1. Sales and profits growth for key Asian gold jewelers continues to set the stage for an imminent and massive mining stocks rally.
2. Please click here now.  Double-click to enlarge this fabulous Chow Tai Fook chart.
3. A major breakout to the upside is in play, and where Chinese jewellers go on the price grid, Western miners are likely to follow.
4. Some of the GDX component stocks are beginning to join what I term the “bull era upside fun” even though bullion has yet to prove itself with a three-day close over $1370.
5. Please click here now. Double-click to enlarge this daily gold chart.  Gold is coiled beautifully inside a drifting rectangle formation, and there’s already been one attempt to break out to the upside.
6. Most component stocks of the US stock market indexes look technically horrific.  A move for gold up to the “promised land” of $1450+ is likely to be fueled by both love and fear trade factors.
7. That’s because the next rate hike and quantitative tightening ramp-up is likely to occur against a background of ever-stronger jewelry demand coming from both China and India.
8. Gold cycle expert Erik Hadik notes that many American wars and disasters have occurred around the date of April 19.  It’s unknown if there will be any “blowback” from the latest US military adventurism in Syria, but from a cyclical perspective, it could happen.
9. Please click here now. The Indian gold market has largely recovered from the ludicrous government policy attacks, and demand is strengthening in what appears to be a permanent trend.
10. With both Chinese and Indian demand looking very solid, all gold needs now to move it towards $1450 is a tiny boost of investment demand from Western fear traders.
11. On that note, please click here now.  I don’t think most analysts and media people are listening carefully enough to Bill Dudley and other key players at the Fed.
12. They are starting to talk about what could make the Fed go from quarterly to monthly decision making for rate hikes.  Bill casually mentions that stronger than expected inflation could push the Fed to do five or six rates hikes this year.  That inflation hasn’t happened yet, but the labour market is still tightening and inflationary tariffs from Trump are likely on the horizon.
13. It’s important for investors to understand that most of the US stock market’s gains have been fuelled by corporate stock buyback programs. Those programs were made possible by QE and ultra-low interest rates.  Just two or three more hikes this year could be enough to end those buybacks.
14. That would essentially create a “lights out” moment for stock market investors.  Many of them bought their stocks late in the business cycle. They ignored the cycle because they hoped Trump would somehow recreate the 1950s US economy for them, even though America’s demographics are now almost the exact opposite of what they were in the 1950s.
15. In India, the population is gargantuan and the demographics of that population are similar to that of 1950s America… with the added bonus being that these citizens are obsessed with gold.
16. A recession in India now is essentially defined as 6% real GDP growth and 8% interest rates.  In America, 8% interest rates would probably create minus 10% GDP and send the Dow Jones Industrial Average crashing down to under 1000.  The bottom line: There are 3 billion new sheriffs in town, and they are all living in China and India, eager to buy more gold!
17. Globally, there are literally trillions of dollars invested in government bonds that still have negative interest rates.  A few more hikes and accelerated QT from the Fed could crush investors in these bonds and create a much bigger panic in the stock market than the one that has already occurred this year.
18. Inflationary tariffs from Trump, an end to corporate buybacks, and the tightest labour market in America since the 1970s are poised to end the Fed’s interest rate policy of gradualism.
19. I’m now predicting that within six months the Fed will begin re-evaluating its quarterly hiking policy and will almost certainly replace it with a month by month evaluation policy for 2019. 
20. I’m also predicting the Fed will begin “hawk talk” about a fifty basis point hike then, and that Powell will stay the course on QT.  These events and processes should combine to create a series of major stock and bond market declines in America.
21. The world’s only true safe havens are gold and silver bullion, and they will see their lustre restored.  I’m also predicting that millions of Chinese and Indian gold market gamblers will begin betting on the demise of American markets and government as the Fed tightens ever-more aggressively.  These gamblers will place their main bets by buying vast amounts of gold.
22. Bond market “supremo” and GDX ETF enthusiast Jeff Gundlach has talked about gold being poised for a “thousand-dollar rally”.  I fully expect Chindian gamblers and an imminent hawkish ramp-up in Fed policy to make his predicted rally happen.
23. Please click here now.  Double-click to enlarge.  We can all dream of what a thousand-dollar rally to $2400 would do for GDX, and for its component stocks that most gold bugs own.  For now, investors need to satisfy themselves with the solid staircase-style rally that is in play.
24. Gold is more vulnerable than GDX in the short term, and I’ve been an eager gold stocks buyer in the entire $23 to $18 GDX price area.  I have enough stock and my focus now is call options.  That’s because a three-day close above $1370 for gold now appears imminent.  Holding 70% calls and 30% puts on gold stocks is probably an ideal way for gold market gamblers to get positioned.  I don’t gamble a lot, but I do gamble, and this gamble appears to be a very good one!  The puts can be covered if gold trades at $1320 – $1280 and more calls can be added there.  Whether gold bugs are conservative, moderate, or aggressive, a major opportunity appears to be at hand in the precious metals markets, and it’s time for action!

 

Special Offer For Website Readers: Please send me an Email to freereports4@gracelandupdates.com and I’ll send you my free “Golden Home Runs” report.  I highlight key stocks gold and silver stocks poised to stage “home run” rallies of 100% and more, as gold surges towards $1450!  I also include a special update on Novo Resources, which has started a fresh surge higher!

 Thanks and Cheers,

Stewart Thomson 

Graceland Updates

https://www.gracelandupdates.com

Email:

stewart@gracelandupdates.com

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?

What’s going to be the catalyst for the junior gold stocks to escape this sideways to downward movement? To me, the key to a momentum change is discovery. Although the market on a whole seems to be stuck in neutral, money has been injected into the best junior gold exploration teams, and because of this, I think it’s only a matter of time before we get a stellar drill hole, which will bring eyes and cash back to the sector.

Supply and demand fundamentals control the direction of markets over the long term, and when looking ahead at almost any metal’s supply fundamentals, I think it’s clear that we’re in for a metal supply crunch in the years ahead. Bull markets driven by supply destruction are very strong, mainly because it requires not only the discovery of new deposits, but those discoveries also have to be permitted developed, and that takes time.

It’s my contention that the next bull market in metals will be discovery driven, as the world’s major mining companies look to fill the supply gaps that are developing in most of their reserve and resource inventories.

In my opinion, buying the highest quality companies gives you the best possible odds of being right when the market turns. The company I’m going to share with you today, Northern Empire Resources Corporation, is, in my opinion, one of those high-quality companies, and they’re poised to discover and expand their resources at the Sterling Gold Project in Nevada.

Let’s take a look.

Northern Empire Resources Corp. (NM:TSXV, PSPGF:OTC Pink)

• DTC Eligibility for its common shares listed on the OTC market in the United States

MCAP: $86.4 million (at the time of writing)

Shares: 66,586,700

Fully Diluted: 77,139,302

CASH: $16 million

Management/Insiders: 7.9%

Institutional Ownership: 32.7%

Coeur Mining: 11.6%

Imperial Metals: 3.7%

Northern Empire’s People

Northern Empire is led by President and CEO, Michael Allen, who is a professional geologist by trade and has 20 years of experience in the mining industry. Allen has worked in various senior roles over the course of his career with Redcorp Ventures, Silver Standard Resources and, most recently, West Kirkland Mining. For those who are not familiar, West Kirkland Mining’s gold project is located in Nevada, giving Allen 8 years of jurisdictional experience, and should prove to be an X-Factor when it comes to developing and exploring for gold on Northern Empire’s Sterling Gold Project.

Additionally, Northern Empire has a strong Board of Directors, made up of individuals with extensive experience in the mining industry. The Board is led by Executive Chairman, Douglas Hurst. Hurst, a geologist by trade, has a great track record for developing mining companies into premier takeover candidates. Hurst was a founding executive of both International Royalty Corporation and Newmarket Gold Inc. Both companies were taken over, first International Royalty Corporation by Royal Gold for $700 million, and most recently, Newmarket Gold by Kirkland Lake Gold for $1 billion.

The Board is rounded out by people whose careers share a common characteristic – successful company building. Each member has been involved in at least one development success in their career, and to me, it’s clear that this is the main goal for Northern Empire; to develop their Sterling Gold Project into a premier takeover candidate.

The other Board members are as follows:

• Raymond Threlkeld has more than 32 years of experience within the mining industry. Threlkeld was Chairman of Newmarket Gold which, as previously stated, was purchased by Kirkland Lake Gold. He was also involved with Western Goldfields which was purchased by New Gold in 2009.
• John Robins, a professional geologist by trade with 30 years of mining experience. He was a founder and Chairman of Kaminak Gold, which was purchased by Goldcorp for $520 million in 2016.
• Adrian Fleming, a geologist by trade with over 30 years of experience in the mining industry. Fleming was President and Director of Underworld Resource Inc which was acquired by Kinross in 2010.  Fleming was an early mentor in Michael Allen’s career when they both worked on the Hope Bay Gold Project.
• Jim Paterson with 20 years of experience on the financial side of the mining business, and the founder, CEO and Director of Corsa Capital Ltd.
• Darryl Cardey and Jeff Sundar both have several years of experience within the mining industry and were a part of the successful development and sale of Underworld Resources.

Nevada, United States

Northern Empire’s 100% owned Sterling Gold Project is situated roughly 160 km northwest of Las Vegas, Nevada and encompasses a total of 14,109 acres over 4 contiguous claim blocks.  Nevada is situated in the western United States and has a long history of mining dating back to the 1840s. Although mining began over a 150 years ago, Nevada’s real fame in the gold mining industry didn’t come until the 1960s when ‘Carlin Style’ or sediment-hosted disseminated gold deposits started being mined.

Why did Carlin Style gold deposits take so long to be mined? Simply, nobody saw them. Unlike the outcropping gold bearing epithermal veins that were discovered by early prospectors, Carlin Style gold is very fine grained and not visible to the naked eye.  Since the 1960s, Nevada has produced around 20 million ounces of gold, making it truly a world-class destination for gold mining.

Given this, it comes as no surprise to me that the Fraser Institute issued a mining investment attractiveness score of 85.45, ranking Nevada 3^rd in the world. The Fraser Institute’s score is based on a mixture of criteria, which includes, but is not limited to, the jurisdiction’s legal system, taxation regime, quality of infrastructure, political stability, and arguably most importantly, the jurisdiction’s geological potential. In my opinion, in terms of mining investment, it doesn’t get much better than Nevada.

Sterling Gold Project

The Sterling Gold Project has a Global Resource of 23,811,800 tonnes at 1.29 g/t for 985,000 ounces of gold and can be broken down into two key areas; the Sterling Mine, which is in the southern portion of the property, and the Crown Block, which resides in the north.

Sterling Mine

The Sterling Mine is a past gold producer with the surrounding area having historical ties that extend back to 1906, with the Panama Mine operating until 1940. The region then saw limited exploration until 1980 when the Sterling Mine began production. The Sterling Mine consists of 3 separate open pits and 2 underground mines, which produced 194,996 troy ounces from 853,984 tonnes of ore for an average grade of 7.44 g/t, over its 20 years in operation.

The Sterling Mine’s deposit mineralization is Carlin Style and is amenable to heap leaching. In the past, the open pit and underground mined ore was placed onto heap leach pads and, without crushing, gold recoveries averaged 88%.

The Sterling Mine does have an existing pit constrained inferred resource of 3,081,000 tonnes at 2.57 g/t for 254,000 ounces of gold. The ‘pit constrained inferred resource’ refers to the estimated economic surface resources found within a 45-degree constant slope pit shell.

Additionally, there’s a non-pit constrained inferred resource of 350,000 tonnes at 3.38 g/t (1.7 g/t cut-off) for a total of 38,000 ounces of gold. The non-pit inferred resource represents mineralization that could potentially be of economic interest, if selective underground mining of the mineralized zone, below the projected pit shell limits, was carried out.

NOTE: The Sterling Mine pit constrained inferred resource grade of 2.57 g/t is fantastic, especially if you consider that it’s amenable to heap leaching for the extraction of its gold. This is a great example of the upside potential at the Sterling Gold Project, as Carlin Style gold mineralization that’s mined in an open pit and has good grades can be very profitable!

Gold Production at the Sterling Mine

A major advantage to the past producing Sterling Mine is that its infrastructure is in place and ready for operation. In the photo below, you can see the layout of the processing areas: The active leach pad, the permitted leach pad, processing ponds and processing facility.

Additionally, from the satellite photo below, you can see the layout of the permitted open pits, Burro, Sterling and Ambrose. In the top right of the image is the processing area, as shown above. Finally, the 144 Zone portal, in the bottom right, gives access to the historical underground workings.

With the necessary permits in hand, Northern Empire has greater control over their production start date, which is an enviable position for most gold exploration and development companies. Moreover, as an investor, the fact that Northern Empire has the necessary production permits in hand is a huge plus, because it reduces the overall risk associated with the Project.

Sterling Mine Exploration Potential

While having the production permits and an inferred resource are the basis for what looks to be a promising future for Northern Empire, the most exciting part of their story, in my opinion, is the exploration potential of the property.

Exploration and infill drilling on the Sterling Mine will focus on the 2017 high grade drill holes that sit on the pit shell edge, as can be seen in the satellite photo below.

As well, in the computer-generated Sterling Mine model image, you can gain a better perspective on the 3 dimensional open pit shell and the location and orientation of the Burro Fault, which is thought to be one of the most important structures for the deposit. Other minor faults in the area trend north to north-northeast and are important in terms of the future exploration of the Sterling Mine area. As the Technical Report states,

“they are significant because they are intimately associated with mineralization, and were almost certainly conduits for hydrothermal fluids.” ~ Technical Report – pg.7-8

PUSH: Watch for drill results from the Sterling Mine. Further proof of continuity in the existing inferred resource and successful step out drilling will be major gains for the company.

The Crown of Northern Empire

The Sterling Gold Project’s north end is occupied by the Crown Block, which is further broken down into 4 main targets: Daisy Deposit, Secret Pass Deposit, SNA Deposit and Shear Zone. The target mineralization which is found in the Crown Block is concentrated around the same detachment fault structure that hosted Barrick Gold’s past producing, roughly 2.3 million ounce Bullfrog gold mine.

The gold within the Daisy and SNA Deposits are carbonate-hosted and classified as Carlin-Style, while the Secret Pass is volcanic-hosted and classified as epithermal.

 

Daisy

The Crown Block’s Daisy Deposit is a past producing open pit gold mine (Glamis/Rayrock), having produced 104,000 ounces of gold between 1997 and 2001. As listed in the Sterling Gold Project’s inferred resource table, Daisy has an inferred resource of 5,362,000 tonnes at 1.34 g/t for 222,000 ounces of gold.

High grade surface samples, up to 15 g/t gold, and 2017 drilling suggest there is potential for expansion of the Daisy Deposit resource. Examining the satellite photo below, you can see the highlighted 2017 drill intercepts – holes D17-002, D17-001 and the 2018 drill intercept from hole D18-003C – and the location of high-grade surface samples which are represented by the purple squares. PUSH: 10 holes are planned for Daisy Deposit in the 2018 drill program. As mentioned above, one stellar drill intercept has already been released, assaying 1.41 g/t over 123.93m, a great result. Watch for more drill results from Daisy in the weeks ahead, as Northern Empire looks to expand the Daisy Resource down dip.

Daisy Deposit Cross-Section – Open Down Dip to the north

Secret Pass

The Secret Pass deposit, like Mother Lode, is volcanic-hosted with disseminated gold mineralization and has a current inferred resource of 11,143,000 tonnes at 0.93 g/t for 335,000 ounces of gold. 2017 drilling on the Secret Pass Deposit was highlighted by SP17-001: 82m @1.26 g/t Au and SP17-002: 30.48m @0.55 g/t Au. Additionally released on March 20^th 2018 – SP18-003C: 70.0m @1.79 g/t.

All three drill holes can be found on the satellite photo of Secret Pass below, including the location of pending and proposed drill holes for 2018. With the purchase of additional claims south of the deposit, Northern Empire will be able to pursue hole D-164, which returned a huge intercept of 56.39m at 3.13 g/t.

PUSH: 15 holes are planned for the Secret Pass deposit in 2018. Watch for drill results in the weeks ahead, as Northern Empire looks to expand the resource both laterally and at depth.

SNA Deposit

The SNA Deposit is a past producing mine and was formerly referred to as Sunday Night Anomaly from 1991 to 1995. The SNA Deposit hosts Carlin Style gold mineralization and has an inferred resource of 3,875,000 tonnes at 1.03 g/t for 126,000 ounces of gold.

Interestingly, the SNA Deposit lies in close proximity to Corvus Gold’s Claim boundary, and more importantly, their Mother Lode open pit. In the satellite image below, you can see Corvus Gold’s claim boundary outlined in orange, along with Northern Empire’s SNA Deposit toward the bottom right.

In Corvus Gold’s 2017 drill program, they hit 51.8m of 1.86 g/t gold which included an interval of 19.8m of 3.43 g/t. The reason I mention this is because the hole was located roughly 8 meters from the claim boundary with Northern Empire. As you can see in the satellite image, Northern Empire’s property completely surrounds Corvus Gold’s Mother Lode deposit and needless to say, makes this is a very intriguing target area with a lot of potential for Northern Empire!

PUSH: +16 holes are planned for the SNA Deposit in the 2018 drill program. Watch for drill results as Northern Empire attempts to expand upon the SNA deposit resource.

Concluding Remarks

As I mentioned in my introduction, I believe that placing yourself in quality companies is the way to succeed in a business where the odds of success are typically stacked against you. That said, quality doesn’t mean they’re free of risk.

In terms of Northern Empire, I believe the biggest risk is an unsuccessful drill program in 2018, which would result in minimal to no improvement in their existing inferred resource. In this worst case scenario, I don’t see much upside from today’s current market cap.

While there’s always a chance of coming up empty handed when exploring, I think there’s a far better chance that their resource will increase, and with permits in-hand, Northern Empire’s Sterling Mine is ready to go.

Recapping Northern Empire’s strengths:

• Good management team with extensive experience exploring and developing gold projects in Nevada.
• The Fraser Institute ranks Nevada 3^rd 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.
• Great exploration potential within the Sterling Mine and the Crown Block’s 4 main target areas: Daisy Deposit, Secret Pass Deposit, SNA Deposit and Shear Zone.  15,000m of drilling planned for 2018.
• Existing inferred global resource of 985,000 ounces of gold at 1.29 g/t.
• CASH – $16 million!!

I am invested in Northern Empire and am looking forward to news flow over the coming months.

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.

 

SPDR Gold Shares is an ETF that tracks the performance of gold in the financial markets. It is denominated by the ticker GLD and is one of the most widely watched gold indicators. The gold price is influenced by a unique set of factors. These include interest rates, the strength of the USD, supply and demand, etc. For casual traders, it’s important to know that gold is the go-to investment when equities markets sour.

When geopolitical uncertainty rocks the financial markets, investors typically flock to gold as a safe-haven asset. It tends to perform strongly when stock prices are volatile, and when the USD is weak. A strong dollar is a disincentive to gold investors, since gold is a dollar-denominated asset that appreciates when the precious metal is more affordable to foreign buyers.

GLD provides one access point to investments in gold (there are many options available), and it is priced at a fraction of the gold price. For example, GLD was trading around $127.62 per share (April 16, 2018), above both the 50-day moving average of $126.15, and the 200-day moving average of $123.13. This clearly illustrates that gold is bullish. Corroborating evidence is available from the anaemic performance of US stock markets.

• The Dow Jones has a year to date return of -0.43%
• The S&P 500 Index has a year to date return of 0.22%
• The NASDAQ Composite Index has a year to date return of 3.72%

Poor Stock Market Performance Feeds Gold Price

The 2018 performance of stock markets is precisely the cannon fodder that commodities like gold need to appreciate. When traders and investors are pulling their money from the stock market, they are either investing it in fixed-interest-bearing securities or shifting resources to gold stocks and physical gold.

The current price of gold (April 16, 2018) is $1,349.10 per ounce on the Comex. Gold was priced at around $1,316.10 on 2 January 2018, and it has consistently appreciated ever since. In percentage terms, gold is up 2.5% for the year to date. This represents the opposite of what we are seeing in equities markets, and it holds true from a theoretical perspective.

Commodities trading options include a wide range of choices These include physical assets, futures contracts, options, exchange traded funds, CFDs, stocks, and even binary options. Gold ranks as one of the most commonly traded commodities and has been a store of value for millennia. Its price is determined by supply & demand considerations, and it is heavily influenced by monetary policy (interest rate hikes), political considerations, and the strength of the USD. A useful barometer of USD strength or weakness is the US dollar index, DXY. This indicator tracks the performance of the greenback against a trade-weighted basket of currencies including the SEK, CAD, GBP, EUR, CHF, and JPY.

Trump and Oil Boosted Gold Prices in 2017

US stock markets have floundered in 2018, and gold is in the black. If we extrapolate back to 2017, gold traded at around $1,151 per ounce in January 2017 and by the end of the year it closed at over $1,309 per ounce. That represents a 13.8% appreciation in the gold price. Equities markets also defied gravity in 2017, with double digit gains for major bourses. It appears that confidence in gold was boosted by uncertainty with oil prices and additional uncertainty related to Trump’s election as president. We have seen a tempering of these concerns as time progressed, and gold has stabilized while equities markets have retreated.

The mega-cap stocks that dominate the US markets have enjoyed an amazing bull run. But February’s first correction in years proved things are changing. With that unnatural low-volatility melt-up behind us, it’s more important than ever to keep leading stocks’ underlying fundamentals in focus.  They help investors understand which major American companies are the best buys and when to deploy capital in them.

For some years now, I’ve been doing deep dives into the quarterly financial and operational results in the small contrarian sector of gold and silver miners.  While hard and tedious work, this exercise has proven incredibly valuable.  With each passing quarter my knowledge of individual companies grows, helping to ferret out miners with superior fundamentals and the greatest upside potential.  Traders love the resulting essays.

This successful fundamental-research methodology can be applied to other sectors, and even the stock markets as a whole.  And no “sector” is more important to the overall stock markets than the biggest and best American companies. So I’m starting this new essay series to analyze their quarterly results on an ongoing basis.  Today’s initial foray starts with their latest results from Q4’17, a critical baseline quarter.

With the new Q1’18 earnings season getting underway, Q4’17’s data is getting stale. Optimally this research would’ve been done 6 weeks or so ago. But it wasn’t until long-lost stock-market volatility finally roared back in February and March that it became abundantly clear big changes are afoot.  After that it took time to build our necessary underlying spreadsheets and dive into the big US stocks’ Q4 results.

Going forward it will be easier to analyze and publish new quarters’ results much sooner after those quarters end.  But getting Q4’17 baseline data was absolutely essential. That may very well prove the final quarter in one of the most-extraordinary bull markets on record.  The flagship S&P 500 stock index had powered 324.6% higher over 8.9 years, making for the third-largest and second-longest US bull on record!

That was also just a hair under the second-largest ranking.  2017 was truly the best of times for the stock markets too.  Record-low volatility along with extreme euphoria in anticipation of Republicans’ coming massive corporate tax cuts drove the S&P 500 (SPX) 19.4% higher with nary even a trivial 4%+ pullback.  Nearly everyone was convinced this idyllic rally could continue indefinitely, traders were utterly enchanted.

A key real-world side effect of last year’s epic stock-market exuberance was sharply-higher spending by households and corporations alike.  Late in major bull markets when everyone is complacent and greedy the wealth effect is very strong.  People extrapolate their fat stock gains out into infinity, and ramp their spending accordingly.  That drives strong growth in corporate sales and profits, greatly reinforcing the elation.

As a contrarian student of the markets and trader, I wasn’t drinking that Kool-Aid.  On 2017’s final trading day I published an essay on the hyper-risky stock markets, explaining why a new bear was long overdue.  The valuations of the elite SPX stocks were deep into formal bubble territory, running at average trailing-twelve-month price-to-earnings ratios of 30.7x at the time.  That would further balloon to 31.8x by late January!

More importantly, the world’s major central banks were pulling away the punch bowls that had directly fueled that vast orgy of stock-market excess.  The Fed was starting to ramp its first-ever quantitative-tightening campaign to begin unwinding long years and trillions of dollars of quantitative-easing money printing.  And the European Central Bank was drastically tapering its own QE bond-buying campaign.

This unprecedented tightening following radically-unprecedented QE would literally strangle the stock markets, as I explained in late October.  The extreme euphoria drowned out those warnings then, but traders are more receptive now after the SPX’s first 10%+ correction in 2.0 years in early February.  All this suggests high odds that Q4’17 will prove the final pre-peaking quarter of that central-bank-goosed bull.

Thus I couldn’t wait for Q1’18 data to start this new essay series, I had to get Q4’17’s baseline data no matter what.  The world’s most-important stock index by far is the US S&P 500, which weights America’s biggest and best 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 $252.4b!

That’s a staggering sum, reflecting the universal popularity of index investing late in major bull markets.  Two of the next three largest ETFs also track the S&P 500, the IVV iShares Core S&P 500 ETF at $140.4b and the VOO Vanguard S&P 500 ETF at $87.1b.  These dwarf the entire rest of the ETF sector. For comparison, the dominant and popular GLD SPDR Gold Shares gold ETF has net assets of just $37.3b.

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! But for now we’re starting with the top-34 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 Q4’17 on December 29th, these 34 companies accounted for a staggering 41.8% of the total weighting in SPY and the SPX itself!  They are the biggest and best American companies that are largely-if-not-totally driving US stock-market fortunes.  Whether the SPX rolls over into a new bear market or not will depend on how these elite stocks fare. They are the widely-held mega-cap stocks everyone loves.

Every quarter I’m going to wade through a ton of core fundamental data on each top-34 SPX company and dump it into a spreadsheet for analysis.  The highlights make it into these tables. They start with each company’s symbol, weighting in the SPX and SPY, and market cap as of the final trading day of Q4’17.  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 their share-price appreciation also reflects shrinking shares outstanding.  Looking at market-cap changes instead of just underlying share-price changes effectively normalizes stock buybacks.  It’s a purer view of company value.

The next data set is quarterly sales along with their YoY changes.  Revenues are one of the best indicators of businesses’ health. While profits can be manipulated quarter-to-quarter by playing with accounting estimates, sales are mostly set in stone.  Ultimately sales growth is necessary for companies to expand, as earnings boosts driven by cost-cutting are inherently limited. Sales declines are bear-market harbingers.

Operating cash flows are also very important, showing how much capital companies’ businesses are actually generating.  Unfortunately most of these elite big US stocks didn’t break out Q4’17 OCF, instead lumping it in with full-year financial statements.  While that can still be calculated by subtracting the Q1 to Q3 OCFs from the annual one, that’s tedious and time-consuming. Not reporting full Q4 results disrespects investors.

Next are the real quarterly earnings that must be reported to the Securities and Exchange Commission under Generally Accepted Accounting Principles.  Late in bull markets, companies tend to use fake pro-forma earnings to downplay GAAP results. These are derided as EBS earnings, Everything but the Bad Stuff!  Companies arbitrarily ignore certain expenses to artificially inflate their profits, which is very misleading.

While we’re also collecting earnings-per-share data, it’s more important to consider total profits.  Stock buybacks are executed to drive EPS higher, because the shares-outstanding denominator shrinks as shares are repurchased.  Raw profits are a cleaner measure, normalizing out stock buybacks’ impacts. When the inevitable bear market arrives, companies will attempt to mask falling earnings by emphasizing EPS.

Finally the trailing-twelve-month price-to-earnings ratio is noted.  TTM P/Es look at the last four reported quarters of actual GAAP results compared to prevailing stock prices. They are the gold-standard metric for valuations. Wall Street often intentionally obscures these hard P/Es by using forward P/Es instead, which are literally mere guesses about future profits!  They have usually proven far too optimistic in the past.

As expected given last year’s spending-driving stock-market euphoria, the top SPY/SPX components’ Q4’17 results were generally quite impressive.  Their sales grew strongly, but were still far-outpaced by their stock-price gains driving valuations sharply higher. Earnings were heavily distorted due to the impact of Republicans’ big corporate tax cuts passing that quarter, which was fascinating to analyze.

Not surprisingly the S&P 500’s top-constituent list was little changed in 2017.  Most of these elite American companies only grew larger. Three stocks did claw their way into the top 34 since Q4’16, their symbols are highlighted in blue above.  Boeing is a high-priced Dow 30 stock, which has skyrocketed on better business prospects driving the Dow higher. Its market cap soared an astounding 85% higher last year!

Any company with YoY market-cap gains over 19% beat the overall SPX last year, while any company below that lagged it.  These top-34 US stocks saw average market-cap gains of 29%, well ahead of that average. One of the telltale characteristics of bull-market tops is gains concentrate in fewer and fewer stocks.  The well-known shrinking-business problems of GE and IBM forced them just out of the top 34 last year.

With 500 stocks in the S&P 500, it’s still amazing and damning that 41.8% of this entire index’s market cap is concentrated in just 34 big US stocks!  At the end of Q4’17, investors had $10.2t of wealth tied up in these elite companies. That extreme concentration is a double-edged sword, because bear markets often inflict downside damage on individual stocks in proportion to their upsides seen in the preceding bulls.

Ominously the universally-adored and -owned mega-cap tech stocks were dominating the SPX at the end of 2017.  Apple, Alphabet, Microsoft, Amazon, and Facebook all had staggering market caps in excess of a half-trillion dollars each.  These 1% of SPX stocks weighed in at a colossal 13.8% of index weight! Their average TTM P/E was 61.7x, more than double the 28x classical bubble threshold.  That’s super risky!

One reason investors have been willing to pay such high premiums for the tech market darlings is their astounding sales growth.  While the top-34 SPX companies together averaged still-impressive 11% sales growth from Q4’16 to Q4’17, the top 5 tech stocks trounced that at 28%!  The rest of these top-34 SPY components reporting Q4 sales averaged about a quarter of that at 7.7%. So these tech stocks look invincible.

But such fast sales growth is unsustainable given their massive sizes, and likely to reverse with the stock markets.  Everyone loves Apple’s products, but they are expensive. iPhones and iPads last years with no need to upgrade, and major upgrades are few and far between anyway with those technologies maturing.  So the upgrade cycles Apple desperately needs to drive its massive sales are lengthening considerably.

As the stock markets’ wealth effect reverses to negative in the next bear market, odds are Americans will keep their iPhones longer before buying new ones.  These are sizable expenses relative to median US household incomes. Amazon might be able to better weather a stock-market storm, depending on how much of the stuff Americans order from it is necessary versus discretionary.  Its bear sales trends will be interesting.

Alphabet, Microsoft, and Facebook rely heavily on business spending.  The coming huge tax cuts made 2017 a banner year for business confidence, leading to giant leaps in spending on online advertising as well as back-office data services.  When the next recession comes accompanying the stock bear, much of that euphoric business spending will wither and reverse. So mega-cap-tech sales growth ahead isn’t so rosy.

I was very dismayed to find only 13 of these biggest-and-best American companies bothered reporting their Q4 operating cash flows to their investors.  These companies have effectively infinite accounting resources, yet their Q4 breakouts from full-year results were terrible. Even the gold miners with their wildly-varying accounting and home countries did way better.  So there’s not enough Q4 OCFs to bother analyzing.

Thankfully that won’t be the case in Q1s to Q3s, where every one of these elite stocks will dutifully report their quarterly operating cash flows.  In the gold-mining space, sometimes companies choosing to obscure their OCFs want to hide poor performance. I don’t think that’s the case in these top SPX/SPY companies given their strong sales growth.  But I’m shocked they don’t consider shareholders worthy of this key data.

The biggest surprises for me in this first foray into big US stocks’ quarterly results came on the earnings front.  As expected given all the spending-inducing stock euphoria last year, overall profits of these top-34 SPY components grew to $112.2b in Q4.  That made for average YoY gains of 137%, certainly sounding phenomenal. But that was just one quarter, not the entire year. So valuations didn’t decline on that.

The dominant reason the stock markets soared in 2017 was the coming massive corporate tax cuts.  All year long there was great anticipation of them becoming law.  The actual Tax Cuts and Jobs Act of 2017 bill was introduced in early November, passed the House in mid-November, passed the Senate in early December, and then was passed again in its reconciled version in both Congress chambers in mid-December.

Trump signed it into law and made it official on December 22nd, 2017.  This whole process surrounding the actual bill began and ended in Q4. Its flagship provision was slashing the US corporate tax rate from 35% to 21%.  This was a huge cut despite many offsetting business deductions and credits also being eliminated. It was probably the biggest change in US corporate taxation in history, a huge shift to adjust to.

For large publicly-traded companies, the SEC requires formal 10-K annual reports after fiscal year-ends to be filed by 60 days after quarter-ends.  So American companies only had about 9 weeks to analyze the impact of the TCJA on their businesses before reporting Q4’17. Fully 33 of these top 34 companies in the SPX reported TCJA adjustments to their Q4’17 profits.  Apple was the only company not breaking it out.

These adjustments’ profits impacts had an enormous range, from a colossal $29.1b boost to Berkshire Hathaway’s Q4 profits to a gargantuan $22.0b hit on Citigroup’s!  So nearly all these Q4 GAAP profits are somewhat-to-heavily distorted by one-time impacts of those corporate tax cuts. Most of the really-big profits and really-big losses above are the result of these TCJA adjustments and not business operations.

In reading through all these 10-Ks and 10-Qs, there were generally two major tax-cut drivers impacting profits.  The first was deferred tax assets and liabilities. These are very complicated, but basically US companies either overpaid or underpaid their taxes in individual years due to various accounting rules.  The differences become DTAs or DTLs, which reduce or increase future years’ tax burdens for these companies.

But when the corporate tax rate was drastically slashed from 35% to 21%, all of a sudden both DTAs and DTLs were worth much less going forward.  DTAs shielded less future profits at lower tax rates, while DTLs would have lower future tax payments. Different industries and businesses had wildly-different deferred taxes on their books.  The second provision driving the adjustments was a one-time repatriation tax.

Because the US corporate tax rate had been so obnoxiously high relative to the rest of the world for so long, major companies played accounting games recognizing earnings in other countries.  This stacked up to trillions of dollars held overseas. The TCJA imposed a one-time repatriation tax assuming that this cash was being sent back to the US whether that was true or not, which was a big cost for some companies.

So these Q4’17 profits numbers are very distorted by these one-time TCJA adjustments flushed through income statements.  I gathered all these with the rest of the data, and expected a big overall impact on their collective profits. The absolute value of all of them together for these top-34 US stocks was a truly-staggering $209.2b in Q4’17!  That dwarfed the actual reported GAAP profits running $112.2b that quarter.

Thus I watched the running total with great interest as I waded through the quarterlies.  I expected to see corporate profits greatly overstated by the TCJA adjustments. But much to my surprise, the net of all of these positive and negative profits impacts was merely +$2.7b.  That’s just 2.4% of the total earnings of these top-34 big US stocks, essentially a wash.  Will the corporate tax cuts be less valuable than expected?

While the old statutory corporate rate was 35%, many companies are using schemes and loopholes to pay far less.  Many of those were closed to get to 21%. If the positive impact of lower corporate taxes is smaller going forward than Wall Street joyously expects, it will have a big adverse psychological impact.  If profits don’t balloon dramatically as forecast, valuations are going to get even more dangerously extreme.

While individual top SPX companies’ profits won’t be comparable with those big TCJA adjustments, they will be collectively with the overall flat impact.  If the $112.2b of Q4’17 GAAP profits earned by these top 34 US companies is annualized, it implies $448.9b of earnings on a $10.2t collective market cap.  That equates to a 22.7x overall P/E for these big US stocks at the end of one of the best corporate-profits years ever.

That’s not in bubble territory, but still very expensive after such a big and long bull.  But not aggregated these top stocks look way more overvalued.  Their average TTM P/Es, which didn’t yet include Q4’17 earnings at the end of December, ran way up at 30.6x. That’s still above that 28x bubble threshold. But Amazon is an insane outlier at 190.2x earnings. Ex-Amazon, that top-SPY-stocks average drops to 25.8x.

That’s still frighteningly high.  The whole purpose of bear markets following long bull markets is to drag stock prices down and sideways long enough for earnings to catch up with lofty stock prices.  Bears don’t end until overall stock-market P/E ratios collapse back down to 7x to 10x earnings! That implies the US stock markets face getting at least cut in half, which is typical in major bear markets.  That’s serious downside.

Ominously most of this past year’s incredible stock-price appreciation in these elite companies wasn’t driven by earnings growth.  The average jump in their market capitalizations from the end of Q4’16 to the end of Q4’17 was 29%. In this same span their TTM P/E ratios climbed an average of 25%.  Thus these top SPY companies’ earnings barely grew during all of last year despite all the record-high-stocks euphoria!

The hard data proves that’s true.  In Q4’16, these same 34 big US stocks collectively earned $110.4b.  That only rose 1.7% YoY to $112.2b in Q4’17. Yet their total market caps still blasted 26.9% higher!  This proves one of the greatest stock-market years on record didn’t drive any meaningful earnings growth in Q4, which tends to be the best quarter of the year on holiday spending.  Fundamentals didn’t improve.

Last year’s extreme stock-market melt-up to dazzling new all-time highs was purely a sentiment thing, not at all fueled by GAAP earnings growth.  2017’s big gains were built on sand. Psychology is a fleeting capricious thing that will absolutely mean revert back to neutral and overshoot to bearish.  And when that happens, the profits won’t be there to keep these elite market-darling stocks from getting mauled by the bear.

Despite the recent mild correction, these stock markets remain exceedingly overvalued and dangerous.  The big US stocks’ Q4’17 fundamentals prove corporate earnings remain far too low to justify such high 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!

Absolutely essential in bear markets is cultivating excellent contrarian intelligence sources.  That’s our specialty at Zeal.  After decades studying the markets and trading, we really walk the contrarian walk.  We buy low when few others will, so we can later sell high when few others can. While Wall Street will deny the coming stock-market bear all the way down, we will help you both understand it and prosper during it.

We’ve long published acclaimed weekly and monthly newsletters for speculators and investors.  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 Q4, all 983 stock trades recommended in real-time to our newsletter subscribers since 2001 averaged stellar annualized realized gains of +20.2%! For only $12 per issue, you can learn to think, trade, and thrive like contrarians.  Subscribe today!

The bottom line is the big US stocks’ latest quarterly results are concerning.  Despite a perfect year for the stock markets, and boundless optimism fueled by hopes for big tax cuts soon, corporate profits were largely flat in Q4.  If the biggest and best American companies can’t grow earnings substantially even in that ideal environment, how will they fare when these stock markets inevitably roll over into a long-overdue bear?

And the initial massive-corporate-tax-cut impact on corporate profits was effectively a wash.  What if the slashed corporate tax rate doesn’t yield the expected earnings windfall in 2018? This risk coupled with slowing sales as stock markets weaken is incredibly bearish.  Especially with the biggest and best US stocks everyone loves and owns still trading near or above bubble valuations as central banks greatly tighten.

Adam Hamilton, CPA

April 13, 2018

Copyright 2000 – 2018 Zeal LLC (www.ZealLLC.com)

Applying modern mineral exploration and mining methods in historic mining districts has been a recipe for success for many mining companies. Vast volumes of material which could never have been found, accessed or economically mined with small scale mining operations are now mined as high-grade ore throughout the country. This is the plan that one Canadian junior gold explorer is hoping to capitalize on in Mexico.

Mexican Gold Corp. (TSX-V: MEX) controls the entire core of the once-famous Las Minas historic mining district.   The Las Minas project presently has two gold-copper deposits in advanced-stage exploration, and multiple high-quality, exploration targets. The project area features complete infrastructure, a highly prospective package of regional geology to allow for years of expansion opportunities.   The project is fully permitted for drilling and up to date for federal and state environmental requirements.

On August 1, 2017, Mexican Gold Corp. tabled an initial Mineral Resource Estimate for the El Dorado/Juan Bran and Santa Cruz zones, two of the eight known mineralized zones at the Las Minas property.
The total Inferred Resource is 719,000 gold equivalent ounces contained within 10,304,000 tonnes grading 2.17 g/t Au Eq. The total Measured and Indicated Resource is 304,000 Au Eq ozs contained within 4,970,000 tonnes grading 1.90 g/t Au Eq. The resource is largely pit constrained, with 13,868,000 tonnes contained within a pit shell. The weighted average grade of the open pit resource is 2.00 g/t Au Eq.  The underground total measured and indicated resource is 1,183,000 tonnes grading 3.00 g/t Au Eq.

The company has been drilling to extend and expand the resource at other Las Minas zones with a 3,000-metre drill program that just completed which will go a long way of increasing the amount of known mineralization.

Highlights from the 2017 and 2018 drilling campaign include:

• Hole 40 cut a cumulative 94.35 meters of high-grade mineralization over three zones. The main zone graded 9.24 g/t Au Eq over 38.0 metres contained within 54.0 metres grading 6.91 g/t Au Eq.
• Hole 49 in the Eldorado zone intersected 38.0 metres grading 10.19 g/t Au Eq (4.51 g/t Au, 16.17 g/t Ag, 3.33 % Cu) contained within 46.0 metres grading 8.81 g/t Au Eq (3.87 g/t Au, 13.81 g/t Ag, 2.90 % Cu)

These results have created some strong market activity and has pushed the shares in Mexican Gold from its year low of 19.5 cents to a year high of 44 cents. These results demonstrate that there is more than in the ground and the potential to significantly improve the size and confidence of the resource.   The Neuvo Pueblo zone will be the new target for drilling once the ground work is complete.

MiningFeeds.com had a chance to sit down with CEO Of Mexican Gold, Brian Robertson, B. Sc.  P.Eng, to discuss the company’s plan going forward and his thoughts on the markets and gold.   

MiningFeeds “MF”:  How do you come into Las Minas?

Brian Robertson “BR”: It is an interesting story.  I was working on a silver property that I had under option  in Zacatecas and while talking to the owner he introduced me to the Las Minas property.  I read the geological report on Las Minas he provided and was very impressed. When I did a site visit, the extent of the skarn mineralization, favourable geology, and large number of historical small scale high-grade mines in the area really impressed me.   I immediately made the arrangements to option the property as well as the adjoining Neuvo Pueblo property.

MF: What is the work that has been done to date?

BR: We have drilled  approximately 26,000 metres to date, including 16,764 metres of resource drilling at the El Dorado/ Juan Bran zone for the initial resource estimate. We have just completed 6,000 metres of drilling to expand the resource. We have also done some exploration drilling on numerous zones. None of the additional drilling is included in the resource estimate.  

It is not a lot of metres for a one million ounce deposit, but it is close to surface and consistent in the mineralization. With a small number of metres you can drill off a significant resource, which was done.

MF: What are some unique characteristics of mining in Veracruz?

BR: This part of Mexico is underexplored but it is showing great potential, which is starting to be recognized because of the work we are doing at Las Minas.    

We have very good relations with the people at the small nearby village of Las Minas. We operate with the underlying principle that we are a guest in their community. We employ a number of people from Las Minas, and our Mexico office is in the village, which creates a lot of daily contact. We also employ a number of people from Las Minas, and have worked with our drilling contractor to train local people as diamond drillers. We make donations to the schools, sports organizations and the community.  We work very hard and building and maintaining good community relations.

The Las Minas area is very safe.  We have not had any safety related issues working there over the last eight years. In fact, contract   diamond drillers working at Las Minas regard it as one of the safest areas in Mexico or Latin America. The surface land rights are largely privately owned, and we own the surface rights for the Santa Cruz deposit. This simplifies the land ownership and surface access arrangements.

Las Minas is a historical mining town, so the people living there view mining positively and see it as an opportunity for employment and bring prosperity to the community.

MF: What are the upcoming plans?

BR: The plan going forward is to expand the resource and carry out field exploration of other under explores areas.   The results will go towards an updated resource. There is considerable potential with resource expansion as our grades are well above the average of other open pit mines in Mexico, which are typically around 1 grams per tonne or less . We are coming in around 2 grams, which is a very high grade for an open pit mine .

MF: What do you think Gold needs to get going?

BR: Smart money is quietly  coming into the gold sector but the retail investor is still hesitant about investing.    What is required to bring investor interest back into the gold sector is another strong upward push of the gold price . We need to see a significant devaluation in the US dollar in order to get gold equities going again.

________________  

MiningFeeds would like to thank Brian Robertson for his time and insights into Mexican Gold (TSX-V: MEX).   

Mexican Gold trades under the symbol MEX on the TSX Venture.   The company has ~38 million shares outstanding and at time of publication shares in the company trade at 31.5 cents.   Institutional Investor Palisade Global Investments w/ ~$40 M AUM increased their position to 18.79%  The company just recently closed a financing of ~$1 million dollars and is well financed to do further exploration and follow up on the strong results it has already produced in 2018; there will be more.  

Mexican Gold Corp.

Website: http://www.mexicangold.ca/

As Russian/British foreign relations continue to plummet, here at Mining Feeds we feel it’s high time to pursue our monitoring of the continuing internal machinations at our favourite London-listed Russian gold miner, Petropavlovsk (LSE: POG)[1].

Within the past couple of months, the attempted murder of a former Russian spy in a sleepy British town[2], coupled with Britain’s vocal condemnation of Russia’s annexation of Crimea and intervention in Ukraine and Syria[3], along with Britain’s support of the US sanctions against prominent Russians, have plunged London-Moscow relations to an all-time low.

But while diplomatic relations freeze over, shenanigans at Petropavlovsk are heating up.

The dormant current board – who ousted POG co-founders Peter Hambro and Pavel Maslovskiy in a much publicized coup last June, the twists and turns of which were followed here at Mining Feeds[4]  – continue to fail on delivering on their transparency pledge[5].

Shareholders will be particularly delighted by the serendipitous exit by Viktor Vekselberg in December of his 22% stake, as the Russian and his Renova Group got shamed this month by stringent US sanctions. Never has a Kazakh been more welcome in London as businessman Kenes Rakishev with his investment in the gold miner.

One of a new breed of Kazakh investor, Rakishev has in many ways been POG’s knight in shining armour, buying up Vekselberg’s old stake. Still little known in the UK, in his home country Rakishev is a recognised and respected entrepreneur, still best known for his investment in Kazakhstan’s Kazkommertsbank and co-ownership of Kazakhstan-focused base metals producer Central Asia Metals Plc (AIM:CAML).

He has a strong history in natural resources in Kazakhstan and, according to the few interviews he has done so far, Petropavlovsk is his first premium listing in London on which he intends to focus a great deal of time going forward. Well, that sure is reassuring after the company’s sorry experience with the still-bewildering “Renova board shake-up then cut-and-run” chapter.

Central Asia Metals is a copper, zinc and lead production and exploration company, with operations in Kazakhstan and Macedonia. Under the direction of Rakishev, its valuation has grown from $100 million to $800 million. Now that’s got to be a track record to thrill any corporate board. So, it is pretty puzzling that POG’s chief appear not to be drawing on their new Kazakh investor’s counsel.

Rakishev has been open about his desire to give Petropavlovsk a fresh start and to bring the sluggish company to a position of growth with a robust M&A strategy to acquire undervalued gold assets across Russia and Central Asia[6], and to bring back the erstwhile Pavel Maslovskiy as CEO, for him to complete his pressure oxidation processing plant at the company’s Malomir mine[7].

Talk to anyone in-country and they will tell you that POG continues to boast an excellent operations team and, along with its underground mining and POX Hub implementation, has the potential to be performing much better than current results suggest.

Worryingly, the board has stayed quiet on its reception of Rakishev’s vision, while offering no vision of its own. Instead, after no action for nine months to strength the company’s leadership team, they’ve announced the appointment of a different CEO with arguably little mining experience: Roman Deniskin, who is due to take the reins next week.

Will shareholders have to wait until the next AGM in June to hear a proper strategy from the board? Or will the new CEO be the breath of fresh air that is so needed? So far, the silence is deafening.

[1]http://www.miningfeeds.com/stock/petropavlovsk-plc-lse

[2]https://www.ft.com/content/1d7968e2-3379-11e8-ac48-10c6fdc22f03

[3]https://www.telegraph.co.uk/politics/2018/04/10/theresa-may-joins-donald-trump-emmanuel-macron-condemning-syria/

[4]http://www.miningfeeds.com/2017/05/25/russian-raiders-setting-sights-on-london-stock-exchange

[5]http://www.miningfeeds.com/2018/01/30/new-board-fails-to-deliver-on-transparency-pledge-at-petropavlovsk/

[6]https://www.telegraph.co.uk/business/2018/03/31/activist-investor-urges-russian-gold-miner-petropavlovsk-find/

[7]https://www.ft.com/content/c8e245d8-0060-11e8-9650-9c0ad2d7c5b5

1. The main drivers of global stock, bond, and gold markets are interest rates and demographics.  Unfortunately, most investors focus on items that get a lot of media attention but are almost irrelevant to price discovery in the markets.
2. Please click here now. I’ve predicted that there will be no trade war, but governments around the world will roll out a modest amount of mildly inflationary tariff taxes.
3. Clearly, top economists at both Fitch and Goldman have the same outlook that I do.  Moderate tariffs are getting a lot of flashy media coverage, but what really matters to the major markets is Fed policy, US citizen demographics, and Chindian citizen demographics.
4. Some tax cuts have now been passed in America.  Yellen and most democrats call them “ill-timed stimulus”.  Most republicans appear to believe the tax cuts are well-timed stimulus that combined with deregulation could create tremendous GDP growth, using ridiculous demographics to do it.  Throughout world history, this type of thinking has been typical in the late stages of ruling empires.
5. Libertarians believe there is no bad time to do a tax cut because tax cuts are about the restoration of citizen freedom and morality rather than economic stimulus.  They believe these tax cuts must be accelerated until the income and capital gains taxes are eliminated regardless of the consequences for the debt-obsessed government. 
6. The libertarians believe the US government resembles a mafia extortionist operation more than a government.  Are they correct?
7. Well, probably.  I don’t think most republicans or democrats really want to face the reality of what governments around the world have become, and nor do the governments themselves.
8. Regardless, with the Fed engaging in significant QT and a rate hiking cycle, the ability of the US government to finance itself is about to come under stress that is unprecedented in America’s history.  Sanctions and tariffs are irrelevant to this stress.  QT, rate hikes, and demographics are of epic relevance.
9. Please click here now. Double-click to enlarge.  I don’t think it’s wise to try to pick an exact top in the US bull market for stocks, but it’s very wise to understand that QT and rate hikes are creating the “beginning of the end” for this market.
10. In 1980 the Fed began a 35-year rate cutting cycle with the baby boomers entering their prime working and investing years.  Tax cuts from Reagan increased the government debt, but the demographics of the baby boomers and the Fed’s massive rate cuts made the government’s debt problem a minor issue.
11. Today, the Fed is engaging in a tightening cycle and the baby boomers are pensioners.  The millennials don’t trust banks or government. Elderly savers are destroyed and generally soaked in debt.  Tax cuts are morally correct, but they are turning the US government’s debt problem into an epic nightmare.  Trump has more cuts planned, and rightly so.  These cuts are going to ramp up the government’s debt nightmare, and from a libertarian gold enthusiast’s “end the extortionist insanity” perspective, that’s fantastic.
12. The bottom line: More stimulus is coming from the US government, and more tightening is coming from the Fed.  This is what is known as “gold market nirvana”.  Trump will soon announce infrastructure spending stimulus, and do so as Powell announces more rate hikes and accelerated QT.  This will crush the bond market and unleash the inflation genie from her bottle.
13. Western stock and bond markets are going to enter a period of massive volatility and then collapse.  Gold is going to continue to rise steadily and then go ballistic as that happens.
14. Millions of Chinese gold market gamblers that bought physical bullion at $1450 – $1320 in 2013 are being “made whole” as gold moves steadily higher now.  The world’s largest gold gambler class is poised to begin a new phase of aggressive buying once gold trades at $1450.
15. India’s “Gold Board” will soon be launched, which will likely have the power to decide the import duty.  In Dubai, talks are underway between gold jewellers and the government to streamline the VAT.
16. On the supply front, mine supply is poised to decline overall and in most countries except Canada and Russia.  I’ve described the emergence of a “gold bull era” based on events in both the West and the East, and any gold market investor reading even a portion of what I’ve written here today can only come to the same conclusion.
17. Please click here now. Double-click to enlarge this key daily gold chart.  Gold is poised in what I call a “golden coil” formation, and there’s a miniature bull wedge in play as well.  It’s unknown whether gold drifts down one more time within the coil or just blasts above $1370 now.  What is known is that the upside blast is coming.  Fed tightening, Chindian buying, and US government stimulus are going to make it happen.
18. Please click here now. Double-click to enlarge this T-bond chart.  The next big theme that US institutional money managers are going to face is the end of the bull market in bonds.
19. For 35 years, investors’ stock market meltdowns have been buffered by bond market rallies.  In early 2018, that changed.  The bond market barely rallied on stock market crash days, and fell on some of them.  It has not reached the panic stage for money managers, but they are getting concerned.
20. Not since Paul Volker ruled the Fed has a Fed chair been as forceful about tightening as Powell.  Last week, with the Dow down 700 points, he gave a speech to the media stating that more rate hikes were coming.  A lot of money managers think he is bluffing.  They don’t believe he will hike relentlessly or keep ramping up QT if the stock market falls.
21. These money managers are greatly mistaken, and as more rate hikes, QT, and fiscal stimulus turn their supposed safe haven of T-bonds into flaming rice paper, they will turn to gold.  It’s already starting.  GLD-NYSE has seen tonnage rise to 859 tons during the latest stock market gyrations.  The bond bull market is dead, and fiscal stimulus and Fed tightening are going to pressure the dollar as well as the stock and bond markets, leaving gold as the only safe haven for investors.
22. Please click here now.  One of my largest gold stock holdings is of course Chow Tai Fook, China’s biggest gold jewellery retailer.  I cover the action at my www.gracelandjuniors.com website.  This chart tells the story of Chindian demand for gold.  Chinese gamblers don’t gamble much on paper gold markets.  They buy gold bullion and jewellery to get in on the upside price action.
23. This stock is a key leading indicator for Western gold miners.  On that note, please click here now. Double-click to enlarge this interesting GDX chart.  I’ve coined the term “Safehavenization of Gold Stocks” to describe the rise of institutional money manager interest in gold stocks as an actual safe haven from the coming implosion of US government, debt, and stock markets.
24. The volume pattern is positive for GDX and most gold stocks, but what’s most interesting is that a price rally of just a few dollars a share represents almost a ten percent gain.  For institutional money managers facing the hurricane winds created by fiscal stimulus and Fed tightening in stock and bond markets, gold stocks are becoming an ever-more enticing opportunity for both shelter and gain.  Gold investors around the world should be totally comfortable buying various gold stocks on all two and three-day pullbacks.  Sell a portion of what is bought on rallies, and hold the rest to enjoy the biggest rewards offered in the glory of the gold bull era!

Thanks and Cheers,

Stewart Thomson, Graceland Updates

https://www.gracelandupdates.com

Email:

stewart@gracelandupdates.com

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?

Readers know that I have beaten this drum all too often. Gold’s major fundamental driver is declining or negative real rates. There is a strong inverse correlation because Gold is money. That’s what JP Morgan said and he’s far more qualified to understand than quotable celebrities like Mark Cuban. But I digress.

When real rates are increasing or strongly positive (during most of the 1980s and 1990s and 2011 through 2015) Gold performs poorly because one can earn a real return on their money unlike with Gold. However, when real rates decrease and particularly when they are negative, Gold flourishes. That being said, right now there is an interesting development. Real rates have increased over the past year but Gold has held steady. Reviewing recent history can help us answer which is right.

First we look at a market-based indicator for real rates (yields). The US Treasury publishes this data daily as calculated from the TIPS market. Below we plot Gold along with the real 5-year TIPS yield, which recently touched an 8-year high. Interestingly, Gold has held up well. Note that there were two previous, similar divergences. Gold peaked in 2011 even though the real 5-year yield did not bottom until 2012. From 2005 to 2006 Gold made a significant break to the upside yet the real 5-year yield also increased during that time. Both times Gold was right.

Market-based indicators are great but in the context of real rates, the basic calculation has proven to be a better indicator for Gold. In this chart we plot Gold along with the real fed funds rate (inflation less the fed funds rate) and the real 5-year yield (inflation yess the 5-year yield). Note that both statistics peaked in 2011 at exactly the same time as Gold. Both have increased since the start of 2017 (along with Gold) but are nowhere close to the 8-year high that the real 5-year TIPS yield is. The TIPS market is exaggerating the strength of real yields.

Ultimately it remains to be seen which is right (Gold or real rates) but the past tells us to side with the market (Gold) rather than a fundamental indicator. The market is a discounting mechanism.

Gold holding steady despite an increase in real rates could be a bullish signal just as Gold declining amid falling real rates would be concerning. Perhaps Gold is discounting the likelihood that real rates have peaked and the risk of a sharp decline in real rates in 2020. In any case, those who focus too much on real rates and not the message of the market could risk missing out on a huge break to the upside. In anticipation of that move we continue to accumulate the juniors that have 300% to 500% upside potential over the next 18-24 months. To follow our guidance and learn our favorite juniors for the next 12-18 months, consider learning more about our premium service.

Lupaka Gold Inc. (TSX-V: LPK) has been completing the necessary steps to achieve commercial production at its wholly-owned Invicta Gold project in Peru, located 120 km north of Lima by road.  Recently, I had the opportunity to re-visit the mine site to see how work is progressing towards production.

It is at this point in the life span of a mining company where institutional investors typically invest, and the stock price starts to move back up towards full value, which makes it a good time to invest. Lupaka Gold (TSX-V: LPK) is at this point.

Lupaka secured its necessary financing back in 2016, in order to advance the Invicta gold project through to production, marking an important inflection point for shares in Lupaka Gold (TSX-V: LPK), according to the life cycle of a junior mining share (pictured above).

With financing secured, the company has commenced construction and development work in order to commence production in the second half of 2018, resulting in potential full appreciation for its shares.   The Company’s diligence and hard work is starting to bare fruit through the following recent developments:

• Fully funded to complete its 6 to 12-month goals, including the start of production at Invicta
• Produced a positive PEA on the project with an initial 6 year mine plan
• Community agreement in place
• Commencement of roadwork to mine site
• Building out the in-country team with the appointment of Dan Kivari, P.Eng., as Director of Operations
• Mine rehabilitation and construction
• Ongoing sampling and surveying

The financing secured in 2016 was through Pandion Finance for a total of $7 million (U.S.), available to the Company in three tranches, all of which have now been drawn.   This forward gold sale agreement is repayable to Pandion by delivering a total of 22,680 ounces of gold over 45 months.

Pandion plays a partnership role in development by receiving payment in gold from the actual mine rather than by way of equity or traditional debt structures. It also does not dilute shareholders as would with a financing in the market.

With money in place, now begins the real work.

On March 1, 2018, Lupaka issued a preliminary economic assessment (PEA) which outlined low capital expenditures, an initial mining scenario of 350 tonnes per day (tpd), and a very quick payback and path to cash flow. The strategy is to commence mining in an area close to existing infrastructure and focus on a small portion of the resources within the Aetnea vein. While the current Environmental Impact Assessment allows for up to 1,000 tpd, Lupaka’s approach is to start small and gradually increase production over the next few years.

The PEA boasts all-in sustaining costs of $575 per gold ounce equivalent (“AuEq oz”) over an initial six-year mine life and an average annual pre-tax operating profit of $12.3-million ($1300 gold assumption), very attractive economics at current metal prices.  There is no need to state the Internal Rate of Return (“IRR”) as it produces meaningful cash flows within the first year.

The updated mineral resource (part of the PEA) outlines 3.0 million tonnes (“Mt”) of Indicated Mineral resources at 5.78 grams per tonne (“gpt”) AuEq oz using a 3.5-gram-per-tonne cut-off, and 0.6 Mt of inferred mineral resources at 5.49 gpt AuEq oz.  The initial six-year mine plan is designed on only a portion of the mineral resource (~0.6Mt at an average head grade of 8.58 gpt AuEq, incorporates existing infrastructure which minimizes capital start-up costs.

The company now has over 24 years of tonnage, in terms of Indicated Mineral resources, mining at the 350 tpd, however management’s goal would be to increase production towards the EIA level of 1,000 tpd, which would increase production from 33,700 AuEq oz/yr up to closer to 100,000 AuEq oz/yr.

At the main portal, the company recently announced sample assay values over the footwall vein averaged 9.86 gpt AuEq over a strike length of 130 metres, with an average width of 6.1 metres.  The average sampled grades are in-line, or higher, than grades within the mine plan, based on the PEA. With a combined average width of over 12 metres, the sub-vertical Invicta deposit extends for over 130 metres in strike length on the 3400 level and will be immediately accessible for extraction when the Invicta mine becomes operational in the second half of 2018.

The start small approach also allows the Company to reinvest into exploration in surrounding areas, in order to gain confidence to increase the mine plan, and to prove up new resources to potentially extend production for years to come.

The Invicta mine site is well situated with access to local infrastructure. There is an existing 66 kV transmission line within 29 km of the Invicta property. Additionally, S.N. Power Peru S.A. has a 220-kV electrical transmission line under construction that could provide a backup power source to the 66-kV line. The mine contractor may even choose to supply their own power.

Lupaka has been granted a water use permit from the Peruvian Ministry of Agriculture. Surface rights have been attained, a well has been constructed, and testing studies have concluded it can supply water up to 60 liters per second during the dry season, which should be sufficient supply for an onsite mill in the future.

As part of the agreement that was completed with the community of Lacsanga in July/2017, Lupaka was to undertake and complete certain improvements to the roads, including widening and creation of bypasses around the communities.   The company signed a contract with local operators to expand, enhance and modify 27 kilometres of road commencing from the paved Huacho-Churin-Oyon Highway, located at approximately 1,500 metres above sea level, up to the Invicta project located at approximately 3,500 metres above sea level.

This new road will provide access to Invicta for heavy machinery and trucks that can transport large loads of material, reduce travel time, significantly increase safety and minimize the operational impact on local communities.  The road will be widened from four metres up to six metres, and a safety berm will be created.

Work is ongoing to ensure that 30-tonne trucks can operate safely and efficiently using North American standards. This involves proper safety berms, passing stations, water drainage, widening hard rock areas using explosives and community by-passes routes.

There is a camp to house workers on site that was built by previous operators. It currently can house about 60 to 70 people, but it is already looking like they will have to expand the camp to accommodate a growing team.

Lupaka announced that development would begin with rehabilitation, preparation at Invicta with three crews, a new adit and 3430 level to be constructed. The Invicta project has approximately of 1.2 kilometres of existing adits, cross-cuts and underground workings.

As you can see below, the cross cut at the 3430 level is in the process of rehabilitation and construction.  Over the past few months, work has been advancing to the point the cross cut has approached the main vein wall.  Two 4.2-yard PLH Scoops have arrived on site along with a single boom jumbo drill in preparation of accelerated development and stope preparation.

At the lead of operations on site is recently appointed Dan Kivari, P.Eng. (picture in the centre above).  He has more than 30 years of international experience in metallurgy, engineering and management of mineral projects throughout various stages of development. Most recently, Mr. Kivari held the position of chief operating officer at Stellar Mining Corp., a privately held mining company in Peru.

Mr. Kivari’s previous work experience includes several senior operating roles such as regional manager for Agnico Eagle Ltd.’s Western and Nunavut operations, where he was responsible for the development of the Meadowbank gold project, and vice-president of operations with Yamana Gold (TSX: YRI) overseeing the development of the Chapada copper-gold project.  Throughout this experience, he has picked up the skills necessary to build a team for the Invicta Project.

There is still plenty of work to be done to meet the company’s goal to de-risk and evaluate the suitability of a plant by the second half of 2018.  New bulk samples need to be extracted and sent to toll milling facilities to test and optimize metallurgical recoveries and concentrate quality.

A previous run-of-mine bulk test in February 2016 achieved good recoveries in concentrate streams — returning 87.5% gold, 91.2% silver, 91.5% copper, 90.03% lead and 90.1% zinc.   The sample was a blend of approximately 80% run-of-mine material and 20% from a low-grade stockpile derived from development.

Looking forward, the company and the geology suggests that there is plenty more to be mined and there is the potential for the construction of a mill which would further reduce the company’s costs and improve any future valuation of the Invicta mine.

From six months ago, the Invicta Gold project is now a completely different scene. Today the roads have and continue to be widened (making them safe), staff and operating equipment is on site and the newly created 3430 Level cross cut has hit the main zone of mineralization.

From an investors perspective, mines moving to production present the greatest investment opportunity because each advancement the company makes de-risks the project and it becomes a question of the operating team to achieve goals on budget and proving the business model works.  Lupaka is at this stage and its shares present an opportunity right now.

The hard work is underway at Invicta and the team is already in place to bring it into production, just in time for improving metal prices and the renewed interest in gold.  The company appears to be well positioned to bring the project online during the second half of 2018 and meet its objective of becoming cash flow positive in its inaugural year.

Investors can look forward to the following positive catalysts:

• Bulk sample results from prospective toll mill facilities
• Toll milling agreement
• Offtake agreement
• Exploration plans and results
• Obtaining commercial production at 350 tpd
• Engineering and trade-off studies for building a plant onsite

With an all-in-sustaining cost of $575 per AuEq oz over initial six-year mine life, and plenty of resources not yet announced with permits in place to increase production, Lupaka Gold (TSX-V: LPK) is a company to watch.

It is at this stage where investors could see the greatest share price appreciation as the company is on task and working towards becoming a producing gold mine.

Lupaka Gold Inc. (TSX-V: LPK)

www.lupakagold.com

1. Will this Friday’s US jobs report be the catalyst that sends gold above the key $1370 resistance zone and ushers in a new era of institutional enthusiasm for gold stocks?
2. Please click here now.  Double click to enlarge.  The US stock market suffered yet another “cardiac arrest” moment yesterday.
3. Market breadth has thinned horrifically, and the low rates and QE that have incentivized corporate buybacks have been replaced with rising rates and QT.  That’s akin to replacing a firetruck’s water with gasoline.
4. I’ve outlined the case for a possible minor rally in April from current price levels, but the market is so weak internally that it is risk of a much bigger cardiac arrest event.
5. I don’t think Jay Powell will announce a rate hike at the early may Fed meeting, but he might.  If he does, stock market investors should be ready to trade in their “Sell in May and go away” mantra for… “Sell in May after getting blown away by Jay.”
6. If he wants to do four hikes in 2018 but avoid doing a hike in the September stock market “crash season” month, he is likely to seriously consider doing a hike in May.  Are investors prepared for such a surprise?  If they own lots of gold, the answer is yes!
7. Please click here now.  So far in 2018 almost eighteen billion US dollars in institutional money has flowed out of the main S&P500 ETF.  This market is very sick, and getting sicker.
8. The bottom line: US stock market rallies should be sold and the proceeds should be placed in cash, gold bullion, and gold stocks.
9. Please click here now. Double-click to enlarge this horrifying T-bond chart.  On a day that the Dow Industrials fell more than 700 points at one point, the T-bond could barely rally at all.
10. Institutional money managers and sovereign wealth funds are beginning to realize that rate hikes and QT are a tremendous headwind to the US government’s ability to finance itself.
11. During the latest stock market mini crashes, they have clearly started to move their focus from T-bonds to gold. 
12. As more rate hikes and QT create much bigger and more frequent crash events in the stock market, I expect this institutional interest in gold to accelerate.
13. Please click here now. Technically, gold’s price action is very impressive.  A small head and shoulders top formation was quickly destroyed with yesterday’s safe haven rally.
14. Please click here now.  Indian demand for the Akha Teej festival is solid.  It should serve as great support for an imminent surge through upside resistance at $1370.
15. For an important look at that resistance zone, please click here now.  Double click to enlarge.  Gold is coiling in what I call a bull “super flag” pattern, and seems eager to burst higher in a rally that should carry it to $1425.
16. What’s particularly exciting is that in addition to bullion, the GDX ETF is beginning to act as a safe haven!
17. “Newbie” investors to the precious metals asset class have memories of the deflationary declines in 2008.  They get nervous when they see the stock market fall, and wonder if gold stocks will also fall.
18. The goods news for these investors is that the current situation is more akin to the late 1960s or early 1970s than 2008.
19. Please click here now.  While institutional money is pouring out of stock market ETFs, it’s starting to pour into the GDX gold stocks ETF.
20. Inflation is on the move, and savvy institutional money managers are moving their safe haven focus from bonds to gold and gold stocks.
21. Please click here now. Double-click to enlarge this GDX chart.  I’ve urged gold stock investors to be eager buyers of all two and three-day pullbacks.  Aggressive players can buy GDX call options and look for 20% gains on those options as a profit booking target.
22. For individual stock enthusiasts, the focus should be on the component stocks of the precious metal ETFs that show the best overall performance from 2016 to the present time.
23. In the 1970s the famous newsletter writer Harry Schultz was known as the “Dean of Gold”.  He promoted the use of two and three-day pullbacks to purchase South African gold stocks.  The current price action in GDX and many of its component stocks is beginning to display an eerie similarity to the price action of gold stocks in the early 1970s.
24. Gold stock enthusiasts who missed the most recent two-day pullback buying opportunity will have to wait for the next one to get in on the upside fun.  Following that pullback, gold and gold stocks could be ready to surf an Akha Teej themed wave, right through $1370 and on towards my $1425 area target price!

 Thanks and Cheers,

Stewart Thomson 

Graceland Updates

https://www.gracelandupdates.com

Email:

stewart@gracelandupdates.com

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?

Gold has firmed above $1300 in recent days and is holding comfortably above $1300 for now. We think the market will break to the upside sometime this year. The question is when. Here are 3 things to watch that will tell us if Gold is on the cusp of that break-out soon or later.

First, keep your eye on Gold’s close at the end of next week. It’s not only the end of the week and month but also the end of the quarter. While Gold has traded above $1350 multiple times in the past two years, it has not made a quarterly close above $1330 since 2012. Since this is a quarterly time frame, we would need to see a close above $1340 or even $1345 to mark a significant breakout. If Gold can make such a close next Friday then the odds are good that it could break above $1375 fairly soon.

Second, (and I always beat this to death) Gold needs to break its downtrends relative to foreign currencies (FC) and equities. The Gold/equities ratio appears to be breaking out but needs follow through for confirmation. The 200-day moving average in that chart appears to have stopped declining. If the ratio can hold above the 200-day moving average then it’s obviously a bullish sign. Meanwhile, Gold/FC has work to do. Over the last 10 months, it has traded in a tighter and tighter range. That trendline resistance could go hand in hand with resistance at $1365-$1375.

Finally, on the equity side, we want to see if GDX and GDXJ can break above their “A” resistance levels which are roughly $23 for GDX and $34 for GDXJ. The miners have been relatively oversold and with improving breadth (discussed in our premium updates) they could reach the A targets, which are slightly above the 200-day moving averages. If the market is sensing a break-out in Gold then GDX and GDXJ should trend above the A targets while the 200-day moving averages would become support. A move up to the B targets over the next four to six weeks would be very bullish.

GDX, GDXJ (Daily Line Charts)

Of course, the price action in Gold itself will answer the question but these other charts can not only give an early hint but can also inform as to the sustainability of Gold’s strength. The first test will be the quarterly close next week. Then we can monitor if the Gold/equities ratio is holding its breakout and if Gold/FC is strengthening.

We have expected the move to a break-out in Gold could begin sometime in Q3. Let’s keep our eyes peeled on the above charts as the genesis of that move has a chance to begin earlier than expected. In the meantime, we continue to be patient but are accumulating the juniors we think have 500% return potential over the next 18-24 months. To follow our guidance and learn our favorite juniors for the next 12-18 months, consider learning more about our service.

1. It’s very important for gold, bond, and stock market investors to stay focused on the main fundamental price drivers and ignore what may feel exciting but is largely irrelevant to price discovery. Citizen demand from China/India and US central bank policy are the main price drivers for gold.
2. From 1960 to 1980, US recessions were generally inflationary, and the Fed raised rates during that period.  Since then, recessions have carried a deflationary theme, and interest rates have fallen.
3. In 2013 I began suggesting that the Fed was going to end its deflationary QE and rate cutting programs.  A new era of rate hikes and quantitative tightening would begin, resulting once again in inflationary US recessions.
4. I’ll dare to suggest that America is now poised to experience its first inflationary recession in almost three decades.  Importantly, this is happening while Chinese and Indian citizen demand for gold is beginning to rise after a multi-year lull.
5. Ben Bernanke created enormous Main Street deflation with his QE and rate cutting policy.  He incentivized corporations to engage in massive stock buyback programs while the Fed itself used printed money to buy government bonds.  Small bank regulation made it unprofitable to make loans to small business.  Main Street deflated, the labour force participation rate collapsed, and financial assets soared.
6.  Please click here now.  Double-click to enlarge this important labour force chart.
7. I’ve described Janet Yellen as the “Great Transitionist”.  She tapered QE to zero as I predicted she would and began modest rate hikes.  It’s clear that the US labour force participation rate bottomed during her tenure as Fed chair.
8. Jay “Mr. Hyde” Powell is poised to take her policy to the next level, and launch aggressive QT (quantitative tightening) and rate hikes, and the first of at least eight rate hikes should come tomorrow!
9. Wage inflation is poised to surge as the participation rate breaks out to the upside.  Unfortunately, because Janet moved so slowly with her rate hikes, this wage inflation is going to occur as the US business cycle rolls over, creating an inflationary recession.
10. What does this mean for gold investors?  Well, I think a celebratory drum roll is what it means!  That’s because nothing is more positive for gold stocks than a long period of stagflation.
11. Against a background of a major resurgence in Chindian citizen demand for gold with stagnant mine supply (except for Russian and Canadian mines), a true “bull era” for gold, silver, and companies involved in all facets of the metals business is born!
12. Please click here now. Double-click to enlarge this Dow chart.  I chart sixty major US stocks, including all thirty Dow Jones Industrials Average component stocks.  What I’m seeing is a major breakdown in the health of the market.  The market is being carried by fewer and fewer stocks.
13. QT and rate hikes are sucking the life out of the market, and I’ve wondered aloud if Jay Powell’s words to stock market investors should be,“Sell in May, or get blown away by Jay!”  The bottom line is that Mr. US Stock Market will have his first meeting with Mr. Hyde tomorrow, and I doubt it goes well for Mr. Market.
14. The meltdown in breadth doesn’t mean the US bull market in stocks is finished right now, but with the US bond bull market already slain by QT and rate hikes, it’s just a matter of time before Jay Powell pulls the US stock market’s life support plug.  I’ve repeatedly told my subscribers that when investment decisions are made, forget about Trump, and focus on the Fed.  Simply put, focus on the Fed, or wind up financially dead!
15. Investors need to think outside the stock and bond market box to prosper in an inflationary recession.  On that note, please click here now. I wasn’t the earliest bitcoin investor, but I certainly was an aggressive bitcoin accumulator in the sub $500 zone.
16. Bitcoin currently trades at about $8000.  After establishing a core position with an average price of about $200, I’m obviously thrilled to be sitting in “forty bagger” mode today.  Blockchain enthusiasts who enjoy this type of sustained wealth building fun can join me at mywww.gublockchain.com website.
17. It’s important for all investors to understand that at about $20,000 a coin, bitcoin threatened to steal thunder from mainstream media’s darling Dow Jones Industrial Average.  An enormous regulatory drive was promptly launched in conjunction with the launch of five-coin bitcoin futures.  An expected price correction was created by the regulators.  These regulators don’t help investors.  They just help themselves by getting salaries to perform useless tasks.  Regardless, markets tend to be “here to stay” once these pencil pushers get involved.  The bottom line is that regulation lets institutional investors embrace the asset class, and that’s happening now.
18. Of great interest to me is the major double bottom that is forming now on the daily bitcoin chart.  Importantly, there’s a huge volume spike on the first decline to my $8000 – $5000 buy zone.  Volume is low on the second decline to that same $8000 – $5000 area.  The volume pattern and the time frame of one to two months between the bottoms is classic “Edwards & Magee” technical action!
19. Tom “Mr. Bitcoin” Lee (Ex head of US equities for JP Morgan) just issued a fresh bitcoin target of $90,000 by 2020.  That’s possible, albeit aggressive.  My intermediate term target of $34,000 is more moderate, more likely to happen, and still a superb gain from current price levels.
20. In a stagflationary environment like the one beginning now, bitcoin and precious metals are mostly likely to earn the title, “assets of champions”.  Please click here now. It’s very important for gold investors to stay focused on the US central bank, India, and China.  Hallmarking and the new spot exchange in India are just two very positive long term drivers of higher gold prices.  A “Gold Board” will be launched soon.  This board could ultimately have the power to determine the gold import duty rate and other key policy that affects the global gold price.
21. My Chinese jewellery stocks that I cover at www.gracelandjuniors.com are soaring higher as Chinese citizen gold buying is accelerating. Australian miners are also doing reasonably well.  Investors in most individual GDX and GDXJ component stocks and the “raw juniors” need the patience to wait for US wage inflation and more progress in the Chindian gold markets.  Then they can sink their teeth into the glory of new highs across the board for these stocks.  It’s going to happen, but realism and patience are required.  The seeds of inflation are being sown now.  It’s not realistic to demand those seeds become jack in the beanstalk trees too quickly.
22. Please click here now. Double-click to enlarge this impressive daily gold chart.  With “Jay Day” (FOMC decision day) tomorrow, gold is performing admirably in its post Chinese New Year trading.  It’s making a beeline towards my $1300 Jay Day target zone.  I expect statements from Jay Powell to set the stage for a move above the ultra-important $1370 area resistance zone. That should usher in substantial buying from Chinese citizens who have been quiet for the past few years.
23. Please http://graceland-updates.com/images/stories/18mar/2018mar20gdx1.png. I’ve predicted that wage inflation an upturn in US money velocity should arrive by the summer if Jay Powell sticks to his projected actions.
24. Most gold investors are not focused enough on buying their favourite gold stocks in the current $21 buy zone for GDX.  Instead they are trying to guess when a big parabolic price rise will occur.  That type of price action starts at the end of an inflationary period, not the beginning of it.  I will say that I’m particularly excited to see substantial insider buying take place now at major gold mining companies. These company directors obviously see the current time as one for major gold stock accumulation.  I’ll dare to suggest gold bugs around the world need to follow that lead!

Thanks and Cheers,

Stewart Thomson, Graceland Updates

https://www.gracelandupdates.com

Email:

stewart@gracelandupdates.com

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?

The gold miners’ stocks remain deeply out of favor, trading at prices seen when gold was half or even a quarter of current levels.  So many traders assume this small contrarian sector must be really struggling fundamentally. But nothing could be farther from the truth!  The major gold miners’ recently-released Q4’17 results prove they are thriving. Their languishing stock prices are the result of irrational herd sentiment.

Four times a year publicly-traded companies release treasure troves of valuable information in the form of quarterly reports.  Required by securities regulators, these quarterly results are exceedingly important for investors and speculators. They dispel all the sentimental distortions surrounding prevailing stock-price levels, revealing the underlying hard fundamental realities.  They serve to re-anchor perceptions.

Normally quarterlies are due 45 calendar days after quarter-ends, in the form of 10-Qs required by the SEC for American companies.  But after the final quarter of fiscal years, which are calendar years for most gold miners, that deadline extends out up to 90 days depending on company size.  The 10-K annual reports required once a year are bigger, more complex, and need fully-audited numbers unlike 10-Qs.

So it takes companies more time to prepare full-year financials and then get them audited by CPAs right in the heart of their busy season.  The additional delay in releasing Q4 results is certainly frustrating, as that data is getting stale approaching the end of Q1. Compounding the irritation, some gold miners don’t actually break out Q4 separately.  Instead they only report full-year results, lumping in and obscuring Q4.

I always wonder what gold miners that don’t report full Q4 results are trying to hide. Some Q4 numbers can be inferred by comparing full-year results to the prior three quarterlies, but others aren’t knowable if not specifically disclosed.  While most gold miners report their Q4 and/or full-year results by 7 to 9 weeks after year-ends, some drag their feet and push that 13-week limit. That’s very disrespectful to investors.

All this unfortunately makes Q4 results the hardest to analyze out of all quarterlies.  But delving into them is still well worth the challenge. There’s no better fundamental data available to gold-stock investors and speculators than quarterly results, so they can’t be ignored.  They offer a very valuable true snapshot of what’s really going on, shattering all the misconceptions bred by the ever-shifting winds of sentiment.

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 24.4x larger than the next-biggest 1x-long major-gold-miners ETF!

Being included in GDX is the gold standard for gold miners, requiring deep analysis and vetting by elite analysts.  And due to ETF investing eclipsing individual-stock investing, major-ETF inclusion is one of the most-important considerations for picking great gold stocks.  As the vast pools of fund capital flow into leading ETFs, these ETFs in turn buy shares in their underlying companies bidding their stock prices higher.

This week GDX included a whopping 51 component “Gold Miners”.  That term is used somewhat loosely, as this ETF also contains major silver miners, a silver streamer, and gold royalty companies.  Still, all the world’s major gold miners are GDX components. Due to time constraints I limited my deep individual-company research to this ETF’s top 34 stocks, an arbitrary number that fits neatly into the tables below.

Collectively GDX’s 34 largest components now account for 90.5% of its total weighting, a commanding sample.  GDX’s stocks include major foreign gold miners trading in Australia, Canada, and the UK. Some countries’ regulations require financial reporting in half-year increments instead of quarterly, which limits local gold miners’ Q4 data.  But some foreign companies still choose to publish limited quarterly results.

The importance of these top-GDX-component gold miners can’t be overstated.  In Q4’17 they collectively produced over 10.3m ounces of gold, or 321.5 metric tons.  The World Gold Council’s recently-released Q4 Gold Demand Trends report, the definitive source on worldwide supply-and-demand fundamentals, pegged total global mine production at 833.1t in Q4.  GDX’s top 34 miners alone accounted for nearly 4/10ths!

Every quarter I wade through a ton of data from these elite gold miners’ 10-Qs or 10-Ks, and dump it into a big spreadsheet for analysis.  The highlights made it into these tables. Blank fields mean a company did not report that data for Q4’17 as of this Wednesday. Naturally companies always try to present their quarterly results in the best-possible light, which leads to wide variations in reporting styles and data offered.

In these tables the first couple columns show each GDX component’s symbol and weighting within this ETF as of this week.  While most of these gold stocks trade in the States, not all of them do. So if you can’t find one of these symbols, it’s a listing from a company’s primary foreign stock exchange.  That’s followed by each company’s Q4’17 gold production in ounces, which is mostly reported in pure-gold terms.

Many gold miners also produce byproduct metals like silver and copper.  These are valuable, as they are sold to offset some of the considerable costs of gold mining.  Some companies report their quarterly gold production including silver, a construct called gold-equivalent ounces.  I only included GEOs if no pure-gold numbers were reported. That’s followed by production’s absolute year-over-year change from Q4’16.

Next comes the most-important fundamental data for gold miners, cash costs and all-in sustaining costs per ounce mined.  The latter determines their profitability and hence ultimately stock prices. Those are also followed by YoY changes. Finally the YoY changes in cash flows generated from operations, GAAP profits, revenues, and cash on balance sheets are listed.  There are a couple exceptions to these YoY changes.

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 numbers instead of weird or misleading percentage changes. This whole dataset offers a fantastic high-level read on how the major gold miners are faring today as an industry.  And contrary to their low stock prices, they are thriving!

After spending days digesting these elite gold miners’ latest quarterly reports, it’s fully apparent their vexing consolidation over the past year or so isn’t fundamentally-righteous at all!  Traders have mostly abandoned this sector because the allure of the levitating general stock markets has eclipsed gold.  That has left gold stocks exceedingly undervalued, truly the best fundamental bargains out there in all the stock markets!

Since gold miners are in the business of wresting gold from the bowels of the Earth, production is the best place to start.  The 10,337k ounces of gold collectively produced last quarter by these elite major gold miners actually fell a sizable 1.7% YoY!  Interestingly that’s right in line with industry trends per the World Gold Council, as overall world gold mine production also retreated that same 1.7% YoY in Q4’17.

These biggest and best gold miners on the planet certainly had every incentive to grow their gold production.  The quarterly average gold price surged 4.8% YoY in Q4’17, really boosting profitability. Of course the more gold any miner can produce, the more opportunities it has to expand thanks to higher cash flows.  Investors often punish flagging production too, so the major gold miners really hate reporting it.

Most investors won’t bother studying long and detailed 10-Qs, 10-Ks, or the accompanying management discussions and analyses.  So gold miners often issue short press releases summarizing some of their quarterly results. These sometimes intentionally mask production declines by excluding year-ago production, looking at quarter-on-quarter performance instead of year-over-year, or only comparing results to guidance.

As a professional speculator, investor, and newsletter writer for nearly two decades now, I spend a huge amount of time analyzing quarterly results.  And I remain a CPA after my previous late-1990s gig auditing mining companies for a Big Six firm. Yet even with this exceptional experience and knowledge, I’m still surprised how deeply I have to dig for some key results miners bury and hide in hundred-plus-page-long SEC filings.

So believe me, major gold miners don’t shout out shrinking gold production from the rooftops.  Yet of the 32 of these top-34 GDX gold miners reporting Q4 production as of the middle of this week, fully half saw declines.  That was even with four different gold miners climbing into GDX’s top 34 components over the past year, which are highlighted in blue above.  The average production decline was a serious 9.5% YoY!

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 heavily 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 are 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 great 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 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 who can’t grow production. Stock picking is more important than ever in this ETF world!

But despite slowing gold production, these top-34 GDX-component gold miners remained quite strong fundamentally in Q4!  Their viability and profitability are measured by the differences between prevailing gold prices and what it costs to produce that gold.  Despite traders’ erroneous perception gold stocks are doomed, rising gold prices and falling mining costs are making the major gold miners much more profitable.

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 Q4’17, these top-34 GDX-component gold miners that reported cash costs averaged just $600 per ounce. That dropped a sizable 4.4% YoY, showing serious gold-miner discipline controlling costs.

Today the gold miners’ stocks are trading at crazy-low prices implying their survivability is in jeopardy.  This week the flagship HUI gold-stock index was languishing near 174, despite $1325 gold. The first time the HUI hit 175 in August 2003, gold was only in the $350s!  Gold stocks are radically undervalued today by every metric.  And they collectively face zero threat of bankruptcies unless gold plummets under $600.

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.  AISC 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.

In Q4’17, these top-34 GDX-component gold miners reporting AISC averaged just $858 per ounce.  That was down a significant 2.0% YoY, extending a welcome declining trend. In 2017’s four quarters, these major gold miners’ average AISCs ran $878, $867, $868, and $858.  The elite gold miners are getting more efficient at producing their metal, which is definitely impressive considering their collective lower production.

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. So the more gold mined, the more ounces to spread those big fixed costs across.  Thus production and AISCs are usually negatively correlated.

The major gold miners have to manage costs exceptionally well to drive AISCs lower 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.

These top-34 GDX gold miners are actually earning strong operating profits today.  Q4’17’s average gold price ran near $1276, again up 4.8% YoY. That remains far above last quarter’s low average all-in sustaining costs among these major gold miners of $858 per ounce.  Thus industry profit margins are way up at $418 per ounce. Most other industries would sell their souls to earn fat profit margins at this 33% level!

A year earlier in Q4’16, the top-34 GDX gold miners reported average AISCs of $875 in a quarter where gold averaged under $1218.  That made for $343 per ounce in operating profits.  So in Q4’17, the major gold miners’ earnings soared 22.1% YoY to $418 on that mere 4.8% gold rally!  Gold miners make such compelling investment opportunities because of their inherent profits leverage to gold, multiplying its gains.

But this strong profitability sure isn’t being reflected in gold-stock prices.  In Q4’17 the HUI averaged just 189.4, actually 1.5% lower than Q4’16’s 192.3! The vast fundamental disconnect in gold-stock prices today is absurd, and can’t last forever.  Sooner or later investors will rush into the left-for-dead gold stocks to bid their prices far higher.  This bearish-sentiment-driven anomaly has grown more extreme in 2018.

Since gold-mining costs don’t change much quarter-to-quarter regardless of prevailing gold prices, it’s reasonable to assume the top GDX miners’ AISCs will largely hold steady in the current Q1’18.  And it’s been a strong quarter for gold so far, with it averaging over $1329 quarter-to-date. If the major gold miners’ AISCs hold near $858, that implies their operating profits are now running way up near $471 per ounce.

That would make for a massive 12.7% QoQ jump in earnings for the major gold miners in this current quarter!  Yet so far in Q1 the HUI is averaging just 187.1, worse than both Q4’17 and Q4’16 when gold prices were considerably lower and mining costs were higher. The gold miners’ stocks can’t trade as if their profits don’t matter forever, so an enormous mean-reversion rally higher is inevitable sometime soon.

And that assumes gold prices merely hold steady, which is unlikely.  After years of relentlessly-levitating stock markets thanks to extreme central-bank easing, radical gold underinvestment reigns today.  As the wildly-overvalued stock markets inescapably sell off on unprecedented central-bank tightening this year, gold investment will really return to favor.  That portends super-bullish-for-miners higher gold prices ahead.

The impact of higher gold prices on major-gold-miner profitability is easy to model. Assuming flat all-in sustaining costs at Q4’17’s $858 per ounce, 10%, 20%, and 30% gold rallies from this week’s levels would lead to collective gold-mining profits surging 43%, 75%, and 107%!  And another 30% gold upleg isn’t a stretch at all. In the first half of 2016 alone after the previous stock-market correction, gold soared 29.9%.

GDX skyrocketed 151.2% higher in 6.4 months in essentially that same span!  Gold-mining profits and thus gold-stock prices surge dramatically when gold is powering higher.  Years of neglect from investors have forced the gold miners to get lean and efficient, which will amplify their fundamental upside during the next major gold upleg.  The investors and speculators who buy in early and cheap could earn fortunes.

While all-in sustaining costs are the single-most-important fundamental measure that investors need to keep an eye on, other metrics offer peripheral reads on the major gold miners’ fundamental health.  The more important ones include cash flows generated from operations, actual accounting profits, revenues, and cash on hand. They generally corroborated AISCs in Q4’17, proving the gold miners are faring really well.

These top-34 GDX-component gold miners collectively reported strong operating cash flows of $4529m in Q4, surging a huge 21.6% YoY!  Running gold mines is very profitable for the major miners, they have this down to a science. Of the 26 of these major gold miners reporting Q4 OCFs, every single one was positive.  Most also proved relatively large compared to individual company sizes, looking really strong.

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.

The top GDX gold miners’ actual GAAP accounting profits didn’t look as good, coming in at a $266m loss in Q4’17.  While a big improvement over Q4’16’s $588m loss, that still seems incongruent with those great all-in sustaining costs and operating cash flows.  Of the 23 of these top-34 GDX components reporting earnings in Q4, 10 had losses. Half of those were big, over $50m. I looked into the reasons behind each one.

These handful of big gold-mining losses that dragged down overall top-GDX-component earnings were mostly the result of asset-impairment charges.  Some of the world’s largest gold miners led by Newmont and Barrick with $527m and $314m Q4 losses continued to write down the carrying value of some gold mines.  As mines are dug deeper and gold prices change, the economics of producing the metal change too.

That leaves some of the major gold miners’ individual mines worth less going forward than the amount of capital invested to develop them.  So they are written off, resulting in big charges flushed through income statements that mask operating profits. But these writedowns are something of an accounting fiction, non-cash expenses not reflective of current operations.  They are mostly isolated one-time events as well.

In addition to writedowns totally irrelevant to current and future cash flows, there were also big losses recognized in Q4’17 due to the new US corporate-tax law.  With tax rates slashed, deferred tax assets that were created by overpaying taxes in past years were suddenly worth a lot less.  These too were non-cash charges, another accounting fiction. Finally some companies realized losses on selling gold mines.

The major gold miners all run portfolios of multiple individual gold mines, each with different AISC levels.  They’ve been gradually pruning out their higher-cost operations by selling those mines to smaller gold miners, usually at losses.  While this hits income statements in mine-sale quarters, it is one reason the major gold miners have been able to drive down their costs.  That will lead to greater future profitability.

In price-to-earnings-ratio terms, the major gold stocks are definitely getting cheaper.  Of the 23 of these top-GDX-component stocks with profits to create P/E ratios, 7 had P/Es in the single or low-double digits!  There are some really-cheap gold miners out there today, even adjusted for any dilution from past share issuances. Of course P/E ratios automatically do that since stock prices are divided by earnings per share.

On the sales front these top-34 GDX gold miners’ revenues soared 13.9% YoY to $12,236m in Q4.  That looks suspect given that 1.7% YoY drop in production and the 4.8% YoY rally in the average gold price.  26 of these gold miners reported Q4 sales, compared to 27 a year earlier in Q4’16. The apparent growth came from some large gold miners that didn’t disclose Q4’16 sales deciding to make that data available in Q4’17.

Cash on balance sheets is also an interesting metric to watch, because it is primarily fed by operating profitability.  Nearly all the gold miners report their quarter-ending cash balances as well, whether they report quarterly like in the US and Canada or in half-year increments like in Australia and the UK.  The total cash on hand reported by these top GDX gold miners surged 7.0% YoY to a hefty $13,974m in Q4’17!

That’s a big number for this small contrarian sector, and it’s conservative.  I just included the bank cash reported, excluding short-term investments and gold bullion.  The more cash gold miners have on hand, the more flexibility they have in growing operations and the more resilience they have to weather any unforeseen challenges.  Material drops in cash at individual miners were usually spent to grow their production.

So overall the major gold miners’ fundamentals looked quite strong in Q4’17, a stark contrast to the miserable sentiment plaguing this sector.  Gold stocks’ vexing consolidation over the past year or so 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 quite strong based on their recently-reported Q4’17 results.  While production declined, mining costs were still driven lower. That coupled with higher gold prices generated fat operating profits and strong cash flows.  The resulting full coffers will help the gold miners expand operations this year, which will lead to even stronger earnings growth in the future.

Yet gold stocks are now priced as if gold was half or less of current levels, which is truly fundamentally absurd!  They are the last dirt-cheap sector in these euphoric, overvalued stock markets. Once gold resumes rallying on gold investment demand returning, capital will flood back into forgotten gold stocks.  That will catapult them higher, continuing their overdue mean reversion back up to fundamentally-righteous levels.

Adam Hamilton, CPA

March 16, 2018

Copyright 2000 – 2018 Zeal LLC (www.ZealLLC.com)

 

 

February 2018 saw 84 deals close in the Canadian financial markets for an aggregate C$367.0 million at an average of $4.5 million, down 15.2% over January 2018 when 105 deals closed for an aggregate C$432.8 million at an average of $4.32 million.

February saw 14 brokered deals close for an aggregate $250.0 million at an average of $17.9 million. This was up 54.3% from the nine brokered deals in January that closed for an aggregate $162.0 million at an average of $18.0 million.  

Within the brokered deals, six bought deals closed in February for an aggregate of $136.7 million deal at an average $22.8 million, an increase of 29.1% over the five bought deals that closed in January for an aggregate of $105.9 million deal at an average $21.2 million.

95 deals opened in February

The top ten deals by size closed in February totaled $230.1 million with gold leading the field taking three spots of the top four spots and five of the top ten. Battery metals cobalt and lithium took three spots.

The top ten deals by size closed in January totalled $241.3 million with graphite, copper and tin leading the field. Gold took three spots of the top ten with cobalt also figuring.

February saw 56 gold deals close for $229.2 million at an average of $3.4 million, up 119.1% in total value terms from the $104.6 million raised in 44 gold deals in January at an average of $2.3 million. The top ten gold deals in February totalled $184.7 million, some 76.5% of the total.

Base metals accounted for $73.6 million of the funds raised in February, some 30.5% of the total, with the top ten deals accounting for $36.7 million with zinc and copper featuring heavily.

Battery metals accounted for $74.8 million of the funds raised in January, some 31.0% of the total and where the top ten battery raises brought in $73.6 million with three cobalt, five lithium one copper and one graphite raises.

#1 Torex Gold $61.7 million

Torex Gold Resources (TSX:TXG) closed a C$61.7 million offering underwritten by a syndicate led by BMO Capital Markets on a best efforts basis.

#2 Orla Mining $30.8 million

Orla Mining (TSXV: OLA) closed a C$30.8 million offering underwritten by a syndicate led by GMP Securities on a bought deal basis. Each unit included half a warrant that expires in 36 months.

#3 eCobalt Solutions $29.9 million

eCobalt Solutions (TSX: ECS) closed a C$29.9 million offering underwritten by a syndicate led by TD Securities on a bought deal basis. Each unit included half a warrant that expires in 18 months.

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.

Website:  www.oreninc.com

The past 18 months have been difficult for precious metals investors. If you had known Donald Trump would be elected and the US Dollar would soon begin a nearly 15% decline, you would have expected Gold to blow past its 2016 high. You would have been shocked to see the gold miners and junior gold stocks trading lower. Gold has fared okay but the gold stocks and Silver have lagged. As US equities have continued to power higher, precious metals have struggled to perform while volatility in the space has dwindled. Precious metals volatility has reached extremely low levels and this is a sign that a major move, while not necessarily imminent is surely on the horizon.

We plot a weekly bar chart of Gold that includes a handful of volatility indicators such as the Gold Vix (GVZ), Average True Range (ATR) and several bollinger band widths (BBw). These indicators have touched major lows in recent months. The Gold Vix which began trading in 2010 recently touched its lowest level ever at 9. ATR recently touched its lowest level since 2007. The 40-week and 80-week BBw’s recently hit their lowest levels since 2005 while the 160-week BBw recently touched its lowest level since 2002.

Like Gold, Silver is showing significantly low levels of long-term volatility. Its ATR recently touched its lowest point since 2006. The BBw for three time frames (40 week, 80-week and 160-week) recently touched 14 year lows.

Although the gold stocks are one of the most naturally volatile markets, they too are showing significantly low long-term volatility. Below we plot the NYSE Gold Miners Index, which is the parent index of GDX along with similar volatility indicators. The ATR indicator recently touched a 15 year low. Interestingly, both the 40-week and 80-week BBw’s recently hit some of the lowest points of the past 25 years. The 40-week BBw recently tied 2007 for the lowest point in the past 25 years while the 80-week BBw recently touched a 6-year low and its 3rd lowest point of the past 25 years.

The major markets within the precious metals sector are showing extremely low levels of long-term volatility. At somepoint this will change but we cannot know exactly when. Given our long-term bullish bias, our thinking is volatility could increase as Gold approaches resistance and then accelerate upon a break-out in Gold. Note that low volatility can last for a while and will not suddenly change overnight. It may slowly start to increase at first. While we cannot know when, we do know that extremely low volatility is present and can facilitate a major move over the next 12 to 24 months. With more time ahead before an increase in volatility and a potential break-out we continue to remain patient and accumulate the juniors we think have 500% return potential over the next 18-24 months. To follow our guidance and learn our favorite juniors for the next 12-18 months, consider learning more about our service.

The small contrarian gold-mining sector remains deeply out of favor, universally ignored. Thus the gold stocks are largely drifting listlessly, totally devoid of excitement. But that’s the best time to buy low, when few others care.  The gold stocks continue to form strong technical bases, paving the way for massive mean-reversion uplegs. And they remain exceedingly cheap relative to gold prices, which drive their profits.

Being a gold-stock investor feels pretty miserable and hopeless these days.  The gold stocks have been consolidating low for 14.2 months now, stuck in a seemingly-endless sideways grind.  There are still gains to be won, but they are mostly within that low-trading-range context. We haven’t seen one of the huge uplegs gold stocks are famous for since the first half of 2016.  So most traders have given up and moved on.

That’s understandable psychologically, but unfortunate for multiplying wealth. Sometimes it takes a while for gold stocks to catch a bid, but once they get moving they often soar.  This sector is so small relative to broader stock markets that even minor shifts in capital flows can drive enormous gains.  While it’s hard waiting for gold stocks to return to favor, the vast upside when they do is well worth the buying-low pain.

The leading gold-stock measure and trading vehicle is the GDX VanEck Vectors Gold Miners ETF.  It was the original gold-stock ETF launched in May 2006, and still maintains a commanding advantage in popularity.  This week, GDX’s net assets of $7.7b were 24.0x larger than its next-biggest 1x-long major-gold-stock-ETF competitor!  GDX is as big as all the other gold-stock ETFs trading in the US combined.

GDX’s price action shows why gold stocks are such compelling investments when everyone hates them.  After gold stocks were universally despised in mid-January 2016, GDX soared 151.2% higher in just 6.4 months!  After the previous time sentiment turned so overwhelmingly against gold stocks in October 2008, GDX rocketed 307.0% higher over the next 2.9 years.  Buying gold stocks low has proven very lucrative.

That quadrupling of GDX after 2008’s first-in-a-century stock panic was actually the tail end of a vastly-larger secular gold-stock bull.  Many years before GDX was even a twinkle in its creators’ eyes, that gold-stock bull started stealthily marching higher out of total despair.  It can’t be measured by GDX since that ETF started too late, but the classic HUI NYSE Arca Gold BUGS Index reveals the magnitude of that bull run.

Over 10.8 years between November 2000 and September 2011, the gold stocks as measured by the HUI skyrocketed an astounding 1664.4% higher!  And that was during a long bear-market span in the general stock markets, where the flagship S&P 500 drifted 14.2% lower. The gains in gold miners’ stocks as they mean revert from out of favor to popular are so epically enormous that they far outweigh any time lost waiting.

Gold stocks are even more attractive today given the exceedingly-overvalued and dangerous US stock markets, which are on the verge of a long-overdue major bear.  Market valuations remain deep in literal bubble territory despite early-February’s correction.  The simple-average trailing-twelve-month price-to-earnings ratio of the elite S&P 500 stocks was still 31.5x at the end of last month, above the 28x bubble threshold!

The market-darling stocks investors love today are crazy-expensive, portending huge downside in the next bear.  The most-popular stock among professional and individual investors alike is Amazon.com, a great company. Yet AMZN stock is now trading at a ludicrous 252.5x earnings!  That means if profits held steady it would take new investors today a quarter millennium just to recoup their stock purchase price.

Meanwhile the world’s largest gold miner in 2017-production terms, Barrick Gold, is now trading at a TTM P/E of 9.5x.  That’s dirt-cheap by any standards! And ABX’s profits-growth potential is greater than AMZN’s. Last year Barrick mined 5.32m ounces of gold at all-in sustaining costs of $750 per ounce.  That was $508 under gold’s average price of $1258 last year, fueling fat full-year profits over $1.5b on $8.4b in sales.

Every 10% increase in prevailing gold prices boosts Barrick’s earnings by 25%.  And the average gold price so far in 2018 is already up 5.7%, so gold miners’ profits are growing fast.  I’m not a Barrick Gold investor, and am just using this leading major gold miner as an example.  There are plenty of smaller mid-tier gold miners with far more upside profits leverage to gold prices.  Gold stocks are darned attractive!

They are one of the last bargain sectors remaining in these overheated stock markets. They are one of the only sectors that can rally in major bear markets, because they follow gold which drives their profits.  Gold investment demand surges in weak stock markets, which brings investors back to gold stocks.  At some point, investors are going to figure out how compelling gold stocks are today and stampede back in.

Despite the apathetic sentiment plaguing them, the gold stocks are still looking fine technically and even better fundamentally.  This first chart looks at gold-stock technicals as rendered by their dominant GDX ETF. Given how bearish traders have waxed on gold miners, you’d think they are spiraling relentlessly lower.  But they are actually consolidating nicely, establishing a strong base from which to launch their next upleg.

After plunging to fundamentally-absurd all-time lows in mid-January 2016, GDX soared into a major new bull market.  While its 151.2% surge in just 6.4 months was undoubtedly extreme, that emerged out of even-more-extreme lows.  And it merely catapulted GDX to a 3.3-year high in early-August 2016, nowhere close to secular topping levels. But the gold stocks were very overbought then, and soon corrected hard.

GDX’s enormous 39.4% correction in 4.4 months after that initial bull peak was also extreme, the result of a couple major anomalies.  First gold-futures stops were run on major gold support failing, which ignited parallel cascading stop-loss selling in the gold miners’ stocks.  Then investors fled gold in the wake of Trump’s surprise election victory, which led stock markets to soar on widespread hopes for big tax cuts soon.

Gold-stock selling finally exhausted itself in mid-December 2016, the day after the Fed’s 2nd rate hike of this cycle.  Just a couple weeks later, GDX entered its now-14.2-month-old trading range that persists to this day.  It is a basing consolidation trend running from $21 support to $25 resistance, which makes for a 19.0% trading range.  This has held rock solid ever since, which has made gold-stock trading fairly easy.

My strategy has been simple.  Given the extreme undervaluations in gold stocks that I’ll discuss shortly, a massive new upleg is likely to ignite anytime.  So I want a full trading book to reap those enormous gains when they inevitably arrive.  Thus every time GDX slumped down into the lower quarter of its consolidation range, between $21 to $22, I’ve been adding positions in great mid-tier gold miners with superior fundamentals.

All this is shared in real-time with our newsletter subscribers, who graciously support our research work.  Buying low in the context of this vexing gold-stock consolidation has driven some great trades despite lackluster overall action.  One example is Kirkland Lake Gold, an elite mid-tier miner. I added a new position in our popular weekly newsletter in December 2016.  A year later I sold it for a hefty 184% realized gain!

So while this gold-stock trading range has sure felt dull, it has still created plenty of trading opportunities.  And over the past month or so since that sharp stock-market correction, GDX has largely meandered in that lower quarter of its range near support again.  That means it’s an excellent time to deploy capital in the unloved and cheap gold miners’ stocks today. Another surge higher is due, and it could be a big one.

While GDX $21 support has proven strong since the end of 2016, so has GDX $25 resistance.  The gold stocks have tried and failed to break out above $25 four separate times since early 2017.  A couple of the attempts were close, but weren’t sustainable as gold retreated. Once that $25 breakout finally comes to pass, investors will realize something different is happening and rush to chase gold stocks’ upside momentum.

Before early February’s sharp stock-market plunge that changed everything, I was looking to the release of gold miners’ Q4’17 operating and financial results as a potential catalyst to fuel that $25 breakout.  That didn’t happen though, as gold and especially gold stocks were sucked into the fear surrounding the unprecedented stock-market volatility shock a month ago.  That dragged GDX back down near support, which held.

This recent support approach is probably a blessing in disguise, offering another chance for investors to deploy capital in cheap gold stocks before they really start moving again. The great and sad paradox of the markets is investors are least willing to buy when stocks are low and out of favor, which is the exact time they should be buying before later selling high.  Gold-stock prices can’t and won’t stay this low forever.

With stock-market volatility back, the highly-likely catalyst to ignite that GDX $25 breakout is gold rallying on resurgent investment demand.  Gold is largely ignored when stock markets are high and investors are euphoric, as they feel no need to prudently diversify their portfolios.  But once stock markets sell off for long enough to spook investors, they start shifting capital back into gold which often moves counter to stocks.

With the US stock markets still trading deep into bubble territory in late February, and euphoria remaining rampant as evidenced by the blistering bounce rally following that early-month plunge, there’s no way the stock-market selling is over yet.  It will have to resume sooner or later with a vengeance to actually start rebalancing away greedy sentiment. When that happens, gold and gold stocks will soon catch major bids.

The fact gold stocks have held strong in their consolidation trading range for well over a year now is a glass-half-full kind of thing.  It testifies to relatively-strong investment demand given the terribly-bearish sentiment pervasive in this sector. The longer prices base during bull markets, the greater the upside potential in their next upleg.  It likely won’t take much of a gold rally to blast GDX back up through $25 again.

This strong technical picture and an inevitable sentiment mean reversion are reason enough for gold stocks to surge dramatically higher.  But supercharging that is the dirt-cheap state of gold stocks today in fundamental terms. That includes current gold-mining profits compared to prevailing gold-stock prices, as well as near-future earnings-growth potential as gold itself continues mean reverting much higher ahead.

I’m well into my quarterly research work analyzing the Q4’17 results from the major gold miners of GDX.  Unfortunately due to the complexities of preparing annual reports, the Q4 reporting season up to 90 days after quarter-ends is double the 45-day deadlines for Q1s through Q3s.  So all the data isn’t quite in yet, but I expect to have enough to delve deeply into the major gold miners’ Q4’17 results in next Friday’s essay.

In the meantime, a great fundamental proxy for gold-stock valuations is the HUI/Gold Ratio.  This is as simple as it sounds, dividing the daily close of that classic gold-stock index by the daily gold close and charting the resulting ratio over time.  This reveals when gold stocks are expensive or cheap relative to the metal which drives their profits. And this sector has rarely been more undervalued than it is today!

This week the HGR was way down at 0.131x, meaning the HUI index’s close was running just over 13% of gold’s close.  That’s incredibly low historically, showing that the gold miners’ stocks have been wildly underperforming gold.  The gold stocks are trading at levels today implying gold and their profits were radically lower.  This is a colossal fundamentally-absurd disconnect that can’t last forever, it has to unwind.

GDX and the HUI were way down at $21.57 and 173.4 in the middle of this week.  The first time the HUI ever hit this level was way back in August 2003, years before GDX was even born.  Back then gold was only running $357, and had yet to trade above $380 in its entire young secular bull. Let that sink in for a second.  Gold stocks are trading at prices today first seen when gold was in the $350s fully 14.6 years ago!

This week gold was trading near $1325, an enormous 3.7x higher.  That should certainly be reflected in gold miners’ stocks.  Today’s super-low gold-stock levels aren’t much above the HUI’s stock-panic lows back in October 2008.  There was only a week where the HUI traded lower than today at peak fear in the stock markets, and gold averaged $732 during that extreme span.  This week it was trading 81% higher!

This is incredibly illogical, only explainable by irrational sentiment.  If any other stock-market sector was trading at levels from a decade or more earlier despite the selling prices of its products doubling to quadrupling, investors would be beating down the doors to buy.  That would rightfully be seen as a huge and unsustainable anomaly, a rare chance to buy deeply-undervalued stocks at decade-plus-old prices.

And it’s not just gold that’s far higher, so are the profit margins for mining it.  With the new Q4’17 results from GDX’s major gold miners not all out yet, the latest data we have this week is Q3’17’s.  During that previous quarter, the top GDX miners averaged all-in sustaining costs of just $868 per ounce.  The costs of mining gold industrywide don’t change much, which is what creates profits’ big upside leverage to gold prices.

My still-incomplete Q4’17 analysis shows AISCs very similar to last quarter’s.  That makes sense, as the past year’s quarters ending in Q3’17 had collective GDX AISCs of $875, $878, $867, and $868.  Mining gold costs similar amounts regardless of prevailing gold prices, at least over medium-term multi-year spans too short for new gold mines to be built.  So Q4’17 AISCs are likely to remain around these levels.

Assuming $868 carries forward into Q4’17 and Q1’18, gold-mining profits are really growing.  Average gold prices surged from $1276 in Q4 to $1330 quarter-to-date in Q1. That’s up 4.2% sequentially, really strong.  This implies major gold miners’ earnings are surging 13.2% QoQ in our current Q1’18 from $408 to $462 per ounce!  That would make for strong 3.1x upside profits leverage to gold, which is impressive.

And whether the major gold miners are collectively earning $400, or $450, or even $500 per ounce today, such profits alone are much greater than the $350s prevailing gold price the first time the HUI traded at today’s levels.  With fat profits like this heading much higher as this gold bull continues, it’s ridiculous for gold stocks to be priced as if gold was still in the $350s like mid-2003 or the $730s like in 2008’s stock panic.

This extreme anomaly can’t and won’t last.  The gold stocks should be priced for today’s prevailing gold prices around $1325.  The first time gold hit $1325 in October 2010, the HUI was trading at 522. That is triple today’s ludicrous levels!  The gold stocks more than quadrupled in the years following 2008’s stock panic, another irrational situation where sentiment had battered gold stocks to fundamentally-absurd levels.

Between that first-in-a-century stock panic and extreme central-bank easing that really hit full steam in 2013, the last quasi-normal years in the markets were 2009 to 2012.  During that post-panic span the HGR averaged 0.346x. If the HUI would merely mean revert back up to those levels relative to gold, it would have to soar to 458.  That’s 164% higher than this week’s levels, upside unparalleled in any other sector.

For 5 years before the stock panic, the HGR averaged 0.511x.  While gold stocks might not be able to sustain levels so high anymore, they could certainly blast up there in a temporary mean-reversion overshoot.  After extremes, prices don’t simply migrate back to the average. Instead they overshoot proportionally to the opposing extreme as sentiment is equalized.  That implies a HUI level of 677, 290% higher from here.

No one knows how high gold stocks can go, but there is zero doubt they are radically undervalued given today’s gold prices and the gold-mining profits they generate.  Whether you expect this battered sector to quadruple again like after the stock panic, or merely double, that dwarfs the potential of the rest of the stock markets.  Especially with the S&P 500 trading at bubble valuations after a long central-bank-goosed bull.

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 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 are basing technically and cheap fundamentally today. While this small contrarian sector has largely been forgotten, its past year’s consolidation trading range continues to hold solid.  The longer the basing, the greater the potential upleg when investors return. And despite trading at levels implying vastly-lower gold prices, the major gold miners are actually earning fat profits today.

Those earnings will surge dramatically as gold continues powering higher in its own bull market.  It’s only a matter of time until investors see the extreme market-leading value inherent in the gold miners’ stocks.  And with stock-market volatility roaring back after long years of central-bank suppression, diversifying portfolios with gold will soon return to favor.  The gold stocks will soar as investment buying drives gold higher.

Adam Hamilton, CPA

March 9, 2018

Copyright 2000 – 2018 Zeal LLC (www.ZealLLC.com)

 

The precious metals sector continues to correct and consolidate. Gold remains in a bullish consolidation. It recently reached resistance again and even though it has failed to breakout, it remains above long-term moving averages which are sloping upward. However, the gold stocks and Silver remain in correction mode. They are trading below the long-term moving averages and at the lower end of their ranges over the past 12 months. That certainly provides an opportunity but these markets may not truly perform until Gold is ready to breakout.

Bullish Silver commentaries (because of its CoT) have been making the rounds and I don’t disagree. In the chart below we plot the net speculative position as a percentage of open interest. It is at 7.4%, which is the lowest reading in nearly three years. Interestingly, the daily sentiment index for Silver is not at an extreme. Its at 40% bulls. Technically, Silver is wedged in between support and resistance. A break does not appear imminent.

Like Silver, the gold stocks are oversold but we do not see an indication of an extreme oversold condition. In the chart below we plot GDX along with the difference between new highs and new lows. We also plot GDXJ along with the percentage of stocks (from a group of 50 we follow) that are trading above the 50-dma and 200-dma. GDX recently held above $21 again (even with over 20% of the index making new 52-week lows) while GDXJ is starting to show a bit more strength relative to GDX. At the low last Wednesday, 19% of those 50 juniors were trading above the 50-dma while 27% were trading above the 200-dma.

Gold, unlike Silver and the gold stocks, has not corrected much and remains much closer to resistance than support. Also, sentiment in Gold is much more optimistic than in Silver. The net speculative position in Gold is 37%, which dwarfs the 7.4% reading in Silver. Gold’s daily sentiment index is 56% bulls which is comfortably above Silver’s. During bull markets, corrections in Gold tend to push the net speculative position below 30%. Gold continues to maintain support at $1300 but we wonder if it needs to break that level and flush out some speculators before breaking out of its larger consolidation.

The precious metals sector is at an interesting juncture and it remains to be seen how the current disparity will resolve. One scenario is Gold breaks $1300 and this causes a mini-washout in the gold stocks and Silver. The other scenario is Gold continues to consolidate above $1300 and the gold stocks and Silver firm in anticipation of a major breakout in Gold. This is something that could take weeks to answer. In any event, we continue to remain patient and continue to accumulate the juniors we think have 5-fold potential over the next 18 months. To follow our guidance and learn our favorite juniors for the next 12-18 months, consider learning more about our service.

1. Gold is showing solid rallies from my $1310 area buy zone (basis April futures).  From both a love trade and fear trade perspective, the fundamental picture is becoming more positive.
2. Please click here now. I’ve repeatedly highlighted the fact that while America has the world’s richest economy, China’s economy is vastly bigger.
3. Courtesy of the Visual Capitalist, this snapshot of Chinese commodity demand should provide a significant confidence booster shot for investors.
4. The huge demand puts a floor of support under commodities like gold… even on minor price declines.
5. On that note, please click here now. Double-click to enlarge this daily gold chart.
6. Gold is rallying for a second time from my $1310 buy zone, and there is a positive non-confirmation in play with the Stochastics oscillator.
7. Since hitting the $1370 resistance zone in late January, gold has consolidated in a drifting rectangular pattern.  The odds of an upside breakout from this pattern are about 67%.
8. Importantly, that breakout implies that the price would move above the huge resistance zone at $1370!
9. Please click here now. While the gold trading volume on the Dubai Gold & Commodities Exchange (DGCX) is nowhere near the size of COMEX volume, it’s growing relentlessly while COMEX volume appears to have peaked.
10. The SGE (Shanghai Gold Exchange) is helping the DGCX.  The Sharia-compliant spot gold contract launch is quite important because it should bring more stability to the overall gold price discovery process.
11. A rise above $1370 against the background of rising institutional money manager concern about inflation in the West would be another huge confidence boost for investors, both in America and in China.
12. Please click here now. Double-click to enlarge.  The current price action of the dollar against the safe haven yen is truly horrific.
13. It’s another stronger indicator that gold is poised to move above $1370.
14. Please click here now. Double-click to enlarge.  The oil market price action is becoming concerning.
15. Some of the decline can be attributed to rising US supply, but the price action is eerily similar to the US stock market.  That synergy suggests that oil traders are concerned that the US economic numbers may be peaking, leading to a drop of demand for oil.
16. Please click here now. Double-click to enlarge.  The US dollar is moving strongly higher in USD-CAD trading.
17. I refer to the Canadian dollar as the “Cbone”, because it is the backbone of the Canadian banking system and government.  Oil exports play a big role in the Canadian economy.
18. The Cbone appears to be getting pummelled by inflationary tariff concerns and a potential collapse in US oil demand.
19. Gold often rises when commodity currencies like the Cbone rise, but in the current situation, the big FOREX traders appear to be mainly focused on what inflation and collapsing economic demand in America would mean for the US government’s ability to finance itself.
20. The bottom line is that twenty years of declining money velocity are coming to an end.  A new inflationary era is being born in the West, albeit at a snail’s pace.  That is a source of frustration for some gold stock enthusiasts.
21. The good news is that current time frame is probably best compared to 1968 – 1970, when interest rates and inflation began to rise.
22. Gold stocks perform like champions in this type of environment once the concept of growing stagflation gains widespread institutional acceptance.  That time is approaching quickly now.
23. Please click here now. Double-click to enlarge this GDX daily chart.  Range traders should take note of the buy zone at $21 and the sell zone at $25.  This trading range has been in play for about a year.
24. If gold bursts above $1370 with rising inflation in the West and the new Dubai spot gold contract serving as wind at its back, GDX should explode upwards above $25.  This would in turn see many more institutional investors come to embrace gold stocks as offering generational value with the best potential for price appreciation!

Stewart Thomson

Graceland Updates

https://gracelandjuniors.com

Email:

stewart@gracelandupdates.com

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?

Today, Canadian Orebodies Inc. (TSX-V: CORE) released results from its fall 2017 Black Raven prospecting program which is indicating a significant discovery of multiple high grade gold bearing vein structures.  The results are validating the company’s strategy of consolidating its land position at Black Raven as it is starting to uncover a new trend in the historic Hemlo mining camp.   

Prospecting and sampling at the Black Raven Project uncovered new gold bearing veins either in outcrop or sub-cropping that are associated with a northeast trending corridor bounded by two regional shear zones: the Beggs Lake and Fallen Lake Faults, which cut through Canadian Orebodies Black Raven claims in the Hemlo greenstone belt.       

“After two months of systematic prospecting and grab sampling throughout the Black Raven Property, our crew was successful in identifying a brand new two-kilometre long zone of alteration that yielded gold values up to 109.0 gpt, (the company is calling this the ABC Occurrence) in grab samples. Late in the season, we took an eight-kilometre step-out along strike to the southeast and incredibly, similar quartz veining in outcrop was located in mafic rocks which returned gold grades up to 11.9 gpt,” said Gordon McKinnon, President and Chief Executive Officer of Canadian Orebodies.

The company recently purchased the Goodchild Lake mining property which sits in the middle of the company’s 100-per-cent-owned Black Raven project.  The property comprises 25 claims totalling approximately 400 hectares, increasing the company’s landholding at Black Raven to over 20,000 hectares.  It lies along an eight-kilometre trend the company’s prospectors have been exploring over the past nine months.

The company purchased the claims from a company in financial hardship, Century Mining Corp., for a cash payment of $40,000 and the assumption of Century’s 3-per-cent net smelter returns royalty obligations.   Orebodies also negotiated with Teck Resources Ltd. to terminate certain rights Teck had on the property in exchange for the granting to Teck of a one-half of 1-per-cent net smelter returns royalty on the property.  All this helps to clean up the rights and ownership of the property and brings it under the scope of the Black Raven project.

“The Goodchild Lake acquisition covers a highly prospective property that hosts numerous high-grade historical showings. Due to the bankruptcy proceedings these claims have not seen any follow-up exploration in over a decade and a half,” said McKinnon. “With this acquisition the company has solidified its land position in the area, which will allow for an aggressive and systematic 2018 exploration program of this gold bearing system.”

Mr. McKinnon has led the Canadian Orebodies since its inception in 2008, serving as President, CEO and a Director. Mr. McKinnon was a co-founder of Mineral Streams Inc., a private mineral royalty company that was sold to AuRico Metals Inc. in 2015.    

Mr. McKinnon had some spare time this morning to sit down and explain the significance of these results and what it means for the Hemlo mining camp.

What led to this acquisition?

After a couple of months of prospecting and grab sampling throughout the Black Raven Property, the crew was successful in identifying a brand new two-kilometre long zone of alteration that yielded gold values up to 109.0 gpt in grab samples – we are calling this the ABC Occurrence.

Previous sampling was showing a trend, so our prospectors just put a line on the map and said let’s do an 8-kilometre step out to test near the eastern geological contact. It produced a significant amount of notable showings such as 109.0 gpt Au, 46.8 gpt Au, 15.0 gpt Au, 14.7 gpt Au, 11.9 gpt, Au, 11.6 gpt Au, 9.7 gpt Au and 7.8 gpt Au over an 8 kilometre strike length.  It was at this point that we realized we had discovered a potentially significant structure that was capable of producing high grade gold values over a large scale.

The company that owned the property was in bankruptcy, it fills a hole right in the middle of our Black Raven property that has shown several high grade gold values. The trend of the structure goes right through this system.  Structure is very important to what we are exploring here.  This could be the first new discovery since Hemlo, we are talking size and under-explored ground that has not been systematically tested before.  

What are your plans now that you have consolidated a position in the Hemlo camp?

Our plan is to be thorough and systematic in testing our hypotheses. We’re currently in the midst of planning the detailed exploration program for 2018 which will include two airborne surveys commencing as soon as weather permits. That will be followed up by having four or five crews continue to map and prospect the property.  We plan on sampling throughout the summer and conducting a drill program in late summer or early fall.  Further details regarding the 2018 program will be made available in the near term.

Barrick is currently conducting a study at its William mine in the Hemlo camp to extend the life of the mine. The object of the study is to evaluate the potential of converting Hemlo back in to a core asset for the company. The camp is heating up with the potential to discover new deposits in underexplored parts of a known district that has a storied history.

We are confident with our team who know the Hemlo area well.  Bruce Mackie has more than 40 years of mining industry experience. He has a proven exploration record, having managed several successful projects in gold, base metals and uranium in senior positions with Noranda, Hemlo Gold and North American Palladium.

On the board we have John Harvey, who served as President and CEO of Hemlo Gold Mines Inc. from 1989 to 1991. He also was President of Noranda Exploration from 1982 to 1994 and was most recently the Chief Operating Officer of Noront Resources until 2009.

Serving as an advisor to the company is Robert Middleton, who led the Rosario Resources team that discovered the Bell Creek Mine in Timmins, Ontario and, in 1982, he played a role in drilling the discovery hole at the Goliath Mine in Hemlo, Ontario. He is also credited with discovering the Cross Lake zinc deposit near Timmins, Ontario in 1997 and conducted exploration in the Nipigon Plate that led to the discovery of the Seagull PGE deposits.

In short, we have much of the original team from the days of Hemlo’s discovery.

What is your financial position?

The company is fully funded for our exploration plans; the company is not looking for money right now.  Currently we have approximately $2.5 million, which is enough for us to conduct our exploration work this summer.  Also with Northfield Capital, Osisko Mining, Rick Rule and management holding the majority of stock, the shares are in committed hands and well supported for the foreseeable future.

What are your plans with Wire Lake?

The new gold zone discovered on surface approximately 600-metre to the south is definitely something that we want to follow up on.  To date we’ve found a significant amount of gold on the Wire Lake property – including wide and near surface intersections, but no orebody yet. We plan to do some follow up exploration work over the course of the year.       

The company has been relatively quiet in the market?

We received some criticism for being quiet, but it takes time to put all the results together given the frequent backlog at assay labs this past year. We were the only ones working with Century Mining on its claims, and it still took nine months of negotiations to secure the transaction. Going forward there will be regular news flow as we advance exploration.   

Bruce MacLachlan, a prospector working for the company, said that in his 30+ year career which included 18 years in the Hemlo camp, he had never had a summer like that in terms of the prospecting results he was seeing.  

I truly think that Canadian Orebodies could be onto the next major discovery.

 

Gold was well bid during the equity correction but it could not breakout then and has retreated as equities have roared back. As a result, the Gold to stocks ratio has retraced most of its recent surge. Meanwhile, the US Dollar has rebounded and the oversold and overhated bond market could be starting a rally. The recent rise in long-term bond yields which has benefitted Gold appears due for a pause or correction. Meanwhile, Gold could also correct and consolidate as it waits for a breakout in long-term bond yields which should in turn benefit Gold.

As we noted in One Big, Potential Catalyst for Gold in 2018, Gold is no longer trading with bonds and therefore could benefit from a big breakdown in bonds. As the chart below shows, the bond market has experienced a major breakdown. In recent days, the 5-year, 10-year and 30-year bonds all touched multi-year lows.

The breakdown in the bond market has helped Gold rally but why hasn’t Gold reached the corresponding multi-year highs?

First, we should remember that the correlation between Gold and bonds was positive until November 2017. The market has begun to sense inflation only recently.

Second, while bond prices have broken down to multi-year lows, bond yields (and specifically long-term yields) have yet to breakout to multi-year highs.

The chart below shows long-term yields are testing multi-year resistance. For the 10-year yield, a strong push above 3.00% would mark more than a 6-year and almost 7-year high. A break above 3.25% in the 30-year yield would mark a 4-year high.

We have argued that Gold was unlikely to breakout immediately due to its lack of relative strength as well as the lack of strength from Silver and the gold shares.

If that remains the case then we would also expect bond yields to correct and digest their recent advance rather than breakout. We should also note that the daily sentiment index for bonds hit an 18-day average of 15% bulls. That is a bearish extreme and suggests the probability that bonds will rebound and yields will decline.

Gold could be waiting for a major breakout in bond yields, which would be a reflection of increasing inflation and inflation expectations. It would also result in more pressure on the economy and therefore the stock market. That would benefit Gold in both nominal and real terms. We expect a counter-trend move in Gold and bond yields before a breakout. This will allow us a bit more time to position in the juniors that should deliver fantastic returns. To follow our guidance and learn our favorite juniors for the next 12-18 months, consider learning more about our service.

After one of the worst bear markets in history, gold and the gold mining stocks began a new bull market cycle in 2016. With the first 8 months of the year filled with incredible gains, a correction in the market ensued. Of the two, the gold mining stocks were hit the hardest, sending a large portion of the company share prices down or sideways over the last 16 months.

Today, in the 1^st quarter of 2018, physical gold continues to show strength, while the gold stocks continue to waiver.  Personally, I think the prospects of a change in sentiment toward the gold stocks will happen in 2018, and mark the next leg up in this bull market cycle.

Why do I think this is the case? There are a few reasons:

• Lack of interest – In my opinion, the weed and blockchain sectors have captured the attention of the large majority of the speculative investors over the last year. Additionally, I have read numerous articles and headlines which allude to gold losing its luster, which I completely disagree with. I believe this is a sign of a great buying opportunity in the junior gold equities.
• 1,033 point correction on the DOW – The broader market has been on a tear for roughly 8 years, and up until this 1,033 point correction on the DOW a couple weeks ago, it didn’t appear to be slowing down. It’s my contention that we are seeing an inflection point downwards in the broader markets bull cycle. My guess is that past will be prologue, gold and gold equities will be the major beneficiaries.
• Inflation – Although, I do think a correction in the broader market becomes more likely with each passing week, I see tremendous inflation in the future. In my opinion, we are entering a major bull cycle in the base metals, which will inflate the cost of living. Real assets will be sought out to curb the destructive and silent force which is inflation. The caveat to this belief is the adoption of artificial intelligence, which will have a huge deflationary impact on the world. However, I think that is still 10 years away from having a profound impact.
• Scarcity and Cost to produce an ounce of gold – As Brent Cook has often pointed out, we are losing approximately the equivalent of the Carlin Trend each year, in terms of gold ounces, and the majority of what we do discover isn’t economic below $1250 USD/oz Au. When the cost of production is more than the price of the commodity, therefore, the price has to eventually go up. I must qualify this statement by saying that, according to regular accounting, gold isn’t scarce, given the fact that more than 95% of all gold that has ever been mined still exists today, albeit in vaults. I don’t, however, foresee gold becoming any less popular as a store of value and, therefore, believe that the scarcity reference is applicable.

Mining is a sector in which the most valuable commodity, for a junior company, is the people. The right people make the right choices no matter what portion of the market cycle they are in. Therefore, picking the right people, in my opinion, gives you a higher probability of being successful with your investments. Bottom line, if you like the metal and its prospects for price appreciation in the future, buy the metal. If you’re willing to do the due diligence, and can handle/manage the risk, there is huge potential in the junior mining stocks.

Which brings me to the company I would like to update you on today, Genesis Metals Corp.

Let’s take a look!

Genesis Metals Corporation (GIS:TSXV) & (GGISF: OTC)

NOTE: DTC eligible

MCAP – $9.4 million (at the time of writing)

Shares – 74,801,204

Fully Diluted – 104,845,092

Management Ownership – 12%

The Genesis Metals Team

A junior resource company is only as good as its people, and in the case of Genesis Metals, they’ve assembled a great team.

Genesis Metals’ CEO and Chairman, Brian Groves, is a 40-year veteran of the mining industry. Groves has explored in both Australia and Canada, working with AMAX Minerals, Noranda and Manager of Corporate Development at Placer Dome. Moving up the organizational ladder throughout his career, Groves has gained valuable experience in capital markets, project development, permitting and corporate strategy. Today, he leads a group of people who have not only worked together previously, but who have a history of success within the mining industry.

Working hand in hand with Groves is Jeff Sundar, President and Director of Genesis. Sundar has 18 years of experience in the mining industry, having held a VP and Director’s position while working with other Genesis Board members in Underworld Resources. Underworld, in particular, was a great success, as the 1.6 Moz White Gold deposit was sold to Kinross for $140 million. Sundar and the team look to replicate this success with Genesis in the years ahead.

Adrian Fleming, the former President and CEO of Underworld Resources and former VP Exploration of Placer Dome, joins the Genesis team as an Executive Director. Fleming is a Professional Geologist with over 30 years of experience in the mining industry. Some of Fleming’s most notable work experience includes the following:

• Former VP Exploration for Placer Dome based in Sydney Australia. Fleming spearheaded Placer Dome into Western Australia, where he directed the group and found the Big Bell Mine.
• Fleming co-led the team that found the high grade zone at the monster, 28 Moz gold equivalent,  Porgera copper gold deposit, located in Papua New Guinea.
• Former VP Exploration for Golden Star in the early 90’s. Fleming directed the team that uncovered the Gross Rosebel Deposit, which has now grown to 17 Moz of gold.
• Fleming will be counted on to provide valuable input as Genesis moves forward with a plan to expand its Chevrier Gold Deposit resource, and explore the gold anomalies at their October gold project.

John Florek, the former Senior Geologist at Barrick Gold’s Famous Hemlo Mines, is on Genesis’ Board of Directors. Hemlo was a world-class gold deposit and is credited as being the catalyst for the 1980’s exploration boom. Florek co-led the exploration team that found an additional 2 Moz of gold, which extended the Hemlo mine life.  He was also Senior District Exploration Geologist for Placer Dome in Red Lake, and in 2008, his team was awarded the Northwestern Ontario Prospectors award. Florek’s more than 20 years of experience in the mining business as a professional geologist should add great value for Genesis in the future.

Last, but certainly not least, Andre Liboiron is the Exploration Manager for Genesis’ projects, Chevrier and October. Liboiron is a Quebec native with more than 26 years of experience as a geologist in Quebec, as well as internationally.

Strategic Advisor

Robert McLeod, Genesis Co-Founder and former Chairman of Genesis’ Board, relinquished his position because of the  heavy time commitment required by his primary focus as CEO of IDM Mining, a near term producer in BC’s Golden Triangle. Given the work history of the members of this management team, however, McLeod has agreed to remain with the company as a strategic advisor.

McLeod is on Casey Research’s Nexten list, which features the top young professionals in the mining industry. A quote taken from Casey Research’s profile of McLeod,

“Luck has nothing to do with it. Rob has the pedigree, the smarts, and the perseverance to have forged a stellar career in mining exploration and company development.” ~ Casey Research

Also, Genesis has added former Laurentian Bank Securities Mining Analyst and Peartree Securities Technical Advisor, Eric Lemieux. Lemieux is a geologist by trade and has 25 years in the mining industry with experience in a variety of areas, such as mineral exploration and project valuation. Lemieux’s  addition to the Genesis team should prove advantageous as Genesis looks to develop their properties.

Strategic Shareholders

While the people who run junior resource companies are the core component for investment, looking at the people who choose to invest in the companies is a great gauge for potential value. In Genesis’ case, there are a few heavy hitters who have taken major positions in this junior gold exploration company.

The list of strategic shareholders is headlined by Osisko Mining, which acquired a 6.4% position in Genesis through a private placement announced in 2017. For those unfamiliar with Osisko Mining, they’re a major player in the gold sector, owning strategic positions in a lot of great companies, such as: Falco Resources, IDM Mining and Beaufield Resources. Outside of owning strategic positions in companies, Osisko is exploring their 70,000 Ha Windfall property, which is located in the Urban-Barry Greenstone Belt in Quebec. Osisko is known for their geological expertise and well timed investment in smaller junior gold companies. Their investment in Genesis speaks volumes about Genesis’ potential.

The strategic shareholders list is further headlined by Eric Sprott, who has acquired a 7.2% position in Genesis through a private placement announced in 2017. Sprott is a major player in the resource sector, with a history of successful investments throughout his career. Also, Sprott has multiple Sprott named companies offering various market related products across the sector.  Over the last few years, he has taken strategic positions in a few junior gold companies such as Kirkland Lake Gold. Sprott’s investment, like Osisko’s, is a great gauge for potential value in Genesis.

For those who aren’t familiar, the Societé de development de la Baie-James (SDBJ) is a government run organization focused on the development of natural resource projects within Québec. Their mission statement is as follows;

“To promote the economic development, development and exploitation of natural resources, other than hydroelectric resources within the mandate of Hydro-Québec, of the James Bay territory, from a sustainable development perspective. In particular, it may encourage, support and participate in projects aimed at these ends.” ~SDBJ

Additionally, the SIDEX fund, which was created by the government of Québec to support mineral exploration activities within its borders, participated in the latest financing. Having both SDBJ and SIDEX as stakeholders in Genesis is a great sign of political support for Genesis’ Chevrier Gold Project. The strategic shareholders list is rounded out by Delbrook Capital, Gold 2000, US Global Investors and Medalist Capital. These organizations and people represent smart money in the sector and I’m happy to speculate along with them.

6th Best Jurisdiction for Mining Investment in the World

From a jurisdictional standpoint, it doesn’t get much better than Quebec when it comes to mining investment attractiveness. The Fraser Institute (FI) gives Quebec an index score of 85.02, ranking it 3rd in Canada and 6th in the world. FI’s mining investment attractiveness index score is reflective of both the mineral potential and the government policy perception of the region.

Source: Fraser Institute

Quebec’s Mineral Potential

Quebec is home to 25 producing mines and over 350 surface mineral mining operations, putting the value of Quebec’s mineral shipments at $8.7 billion in 2014 (Investissement Quebec). Quebec is Canada’s 2nd largest producer of gold, largest producer of iron and zinc, and the only North American producer of niobium. The mineral wealth is evident and is a big reason why FI ranks Quebec among the world’s top ten in mining investment attractiveness.

Highlighting Quebec’s world class mineralization is the Abitibi Greenstone Belt (AGB), which is 150 km wide and stretches 650 km from roughly Wawa, Ontario to Val d’Or, Quebec. The belt has produced millions of ounces of gold over its history, with the Cadillac Gold Camp, Virginiatown, Rouyn-Noranda Gold Camp, and Val d’Or Gold Camp being just a few of its largest contributors.

Source: Genesis Metals

Quebec Politics and Infrastructure

The government of Quebec supports mineral exploration within its borders with a tax credit system that refunds 25% of eligible exploration expenses for non-operating corporations, and 10% of eligible exploration expenses for operating corporations (Financial Incentives). So, roughly, for every $1 spent by a Quebec based mineral explorer, 25 cents will come back to the company, which can effectively be rolled right back into further exploration work. This is not only a huge plus for the company and its shareholders, but an ingenious way for the province to promote mineral exploration.

The long history of mining in the AGB means that most regions of the belt are accessible or near infrastructure such as highways, rail, power, and deep water ports along the St. Lawrence Seaway. Also, Quebec boasts some of the most competitive electricity rates in Canada, as its hydroelectric dams constitute a major portion of its electricity production.

Source: Genesis Metals

Finally, Quebec takes great pride in a transparent mining system, which is built around three key pillars:

“Open access to resources is ensured on the largest possible portion of territory, Mineral rights are granted on a first-come, first-served basis and if a discovery is made, the title holder can be reasonably sure of obtaining the right to develop the resource.” ~ Investissement Quebec

Favourable politics and world class geology – for me, it doesn’t get much better than Quebec, as far as your investment buck goes!

Gensis Metals Corp. – Chevrier Gold Project Phase 1 and 2 Drill Update

Genesis’ 100% owned Chevrier Gold Project encompasses 120 square km and is located 35 km south of Chibougamau, Quebec, in the heart of the Abitibi Greenstone Belt. Chevrier straddles 15 km of the Fancamp deformation zone, and is 15 km northeast of IAMGOLD’s high-grade Monster Lake gold discovery.

Chevrier has an existing NI 43-101 inferred resource for its Main Zone, which is 300,000 oz of gold at 1.99 g/t (1 g/t cut-off), and is open for further expansion at depth and to the north.

Phase 1 Drilling

Roughly 5,000 metres of drilling was completed in Phase 1 at Chevrier. The focus of the drilling was four fold; confirm historical Geonova drill holes by twinning, complete infill and step out drilling on the existing Main Zone Deposit, and finally, explore other IP and geological targets.

The results of the twinned and infill holes did not disappoint, as they confirm continuity of the shallow gold mineralization within Chevrier’s Main Zone. A full list of drill results can be found on SEDAR, a few of the highlights from the results are:

• Twinned hole GM17-09 returned 2.94 g/t gold (Au) over a width of 58.70 m (starting at 74.60 m down hole), which included an interval of 14.01 g/t over a width of 6.35 m.
• Hole GM17-20 returned 2.00 g/t Au over 35.20 m within a zone that graded 0.93 g/t Au over 94.90m starting at 91.5 m down hole.
• Hole GM17-21 returned 1.13 g/t Au over 38.05 m.
• Hole GM17-22 returned 1.06 g/t Au over 24.45 m.
• Hole GM17-16 returned 1.06 g/t Au over 14.22 m including: 3.50 g/t Au over 3.22 m.

Using the image below to reference the highlighted holes:

Chevrier Gold Project – 2017 Drilling

Trenching

The IP survey of the property identified a geophysical anomaly roughly 5 km northeast of the Chevrier Main Zone.  During the Phase 1 drill program, Genesis completed exploration of this anomaly via trenching. In a news release on October 3^rd, 2017, Genesis reported that they had identified a new area of gold mineralization in Trench 29, returning a channel sample of 2.55 g/t Au over 2.3 m.  This area will be explored further in the future.

Phase 2 Drilling

On January 22, 2018 Genesis announced the results of its 5,000 metre Phase 2 drill program on the Chevrier Gold Project.  The Main Zone was the focus of Phase 2, completing 18 holes of infill and step-out drilling. The results, in my opinion, look good. Check out highlights from the drill program:

• 8.73 g/t Au over 21.35 m including 37.97 g/t Au over 3.00 m in hole GM-17-42
• 3.59 g/t Au over 22.60 m in a separate zone in hole GM-17-42
• 4.26 g/t Au over 19.40 m including 8.99 g/t Au over 7.80 m in hole GM-17-48
• 4.47 g/t Au over 12.45 m within an interval of 1.08 g/t Au over 84.85 m in hole GM-17-46
• 5.06 g/t Au over 8.45 m and 1.23 g/t Au over 43.00 m in two intervals in hole GM-17-41
• 4.53 g/t Au over 13.80 m in hole GM-17-44
• 1.04 g/t Au over 50.05 m including 1.94 g/t Au over 17.10 m in hole GM-17-44

Putting the results into perspective, remember that the Main Zone’s existing inferred resource has an average grade of 1.99 g/t.  The impact of these shallow, higher grade results should be realized in Genesis’ resource update for the project coming later this year.

Additionally, and of particular importance, was the step-out results which came from holes GM-17-45 and GM-17-46. These holes were drilled with the intent of testing for an extension of the mineralization from hole GM-17-09, which was drilled in Phase 1 (refer to the image above for the location).

The results from these two holes reveal a new north-east trending shallow extension of the mineralization discovered in GM-17-09. Specifically, from the drill results table in the news release , GM-17-45 returned a shallow interval (35.4 m down hole) of 63 metres at 0.5 g/t gold, while GM-17-46 returned a shallow interval (19.35 m down hole) of 84.85 metres of 1.08 g/t gold.

PUSH: Announcement of follow up drill program on the Main Zone, focusing on the high grade holes which were discovered in 2017.

PUSH: Chevrier Gold Project resource estimate update in 2018.

Chevrier South Zone

While Chevrier’s Main Zone, with its existing Inferred Resource, has garnered the bulk of drilling over the history of the Project, I believe there’s the possibility of some great results from Chevrier’s South Zone. Why? Although the South Zone doesn’t have an existing 43-101 resource, Met-Chem’s comments within the technical report state,

“the Chevrier South deposit contains a potential between 8.5 and 9.0 million tons of mineralized material grading 1.8 to 2.2 g/t Au.” ~ Met-Chem – 43-101 Technical Report on the Mineral Resource of the Chevrier Gold Project – pg.93

If you express the 8.5 million tons of mineralized material at 1.8 g/ton, you get 459,000 ounces of gold. Met-Chem’s reference to the possible resource size of the South Zone deposit is based off a small historical drill data set and its similarities in alteration and deformation like the Main Zone. The fact is, the South Zone needs further drilling before a 43-101 complaint resource can be officially estimated.

As Genesis intends to update the Chevrier Gold Project resource estimate in 2018, I believe there’s a good chance that we could see them refocus their attention on the Project’s South Zone. Given Met-Chem’s comments, I believe there’s good reason to believe drilling within the South Zone could have a tremendous impact on the updated resource estimate for the entire Project.

In my opinion, the updated resource on the Chevrier Gold Project, which will include both the Main and South Zones, will exceed 1 million ounces and should set Genesis up for a market re-rating, as its current sub $10 million MCAP doesn’t reflect the potential of what it possess.

PUSH: Watch for the announcement of a drill program on Chevrier‘s South Zone. The results from a South Zone drill program could have a major impact on Chevrier’s updated overall resource estimate.

October Gold Project

Genesis also owns 100% of the 203 square km October Gold Project, located in the southern Swayze greenstone belt in Benton Township, Ontario. This project is located 35 km northwest of IAMGOLD’s Cote Lake deposit, and 50 km southeast of Goldcorp’s Borden Gold Deposit. The Cote Lake Deposit was purchased by IAMGOLD from Trelawney Mining for $585 million, while the Borden Gold Deposit was purchased by Goldcorp from Probe Mines for $526 million. This demonstrates how coveted this Ridout Deformation Zone is, and Genesis’ October Gold Project is right in the middle, and on trend.

IAMGOLD announced in a press release on June 5, 2017 that Sumitomo Metal Mining has acquired a 30% undivided participating joint venture interest in IAMGOLD’s ownership interest in the Cote Gold Project for an aggregate $195 million. Sumitomo’s interest in this area of Northern Ontario should bring more attention to the surrounding land claim owners, one of which is Genesis’ October Gold Project.

The October Gold Project straddles what is considered the western extension of the Larder Lake-Cadillac Deformation and a portion of the Ridout Deformation zone. Historic gold deposits on these deformations, Kirkland Lake and Kerr Addison-Chesterville, have historic gold production north of 49 Moz.

The October Gold property saw surface exploration work in 2011. The program comprised of Soil Gas Hydrocarbon (SGH) sampling and reconnaissance level gravity geophysical surveys.

“A SGH survey is a deep penetrating geochemical method that involves the analysis of various hydrocarbons associated with ore bodies at depth using a forensic and comparative approach for Identification. “ ~ Genesis

The program has identified two gold anomalies, which Actlabs, the interpreting laboratory, says have a high degree of confidence. This confidence is based on comparisons with other surveys that Actlabs has completed on other gold deposits. These anomalies will see future surface work which should better define where the diamond drilling should take place.

The October Gold project property is early stage, but holds very promising gold exploration potential.

Concluding Remarks

The Genesis Metals story is not without risk, as any gold exploration company runs the risk of not finding anything or not finding mineralization which is economic. In Genesis’ case, I believe further modelling of the gold grade distribution within the Main Zone, should feed nicely into Chevrier’s updated resource estimate later this year. While on the exploration side, drilling on Chevrier’s South Zone appears to be very promising.

Outside of the risk of exploration, Genesis has some compelling facts that make their story undervalued in comparison to the paltry sub $10 million MCAP that they currently possess, including:

• A proven management team: Groves, Sundar, Fleming, Florek, Liboiron and Mcleod
• Strategic Shareholders List Headlined by: Osisko Mining, Eric Sprott, Delbrook Capital, Gold 2000, US Global Investors, SIDEX/SDBJ and Medalist Capital
• Located in the 6th best jurisdiction in the world, Quebec
• PUSH: Announcement of a follow up drill program, focused on Chevrier’s Main Zone high grade drill holes, which were discovered in 2017.
• PUSH: Announcement of a drill program focused on Chevrier’s South Zone in 2018.
• PUSH: 2018 Chevrier Gold Project Resource Estimate Update – In my opinion this estimate could exceed 1 million ounces of gold.
• Great bang for their drilling buck, as their all-in drill costs thus far have roughly averaged $220 per metre
• Large land package with exploration potential, Chevrier Gold Project and October Gold Project

The next leg of the gold bull market is upon us, fortunes will be made in the coming years by buying right and sitting tight, investing in companies that look to add value for their shareholders. Genesis Metals (GIS:TSXV) is a great example of this and is a company in which I’m investing.

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 Genesis Metals Corporation stock. All Genesis Metals Corporation analytics were taken from their website and press release. Genesis Metals Corporation is a Sponsor of Junior Stock Review.

Northern Empire Resources Corp. (TSX-V: NM) released results from its Daisy Deposit  as part of its 2018 15,000-metre drill program to expand resources at the Sterling Gold Project in Nevada.  These results will go towards an updated resource due in the first half of 2019 and indicate the potential for an open pit, heap leach operation. The Daisy Deposit is located within the Crown Block of deposits in the north of the Company’s property.

Drill hole D18-003C was a vertical core hole that returned an intercept of 123.93 meters of 1.41 grams per tonne (g/t) gold (Au). The intercept included 38.25 meters of 3.09 g/t Au and oxides in the hole extended to a depth of 173 meters.

This is the third drill hole Northern Empire has reported from the Daisy Deposit.  Results from last year included 47.24 meters of 1.47 g/t Au in hole D17-001 and 21.34 meters of 1.83 g/t Au in hole D17-002.   All historical drilling at Daisy occurred before the introduction of NI 43-101 reporting standards, so confirmation drilling is required to expand the resource. Historical drilling was also all reverse circulation (RC), so core holes are vital for developing a comprehensive geological model.

In comparison to historical holes near D18-003C, yesterday’s result encountered mineralization closer to surface than expected. In concert with nearby mapping and sampling which returned surface grades of up to 15g/t, these results are demonstrative of the potential this system could be larger than previously thought.  

Michael G. Allen, President and CEO, commented:

“D18-003C is the first of at least 10 exploratory, resource expansion, and infill holes that we plan to drill into the Daisy Deposit as part of our 15,000-meter program.  The exceptional grade of these results is very encouraging. All of the mineralization from 67.88 to 173.22 meters down the hole was oxidized, as was the final 2.87 meters of mineralization. For the high-grade core of the deposit, where we cut 38.25 meters of 3.09 g/t gold, cyanide solubility assays averaged 90% of fire assay, indicating that the Daisy deposit may be amenable to open pit mining with heap leach recovery of gold.”

The broad intervals of relatively shallow, high-grade oxide mineralization present here are key if Daisy is to ever benefit from a low cost and efficient open pit, heap leach operation.  The advantage of heap leach mining is that they generally have low all-in sustaining costs and provide rapid payback to the operator. The average grade of heap leach operations in Nevada is approximately 0.7g/t gold, which would make the inferred resource at Daisy of 174,000oz of gold at 2.12g/t triple that.

The Daisy Deposit is located in the Bare Mountain district known for its legacy of past production. The trend is along an east-west structure that hosts Barrick’s Bullfrog Mine on the westernmost extension and stretches to the east where Northern Empire’s SNA deposit and Corvus Gold’s (TSX: KOR) Mother Lode deposit. Mother Lode is located completely within Northern Empire’s claim package. Along this trend, more than four million ounces of gold have been extracted or identified in situ.

With several high-grade historical holes and showings, Northern Empire’s overall land package remains underexplored and numerous regional targets demand follow-up.   For 2018, Northern Empire management put together a large exploration program with the intention to expand the resource through drilling. The company’s exploration is starting to demonstrate the potential at the Daisy Deposit.

The market has been responding positively to drill results. Since initial results released from the Daisy deposit on October, 04, 2017, shares in the company have moved from 77 cents per share to a year-high of $1.43, and at close of Feb. 23, 2018, $1.30.  Upon release of the most recent results from Daisy, the stock rose 12 cents to $1.39 on 231,088 shares.

The company is also responding positively to these results with immediate plans to mobilize an additional drill rig to Daisy. Currently rigs are working on the SNA and Secret Pass deposits which are part of the Crown Block of deposits which includes the Daisy Deposit. In addition, field crews are mapping extensions of the known deposits and new drill targets.

This is just the beginning for Northern Empire in Nevada.  Nevada is one of the largest gold producers in the world, renowned for open pit deposits which are amenable to heap leach mining.  The early results from Daisy are indicating that the company is on the right track to adding high grade ounces to support the case for another open pit, heap leach mine in Nevada.

 

1. For the past fifteen months or so, gold has repeatedly been turned back by immense technical resistance in the $1370 area.
2. Please click here now.  Double-click to enlarge this daily gold chart.
3. There have been three clear attempts to push through the $1370 area since November of 2016.  The first two failed miserably, but the current move looks much more positive.
4. During the latest pullback from $1370, the bears have only managed to push the price modestly lower, to my key buy zone at $1310.
5. The gold price promptly leaped higher as soon as it touched that area.  This is very positive technical action.  If the bulls fail a third time (unlikely), investors should be aggressive buyers at my $1270 and $1240 buy zones.
6. Please click here now. Double-click to enlarge this gold chart for a closer look at the current price action.
7. Gold is attacking the $1370 area from a symmetrical triangle pattern.  Using the classic technical analysis promoted by Edwards & Magee, there is roughly a 67% chance of an upside breakout.
8. That breakout would push the world’s mightiest metal through $1370… and open the door for a rush higher towards $1420, $1470, and $1520!
9. Please click here now. Double-click to enlarge this exciting dollar versus yen chart.
10. The dollar’s breakdown under the key 108 support area adds tremendous weight to the argument that gold is poised to surge above $1370.
11. Most Trump supporters are focused on his campaign pledges regarding immigration, tariffs, defence, deregulation, and tax cuts.  Their focus is on growth rather than inflation.  That’s a mistake.  
12. Reduced immigration tightens the labour market, pushing inflation higher.  Borrowing money to buy more bombs to expand an already-gargantuan military-industrial complex puts immense pressure on the bond market. Deregulation and tax cuts are also inflationary.
13. While these pledges are indeed positive for gold, my main focus has always been on his more “thunderous” pledges regarding dollar devaluation and a haircut for T-bond investors.
14. The dollar breaking 108 is a gamechanger, and the T-bond chart now looks like a train wreck.  As bad as it looks now, this may be only the beginning of a bond market nightmare.  The bottom line is that Jerome Powell could essentially drop financial nuclear bombs on that train wreck with relentless rate hikes, quantitative tightening, and small bank deregulation.
15. To view the current T-bond train wreck chart, please click here now. Double-click to enlarge.
16. The T-bond has arrived in the 142 target zone area of the H&S top pattern and a modest rally is expected. Having said that, fundamentals make charts.
17. The negative fundamentals that Jerome Powell is set to put on the US government’s bond market table are going to put truly epic pressure on the government’s ability to finance itself.
18. Trump is a brilliant businessman, but even a child operating a hot dog stand should clearly see that the US government’s debt problem has no solution other than some kind of bond market default, dollar devaluation, and gold revaluation.
19. Trump is not concerned about the US debt problem, and nor should he be concerned if he’s a realist that knows there is no fix to the problem, only an end to it.  An endgame that is incredibly positive for gold.
20. Please click here now.  Double-click to enlarge this GDX daily chart.
21. Legendary mining expert David Harquail is launching a major drive to make gold an asset owned by most Western money managers.  He’s bringing in heavyweight speakers like Alan Greenspan and other key central bank experts to bolster his presentations to institutional money managers.
22. I’ve predicted that this would happen by the summer of 2018 as the Fed successfully transitions America from a deflationary vortex into a modest growth with significant inflation economy.
23. King World News has covered the dramatic increase in free cash flow of most GDX component stocks.  “Super Dave” Harquail is likely to get a US M2 money velocity bull market wind at his back (thanks to the efforts of Jerome Powell’s rate hikes and QT) as he makes his institutional presentations that highlight both bullion and the miners.
24. If that happens, the Western gold community is very quickly going to be happily looking down at prices like GDX $32, $40, $55, $65, and even $100!  Of course, that happiness can only happen if gold stock enthusiasts are prepared to take buy-side action right now in my key $23 to $18 GDX price range with a focus on their favourite individual miners!

Thanks and Cheers,

Stewart Thomson 

Graceland Updates

https://www.gracelandupdates.com

Email:

stewart@gracelandupdates.com

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?

Gold is faring quite well today technically, though you sure wouldn’t know it from the rampant bearish sentiment.  Gold’s price is in a strong uptrend over a year old, high in both its current upleg and young bull market.  Gold isn’t far from breaking out to its best levels since September 2013, a really big deal.  The stock markets even finally sold off after years of unnatural calm.  Yet traders are still down on gold.

Across all markets price action drives psychology.  When something’s price is rising, traders get excited and bullish on it.  So they increasingly buy to ride that upside momentum, amplifying it.  Of course the opposite is true when a price is falling, which breeds bearishness and capital flight.  Given gold’s great technical picture today, investors and speculators alike should be growing enthusiastic about its upside potential.

But they really aren’t, which is certainly curious.  Gold’s current upleg was born right before the Fed’s last rate hike in mid-December.  Everyone thinks Fed rate hikes are very bearish for gold, but history proves the opposite as I argued near gold’s recent interim lows.  In the 2.4 months since, gold has rallied 6.6% as of the middle of this week.  That trounces the leading benchmark S&P 500 stock index’s mere 1.6%.

Gold’s rate of ascent since mid-December annualizes out to a 33% pace, which is pretty darned exciting!  Yet gold’s two primary sentiment proxies, silver and the stocks of gold miners, show enthusiasm for gold is nonexistent.  Over that same current-gold-upleg span, silver is only up 5.0% while the HUI gold-stock index clocked in with a dismal 1.8% gain. Normally silver and the gold stocks leverage gold upside by 2x to 3x!

As I discussed about a month ago, gold is on the verge of a major breakout that would greatly shift psychology back to bullish.  Gold’s bull-to-date peak was carved in early-July 2016 at a $1365 close.  For a variety of reasons gold stalled at best since.  Just a month ago gold surged to $1358 though, and only a week ago it hit $1353.  It wouldn’t take much of a rally to boost gold to new bull-market highs to catch the limelight.

Generally upside breakouts have to be decisive to really attract traders’ attention.  I define that as 1% beyond the old level, so $1379 in gold’s bull-high case.  That’s only a handful of good up days away, not far at all.  And that’s close to $1383, which is gold’s best level in a whopping 4.5 years.  Start pushing $1400 again, and even oblivious traders who’ve long forgotten about gold will realize something big is changing.

On top of these key technical upside-breakout levels so close, the sharp stock-market selloff is fantastic news for gold investment demand.  The S&P 500 plunged 10.2% in just 9 trading days!  That ended an all-time-record 405-trading-day span without a mere 5% pullback, and is the first stock-market correction in 2.0 years.  Stock selloffs are very bullish for gold, as investors remember the wisdom of diversifying portfolios.

So gold’s popularity should really be mounting now given its strong price action.  Yet that certainly hasn’t happened yet, gold’s sentiment is really curious.  The prevailing psychology remains quite bearish, which feels much more like a major bottoming.  The fear, anxiety, and apathy somehow still plaguing gold is the polar opposite of the greed and excitement near major highs.  Gold is still overlooked, ignored, and shunned.

This weird sentiment anomaly totally disconnected from technical realities can and will turn fast, likely as gold decisively breaks out to new bull highs.  That could happen anytime in the coming weeks or maybe months, it is nearing.  But for now, it’s useful to understand why gold oddly remains so out of favor.  The answer lies in the psychology of gold’s two primary driving forces, futures speculators and stock investors.

Gold-futures speculators exert inordinate influence on daily gold price action.  This is primarily due to the extreme leverage inherent in futures trading.  This week a single gold-futures contract that controls 100 ounces of gold has a maintenance-margin requirement of just $3500.  That’s all the capital traders need to buy or sell a contract.  But at this Wednesday’s $1323 gold, each contract controls gold worth $132,300.

That equates to extreme maximum leverage of 37.8x, death-defyingly high!  For comparison, the legal limit in stock markets for decades has been 2.0x.  At 35x leverage, each dollar speculators deploy in gold futures has 35x the gold-price impact of another dollar used to invest in gold outright.  Such ridiculous leverage allows futures speculators to collectively punch far above their weights, dominating gold-price action.

As if that’s not unfair enough to normal investors, gold futures’ extreme leverage necessitates an ultra-short-term focus.  Again at 35x leverage, a mere 2.9% adverse price move in gold would wipe out 100% of the capital speculators risked!  So these guys are forced to think in terms of minutes, hours, days, or sometimes weeks for their trading time horizons.  The months and years of investors may as well be eternities.

That incredibly-myopic view on gold creates all kinds of problems because data is far too sparse to justify ultra-short-term trading.  The best fundamental data available on gold is only published once each quarter by the World Gold Council.  Some other localized peripheral data is released monthly.  So with insane leverage compressing down speculators’ gold outlooks into days or less, they have nothing to trade on.

Instead of backing way off on their leverage and taking rational longer-term trading spans, they fabricate their own gold-trading cues.  The two they’ve collectively decided on are the price action in competing US Dollar Index futures and the closely-related Fed-rate-hike outlook.  Developments there motivating gold-futures speculators to act are half of the explanation surrounding gold’s curious sentiment these days.

Nearly a month ago futures speculators bid gold up to $1358.  They were watching USDX futures, as that leading US dollar benchmark was grinding inexorably lower.  On February’s first trading day, the USDX slumped to a major 3.1-year secular low.  That weak dollar is what drove gold tantalizingly close to a major bull-market breakout.  But futures speculators were perplexed if not angry this was actually happening.

These elite traders hold tight to certain core beliefs with tenacity that puts religious zealots to shame.  The main one is that Fed rate hikes are bullish for the US dollar and therefore bearish for gold.  The idea is simple, higher rates boost dollar yields making it relatively more attractive than other currencies.  So foreign investors rush to buy, bidding the dollar higher.  Futures speculators know this is how the world works.

That logic appears sound, but what if their deeply-held thesis simply isn’t true?  The Fed’s current rate-hike cycle began in December 2015 after 9.5 years with no rate increases, and 7.0 continuous years of a zero-interest-rate policy.  The 5 hikes since coming off a near-zero base should’ve been wildly bullish for the USDX, right?  Futures speculators bet heavily long the dollar and short gold heading into that initial hike.

Yet since the day before the Fed started its current rate-hike cycle, the USDX is down 8.3% and gold is up 24.7% as of the middle of this week!  Clearly Fed rate hikes aren’t as bullish for the US dollar or as bearish for gold as futures speculators thought.  You’d think they’d be smart enough to form their trading strategies based on hard data instead of mere conceptual arguments.  But they steadfastly refuse to budge.

Gold started to sell off on Friday February 2nd in the wake of the latest monthly jobs report.  It saw wage growth climb at its fastest annual pace since June 2009, stoking inflation fears.  Higher inflation implies the Fed will have to hike rates faster.  So the oversold USDX surged 0.7% higher that day, making for its biggest up day since late October.  Gold-futures speculators saw that and fled, hammering gold 1.4% lower.

The S&P 500 happened to plunge 2.1% that day on those same inflation fears, its own worst down day since early September 2016 before Trump won the election kicking off the extreme taxphoria rally.  That sharp stock-market drop shattering the unnatural calm was the dominant news that day.  That led investors to assume gold fell because the stock markets sold off, but the real reason was that big dollar bounce.

That’s happened before.  Back in late 2008 during that first stock panic in a century the USDX rocketed 22.6% higher in just 4.2 months, its biggest and fastest rally ever!  That was in response to safe-haven buying as the S&P 500 plummeted 38.1% in that short span.  But that epic dollar strength hammered gold a proportional 23.7% lower.  Investors wrongly figured weak stock markets hurt gold, but it was the hot dollar.

When stock markets fall sharply, cash suddenly becomes much more attractive than stocks.  So dollar demand surges as stocks plunge.  Gold-futures speculators see that and dump gold, driving it lower.  This dynamic fully explains gold’s weakness in recent weeks. Every single gold down day was the direct result of a parallel USDX rally!  That was true in early-February’s S&P 500 selloff and then again this week.

Since the dollar’s action and the Fed-rate-hike outlook is the extent of gold-futures speculators’ entire trading worldview, they’ve been really bearish on gold as the dollar bounced twice this month.  Thus they have greatly pared their long gold-futures positions.  This chart superimposes gold over the total gold-futures long and short contracts held by speculators, published weekly in the Commitments of Traders reports.

CoT data is released late each Friday afternoon current to the preceding Tuesday close.  So the latest-available data on speculators’ collective gold-futures trading when this essay was published is as of February 13th.  In just the 3 CoT weeks since gold hit $1358, these guys dumped a massive 59.8k long contracts!  That’s equivalent to 185.9 metric tons of gold, a huge amount.  No wonder gold couldn’t rally during that.

But interestingly all that frenzied gold-futures long selling on modest US-dollar strength drove specs’ total longs back down to their gold-bull support line rendered above in green. Other than a brief break below leading into the Fed’s last rate hike, strong buying has soon followed earlier support approaches.  That has fueled sharp gold rallies once spec longs hit support.  That will likely prove true again in coming weeks.

Despite the extreme leverage they wield, gold-futures speculators’ capital is finite.  They only have so much they can deploy on both the long and way-smaller short sides of the trade.  So looking at where specs’ total longs and shorts are relative to their own past-year trading ranges offers an excellent approximation of how much buying or selling firepower these guys have left.  That greatly affects gold’s outlook.

As of last Tuesday the 13th, their total longs were only running 35% up into their past-year trading range.  That means these elite traders still had room to do nearly 2/3rds of their likely near-term buying!  That’s very bullish.  The short side was far-less bullish, with speculators’ total gold-futures shorting running just 14% up into their past-year trading range.  That means 6/7ths of likely short-covering buying was already done.

The gold-price impact of buying new long contracts or buying to cover existing shorts is identical.  If these total long and short trading ranges are combined, speculators’ effective total upside bets on gold were at 55%.  That implies 45% of probable near-term buying remains!  That’s exceptionally bullish with gold still up near major breakout highs. Normally near highs 80% to 90% of buying power has already been expended.

So once the USDX inevitably turns lower again, there’s lots of room for speculators to buy gold futures and push gold higher.  The dollar weakness will likely reemerge on ballooning US deficits and debt.  The Republican lawmakers are keeping the extreme out-of-control government spending of the Obama era intact, while simultaneously cutting taxes.  Rising rates are also catapulting US interest expenses much higher.

And more Fed rate hikes aren’t likely to ride to the dollar’s rescue.  The USDX entered the last Fed-rate-hike cycle between June 2004 to June 2006 relatively low, perfect conditions for a rally.  Then the FOMC hiked 17 times in a row, more than quintupling its federal-funds rate to 5.25%.  Yet the USDX still slipped 3.8% over that exact span, while gold powered 49.6% higher!  Fed rate hikes haven’t proven great for the dollar.

The second driving force behind gold’s curious sentiment is little investor interest. Investors control vastly more capital than futures speculators.  So when investment capital is moving into or out of gold in any significant way, it overpowers and drowns out all the daily gold-futures noise.  Stock selloffs greatly boost gold investment demand, but not immediately.  Investors first get distracted by the dollar-driven futures action.

The S&P 500 plunged 8.5% in just 5 trading day ending February 8th, a precipitous tumble.  Yet instead of surging on that stock weakness, gold dropped 2.4%.  Investors assume that was in sympathy with the stock markets.  But it was really the result of the USDX surging a similar 2.0% over that span on safe-haven buying.  The dollar surging on heavy demand in the hearts of stock-market selloffs delays gold’s reaction.

So investors weren’t yet flocking back to gold earlier this month.  The world’s dominant gold ETF publishes its physical-gold-bullion holdings held in trust for shareholders daily. The GLD SPDR Gold Shares showed no holdings builds as stock markets recently plunged, indicating stock-market capital wasn’t yet flowing into gold.  There were actually sizable draws over that span as stock investors dumped GLD shares.

When stock markets fall sharply, investors freak out.  Fear flares so fast that people have to act instead of think.  So they sell everything they can to raise cash, including gold. Weaker gold prices driven by futures selling in response to the surging USDX exacerbate any gold selling.  In the heat of the moment investors think gold gets sucked into stock-market selloffs, that it really doesn’t move counter to stocks.

But once the biggest-fear days in stock-market selloffs pass, investors come to realize they are taking on too much risk with their stock-dominated portfolios.  So they start rebuilding depleted gold positions in the wake of major stock-market selloffs.  We’re indeed already seeing modest GLD builds return over the past week or so.  And this same dynamic was actually what birthed today’s gold bull back in early 2016.

Heading into that first Fed rate hike in 9.5 years in December 2015, gold slumped to a brutal 6.1-year secular low.  Because futures speculators are totally convinced Fed rate hikes are kryptonite for gold, history be damned.  The S&P 500 had gone a near-record 3.6 years without a single 10%+ correction, so complacency was extreme.  Investors believed stocks did nothing but rally, so they could hold them forever.

Finally back-to-back S&P 500 corrections arrived in mid-2015 into early 2016.  This benchmark stock index fell 12.4% in 3.2 months, bounced most of the way back, and then dropped another 13.3% over 3.3 months into mid-February 2016.  That first SPX correction only spurred limited gold investment buying.  Stock investors weren’t very worried the lofty stock markets would head much lower again, so they procrastinated.

Yet after that second correction arrived shortly after, differential GLD-share demand exploded!  Investors flocked back to gold to prudently diversify their stock-heavy portfolios.  That heavy investment buying catapulted gold 29.9% higher in just 6.7 months, birthing today’s bull market.  Gold kept rallying rather relentlessly until the stock markets finally made new highs which totally dispelled weaker-stock worries.

The same thing happened during and after 2008’s epic stock panic.  Gold was hammered by the skyrocketing USDX during that extreme stock-market selloff.  But in the following months gold investment demand blasted higher as investors realized they needed counter-moving gold allocations in their portfolios.  That heavy gold investment demand persisted for years after the stock panic, driving gold to record highs.

History has shown over and over that gold investment demand is weak when stock markets are high and euphoric.  Why buy gold when stocks apparently do nothing but rally indefinitely?  But once corrections or new bear markets emerge to rebalance sentiment and knock back overvalued, overbought stocks, gold soon returns to favor.  That doesn’t happen instantly, as safe-haven dollar buying temporarily forces gold lower.

But after major selloffs when investors start to realize that stock markets can fall too, they start thinking about gold again.  It’s the ultimate portfolio diversifier.  That post-selloff gold-investment process is very gradual, it takes months or years to rebuild significant gold positions relative to stock portfolios.  Odds are a similar outcome will play out again following this latest sharp S&P 500 selloff, which likely isn’t over yet.

Given the radical gold underinvestment following this extreme stock bull, investors will likely have to do big gold buying for years to reestablish normal portfolio allocations.  That will continue to fuel this young gold bull born in late 2015 in the previous stock-market correction.  At best gold was only up 29.9% so far as of mid-2016, nothing yet.  The last gold bull powered 638.2% higher over 10.4 years ending August 2011!

While investors can ride gold’s ongoing bull in GLD shares, far better gains will be won in the stocks of its leading miners.  They tend to amplify underlying gold gains by 2x to 3x due to their profits leverage to gold.  With gold so out of favor, the gold stocks are deeply undervalued today.  That gives them huge upside as gold mean reverts higher, dwarfing everything else in all the stock markets.  Fortunes will be won.

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’s curious sentiment today results from an interplay of factors. Safe-haven dollar buying erupted as usual during the stock markets’ first real selloff in a couple years.  That led the gold-futures speculators to sell aggressively, driving gold lower. Investors saw gold falling with stocks and wrongly assumed stock selloffs aren’t bullish for gold.  And their confidence in stocks remains very high.

But as stocks head lower again after their post-correction bounce, psychology will really shift.  Investors will increasingly worry that stock weakness could persist for some time.  They will remember gold is the ultimate portfolio diversifier, and start shifting capital back into it.  The resulting investment buying will persist for months or even years, drowning out whatever the hyper-leveraged gold-futures speculators are up to.

Adam Hamilton, CPA

February 23, 2018

Copyright 2000 – 2018 Zeal LLC (www.ZealLLC.com)

 

1. I’ve noted that when China’s markets go quiet during the “Golden Week” holiday, the gold price tends to soften.
2. Please click here now. Double-click to enlarge this key gold chart.  Price softness is expected during this holiday, and the good news is that it is occurring on very light volume.
3. The bears would argue there’s a small double top in play, while the bulls have an inverse head and shoulders bottom pattern on their team.  A bull flag pattern may also have formed.
4. I’ve told investors to expect a substantial battle between the bulls and bears in the $1370 area, and that’s exactly what is taking place.
5. Please click here now. Double-click to enlarge this US dollar versus Japanese yen chart.  After tumbling through key support at 108, a relief rally is now in play.
6. The 108 area is now resistance.  For gold, the price action of the dollar against the yen is very important.  I expect the dollar’s relief rally to fail in the 108 – 110 area, and then a descent towards par (100) should get underway.
7. That would be a key signal that gold is going to move above $1370 and attract significant institutional interest by doing so.
8. In terms of trading volume, gold is a huge market.  On a daily basis, dollar volume for gold trading in London is about as big as all the dollar volume for all the stocks traded on the New York Stock Exchange.
9. Banks trade gold as a FOREX market currency.  In terms of volume, it’s the fifth most active in the world.  So, when the gold price weakens as Chinese buyers go on holiday, that can affect other major markets.
10. For example, today the Dow is down, bonds are down, but the dollar is up against the yen.  That’s because Golden Week is pushing gold down against the dollar and FOREX traders are reacting to that in the dollar-yen market.
11. Please click here now. Double-click to enlarge this T-bond chart. Most bank analysts thought that gold would fall if the Fed launched quantitative tightening and rate hikes.  Instead, gold has rallied since the tightening cycle began, as I predicted it would.
12. Most investors underestimate the effects of love trade demand for gold (or lack of it) on the world’s major markets.  Gold demand growth in China and India can put pressure on US interest rates.  That’s because bank FOREX traders react to the rise in the gold price by selling the dollar.
13. Credit Suisse notes that countries like China are increasing their “dedollarization”.  That’s more good news for gold.
14. Trump and most congressmen are aggressively increasing the US government’s debt.  I’ve argued that Trump likely believes there is no solution to the government’s debt problem other than gold revaluation, dollar devaluation, and T-bond default.
15. Since there is no real solution and Trump is a pragmatist, he just lets the debt rise to the T-bond default/gold revaluation point.  It’s a wise move on his part, and fabulous news for gold stocks!
16. Please click here now. Double-click to enlarge this GDX chart.  GDX has again entered my ultra-important $23 – $18 accumulation zone.  Investors need to keep their eye on the US M2 money velocity reversal prize, because that is what will produce sustained outperformance of gold stocks against gold.
17. On that note, please click here now. Fred Hickey does a spectacular job of outlining the mindboggling undervaluation of gold stocks versus bullion.  The same is true for the silver stocks; the miners have cut costs but are trading at generational lows against bullion.
18. Fred notes that for the average GDX component stock the spread between the company’s revenues and costs is about the same as it was in 2012, there are less GDX shares outstanding now, but the GDX ETF price is now about $22 versus about $45 in 2012!
19. Many gold market analysts have noted the facts that Fred notes.  To repeat, what creates a sustained outperformance of gold stocks versus bullion is inflation.  To get serious inflation, money velocity must rise.
20. To get a rise in money velocity, fiat money must move out of the deflationary hands of the US government (T-bonds) and into the fractional reserve banking system.  To get that job done, rate hikes and quantitative tightening are mandatory catalysts.
21. The great news is that Jerome Powell is now sitting in the Fed’s big chair.  On March 21 he is going to set the tone for the rest of the year with his statements and actions.  Jerome has stated that he doesn’t really follow the stock market.
22. That’s a slap in the face for mainstream analysts that literally worship the US stock market as some kind of “supreme being”.  Jerome is set to do a lot of the things that Paul Volker did in the 1970s (without the cigars, fanfare, and ego).
23. Ben Bernanke promoted deflation with QE and rate chops.  That produced a dramatic acceleration in the gold stocks versus gold bear cycle.  Janet Yellen talked a great inflationary talk, enacted the right policies to get the inflationary job done, but moved at a snail’s pace.
24. Jerome has tax cut inflationary wind at his back, and I expect most market gurus (mainstream and gold) to find themselves shell shocked when Jerome shows them on March 21 just how focused he really is on reversing US money velocity.  Let’s hope the entire world gold community is as focused as I am on accumulating key gold stocks in my $23 – $18 buy zone for GDX, in preparation for a major league bull market in US money velocity!

Cheers

Stewart Thomson, Graceland Updates

Note: We are privacy oriented.  We accept cheques, credit card, and if needed, PayPal.

Written between 4am-7am.  5-6 issues per week.  Emailed at aprox 9am daily.

https://www.gracelandupdates.com

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?

Gold has been on the cusp of a major breakout but someone forgot to tell the gold stocks. Gold is right back at resistance levels yet the various gold stock indices are off their September 2017 highs by 11% to 16%. The relative weakness in the gold stocks (and Silver) is a signal that Gold is unlikely to breakout now. In fact, if Gold were to correct here the gold stocks could threaten support and perhaps make new lows. While that sounds quite bearish, history shows that a break to new lows in gold stocks would be a massive buy signal.

The history we refer to is the path of recovery for a market following a mega-bear, which we define as nearly 3 years and at least an 80% decline. There are three strong historical examples. Those are the S&P 500 during the Great Depression, Thailand after its bust in the mid to late 90s and the housing stocks after 2005 to the March 2009 low. The recovery in each (following the mega-bear) followed three distinct phases. There is a sharp initial rebound which is followed by a correction and lengthy consolidation which lasts at least 18 months. Eventually, the long consolidation ends and the market surges higher in an impulsive fashion.

The gold stocks are currently in the 19th month of their correction and consolidation. They bounced from support in December but retraced that entire bounce. After a second rebound from support, they could threaten a break of that support. Below we show the HUI Gold Bugs Index which does not include the royalty companies as GDX does. The HUI is not too far from its December 2016 low and could even break it if Gold were to correct.

Conventional technical analysis would imply that is a sell signal for the gold stocks.

But history argues the complete opposite.

In the 21st month of its correction and consolidation in 1935, the S&P 500 had broken down to a 2-year low. Was the market headed for a retest of the Great Depression low?

In the 19th month of its consolidation in the fall of 2011, housing stocks had broken to a 2-year low. Was the sector headed for a retest of the Global Financial Crisis low?

Thailand’s correction and consolidation phase was different than the others as it made its low only 15 months in but then consolidated and grinded slightly higher for the next 13 months before exploding to the upside. At its corrective price low 15 months in the index was at a 2-year low.

The HUI closed Friday just below 185. Its December 2016 low is 163.49. A 12% decline would put it below its December 2016 low and at a 2-year low.

The three historical examples all made 2-year lows before their correction and consolidation phase ended.

A potential failed breakout or correction in Gold could leave gold stocks vulnerable to a decline to new lows. While that sounds bearish, the historical context argues otherwise. Two of the three historical examples that show similarities to the gold stocks broke to new lows. Yet that break proved to be the best buying opportunity since bear market low. All three of the historical examples made 2-year lows before exploding higher. History shows that if the HUI Gold Bugs Index were to break to new lows it could be a false break and a massive buy signal. Quality juniors that are bought on forthcoming weakness (if Gold corrects) should deliver fantastic returns over the ensuing 12 to 18 months. To follow our guidance and learn our favorite juniors for the next 12-18 months, consider learning about our premium service.

The gold miners’ stocks weathered the recent stock-market plunge really well.  As evident in their leading GDX ETF, they were already beaten down before stock markets started falling.  The resulting explosion of fear bled into GDX, forcing it even lower.  Nevertheless, no major technical damage was done.  GDX remained well within its consolidation trend channel and is still within striking distance of a major $25 breakout.

Gold stocks’ behavior during stock-market selloffs can seem capricious.  This small contrarian sector generally amplifies the price action in gold, which drives its collective profitability.  Gold tends to surge in the wake of major stock-market selloffs, which erode investors’ confidence in stocks’ near-term outlook.  That greatly boosts gold investment demand as investors soon rush to wisely diversify their stock-heavy portfolios.

This drives gold prices higher after material stock-market weakness.  So naturally the gold stocks mirror and amplify gold’s gains which really improve their fundamentals.  But this broader strengthening trend is interrupted by a lot of chaotic noise.  The collective greed and fear generated by the stock markets’ daily action heavily influences gold-stock traders, especially when the stock markets are exceptionally volatile.

The gold miners’ stocks are just that, stocks.  So it’s not uncommon for them to get sucked into serious down days in the general stock markets, which fuel widespread fear.  When the flagship S&P 500 stock index (SPX) falls sharply, nearly everything else is dumped in sympathy including the gold stocks.  The SPX truly is the dominant center of the global financial-market-sentiment universe, greatly affecting everything.

Unfortunately sharp SPX down days’ ability to heavily influence GDX wreaks havoc on sentiment in the gold-stock sector.  Traders read historical studies proving the precious-metals realm is the best place to deploy capital in and after weakening stock markets.  So they rightfully expect gold-stock prices to rally on balance.  But when GDX plunges on a big SPX down day, their fear soars and they abandon gold stocks.

Human psychology always tends to overweight the importance of recent and traumatic events, with our minds wanting to extrapolate short-term turmoil out into infinity.  Thus when gold stocks get sucked into a sharp general-stock selloff, traders assume they can’t thrive in weak stock markets.  They lose the trend forest for the daily trees!  This fearful herd sentiment scares them into panicking and selling gold stocks low.

Weakening stock markets are like springtime for gold and its miners’ stocks due to higher investment demand.  Just as daily temperatures gradually warm over time during spring, gold stocks rally on balance after material stock-market weakness.  But spring weather also includes periodic cold snaps that can feel winter-like.  They are just temporary counter trend aberrations though, like gold-stock drops on big SPX down days.

This first chart looks at gold stocks’ recent price action through the lens of GDX, the VanEck Vectors Gold Miners ETF.  Since its birth in May 2006, GDX has grown into the leading and dominant gold-stock ETF.  As of this week GDX’s $7.6b in assets under management ran a whopping 22.0x larger than its next-biggest 1x-long major-gold-stock-ETF competitor!  GDX actually weathered the stock plunge really well.

The sharp stock-market selloff in the past couple weeks has been extraordinary, largely unprecedented on multiple key fronts.  The S&P 500 was wildly overvalued and overbought in late January, deep in its longest span ever witnessed without a mere 5% pullback.  Volatility was trading near record lows, which catapulted complacency off the charts.  Last week I explored all this in an essay analyzing stock selling unleashed.

The first real day of serious SPX selling was Friday February 2nd.  The gold stocks certainly weren’t high leading into that, as GDX had closed the day before at $23.70.  That was merely on the high-middle side of gold stocks’ consolidation trading range.  Really since late 2016, GDX has largely meandered between $21 support and $25 resistance.  It had neared a major $25 breakout in late January, but couldn’t punch through.

On Friday the 2nd the SPX plunged 2.1% after rising wages on the US monthly jobs report stoked fears of inflation.  10-year Treasury yields continued their sharp surge since the latest Fed rate hike in mid-December.  That SPX down day was the worst since September 2016, before Trump won the election and the resulting extreme taxphoria rally.  It generated some real fear which spilled over into the gold stocks.

But that stock-fear bleed-in sure wasn’t the only reason GDX fell 3.3% that day to revisit its technically-important 200-day moving average.  With inflation fears mounting, futures traders figured the Fed might have to increase the tempo of this rate-hike cycle.  So the US Dollar Index surged a sharp 0.7% higher, which led gold-futures speculators to hammer gold 1.4% lower.  GDX’s initial stock-selloff loss was reasonable.

The major gold stocks tend to amplify gold’s underlying price action by 2x to 3x.  And GDX’s downside leverage to gold that day ran 2.4x, right in line.  Most of the time gold stocks still follow gold, even when stock markets are weaker.  But on exceptional SPX down days when fear really flares, that overshadows gold as traders are infected by prevailing herd sentiment.  That really started to happen on Monday the 5th.

The SPX selloff greatly intensified as it plunged 4.1%, its worst daily drop since way back in mid-August 2011!  That was extreme, as stock markets usually don’t plummet so rapidly from record highs.  Because it had been so long since the SPX plunged, fear skyrocketed as evidenced by the VIX implied-volatility index.  Foolish traders who had aggressively shorted volatility near record lows scrambled to unwind their bets.

Gold caught a modest bid that day, rallying 0.6% despite the US Dollar Index climbing another 0.4% on safe-haven buying.  On days when the SPX plunges yet gold climbs, traders are torn about what to follow so the gold stocks generally split the difference. Indeed that day GDX slid another 0.9%, far milder than the sharp SPX plunge but still worse than gold.  That left GDX at $22.71, sliding farther under its key 200dma.

After plunging even deeper early on Tuesday the 6th, the SPX reversed sharply to a 1.7% gain on close as the extreme VIX-futures long buying abated.  Gold suffered a 1.1% loss on the stronger stock markets as well as a major 1.4% draw in its leading GLD gold ETF’s holdings.  Investors likely dumped GLD shares for a source of capital.  Since gold is much stronger than general stocks in SPX selloffs, GLD is easy to sell.

With gold falling sharply GDX dropped another 2.6% on that third day of the SPX selloff. Once again that made for 2.4x downside leverage to gold, which is perfectly normal. Although that decisively broke GDX below its 200dma, at $22.11 it remained well within its long-established consolidation trend channel.  With trend support at $21, gold stocks still had a ways to go before they threatened a major technical breakdown.

The SPX selling resumed on Wednesday the 7th with a relatively-minor 0.5% loss.  Gold fell by the same amount, as once again the US Dollar Index surged 0.7% on flight-capital safe-haven buying.  GDX lost another 1.4% to hit $21.80 on close.  That amplified gold by 2.8x, still within that normal 2x to 3x range for the major gold stocks.  The gold stocks were weathering that sharp SPX selloff really well by that point.

On Thursday the 8th the stock markets started sliding again on no news, and the SPX fell relentlessly all day long.  By the time the dust settled, it had collapsed another 3.8%!  Two huge 4%ish down days out of just four trading days was very serious, generating the most fear traders have experienced for at least a couple years.  Gold eked out a 0.1% gain with the US dollar flat, and the gold stocks split the difference as usual.

GDX only retreated 0.6% that day the SPX formally plunged into correction territory for the first time since early 2016.  That was truly an impressive show of strength given the stock markets rapidly spiraling lower.  At $21.68, GDX remained well above its $21 support line that has held rock solid since late 2016.  It looked like the gold stocks were nearing selling exhaustion since they fell so little on such a huge SPX down day.

In just five trading days the SPX had plummeted 8.5%!  That was a big drop by any standard, let alone off record highs out of near-record-low volatility.  Interestingly GDX exactly mirrored that drop, falling an identical 8.5% in that same span.  Relative to gold that was excessive, 3.5x the 2.4% gold lost during that same timeframe.  But with GDX remaining well within its consolidation trend channel, technical damage was minor.

Last Friday the 9th once again saw the SPX slide rapidly after open before reversing sharply to a large 1.5% daily gain.  Gold stocks got sucked into that early fear-spawning selling, which was exacerbated by gold itself slumping lower before a -0.2% close.  GDX tested that $21 support intraday, but bounced back to a dead-flat close.  This small contrarian sector had successfully weathered an exceptional SPX selloff!

This week the SPX and gold both rebounded, each rallying Monday, Tuesday, and Wednesday.  Thus it wasn’t surprising GDX followed suit, rallying 1.3%, 0.1%, and a monster 4.6% by the data cutoff for this essay.  Thus over the entire 9-trading-day span of the recent volatility storm, GDX merely slipped 2.9%.  That was again between the SPX’s 4.4% loss and gold’s slight gain.  The gold miners’ stocks are faring fine!

This Wednesday GDX was back up to $23.01, exactly in the middle of its consolidation trading range of the past year between $21 support and $25 resistance.  GDX was back over its 200dma again, and still within striking range of that critical $25 breakout I discussed a month ago.  If you had totally tuned out for 9 trading days and ignored the SPX-selloff action, it would’ve looked like gold stocks were still merely basing.

One of the greatest benefits to continuing to study the markets and staying immersed in them is you will gradually become immune to herd sentiment.  After you’ve seen enough selloffs, they increasingly lose their ability to scare you.  And you remember that sharp selloffs are short-lived, whether in the general stock markets or gold stocks.  So you come to accept them as inevitable periodically, and they don’t rile you up.

A great analogy is a beekeeper.  Most people are scared of bees, freaking out if bees buzz too closely or land on them.  I know I’m no fan of bees invading my personal space.  But beekeepers have no fear of bees because they work with them all the time.  They certainly respect bees and understand the risks of being around them.  But all their experience with bees leads to enough knowledge to negate emotional responses.

Gold stocks have always been a volatile sector.  That’s actually a core reason they are so alluring, as this volatility translates into big and fast gains when they are rallying.  In roughly the first half of 2016, GDX rocketed 151.2% higher on a parallel 29.9% gold upleg! Volatility is a double-edged sword, sectors that can rally fast will also fall fast.  So gold-stock investors must accept periodic sharp selloffs as par for this course.

The major gold stocks as represented by GDX are doing fine.  Despite some choppiness as the SPX was flailing about in recent weeks, they are continuing to base in their well-established consolidation trend.  They are still on track for a major GDX $25 breakout, which will work wonders to shift sector psychology back to bullish again and spur big capital inflows.  The gold miners’ stocks are low technically and cheap fundamentally.

This last chart zooms out to the bigger picture, looking at GDX since 2007 which is largely its entire life.  Gold stocks move in great bull-bear cycles like everything else, and they remain incredibly low today.  The small highlighted square in the lower right encompasses the entire first chart.  These prevailing gold-stock levels are almost as low as during 2008’s epic stock panic, which is absurd based on fundamentals.

This powerful new gold-stock bull ignited in early 2016 remains young and small.  Its bull-to-date peak in early August 2016 was merely a 3.3-year GDX high, still very low in secular context.  After this sector was sucked into 2008’s stock panic, the major gold stocks more than quadrupled out of those extreme lows.  A quadruple from January 2016’s all-time low birthing this bull would catapult GDX back up near $50.

That means the major gold stocks easily have the potential to more than double again from here, seeing another 117% GDX gain in the next couple years!  Is there any other sector in all these wildly-overvalued stock markets that can make such a claim?  No way.  Like gold, the gold stocks are now deeply out of favor thanks to the extreme stock-market bull that may have just peaked in late January.  Sentiment is poor.

But as gold inevitably powers higher in the wake of this newest SPX correction on strengthening demand from investors, the gold stocks will follow and amplify its gains.  Fundamentally the major gold stocks are still dirt-cheap.  That’s readily evident in their quarterly operational and financial reports, which I closely follow and analyze for the major GDX gold miners.  I can’t wait for their Q4’17 results over the coming weeks.

The primary measure of industry-wide gold-mining profitability is all-in sustaining costs, what its costs to mine and replenish an ounce of gold.  In Q3’17 that averaged $868 for the GDX gold miners.  And these costs are pretty stable, averaging $867, $878, $875, and $855 in the four quarters before that.  So odds are the major gold miners’ collective all-in sustaining costs will hold near these levels in Q4’17 and Q1’18 too.

Gold averaged $1279 in Q3, leading to fat per-ounce profits of $411.  Gold was essentially flat in Q4 with a $1276 average price.  That means the GDX-component gold miners are likely to soon report profits of $408 per ounce.  I’ll dig deeply into those new Q4 quarterlies as they are released, and publish an essay on the results in mid-March.  Since Q4 reporting includes full-year results, regulatory deadlines are twice as long.

The SEC requires normal quarterly reports to be filed within 40 to 45 days after quarter-ends, depending on companies’ sizes.  But since they have to prepare annual reports with the quarter that ends fiscal years, usually Q4, that deadline is extended to 60 to 90 days.  So by mid-March most of the major gold miners’ Q4’17 results will be out.  I expect average all-in sustaining costs to come in flat like usual in these reports.

And that’s super-bullish given what gold is doing.  The yellow metal that drives its miners’ profits is faring much better in Q1 than it did in Q4.  It’s averaging $1331 quarter-to-date, up 4.3% sequentially from Q4.  So if AISCs are stable like usual, profits will surge which investors will anticipate in advance.  The same $868 AISC implies Q1 GDX-major-gold-miner profitability of $463 per ounce, soaring 13.3% quarter-on-quarter!

So my month-old forecast of a GDX $25 breakout on Q4 earnings remains highly likely. When investors see how the gold miners are faring in their latest reported quarter, they are going to extrapolate mining costs into Q1.  That will portend exploding profitability.  GDX only needs to rally another 8.6% from its mid-week levels to hit $25.  And once gold stocks break out decisively to the upside, they are off to the races.

In all the markets buying begets buying.  The more a sector or asset is rallying, the more investors want to participate.  And the more capital they pour in, the more those prices keep rallying.  That creates and fuels a powerful virtuous circle of buying.  Gold stocks have drifted sideways for so long now that they need to achieve a major upside breakout from their consolidation to catch investors’ interest.  That’s not far away.

Despite the roller-coaster ride in gold stocks as the wild SPX volatility bullied them around in the past couple weeks, GDX is still within striking distance of that key $25 breakout. Once that happens, the gold stocks’ popularity will surge again.  There’s still time to buy low before lots more investors start returning which will catapult this small contrarian sector sharply higher.  The gold stocks look really bullish today!

While investors and speculators alike can certainly play gold stocks’ powerful coming upleg with 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 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 the gold stocks weathered the recent sharp stock-market selloff really well.  The SPX plunged for the first time in a couple years, generating a big and sharp fear spike.  As usual that spooked the gold-stock traders, who sold and fled.  Yet despite the carnage GDX’s major consolidation support at $21 held solid.  The gold miners’ stocks soon rebounded sharply back up to the middle of their basing channel.

With GDX trading near $23 this week, that critical $25 breakout to entice investors back remains within easy range.  Once the collective gold-mining costs reported in the upcoming Q4 results are compared with higher Q1 prevailing gold prices, strong gold-stock buying should resume.  Gold stocks have always been a volatile sector, so there’s no reason for traders to fear periodic selloffs like they suffered in recent weeks.

Adam Hamilton, CPA

February 16, 2018

Copyright 2000 – 2018 Zeal LLC (www.ZealLLC.com)

 

It was a rough week for investors in stocks and stocks of all kinds. The S&P 500 lost 5%. Emerging Markets also lost 5%. Gold Stocks, which had weakened before the broader equity market have been hit hard. They (GDX, GDXJ) also lost 5% last week. The HUI Gold Bugs Index (which excludes royalty companies unlike GDX) lost 7%. After a strong start to the year, gold stocks have essentially given back all their gains. Nevertheless, we remain extremely optimistic on gold stocks over the next 12-18 months as trends in the economy and stock market should begin to support Gold after the second quarter.

Historically speaking some of the best performance in Gold and gold stocks occurred during or after a bear market in stocks. The best examples can be found in the 1970s and 2000s as the charts show. Gold surged after the bottom in stocks in 1970 and continued to perform very well during the 1973-1974 bear market. After a brief but sharp bear in 1975-1976 Gold rebounded strongly as the S&P 500 began a mild bear market in 1977. Years later Gold emerged from a significant bottom in 2001 while the stock market endured its worst bear market in a quarter century. Gold continued to perform even after the market bottom in late 2002. Gold emerged from the global financial crisis before the stock market but continued to make new highs after the stock market bottomed in March 2009.

This performance is not just random. It makes quite a bit of fundamental sense. As we know, Gold is driven by falling or negative real rates. Typically policy makers in response to a recession or bear market will pursue policies that lead to falling or negative real rates. These policies are not reversed until the economy gains strength. Gold can also benefit from inflationary recessions, which we saw in the 1970s. Perhaps we are headed for that outcome at somepoint but I digress.

The best comparison to today may be the mid 1960s. Although the Gold price was fixed until 1971, we can use gold stocks to study the macro picture of the 1960s and how it may relate to today.

Gold stocks and the stock market were positively correlated during the 1960s but gold stocks dramatically outperformed and especially from 1964 to 1968. That outperformance accelerated after 1963 as inflation and bond yields began to rise to higher and higher levels in the years ahead. That would soon negatively impact the stock market in both nominal and real terms. The Dow peaked in 1966 while the S&P 500 did not peak until 1973 (as it made marginal new highs in 1969 and 1973). In real terms stocks would peak in 1966 or 1968 (depending on which index you use).

Economic fundamentals appear to be headed in a direction that is bullish for Gold and gold stocks and less positive for the stock market. While inflation has yet to be unleashed, the markets are showing that inflationary pressures are forming. This will impact corporate margins (which are extremely high) as well as profits. Higher inflation also leads to higher bond yields which means higher costs to service debt. That is a problem for the economy and equity market due to the debts that have piled up in recent years.

So the question now is where is the threshold for when inflation and bond yields start affecting the economy and stock market in a way that is favorable for precious metals?

With respect to the 1960s and 1970s, the answer would be 1964.

When precious metals begin and sustain outperformance against the stock market it will signal that the threshold or inflection point has been reached. That outperformance will also go a long way in helping Gold make its major breakout.

It is not yet time for Gold and gold stocks to shine but it is getting very close. Gold remains in a bullish consolidation pattern that should give way to a breakout later in the year. Meanwhile, gold stocks and Silver are lagging badly but that does not have us concerned. The next few months could prove to be the best buying opportunity in precious metals since the end of 2015. Quality juniors that are bought on weakness over the medium term should deliver fantastic returns over the ensuing 12 to 18 months. To follow our guidance and learn our favorite juniors for 2018, consider learning more about our premium service.

Jordan@TheDailyGold.com