average annual indexed performance in the flagship HUI NYSE Arca Gold BUGS Index in these same bull-market years of 2001 to 2012 and 2016 to 2017. Because of gold’s dominant influence over gold-mining earnings, gold-stock seasonality naturally mirrors and amplifies gold’s own seasonality.
Gold stocks’ seasonal spring rally is much stronger than gold’s, buttressing that spring-optimism-drives-stock-buying thesis. Between mid-March and early June, the gold stocks have averaged hefty 12.8% rallies in these 14 modern bull-market years. That makes for exceptional 3.5x upside leverage to gold’s 3.7% seasonal spring rally! Interestingly this is gold stocks’ best seasonal leverage to gold’s gains by far.
While the HUI averaged 15.5% surges during gold’s winter rally, that only made for 1.6x upside leverage to gold’s big 9.5% gain. And the HUI’s 10.5% average gain during gold’s autumn rally also only amplified gold’s 6.6% gain by 1.6x. So while the gold-stock spring rally’s 12.8% average gains rank second out of these three seasonal rallies, it offers the most bang for the buck in gold-stock upside compared to gold!
This year the gold stocks’ spring-rally bottoming happened on March 20th, the same day as gold’s. The HUI slumped to 169.2 that day. Since then this leading gold-stock index has recovered 6.9% as of the middle of this week, trouncing gold’s 1.0% spring-rally gains so far. A merely-average spring rally would take the HUI to 190.9 by late May or early June, which is another 5.6% higher from here. That’s worth riding.
But if gold’s seasonal spring rally is compressed into May, and strong buying forces it over $1350 or even better its $1365 bull-to-date high, the gold miners’ stocks have far more near-term upside potential. For the most part gold stocks remain deeply out of favor, forgotten or ignored. But they will explode back on to speculators’ and investors’ radars if major new gold highs attract the financial media’s interest and attention.
Again as I discussed last week, gold’s nearing bull breakout will work wonders for not only psychology but hard gold-mining profits. The gold stocks are radically undervalued today compared to their actual underlying fundamentals. In Q4’17 gold averaged about $1276 per ounce, but the major gold miners of the leading GDX VanEck Vectors Gold Miners ETF reported average all-in sustaining costs of just $858 per ounce!
So they were already collectively earning fat operating profits of $418 per ounce. And these are going to soar in Q1’18, because the average gold price surged 4.1% quarter-on-quarter to $1329. Since mining costs are largely fixed, all-in sustaining costs will likely stay flat from Q4. That means major gold miners’ operating profits are likely to rocket 12.7% QoQ to $471 per ounce! That will delight contrarian investors.
The gold miners will be releasing these latest Q1 results between now and mid-May, right when gold is powering higher in its seasonal spring rally. So the gold stocks are certainly set up for an outsized spring rally this year! The potent combination of absurdly-cheap gold-stock prices, surging earnings forcing their valuations even lower, and higher gold prices attracting financial-media attention should really stoke traders’ interest.
This last chart breaks down gold-stock seasonality into even-more-granular monthly form. Each calendar month between 2001 to 2012 and 2016 to 2017 is individually indexed to 100 as of the previous month’s final close, then all like calendar months’ indexes are averaged together. Slicing up seasonal tendencies this way shows May has averaged the second-strongest monthly gold-stock gains in modern bull-market years.
During these 14 Aprils in modern gold bull-market years, the gold stocks as measured by the HUI saw average gains of 1.6%. But the lion’s share of the spring-rally gains came in May, where average gains more than tripled to 5.0%! For decades if not longer, May has been one of the best and most-important months to be heavily long gold miners’ stocks. Only February proved better seasonally at a +5.4% average.
The key to gold stocks’ spring rally is to get your capital deployed in mid-March, when gold stocks swoon to their spring-rally bottoming. In intra-month terms the initial gains are often fast in late March as gold stocks rebound out of oversold lows. But then the spring rally tends to slow down in April, discouraging impatient and short-sighted traders. The real gains come in May, and next month’s setup is exceptionally bullish.
Of course the standard seasonality caveat applies that these are mere tendencies, not primary drivers of gold or gold stocks. Seasonal tailwinds can be easily drowned out by bearish sentiment, technicals, and fundamentals. Seasonality doesn’t always work, especially when it doesn’t align with the primary drivers of sentiment, technicals, and fundamentals in that order. Thankfully that certainly isn’t the case this year.
The gold miners’ stocks aren’t entering their second-strongest month of the year overbought after a big rally. Quite the contrary, they have really underperformed year-to-date on excessive bearishness. This week the HUI was actually still down 6.0% so far in 2018, far behind gold’s modest 1.6% gain! Since gold-mining profits amplify gold price moves, gold-stock prices tend to leverage gold by 2x to 3x much of the time.
Thus spring rally aside the HUI should already be up 3.1% to 4.7% year-to-date, or trading between 198.3 to 201.4 compared to this week’s anomalously-low 180.8. That’s another 9.6% to 11.3% higher from here even if gold merely stays near $1325. The gold stocks are overdue to mean revert higher no matter what gold does! Gold’s spring rally will simply hasten and enlarge gold stocks’ long-delayed next upleg.
The farther gold rallies in May in one of its strongest spans of the year seasonally, the closer it will get to major breakouts and new highs. The higher gold climbs, the more attention it will get from the financial media, investors, and speculators. As their sentiment turns bullish again, capital will flood back into the beaten-down gold stocks. The gold miners’ coming surging earnings in their Q1 results are icing on the cake.
While investors and speculators alike can certainly play gold stocks’ coming spring rally with the major ETFs like GDX, the best gains by far will be won in individual gold stocks with superior fundamentals. Their upside will trounce the ETFs’, which are burdened by over-diversification and underperforming gold stocks. A carefully-handpicked portfolio of elite gold and silver miners will generate much-greater wealth creation.
At Zeal we’ve literally spent tens of thousands of hours researching individual gold stocks and markets, so we can better decide what to trade and when. As of the end of Q4, this has resulted in 983 stock trades recommended in real-time to our newsletter subscribers since 2001. Fighting the crowd to buy low and sell high is very profitable, as all these trades averaged stellar annualized realized gains of +20.2%!
The key to this success is staying informed and being contrarian. That means buying low before others figure it out, before undervalued gold stocks soar much higher. An easy way to keep abreast is through our acclaimed weekly and monthly newsletters. They draw on my vast experience, knowledge, wisdom, and ongoing research to explain what’s going on in the markets, why, and how to trade them with specific stocks. For only $12 per issue, you can learn to think, trade, and thrive like contrarians. Subscribe today, and get deployed in the great gold and silver stocks in our full trading books!
The bottom line is gold stocks experience a strong spring rally seasonally. This is driven by gold’s own seasonality, where outsized investment demand arises at certain times during the calendar year. Gold usually enjoys a strong spring rally likely driven by the universal optimism this season brings. And since gold drives gold miners’ profitability, their stock prices naturally follow it higher while amplifying its gains.
And gold stocks’ already-strong spring rally is likely to prove exceptional this year. Gold stocks have really lagged gold so far in 2018, despite fat earnings rapidly growing with higher gold prices. Once gold nears breakouts, traders are going to remember the gold miners and be amazed by their dirt-cheap stock prices wildly disconnected from fundamentals. They will flood back into this small sector catapulting it higher.
Adam Hamilton, CPA
April 27, 2018
Copyright 2000 – 2018 Zeal LLC (www.ZealLLC.com)
Heap leaching has become a popular method of extracting gold, writes mining consultant Nicolaas C. Steenkamp and Leon Louw, writer, editor and specialist in African affairs and mining.
Heap leaching is used to extract gold, copper, silver, uranium, and iodine. This method was first employed to extract copper at the Bluebird mine in the US in the early 1960s, and then by several gold mines in the western parts of the US a few years later. Since then, heap leaching has been adopted successfully by many mines across the world.
Heap leaching occurs after the mining and crushing of low-grade ores, usually in an opencast mine. High-grade ores and ores not amenable to cyanide leaching at coarse particle sizes require further processing to recover the gold values. These processing methods can include further grinding, concentration, pressure oxidation, and roasting, which is used to treat these ores to expose the gold particles prior to cyanidation.
The crushed ore undergoes an agglomeration stage, after which the agglomerated ore is deposited onto the heap leach pad. The heaped ore is irrigated with a lixiviant (a liquid medium) to dissolve the metals and generate the leachate. The lixiviant will depend on the target metal being extracted.
The pad is compacted and then lined with a high-density polyethylene membrane, which prevents toxic compounds and elements (such as cyanide and the leachate solution) from entering the groundwater system.
The leachate is collected in a pond or tank, and it is referred to as a pregnant or value-bearing solution. The solution is then processed to recover the metals. In gold operations, recovery is affected through carbon adsorption or the Merrill-Crowe process. The barren solution, together with additional lixiviant, is recycled back to the heap.
Heap leaching can take anything from a couple of months to several years. In the case of gold recovery, heap leaching generally requires 60 to 90 days to leach the ore, compared to the 24 hours required by a conventional agitated leach process. Gold recovery is also usually only 70% compared with 90% recovery in an agitated leach plant. Other metals, such as copper, use solvent extraction and electrowinning to extract the target metal from the solution.
According to Phil Bundo, process engineering director at Senet, mines need large reserves, a large resource, and significant real estate if they want to employ the heap leach method. “To build a big heap and accommodate all the associated equipment, a large space is required; and to fill that space, a mine needs to produce enough ore,” says Bundo. Bundo adds that climatic conditions like rain can negatively affect a heap leach operation, although this would not ordinarily be enough cause to discard heap leaching as a processing method. Resources and reserves play a much bigger role in determining whether heap leaching will be viable.
Heap leaching is not that popular in South Africa because it is more applicable to shallow opencast mining, and South African gold mines are mostly underground operations. The method is, however, being used on a large scale in the copper mines of South America and, according to Bundo, it will be used more and more on the African continent in future.
Weighing up the alternatives
According to Bundo, there are other recovery methods, besides heap leaching, to consider when mining gold. These include gravity concentration, carbon in pulp (CIP), and carbon in leach (CIL). “The methodology selected is a function of the mineralogy of the ore. If the gold is associated with oxides, for example, it can be amenable to heap leaching. The grade also plays a key role. Heap leaching is used for low-grade oxides, while high-grade ore (with or without oxides) is better suited to CIP or CIL methods,” says Bundo.
Bundo explains that while heap leaching is not as costly as CIL or CIP, the recovery achieved is also not as efficient. “CIP and CIL are costlier in terms of initial capital and operational costs, but they provide the benefit of high recovery,” says Bundo. In cases where the oxides are amenable to heap leaching and cannot economically justify the construction of a CIL or CIP plant, then the operations start off with heap leaching to generate sufficient capital to finance the CIP or CIL circuits when mining more refractory ore.
“It is also important to remember that if the gold is associated with sulphides or other minerals, heap leaching cannot be effectively employed as recoveries are generally low. In such cases, it is advisable to install a CIP or CIL system from the beginning,” says Bundo.
The higher capital and operational investment in methods such as CIP and CIL are due to the more aggressive techniques used to recover the gold. A CIP process will, for example, involve crushing, milling, and agitator tanks. Heap leaching requires less aggressive techniques: a chemical solution is simply sprayed on heap ore. As the solution percolates through the heaped ore, it dissolves the gold. The solution is then collected and treated further by adsorption.
The heap leach stack must be porous enough to allow the solution to drip or to drain through the stack. There are potential recovery failures due to the inability to obtain the optimal flow solution. High clay content is achieved by agglomeration prior to stacking the piles.
Further research is underway to both increase the recovery of metals and reduce the risks of the solutions used and generated during the process. Heap leaching has the potential of extending the life of mine or bringing mines under care-and-maintenance back into production by reprocessing the tailing or fine-residue dumps.
Agglomerating the ore
Part of the preparation stage is known as agglomeration, in which an agglomeration drum is used. Although heap leaching is efficient on its own, its efficiency is greatly improved by adding an agglomeration drum. Agglomeration drums are also called ore drums, agglomerators, and heap leaching drums. Agglomeration is based on a rotary drum design that tumbles ore fines, in the presence of the leachate, through its interior to promote uniformity and to mix the leachate and fines. The agglomeration step happens after the ore is crushed, but before it is heaped.
Using an agglomeration drum to agglomerate the ore fines will ensure that the crushed ore particles are more uniform, making it easier for the leaching solution to travel through the channels between the particles to help maximise recovery (increased percolation). In addition, adding the agglomeration drum allows the leaching solution to mix with the ore fines. As the ore fines are agglomerated, the solution is sprayed throughout the drum and mixed thoroughly with the ore fines, which ultimately makes the process more efficient.
“The agglomeration drum is the start of the heap leach stacking process, which ends at the leaching pad,” says Theo Winterbach, mechanical and materials handling manager at Senet. From the agglomeration drum, the material is transferred via an intricate conveyor system to the heap leach pad. “The heap leach pad covers a large area and the product has to reach the entire pad. The system thus requires multiple conveyors to transfer the material to the furthest point of the pad,” says Winterbach. The agglomerate should be transferred as smoothly as possible, as it is important to keep it intact. One benefit of having multiple and mobile equipment is that a company will not have to lay out all the capital in the beginning. Once the team has decided where the pad will be located, they can acquire only the necessary equipment until production starts ramping up. “The added advantage is that the mobile equipment allows for a certain amount of flexibility; therefore, the entire system can be moved to ensure that the conveyors feed the stacker at the end of the chain,” says Winterbach. A typical heap is between eight and 10 metres high. The normal flow of material is from the agglomeration drum to the grasshoppers and then to the linear index conveyor, which delivers it to the stacker machine.
Stacking the heap
The linear index and stacker machine need to move backwards as the stockpile is stacked in preparation for the leaching. At times (depending on the size of the heap leach pad), the entire set of machines has to be fully retracted and repositioned to a new position on the heap leach pad before the process is repeated. When the entire system needs to be adjusted, front-end loaders or other applicable equipment can be used to move the equipment, as most of the equipment, including the stacker, is wheel or track driven. A combination of wheels and tracks is used to minimise the bearing pressure on the pad.
The stacker can slew and move backwards and forwards in a linear fashion. Heap leach pads require special preparation in construction. According to Bundo, a pad should slope by one or two degrees so that the solution can gravitate to the pond, and there should be sufficient aggregates underlying the surface. Moreover, the high-density polyurethane (HDPE) liners that cover the surface are critical to prevent the chemical solution from seeping into the groundwater. Special collection pipes are installed underneath the pad to direct the solution to the relevant ponds.
Pros and cons
For Breton Scott, managing director of Bowline Professional Services, the most important advantage of heap leaching is that it lowers the capital and operating expenses relative to other traditional methods like flotation, agitation, and vat leaching, especially where low-grade ores and tailings are present. It also has a potentially rapid payback period.
“Heap leaching further eliminates some environmental concerns and restraints. The main benefit, in terms of the environmental impact, is that it requires less energy and water,” says Scott. Moreover, the method has uncomplicated design and equipment requirements, and the construction phase is a lot faster than other treatment methods.
Although Scott says that the heap leach method is not seriously affected by climate, he mentions that a lower efficiency has been noted at low temperatures. “High rainfall areas may also dilute the solution, requiring additional monitoring,” he says.
The risks associated with heap leaching are mainly related to environmental concerns, should the pad construction process not be done correctly from the design stage. Potential issues with the regional water balance are highlighted as a risk, along with the possible exposure of the solutions used to the surrounding areas. Heap leaching does, however, have a much lower potential of acid mine drainage. The costs associated with pollution control and closure efforts are one of the main continual expenses in such operations.
“The drilling of water-monitoring boreholes and regular testing of the groundwater by an accredited water-quality laboratory would be required if the heap leach method is used,” says water laboratory analyst, Ben Steyn. “Tests would generally include pH, dissolved solids, and heavy metals.”
“The biggest question a mine needs to ask itself is whether it has an ore body that is amenable to heap leaching. Senet prefers to get involved in a project from the test work phase, which enables us to prove that heap leaching, as a processing method, will work for the project. We not only consider heap leaching, but also all the other options available. It is always a trade-off between the capital investment and recovery,” Bundo concludes.
About Leon Louw:
Leon specializes in African affairs and doing business in Africa, and has been writing about mining in Africa for 8 years. He was born in Johannesburg, South Africa, and has traveled Africa extensively, especially southern Africa. He has a BA degree with a specialization in African studies and an honours degree in Africa Politics. He also have a national diploma in Nature Conservation and an honours degree in Environmental Management. It is is passion to promote business in Africa and I can assist companies that are interested in doing business in African countries.
The thrill of victory and the agony of defeat. Gold investors focused on the Western markets and government debt fear trade tend to feel the same kinds of thrills and agony that professional athletes regularly experience.
Here’s a good example: For a few days, silver soars higher on what appears to be the guaranteed start of a long-term uptrend. Within days or just hours, the gains are suddenly gone, and the price appears to be going much lower with absolute certainty.
Please click here now. Double-click to enlarge this positive-looking gold chart.
Bullion banks around the world arguably have the most effect on gold price discovery and they focus on physical supply versus demand.
Given that India’s gold-focused Akha Teej festival ended April 18, and Chinese jewellery demand is slightly soft (with dealer interest at $1320 – $1300), it’s clear that gold is not quite ready to surge above $1370 and begin a new era of sustained trading above $1400.
Also, some Fed speakers have hinted that the pace of Fed rate hikes could be slower than expected. At first glance, that would seem to be positive for gold, but fear trade price discovery is about how rates affect risk.
In the current environment, modest rate hikes support a “risk-on” theme. For a closer look at what I mean, please click here now. Double-click to enlarge this US dollar versus yen chart.
Bank FOREX traders view the dollar as risk-on and the yen and gold as risk-off, and rightly so. Given the beyond-insane financial state of the government, aggressive rate hikes from the Fed put the government at serious risk of being able to finance itself.In that situation, the dollar falls against the yen and gold.
In the immediate time frame, money managers believe that Powell will hike rates very gradually. That incentivizes money managers to take risk and invest in the dollar, because it will pay a higher rate of interest without putting too much pressure on the government’s ability to make its principal and interest payments on its debt.
Gold peaked in February as Chinese New Year buying peaked. Now it’s made another modest peak as Akha Teej buying peaks, with Western money managers believing that the Fed cares about the US government’s debt problems. These money managers also believe the Fed cares about the stock market.
Under Greenspan, Bernanke, and Yellen, the Fed cared. I don’t believe Powell cares what the ramifications of his actions are for the “spendaholic” government or for the Wall Street vampires that require low rate policy for their stock market buyback programs.
Please click here now. Double-click to enlarge this key bond market chart.
This chart tells me that the Fed is going to become vastly more aggressive with rate hikes and inflation is going much higher. The current price and time zone is the calm before that storm.
I expected Trump to launch tariffs, and he’s done that. Most investors are focused on whether the tariffs are good or bad for growth, rather than on the fact that they are inflationary.
Please click here now. I didn’t predict the sanctions that have been applied to Russia by the US government, although I’m not really surprised.
That’s because most of what all governments do involves the insane use of sticks much more than the sane use of carrots. Regardless, sanctions are here and they are inflationary. I view sanctions as nothing more than aggressive tariffs.
More are coming as governments (especially the US government) seek new sources of revenue to pay their debts as inflation and rates rise.
Please click here now. Double-click to enlarge this GDX chart.
While many fear traders involved with gold stocks are nervous today, I don’t see anything to be concerned about. I suggested GDX would make a short-term peak at about $23.25 as Akha Teej demand peaked with the Fed in between rate hikes.
It’s done that and investors who have insured their “bull era ride” with GDX put options in that $23 area are now looking very good indeed. Some of these options rose 15% just in yesterday’s trading. The bottom line: Insurance works, whether it is home, auto, or price insurance for gold stocks.
Please click here now. I have two short term scenarios for GDX. The first involves the current pullback ending in the $22 area, and the second one shown here has the pullback end at around $21. Put options enthusiasts and those carrying a short position in GDX against their portfolio of individual miners could cover off half the puts at around $22 and the rest near $21.
As with gold and silver bullion, I have no concerns at all about the current price action in gold stocks. Most have staged huge rallies recently and many are above their February highs. A pullback is normal and expected as major Chindian festival demand peaks at a time when the Fed is in between major policy action.
Chindian income growth versus limited mine supply is the main driver of higher gold prices for the long term. There are no “upside breakouts” in that process. It’s ongoing and relentless. The inflationary policies of the debt-plagued US government and the Fed’s increasingly aggressive QT and rate hikes in response to that will generate significant institutional interest in gold stocks as gold trades above $1400.
All the fundamentals are in place to create significant inflation and debt financing problems for the West. They are also in place to create significant income growth in the East for a long period of time. The only thing that astute investors need to build sustained and significant wealth in the coming gold bull era is a very modest amount of patience and rational thought. It’s the greatest time in history to be invested in the precious metals asset class, and getting greater by the day!
Stewart Thomson is a retired Merrill Lynch broker. Stewart writes the Graceland Updates daily between 4am-7am. Stewart Thomson is no longer an investment advisor. The information provided by Stewart and Graceland Updates is for general information purposes only. Before taking any action on any investment, it is imperative that you consult with multiple properly licensed, experienced and qualified investment advisors and get numerous opinions before taking any action. Your minimum risk on any investment in the world is: 100% loss of all your money. You may be taking or preparing to take leveraged positions in investments and not know it, exposing yourself to unlimited risks. This is highly concerning if you are an investor in any derivatives products. There is an approx $700 trillion OTC Derivatives Iceberg with a tiny portion written off officially. The bottom line:
Are You Prepared?
It was an interesting week in the precious metals complex. There appeared to be the start of a short squeeze in Silver (hedge funds were heavily short) but it ceased at an important resistance. Meanwhile, Gold closed the week on a weak note, losing $1340-$1350. The gold stocks, like silver closed the week below technical resistance. The price action in the complex continues to suggest that a breakout in Gold is the key to unleashing strong outperformance from Silver and the gold stocks.
While Silver has very supportive sentiment, it has not broken out from its downtrend yet. The net speculative position was at 1.1% a few weeks ago, an all time low. That won’t spring Silver by itself unless Silver can surpass critical resistance in the mid $18s. And that may not happen until Gold breaks $1360-$1370. Silver has strong support in the low to mid $16s.
Silver & Silver Net Speculative Position
Moving to Gold, the daily chart below shows Gold losing $1340-$1350 after rejection again at $1360. Immediate support for Gold lies at $1325 which if broken would lead to a test of $1300-$1310 and the 200-day moving average.
Gold Daily Candles
We have a few observations to share with respect to the gold stocks. First, GDXJ has pulled back from trendline resistance around $34. Second, breadth indicators for GDX such as the advance decline line (A/D) and the bullish percentage index (BPI) are showing a positive divergence. The BPI has reached a 52-week high while the A/D line is not far from its January peak when GDX nearly hit $25. So while GDX has been relatively weak, its internals are showing more strength.
Silver and the gold stocks have yet to break important resistance as Gold once again was turned back at major resistance. If the US Dollar, which closed at 90.07, rallies up to its 200-day moving average at 92, Gold would likely test $1300-$1310. Should Silver and the gold stocks hold up well in that scenario (which could be suggested by current breadth) then it would imply a good rebound from the sector back to resistance points. Lower prices in the juniors would be a welcome sign and another opportunity to accumulate ahead of a major breakout in the not too distant future. In anticipation of that breakout, we have been accumulating the juniors with 300% to 500% upside potential over the next 18-24 months. To follow our guidance and learn our favorite juniors, consider learning more about our premium service.
Gold remains largely forgotten, off the radars of most investors. But that’s likely to change soon as this leading alternative investment is nearing a major bull breakout. Once gold climbs to decisive new bull-market highs, sentiment will turn and investors’ interest will surge. Their resulting buying will rapidly drive gold higher, attracting in more capital inflows. Gold is only a couple modest up days away from that key breakout.
Universally in all markets, traders’ psychology is completely dependent on price action and levels. When prices are high and rising, speculators and investors alike eagerly buy in. They love chasing winners, so buying begets buying. This creates powerful self-reinforcing virtuous circles, with rising prices helping to entice in ever-more traders. In recent years this dynamic catapulted the market-darling FANG stocks higher.
With capital inflows following performance, investments that aren’t high and rallying naturally see waning popularity. That’s the story of gold over the past couple years or so. Gold’s last new bull-market high came way back in early July 2016, when it hit $1365. That was 21.3 months ago, which may as well be an eternity in terms of sentiment. In most traders’ minds, gold has effectively been dead and buried ever since.
While contrarian investors always follow gold, most mainstream investors don’t. They only get interested when gold is powering up to major new highs. This psychology holds true everywhere in the markets, it’s certainly not unique to gold. A handful of mega-cap tech stocks have soared since Trump’s election win in November 2016, but other mega-cap tech stocks have lagged far behind. Traders always pursue performance.
This first chart looks at gold’s technical price action over the past couple years or so. A mighty new bull market erupted out of deep despair, blasting higher with steep gains. But the gold-investment-driving force behind it soon reversed, so this young bull stalled out. Gold hasn’t been able to best those initial bull highs ever since. So with no new highs to spark excitement, gold has slipped off investors’ radars.
Gold prices are heavily influenced by gold-futures speculators. The extreme leverage inherent in futures trading enables these traders to punch way above their weight in bullying the gold price around. There is nothing these guys fear more than Fed rate hikes, even though history proves that’s absolutely irrational. So heading into the Fed’s first hike of this cycle in December 2015, gold slumped to ugly 6.1-year secular lows.
But such extreme bearishness made no sense, as gold has thrived in past Fed-rate-hike cycles. So once that initial rate hike came and gold didn’t plunge, speculators rushed to buy back in to gold futures after that $1051 low. They were soon joined by investors with their huge pools of capital. They were spooked by the first stock-market corrections in 3.6 years, which boost gold demand to diversify stock-heavy portfolios.
Thus gold soared 29.9% higher in just 6.7 months in essentially the first half of 2016, easily crossing that classic +20% new-bull-market threshold. Gold’s $1365 bull peak in early July 2016 was closely tied to stock-market fortunes, coming the very day before the flagship US S&P 500 stock index achieved its first new record close in 13.7 months. With stock markets off to the races again, gold investment demand waned.
Gold had been very overbought after such a blistering rally, and speculators had record long positions in gold futures which is a contrarian indicator. But gold still consolidated high in the summer of 2016 until it was hit by two anomalous events. First gold-futures stops were run as gold fell below $1300, driving a sharp drop to its 200-day moving average. Gold recovered quickly from that until Trump’s surprise win.
Very few traders expected Trump to stage a colossal underdog upset and win the presidential election in early November 2016. It was an extreme contrarian position, seen as madness. Interestingly as I wrote the very weekend before that voting, a powerful stock-market indicator predicted Trump would indeed win! That soon came to pass, shocking speculators and investors into greatly reevaluating their outlooks.
With Republicans soon to control the presidency and both chambers of Congress, traders’ euphoria flared to eye-searing brilliance. They were captivated by hopes for big tax cuts soon, and rushed to buy stocks with reckless abandon. As the stock markets surged first on Trumphoria and later taxphoria, gold fell deeply out of favor. Investors abandoned it since they felt no need to prudently diversify their soaring portfolios.
Thus a normal healthy gold correction after a strong upleg cascaded into a 17.3% plunge over 5.3 months ending in December 2016. Such sharp losses naturally devastated gold psychology among traders. The bull market was still alive and well technically, as gold didn’t cross that -20% new-bear trigger. But gold was still left for dead as the levitating stock markets sucked in most capital. Traders had largely moved on.
But gold still looked really bullish in mid-December 2016, as I explained within days of that correction low. Investors were radically underinvested in gold after fleeing in the election’s wake. And the truly incredible psychology unleashed by the Republican sweep wasn’t sustainable or repeatable. It’s pretty rare where nearly everyone gets presidential and congressional elections so wrong! So gold was overdue for some buying.
Ever since that post-election anomaly it has indeed powered higher on balance in the solid uptrend you can see in this chart above. Gold has been relentlessly carving a series of higher lows and higher highs, which made for a 20.4% upleg over the next 13.3 months. That’s actually big enough to qualify as a new bull market, but again gold never entered a bear. Such strong price action should’ve improved sentiment.
But it really didn’t. The extreme taxphoria last year made 2017 one of the most-extraordinary years on record for the US stock markets. The S&P 500 ceaselessly levitated to a massive 19.4% gain in the first year of the Trump Administration, accompanied by record-low volatility. With big US stocks powering higher so dramatically and painlessly, who needed gold? It tends to rally when stock markets are selling off.
While contrarians were rightfully impressed with gold’s strong bull-market uptrend since those anomalous post-election lows, mainstream investors didn’t know or care. Everything was rainbows and unicorns for them, despite dangerous bubble valuations in the stock markets. While gold’s 13.2% rally in 2017 would command attention normally, the 35% to 57% gains in the FANG stocks overshadowed it and stole the limelight.
There’s no doubt over a year of gold seeing higher lows and higher highs is very-bullish price action. All students of the markets would recognize this viewing gold charts. But climbing support and resistance lines are lost on the financial media and mainstream investors. Investments only start garnering talk and mindshare when major new highs are hit. Popular psychology is totally dependent on that one technical aspect.
Futures speculators view the horizontal $1350 line as key technical resistance. Gold has tried and failed to break out above it from several to nearly a dozen times since the summer of 2016 depending on how you slice such attempts. These guys need to see a decisive $1350 breakout to really motivate them to buy again. I define decisive as 1%+ beyond an old technical extreme, or about $1364 in gold’s case today.
That’s just a stone’s throw away, very close. Last week gold closed near $1352, and this week it was still up at $1349. All gold needs to see is a couple modest up days of 0.6% to push it back over $1365 for the first time in 21.3 months! That would work wonders for sentiment, rapidly turning it to bullish which would fuel much gold-futures buying. And the speculators currently have lots of room to buy gold futures.
As of the latest Commitments of Traders report before this essay was published, total spec gold-futures longs are only running 25% up into their past year’s trading range. That means 3/4ths of these traders’ likely capital firepower remains available to buy back in. Believe me, if they think gold is going to break out above $1350 resistance they will flood in with a vengeance. These elite traders follow charts by necessity.
Every gold-futures contract controls 100 troy ounces of gold, worth $134,900 this week. Yet these only require traders to keep $3,100 of cash per contract in their accounts. That works out to absurdly-extreme 43.5x maximum leverage! The legal limit in the stock markets has been 2x for decades. Traders running at that crazy limit would lose 100% of their capital risked if gold merely moves 2.3% against their futures bets.
At 20x leverage that risk is still suffocating, with a 5% adverse move necessary to wipe out capital risked. So when gold looks to be breaking out above $1350, these traders will rush to buy to cover shorts and add new longs. They are well aware gold has formed a giant ascending-triangle chart pattern over the past couple years or so. That’s defined as rising lower support compressing a price into horizontal upper resistance.
When ascending triangles resolve, it’s usually with a sharp-to-explosive upside breakout. Once that long-vexing overhead resistance fails, traders rush back in catapulting the price higher. When gold breaks out of such a massive ascending triangle, technically-oriented traders are going to get the heck out of the way if they are short and rush to ride the breakout on the long side. Futures speculators live and breathe technicals.
Their coming buying will fuel a far-more-important breakout. To the financial media and investors, new bull highs are the only thing that will draw their interest. Before July 2016’s $1365 bull-to-date peak, the last time gold closed over $1365 was way back in March 2014. So a $1365+ close right now would be a major new 4.1-year high. You better believe that will catch investors’ attention, getting gold back on radars!
A 1% decisive breakout above $1365 requires $1379 on close. That sounds lofty since it’s been so long since gold challenged $1400, but it is merely 2.2% above this week’s levels! When investors start getting excited about gold again, it takes months or even years to reestablish meaningful portfolio positions. The vastly-larger pools of capital they control overpower and dwarf whatever the futures speculators are doing.
As I explored a couple months ago, investors are radically underinvested in gold today. They will have to shift capital into gold for a long time to come to reverse this major anomaly. New gold bull-market highs all alone will prove a powerful motivator for them. But that will likely be amplified greatly by the ongoing stock-market correction. Stock selloffs ignite big investment demand for counter-moving gold to diversify portfolios.
If either speculators buy gold futures or investors buy gold and its major ETFs led by GLD SPDR Gold Shares in any significant quantities, gold will absolutely see these major breakouts. And there’s actually a good probability of that coming to pass in the next month or so. Gold tends to enjoy a major seasonal rally from late March to late May. That ought to be plenty big to drive gold decisively over $1350 and $1365.
This should really excite contrarian speculators and investors. While the gains in gold will be nice, they will be trounced by the accompanying surge in the gold miners’ stocks. This sector’s leading benchmark is the GDX VanEck Vectors Gold Miners ETF. Its technical price action over this same gold-bull span is shown in this second chart. While gold is nearing new bull highs, the gold stocks are lagging far behind.
With little interest in gold since Trump’s election victory, the gold miners’ stocks have been abandoned and left for dead. They’ve been drifting sideways in a vexing consolidation between $21 to $25 in GDX terms since late 2016. That’s despite their very-strong fundamentals. In their latest-reported quarter of Q4’17, these leading gold miners reported collective all-in sustaining costs averaging just $858 per ounce!
That’s far below prevailing gold prices, showing this industry is earning fat operating profits. In Q4’17 gold averaged about $1276 per ounce. In the latest Q1’18 which the gold miners will soon report on, that surged 4.1% quarter-on-quarter to a $1329 average. That implies profits of $471 per ounce, which is up 12.7% QoQ from Q4’17’s results! The gold miners are thriving which stock prices haven’t recognized yet.
In Q1’18 GDX’s average price of $22.57 was actually 0.8% lower than Q4’17’s $22.76! This highlights how deeply out of favor the gold miners are. But that psychology will reverse dramatically on that coming major gold breakout. Once gold starts hitting new highs again, traders will flock back to gold stocks since their mining profits leverage and amplify gold’s gains. That will drive a parallel big breakout in major gold stocks.
This week GDX was languishing near $23, dead-center in its 15.6-month-old consolidation between $21 support and $25 resistance. It would have to surge to $25.25 for a decisive breakout that would attract in a deluge of new capital. That’s 9.9% higher from this week’s levels, which actually isn’t much at all for this small volatile sector. Once gold stocks start rallying, they tend to move fast making for huge gains.
Since gold’s bull market began in mid-December 2015, GDX has actually seen 55 trading days with 3%+ gains! That’s nearly 1 out of every 10 trading days over that entire 2.3-year span. The gold stocks are truly less than a week of decent rallying away from a decisive breakout of their own. And once they start moving, traders will rush to buy back in to ride their explosive upside. When gold is in favor, this sector soars.
In roughly the same span of this gold bull’s first upleg in the first half of 2016, GDX skyrocketed 151.2% higher in 6.4 months on the parallel 29.9% gold upleg. That made for awesome wealth-multiplying 5.1x upside leverage to gold! While gold stocks are abandoned and forgotten when gold isn’t on traders’ radars, once they get interested again the gold stocks stage massive catch-up rallies. The next one is nearing.
The major gold miners’ early-2016 upleg wasn’t extreme at all considering the fundamentally-absurd prices gold stocks were trading at back then. GDX actually slumped to an all-time low, while the major gold stocks as measured by their HUI index were at a 13.5-year low. They were trading at levels last seen in July 2002 when gold was near $305. So they needed to soar to mean revert out of that crazy anomaly.
Another massive mean reversion higher is certainly needed today. Gold first hit this week’s $1350 levels in mid-October 2010. Since this metal was carving new all-time highs, investors were eager to buy in for the ride. Back then GDX was trading over $57, or 150% higher than today’s levels with these same prevailing gold prices! GDX’s bull-to-date peak in early August 2016 was $31.32, or just 36% higher from here.
So there’s a high chance the gold-stock upleg driven by the coming gold breakout will easily catapult the gold stocks to new bull highs too. During the last secular bull in gold stocks between November 2000 to September 2011, the HUI skyrocketed 1664% higher. There were 11 major uplegs during that span that averaged 81% gains over 7.9 months each! So seeing gold stocks rally 40% or 50% from here is nothing.
The gold stocks are truly a coiled spring today, ready to explode higher soon and trounce everything else. They are deeply out of favor, incredibly undervalued, and one of the only sectors that can rally sharply when general stock markets sell off. If you want to multiply your wealth this year by fighting the crowd to buy low then sell high, this small and forgotten contrarian sector is the place to be. Nothing else rivals it.
While investors and speculators alike can certainly play gold stocks’ coming powerful upleg with the major ETFs like GDX, the best gains by far will be won in individual gold stocks with superior fundamentals. Their upside will far exceed the ETFs, which are burdened by over-diversification and under-performing gold stocks. A carefully-handpicked portfolio of elite gold and silver miners will generate much-greater wealth creation.
At Zeal we’ve literally spent tens of thousands of hours researching individual gold stocks and markets, so we can better decide what to trade and when. As of the end of Q4, this has resulted in 983 stock trades recommended in real-time to our newsletter subscribers since 2001. Fighting the crowd to buy low and sell high is very profitable, as all these trades averaged stellar annualized realized gains of +20.2%!
The key to this success is staying informed and being contrarian. That means buying low before others figure it out, before undervalued gold stocks soar much higher. An easy way to keep abreast is through our acclaimed weekly and monthly newsletters. They draw on my vast experience, knowledge, wisdom, and ongoing research to explain what’s going on in the markets, why, and how to trade them with specific stocks. For only $12 per issue, you can learn to think, trade, and thrive like contrarians. Subscribe today, and get deployed in the great gold and silver stocks in our full trading books!
The bottom line is gold is nearing a major bull breakout above $1365. That will turn psychology bullish and bring traders back in droves. Gold is rallying ever closer to new bull-market highs as evidenced by its massive multi-year ascending-triangle chart pattern now nearing a bullish climax. Today gold is only a couple percent below that decisive breakout, which will finally blast it back onto the radars of investors.
That’s likely coming soon, with gold in the midst of its major spring seasonal rally. Speculators have lots of room to add gold-futures longs, while investors remain radically underinvested. And once gold comes back into favor, the abandoned gold miners’ stocks are going to soar. Their prices are far below where they ought to be based on their fundamentals and prevailing gold levels. Their upside from here is enormous.
MiningFeeds previously wrote about Bonterra Resources (TSX-V: BTR) and its Gladiator Gold Project in Quebec. The company has steadily advanced through an extensive resource development program expand and define its geological resource model for an updated 43-101 Mineral Resource technical report that will likely prove to be significantly larger than its dated 2012 resource estimate.
In 2012, using a 4 g/t Au cut-off grade and comprised of approximately 15,600 meters of drilling, the Gladiator Gold Deposit contained an inferred resource of 905,000 tonnes, grading 9.37 g/t Au for 273,000 ounces of gold. On average, 90% of operating mines have a grade of less than 8 g/t gold. This ranks Gladiator in the top 10% of the world, when discussing the grade nature of the mineralization. The company has invested significantly since 2015 to expand this resource in the Abitibi Gold Belt, known as one of the world’s most prolific gold belts.
Bonterra has continued to drive shareholder value over the past three years by focusing on putting shareholder dollars in the ground and completing over 100,000 meters since 2016, most recently by continuing drilling through an infill/definition winter camp drill program. Bonterra’s share performance has beat Gold, TSX Venture Index, TSX Index and even the GDXJ Index, which tracks all miners:
This work is part of the company’s 70,000-metre drill program planned for 2018 and has consistently intersected gold mineralization in every hole, and is clearly proving up the company’s deposit in Quebec. There will be more results for an updated resource
Dale Ginn, VP Exploration for Bonterra Resources, stated:
“Initial results from the winter drilling campaign continue to highlight the predictability of the mineralized zones and the validity of the geological model. The positive results from the large diameter drilling will contribute to the success of the preliminary metallurgical work at the deposit. Bonterra continues to successfully execute its aggressive resource development program with seven active drills on site, and five drills at work on the Gladiator Gold Deposit.”
The company is clearly improving its confidence in the resource, and highlighting to the market how predictable the zones have become for targeting drilling to intersect gold mineralization. Another important milestone was to demonstrate that the resource they are drilling has the potential to be economic, which they have done with a recent press release that states the mineralization found at Gladiator is 99% recoverable. By industry standards, their rock is as clean as it gets, and indicates the quality of the deposit in regards to extraction of the gold, and how they stand well above their peers in regards to metallurgical extraction.
Peter Ball, the vice president of operations for Bonterra recently gave an interview to outline these results.
The market is slowly realizing the robust nature of the project, and potential economic nature of the rock when highlighting the high grade resource and metallurgical recovery.
Bonterra is likely pushing towards to a significant re-rate upwards to align with other more advanced peers, and thus the current valuation of the share price represents an opportunity for investors.
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Bonterra Resources Inc. (TSX-V: BTR, OTCQX: BONXF, FSE: 9BR1)
Gold and silver mining stocks face increased risks and uncertainty in 2018, not seen by investors and mining management teams for quite some time. Many of the top risks to gold stocks are related to geopolitical and financial, which will only compound the already high operational risks. Many of these top risks to gold stocks can be applied to silver stocks and any commodity stocks as well. What was most interesting, many of these risks are not seen as a concern to the management teams of Newmont Mining or Barrick Gold when going through their 10-Ks, versus the elevated risks the investment community sees in the macro landscape. Is the investment community concerned with many risks or is management thinking many of the risks won’t happen to them? These risks can heighten mining risk because of the elevated geopolitical and financial risks, potentially disrupting supply, and driving up gold prices even further without gold demand increasing.Are these the catalysts that will push up higher gold prices?
HISTORY REPEATS
Over a long-term enough time horizon, the sixteen biggest risk events repeat, but with a slight twist. The risks are the same, but the characters in the play are different. Capital controls, nationalization of assets, labor disputes, increased regulation on assets, and royalty changes. They all have occurred during different time periods, at some point or another. Most are tied to miners generating an incredible amount of profits, and individual countries wanting to get a bigger share of those revenues. It’s hard to move a mine, putting the mine at increased operational and political risk to earn more on those assets.
GEOPOLITICAL RISKS
Geopolitical Escalations Disrupting the Supply-chain
Government Election Uncertainty
Tariffs (on Mine Supplies)
Export Restrictions of Commodities
Supply disruptions from geopolitical are at heightened levels of risk not seen since the 1930’s and 1940’s, because of increased geopolitical risks. All of this political uncertainty increased demand for all private assets (not just gold).There is a shift from public assets to private assets.
Geopolitical risks are always the hardest for management and investors to get a firm grip on. It requires so many “ifs or if that”, to really pinpoint which will do harm to the mine operations. The geopolitical risks can impact other items that impact funding of the operations like capital controls or the mine operations supplies. A simple solution for investors to mitigate geopolitical risk is to see if the miner has its operations across more than one country, to limit any country-specific risk. There are also several general elections in 2018 and 2019 in commodity-specific countries. Mexico is a significant gold and silver mining producer, and it is having elections in 2018. Brazil also has its general election in 2018, its second largest export commodity in dollar value is gold. Brazil also produces more than 90% of the worlds Niobium, third largest producer of iron ore, and sixth largest producer of aluminum [1]. Heightened political matters will only increase throughout 2018 and continue into 2019, adding to already heightened geopolitical issues.
FINANCIAL RISKS
Economic Slowdown
ETF margin requirements reducing liquidity in mining ETF impacting financing
Financial Taxation Changes by Governments
Bail-in Risk to cash balance
Rising Interest Rates
Cash held Government Bonds – Debt Jubilee
The world continues to work through the debt issues, that have not been resolved since 2008 financial crisis. The risks at banks continue to remain elevated, particularly the European banks. We expect there will be a debt jubilee in some form, with shorter duration government bonds being converted into longer-dated bonds. Companies that are holding shorter-term term government paper as “safe” allocation for their cash, will be caught off guard if their government paper is re-adjusted to a longer duration.Corporate bonds are a better alternative. For Canadian and Australian miners they also face the added bail-in risk of deposits. Federal governments have explicitly stated that they will consider bail-in options, issuing depositors a clear warning. However, “This will never happen to us” management teams always say. Well, they have before, and they will again. If governments are already warning you what they will do in the next crash, and you fail to heed their warning. The list of repeat offenders is quite long.
Even Goldman Sachs CEO, Lloyd Blankfein is warning about the sovereign crisis coming next.
“What is kind of a little bit off. A lot of the bank issues in the United States and around the world have been solved. But migrating the problem to the sovereign balance sheets. So the banks look pretty good,but the Fed has $4 trillion of debton its balance sheet. And it’s even more, we are not in a European audience. In Europe they would really know what they meant because all the European banking system is fixed but Europeans are all also buying up all the debt. The budget deficits haven’t contracted, they’ve widened. The banks buy the debt, then walk over to the European Central bank, finance it. Get new money, so they can buy the next round of debt.
So, you have countries with way bigger deficits, as a percentage of GDP than the U.S., that are borrowing money for ten years, at 3.0% or 2.5%. Really? And the banks look ok.
It is the sovereigns that look risky, like Greece. You wonder is the next crisis going to be a sovereign crisis? And if it is, it will just be a continuation. People will look back and say.. what we really did, we didn’t fix the outcome of the financial crisis. We left that open and as a result, its really been a thirty-year workout.”Lloyd Blankfein [Source: CNBC]
THIS COULD NEVER HAPPEN?
LATE IN THE CYCLE COMMODITY ISSUES
Labor price issues
Government Expropriation Risks
Royalty Regime increases on mining assets
Investors, who say that any of the above risks can never happen, fail to learn the lessons of history to see that, yes, these events have happened and they impacted miners at one point or another. They have impacted many miners over the past 30 years. My experience has taught me, that most investors only really look back far enough to the last crash as to what could happen. Every one of these late in the cycles issues (labor price pressures, government expropriation, royalty regime increases) have always all occurred during the last mining boom. We don’t see these late in the cycle commodity risks evident in gold and silver stocks at this time. Look at cobalt and the skyrocketing price increases. This resulted in governments stepping in and raising cobalt taxes. Investors and management should not be surprised that this occurred, but human beings rarely learn from the past lessons.
For the longer cycle-related events, the time period is much longer than the typical business cycle. By taking into account the business cycle and debt cycles in conjunction with the commodity cycle, you can see where the events will take place. One of my leading long-term bearish indicators in any industry is the regulation card because it has historically highlighted the top in the industry. The mining sector is not there yet.
RISK ALWAYS ON OPERATIONS
OPERATIONAL RISKS
Mine start-up
Cyber Espionage on Mines
Regulatory changes on permitting
The risk to miners will always have the operational risks, particularly when the mine is starting up. Even the best construction engineers and site managers do their best to mitigate the mine risks. The financial and geopolitical poses an added layer of risk that could disrupt the supply chain.
MANAGEMENT TEAMS WILL RESPOND ONLY AFTER
History has shown that management teams from all industries will respond only to a situation or negative event after it has happened. “It couldn’t happen to me” or “That happened 30 years ago”. For the investor, it is better to assume that management will respond only after the event has happened. I am always concerned when the majority of new MBA’s choose a hot and trending industry to build a career in because the top is almost always nearby. We don’t see MBA’s flocking to the gold sector at issue at this time, which continues to make an unloved and unwanted, but excellent for the long-term investor.
FAILURE TO LEARN FROM PAST CYCLES
As this new commodity cycle takes fold, new management teams have entered the mining sector. Old management teams have either sold out, been fired or decided to call it quits after a number of mining cycles. Gone are the lessons from past cycles putting out fires, dealing with governments, capital raising, and operating expertise. This is why it is important to seek those management teams that have succeeded in the past and are still around. It will only increase the odds of success.For the new management teams, they have to earn investor’s trust. If investing in them, watch about putting all your money in from the start, because they will slip. That is certain.
OPPORTUNITIES FOR INVESTORS
Risk events can present opportunities for investors on assets because when investors indiscriminately sell stocks, they sell out the good ones. By thinking through risk events now, it allows investors and management CEO’s to better capitalize on opportunities that can present themselves because your weaker and ill-prepared peers won’t. The risks can also reduce overall gold supply and even with the heightened demand due to geopolitical and financial risks. The gold and silver sectors remain under-owned in relation to other sectors. Technology remains over owned particularly given it is at the beginning of incoming regulation.
“By failing to prepare, you are preparing to fail.” ― Benjamin Franklin
TAKE AWAY FOR THE PORTFOLIO MANAGER & GOLD STOCK ANALYST
Warren Buffett said it best, in managing risk in the investments one makes:
“The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs.”
Better to focus on risk control
Country Diversification- Reduce risks in the portfolio by diversifying across multiple countries.
Financial Strength – Balance sheet counts at the end of the day. How management diversifies its cash will be critical reducing bank deposit risk and debt jubilee exposure.
Margin of Safety – The greater the difference between commodity price and the mine’s All-In-Sustaining-Cost (AISC) reduces the chances of going bust should commodity prices fall.
Investors can seek out less financially leveraged companies, and while ensuring the company is growth focused.
Seeking companies with high management ownership with a significant portion of their wealth in the company.
We have outlined the key geopolitical, financial, and operational risks that investors should be aware of and at least think through in their own portfolios and CEO’s in operating their businesses. 2018 is a period of elevated geopolitical and financial markets related risks to gold stocks. This elevated risk may be the catalysts that wake up the investment community and shift from public assets to private assets, benefiting commodities like gold and silver. While risk is always present when investing, there are risks that one can control, and there are risks that one cannot control.
“If you are not worried, you should be. If you are worried, probably less to be worried about” – Paul Farrugia
Paul Farrugia, BCom. Paul is the President & CEO of First Macro Capital. He helps his readers identify mining stocks to hold for the long-term. He provides a checklist to find winning gold and silver mining producer stocks, including battery metals.
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