A significant breakout is occurring not only in gold, but also in the gold to gold mines ratio. The Big Wave in gold stocks is just getting started.
Monday, July 22, 2024
Gold bugs have been complaining endlessly about the poor performances of their mining stocks.
Rightly so!
Now, with this new leg up in the yellow metal, gold stocks are coming back with a vengeance.
Today, we are witnessing a significant breakout not only in the gold price but also in the gold to gold mines ratio. The big wave in gold stocks - that investors have dreamt about - is just getting started.
Western investors missed the historic breakout at $2070.
After breaking out to new highs in most currencies, the price of gold in US dollars went straight up from $2070 in March 2024 to $2338 in less than a month and a half, leaving western investors in the dust.
All throughout PDAC, the largest mining conference in the world, attendees were reluctant to buy because they had been disappointed so often before.
They wanted to wait for confirmation that this was a genuine breakout. Many are still on the sidelines!
But who can blame them?
Most money managers were concentrating on making profits in well-established trending markets.
Why bother with the barbarous relic when you’re making a killing by just sitting on a NASDAQ ETF, an S&P index, real estate or Apple shares!
Even the very smart, sophisticated investors missed the boat.
Why?
Simply because the usual correlations, which had worked quite well for decades stopped giving reliable signals.
When interest rates go up, especially real rates, gold is supposed to go down, but not this time!
Same thing with the dollar, it was going up, so the conventional wisdom was that the gold price should have gone down. Instead, the price of gold also went straight up.
Sometimes being too knowledgeable is a huge disadvantage. As the old market technicians would say: “Don’t think, look”.
Now gold is gold!
For hedge funds and shrewd bankers, the gold market has been a very liquid market enabling one to generate huge fees by trading the latest fads in correlation or the whims of computers.
Not mentioning the fat profits in the very deep and obscure derivatives market.
Now gold is once again gold.
The big physical buying is simply because many in the east have now realized that the yellow metal is a real asset and offers true protection in times of uncertainty.
Why would a central bank or an oligarch own US treasury bonds that could be frozen by Washington?
The great analysts and writers behind the Incrementum, In Gold We Trust report call this, “Gold, the new playbook”.
Published on May 17, 2024, their 439 page report is a must read for any serious gold investor.
Luckily, Ronald-Peter Stöferle has also published a compact version. And, as all the best things in life, it is free and can be downloaded from their website.
Central Banks and Asia are Buying Gold
As recorded by the World Gold Council, central banks have been big buyers since 2010. Especially in 2022 and in 2023, they took more than 1000 tons off the market each year.
This is huge, especially in relation to world mine production which reached 3644 tons last year.
In Q1 2024, East and Asian Central Banks accounted for the majority of net purchases.
Asian retail buying has also been strong. In China, individual investors seeing the price of real estate going down, did not have many other options for their savings than to buy their favorite metal.
Unfortunately, there are no precise numbers to explain the sudden rise.
Why did it start in March 2024? Why did gold go up $360 in a month and an half?
The gold market remains pretty obscure.
This is another reason why Western investors were slow to jump on the bandwagon. They simply could not understand the recent rise. So why should they jump in? But now they are slowly creeping back.
Of course, with gold up nicely, the hedge funds who are mainly trend followers, are back in the game. This, of course, could create some short-term volatility.
But with rising political and economic risks, the fear of missing out is enticing the major banks around the world to reintroduce gold gradually into their asset allocation.
As an example, banks in Switzerland had 10% of customer money in the precious metal in 2011. They all got out in 2013.
Since then, these conservative banks which historically have always maintained a high percentage in gold, have instead totally ignored this traditional store of wealth.
It is only very recently that physical gold is reappearing in the asset allocation of the major Swiss banks. UBS, the largest of them all, which recently merged with Credit Suisse, increased in June their allocation to 2%. Julius Bear, a private bank, recommended in May to introduce a 1% allocation with the objective to grow it over time to reach 3%. For dynamic portfolios they even suggested a 0.5% position in silver!
Lombard Odier, another leading private bank, now advocates holding 3% in gold.
Here, we are talking physical gold (allocated or not).
But as of today, I’ve not heard of any bank recommending the purchase of gold stocks in their formal asset allocation. Herein lies the historical opportunity.
New highs on gold miners indices (GDX)
The very significant breakout in the gold to gold mines ratio.
For decades, up until March 2008, it was relatively easy to make money in gold mines.
As you can clearly see the XAU to gold ratio traded within a pretty well-defined channel for decades.
It regularly oscillated between around 0.18 and 0.30.
When the ratio was near its lows, you could be pretty sure that the physical had already seen or was about to see a bottom. So by simply buying the gold mines when the ratio was near the low of its trading range you would capture a move up in the gold price and a re-rating of the gold stocks versus the metal.
Double whammy! Easy money, especially when South African gold mines often paid out high dividends!
Unfortunately, starting in March 2008, this ratio collapsed.
From an all-time high of 0.38. It bottomed at 0.04 in 2015.
This massive decline is significant and reflects the massive deterioration in the fundamentals of gold mining around the world.
We all know the key reasons: rising cost of production, bad management, fewer new discoveries, decrease in overall reserves, resources and grades, stupidly long and costly permitting process, increased political risk, expropriation, tax increases, etc etc.
Of course, by now all these negatives are all well-known and certainly in the price.
The collapse of this ratio went too far and for too long. Now that it’s breaking out on the upside the outperformance of precious metals equities have a long way to go!
Charts to keep an eye on
Not only all the major gold mining indices like GDX and GDXJ are making new highs but the advance / decline lines look good showing a healthy and broad increase.
Another good sign GDXJ (which encompasses smaller precious metals companies) is starting to outperform GDX.
Even the distressed juniors are starting to pick up steam, although still timidly, as can be seen in the chart of the Toronto venture exchange.
The gold to the S&P 500 ratio is still not acting well. Yet!
As soon as this ratio breaks down, an even more dynamic rise in gold shares could happen.
Historically, the strongest rise in gold equities occurred when overall stock markets were weak.
With the massive overvaluation of most stock markets in the world, along with the crazy unsustainable bubble in technology stocks, and the overhyped AI craze, a fierce bear market should rear its ugly head in the not too distant future.
Thus, precious metals equities are the place to be.
But which mining sectors to buy?
As usual, big caps move first.
They could continue to do well since we are about to enter an unusually good earnings season.
In Q1 2024, the average price of gold was $2070.
For Q2, it will hit a historical high of $2338.
This will feed into exceptional profits for the producers which should surprise more than one investor!
This is the first time that the gold price goes up a lot without at the same time seeing huge cost increases.
Many senior producers have gone up quite a lot.
A strategy is to buy - preferably on weakness - laggards like Equinox Gold (previously discussed by SGL) or B2Gold.
B2Gold (BTG - $2.93)
B2Gold with its four mines should produce this year 835,000 to 895,000 ounces.
Thanks to its CEO, certainly one of the best in the industry, the company should be a more than 1 million ounce producer in 2025.
With first gold pour in Q2 2025, the Goose Project in Nunavut Canada will produce 310,000 Oz of gold per year.
This growth and the increased percentage of production in safe jurisdiction should ensure this 5.4 B $CAD company a solid rerating.
The more one goes down the food chain, the more precious metals equities are undervalued.
They are much more speculative, trading at a fraction of their senior peers. As long as one employs good stock selection and stays diversified, one should be handsomely rewarded for the risk.
Undervalued Development Companies
West Red Lake Gold (WRLG.V - .65 cents)
These shares could appreciate significantly because WRLG is transitioning from spending money to making money. The market capitalization is only $C 280 million.
Three main catalysts are favorable: the release of a prefeasibility study; the financing package; and the start of production. All three could occur within a year or 18 months.
WRLG trades at a P/NAV of 0.23, but junior producers average 0.64 P/NAV.
The Madsen Mine which will be put back into production was bought from Sprott Resource Lending for only $6.5 million, a 1% NSR and 20% of the company. However $350 million had been spent putting Madsen into production with a brand-new mill before the previous operator went bankrupt.
Naysayers will say that Madsen has already bankrupted three firms.
However, this Frank Giustra company has the team and the money to be successful.
Shane Williams, the CEO, was Chief Operating Officer for Skeena Resources and before that VP of Operations and Capital Projects at Eldorado Gold. And cherry on the cake, the very knowledgeable Gwen Preston is their IR person.
Vista Gold (VGZ - 0.52)
This very well-known deposit in Northern Territory (Australia) has gone through numerous serious economic studies including a low capex solution (under 350 M$) for staged development.
It has only 121.6 M shares outstanding for a market of some US $60 million.
Its updated feasibility study (2024) shows M + I resources of 7.8 M Oz, an average annual production of 479,000 Oz, with 92.2% recovery with a 16 years mine life.
The cherry on the cake is yes the project is permitted!
Given that there are practically no large, economic, permitted deposits in safe jurisdictions, the shares could significantly rerate in the next phase of the bull market.
Economic Deposits Selling for a Song
The sector with the most upside and presenting one of the best risk-reward opportunities are the companies with large economic deposits which are not yet financed, nor permitted, but stand a good chance of becoming a producing mine.
The market is schizophrenic.
It will pay nearly US$ one billion for 160,000 ounces of production. (See Equinox Gold's purchase of Orion Mine Finance's portion of Greenstone Gold Mine.)
On the other hand, one could buy massive economic deposits for pennies on the dollar. These deposits may ultimately need to be acquired by majors at much higher prices to replace diminished reserves. As Wilton, CEO of First Mining Gold states, 'The cupboard is empty.'
First Mining Gold (FF.TO - 0.135)
With a US$120 million market capitalization, one has exposure to two world-class deposits (not in the Congo), but in Canada.
The Springpole Gold Project in Ontario has an after-tax NPV of $1.6 billion with an IRR of 40% with a yearly gold production of 355,000 ounces.
The Duparquet Property, located in the prolific Abitibi Greenstone Belt in Quebec, has a 2023 PEA at $2,200 gold, showing an after-tax NPV (5%) of $1.12 billion and an IRR of 28%.
Of course, because of the long bear market in junior mining stocks, even knowledgeable analysts will say that one cannot mine a deposit under shallow lake or that there will be no electricity available in Quebec.
History has proven otherwise.
First Mining has $10 million in cash, is trading for $6 an ounce of gold in the ground and at 0.1 X P/NAV when advanced developers trade at 0.59x.
The stock is so cheap in part because a large fund had been selling relentlessly. However, the fund is apparently out now, which presents a rebound opportunity.
Troilus Gold (TLG.TO - 0.38)
On June 28, Troilus Gold published a feasibility study which came in below analysts expectations.
The stock after a high of 84 cents is now trading at 37 cents for a market capitalization of around C $120M.
The selloff may represent a buying opportunity.
Troilus shows a robust mineral resource of 11.2 million ounces in Quebec which ranks it among the top 10 underdeveloped deposits in North America.
At $2,332 ounce gold, its 2024 feasibility study shows an after-tax NPV of 1.55 billion with an IRR of 19%.
In a normal junior gold equity market, an average production of 303,000 AuEq (80% gold, plus copper and silver) per year could very well accommodate a 1.08 B$ capex.
The published AISC is the second lowest in Canada. Troilus expects to receive mining permits by 2026. The EV / resource is only around $15.
Liberty Gold (LGD.TO - 0.385)
With Cal Everett back as CEO, this quality deposit which is expected to become a mine, should be bought at a much higher price than today’s ridiculously low market capitalization of C$160 M. The Black Pine oxide gold deposit in Idaho is well advanced in the permitting process and could have all permits by 2026.
This past producing open pit heap leach oxide gold mine has already a resource of 3.21 M Oz at 0.49 g/t. What should also help the stock this year is plenty of news flow with 20,000 meters of drilling and a PFS in Q3 2024.
Everyone Hates Explorecos
Finally exploration companies are still hated.
At the Rick Rule Symposium, an excellent conference that took place last week, even very knowledgeable newsletter writers were reluctant to recommend exploration companies!
On the other hand, experienced speculators like Rick Rule himself or savvy fund managers like Crescat Capital (see our interview with Dr. Quinton Hennigh), have been buying these not very fashionable stocks.
If one has the expertise one can buy a basket of them or hire a good manager who can do it. In this phase of the gold bull market, one should be handsomely rewarded. Historically bull markets starting from very depressed levels, generate stocks that go up 5, 10, 20 times or more.
Hopefully, we can participate in some of the winners!
The big bull market in gold equities that investors have been dreaming about has started in earnest. Good luck riding the big wave!
Disclaimer: SGL does not provide investment advice and is not a registered investment advisor. Always do your own due diligence before making an investment. Investing in securities, especially junior miners, can be risky and never invest money you cannot afford to lose. SGL cannot guarantee the accuracy of the information in this post. SGL has no relationship with any company discussed in this post. SGL has attempted to present the information fairly, but it or its contributors may own shares of the companies mentioned in this article so bias cannot be excluded. SGL or its contributors may buy or sell shares at any time.
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