Bull markets start when few believe it is underway, we saw it in gold around this time last year. Back then gold was slightly over $1600, here we are a year later and gold is over $2000 and looks to head significantly higher in 2024. Yet, few believe we are a year into a gold bull market, even many that consider themselves gold bulls.
In several written reports, and reports I’ve published on podcasts and videos, I’ve presented the key reasons. I have plenty of confidence based on overwhelming evidence to be bullish on gold and that 2024 will be an exceptional year for gold that we will see a series of new all-time highs.
Before I make some gold bulls mad at me by saying I don’t think the gold bullion is not the best way to play a gold bull market. I first want to say I see gold going over $2500 and possibly see $3000 in 2024. Let me be clear, I’m very bullish on gold.
There is a huge chasm between gold and gold stocks. Gold is strong and gold stocks are depressed, which makes for the serious torque to bullish gold moves in the gold stocks.
They are so unloved that the gold stocks are trading at valuations much like they were in the years just prior to the 2001 to 2011 gold bull market. One of the key arguments I make is looking at the gold stocks valuations relative to the value of the gold in the ground. Back then, gold in the ground was being valued at under $10 per ounce.
In a strong market for gold, the value of ounces in the ground can get well north of $100 per ounce. Currently, in many cases, gold in the ground is trading for less than the costs to find those ounces. This is unsustainable based on the supply and demand story.
The supply chain of gold is severely broken. Major mining companies are mining out their old mines and not replacing them as fast as they are mining their gold. They have basically abandoned exploration over the past 25 years. Instead of trying to replace what they mine with the drill bit, they buy them.
We saw this in the 2001 to 2011 gold bull market, when the big guys bought out the smaller guys. Often just for the sake of getting bigger, not to buy quality ounces that could be mined with healthy profit margins. Trouble is, they often overpaid for less than top quality projects, so the ounces they bought will sit in their resources and reserves for many years. Some may need gold to double in price to make them viable.
The entire food chain of gold mining, from the majors down to the exploration companies are broken. Of course people will say, but those majors have multiple billion dollar valuations and lots of cash. This is true, but looking at their sustainability there are big cracks.
Their costs are going up so their margins are tightening, even though gold is near all-time highs. They have high graded their mines for a couple decades, which makes portions of their deposits not feasible to mine. Their head grades are in decline. They are sitting on resources that may never be mined because they have too many issues. They are going deeper for lower grades into more challenging terrains and countries with significant political risks. The biggest problem is they are not replacing what they mine each year.
The majors have to go down the food chain to replace what they mine each year. The problem is that there aren’t many mid-tier miners and smaller miners for them to take over. Plus, the majors are so big now, that plenty of the mid-tier and smaller miners are not big enough to move the needle for the majors.
Further down the food chain are the developers moving toward production. That cupboard is bare as well with not nearly enough in the pipeline to create new mines.
The explorers are seriously struggling, they don’t have the money or patient shareholders to give them the time and money needed to find the new mines that can then be moved up the food chain to development and then built into new mines. Their valuations are depressed, making raising money highly dilutive even if they are able to raise money.
A chain is only as strong as its weakest link. In the mining sector, the explorers are the weakest link and they are suffering. But, I would argue at this point in time, they are the most crucial link as more discoveries need to be made, in order to be developed into new mines, to be used to grow big enough new mines that the industry needs in order to feed the demand.
It’s my contention that not only is the weakest link in the gold mining food chain broken, but the rest of the chain is also facing issues.
One thing that will help the gold food chain is higher gold prices. We are already seeing that with the recent strength in gold prices after the Fed got dovish in their last meeting. The major gold miners and ETFs have moved off their recent 52-week lows and are trading up from them in a significant way.
A Death Spiral of Debt, caused by the Free Money Era, and a dovish Fed that is ready to lower rates in an election year are strong arguments for the US dollar to be under pressure and gold to go much higher.
Plus, you have central bankers all over the world buying gold and returning to somewhat of a Gold Standard where they hold less US dollars and US debt in their reserves and more gold. Many of the leading central bank buyers are in the BRICS nations and they also want to have an alternative to the US dollar as the dominant currency for international trade. They are already making deals to trade goods in their domestic currencies and I believe gold will play a bigger role in international trade.
Another bright spot on the horizon for gold is that the World Gold Council is developing a digital instrument that will be backed by gold that will make it much easier for digital currency folks, and people that want to buy fractions of an ounce to buy gold. This could have as big of an impact on gold as when ETFs were introduced and they had to fill their vaults with gold. It took a lot of gold off the market. In fact, I think it will have an even bigger impact as it will bring a lot more people into the market to buy gold.
There is a remarkable pent up demand for physical gold in America. Costco is just starting to dabble in offering physical gold for sale. Recently their CEO was asked if there are some bright spots in their sales. He said that they sold $100 million worth of gold in their last quarter. Take into consideration that they limit members to two ounces and are usually sold out within a couple hours of putting it on sale.
Costco are brilliant retailers, you can bet that they see these numbers and will be scouring the globe to get their hands on every ounce they can and take off restrictions on how much their members can buy.
Costco and the World Gold Council can take a lot of physical gold off the market, when combined with the buying from Indians and Chinese, and the central bankers they can overwhelm the physical supply of gold and drive the price of gold much higher. Addon that the Fed is going to move from dovish comments to dovish actions by lowering rates in the election year of 2024 and you have a recipe for a run on gold.
A stronger gold price will help repair the broken gold mining food chain. Another trend is developing that will be helpful for the smaller miners, new mine developers and explorers. These companies are like the minor leagues of baseball that develop the talent for the big league. The majors need them to be successful.
I have been in the mining business for 30 years, for most of my career, when majors would help the minor leaguers of the mining business, the deals were pretty abusive to the smaller players. But, in the past couple of years, for the first time in my career, I’ve seen junior friendly deals.
I can see a trend developing that the majors see that the smaller players need their financial support and patient money. The gold mining food chain is so broken that I don’t think this will stop, in fact, I think it will grow much bigger. I get the sense that the majors want to show that they are the partner of choice and not the bully that is going to come in to smack the smaller players around.
I strongly believe that economics has a way of fixing stupid. It was less than smart for the under investment in gold mining over the past few decades, all along the food chain that has weakened the major links, and the smaller links of mid-tier miners, developers and explorers. Especially when there is an insatiable appetite for physical gold from the sources mentioned earlier.
It takes time to find news mines, then economically evaluate them, permit them and then build them. It isn’t easy for the gold mining sector to fix the chronic underinvestment over the past few decades. Even if the price of gold goes much higher. Which I think it is on the verge of doing. As it goes higher, more investors will find their way into gold stocks.
As mentioned earlier, we are already seeing it at the top of the food chain. The majors and gold stock ETFs have recently hit their 52-week lows and bounced off them in a significant way. We are also seeing it happen down the food chain. If I’m correct, I would expect to see the top of class mid-tiers, developers and explorers join the party.
All the best,
Allan Barry Laboucan
Rocks And Stocks News does not make buying or selling recommendations. The reports are for information purposes only. Sponsors pay a fee to Rocks And Stocks News for content creation. This funding helps cover the costs of research and reporting on the sponsors and picks that aren’t sponsors. Before making any investment decision it is important for you to speak with your financial advisors to consider your risk profile. It is also important to do your homework. To help in that process, Rocks And Stocks News means to be a gateway by doing reports and interviews of management of sponsors and picks. The reports and interviews should not be considered investment advice. Allan Barry Laboucan is the founder and owner of Rocks And Stocks News, he has worked in the mining sector since 1993 and has been reporting on the sector since 2005. He has worked with and been mentored by very talented geoscientists in geology, geochemistry and geophysics. He uses the skills he has picked up during his career to assess sponsors and picks in the reports. Whether a company is a pick or a sponsor they go through the same filter and are reported on when important news is made that Allan Barry Laboucan wants to discuss on the Rocks And Stocks News platform. He may own shares in sponsors and picks for investment purposes.