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Sector Spotlight: GOLD

Jeff Nielson Jeff Nielson, Stockhouse
3 Comments| January 4, 2019


Gold is eternal.

As a metal, it has almost unparalleled aesthetic qualities (silver is actually a slightly more brilliant metal). It is also rare. These two factors make gold a “precious metal”. For these reasons, gold has perpetually strong demand as jewelry and for the decoration/adornment of objects – especially those of a religious nature.

It is also History’s most reliable form of money. In the 21st century, the world’s central banks have been swapping their own, debauched paper currencies for gold, in unprecedented quantities. Because of this additional fundamental, gold also has strong/permanent investment demand among more sophisticated investors.

Click to enlarge

The rebuttal from investors – and analysts – who don’t understand this market is simple. If gold is such an important asset class, then why is it currently in the midst of a long (and brutal) trough.

The answer to that question is also simple. Gold is in the midst of another long-term trough because it is such an eternal metal. As a precious metal, gold is conserved. Almost every ounce of gold ever refined can still potentially be recovered, because instead of being used and discarded like the metals in ordinary consumer products, we hang onto our gold because of its eternal, aesthetic qualities.

With lead or zinc, or most base metals, we extract the metals from the Earth. We smelt or refine these metals, and then use them as building blocks for the global economy. Some recycling takes place (especially with higher value metals like copper), but for the most part, we use these base metals and throw them away.

Not gold. Because virtually all of the gold ever refined remains available, there are relatively large stockpiles of gold in the world. These stockpiles can be cannibalized to supply markets with the gold needed for global consumption, for months – and sometimes even years. But not forever.

This became abundantly clear to investors back in the year 2000. At that time the gold sector had also been in a long-term trough, throughout roughly the entire 1990’s. As available stockpiles dwindled, mine supply shrank and mine reserves plummeted. The world needed more gold.

What followed was a 10+ year bull-market run, the longest/strongest bull market for any asset class this century – except for silver.

Investors reading about the gold market around the year 2000 would have heard (from countless semi-informed sources) that gold had become an archaic asset class, a “barbarous relic” according to the gold-bashers of that time. These anti-gold commentators were all exposed as charlatans.

Eighteen years later, the gold market has been in another long-term trough, tracing all the way back to mid-2011. Once again, investors can find no shortage of semi-informed market pundits who are trying to make the case that gold is yesterday’s asset class.

Nothing has changed…except that the world’s paper currencies are much more debauched than they were in 2000, and mine reserves for the senior gold producers are even lower than they were at that time. Mine supply is also falling, since the current price for gold isn’t nearly sufficient to sustain the industry. In other words, the gold market is set up for an even stronger bull market today.

A further, important driver for the price of gold is that this is humanity’s ultimate safe-haven asset. A comparison with the U.S. dollar (a paper currency that is erroneously described as “a safe haven”) will illustrate this point.

Two thousand years ago, during the Roman Empire, with a 1-ounce gold coin a gentleman from that time could purchase the finest attire of the era: a hand-made toga, along with a leather belt and sandals. During the Renaissance, a gentleman of that period could use the same 1-ounce coin to purchase a tailor-made suit, plus accessories.

Today, even with the price of gold heavily and abnormally depressed, a 1-ounce gold coin is still sufficient to purchase a suit + accessories. But because of the (temporarily) depressed price, a gentleman would have to purchase off the rack. Virtually perfect wealth preservation, over thousands of years.

Then there is the U.S. dollar. In the roughly 100 years that the Federal Reserve has had a statutory responsibility to “protect the dollar”, it has lost 99% of its value. All of that lost purchasing power (and wealth) can/will never be recovered. Every fiat paper currency ever created has gone to zero, all that varies is the amount of time before it becomes completely worthless.

Click to enlarge

Gold: virtually perfect wealth preservation over 2,000 years.
The U.S. dollar: virtually a total loss of wealth in 100 years.
Gold is a “safe haven”. The U.S. dollar is just an over-hyped piece of paper.

2019 outlook

This fundamental discussion of gold merely makes the case for gold bullion as an investment option. Because it is also the perfect safe haven, experienced financial management professionals recommend holding (at least) a 10% gold bullion component in one’s portfolio.

However, for investors looking for a growth component in their portfolio with huge upside potential, investors will be hard-pressed to identify any class of companies with as much upside potential as the junior and mid-tier gold mining companies.

Here is it important for investors to distinguish these smaller gold mining companies from the Senior Producers. With rare exceptions, the large-cap gold mining companies have chronically suffered from poor management and (as a result) gross under-performance.

In contrast, there are dozens of junior and mid-tier gold mining companies – both producers and development companies – that boast strong, experienced management, highly prospective assets, and very efficient, streamlined operations. It is only such companies (for the most part) that have been able to survive the current trough in the gold mining industry.

Coming out of the Crash of ’08, these junior and mid-tier gold mining companies provided “ten-bagger” returns for investors, as a class. And today, these same gold mining companies are arguably even cheaper than they were at the beginning of 2009.

Part of the reason for the spectacular returns of gold mining companies from 2009 – 2011 is that commodity producers provide natural leverage on the commodity they produce. As with any form of leverage, this cuts both ways.

As the price of gold has fallen from a peak of USD$1,900+ per ounce to USD$1,200+ per ounce, the share prices for almost all of these gold mining companies have plunged by multiples of that decline. This means that shares in these companies can be purchased today at a small fraction of where they will rise to when the gold sector begins its next rally.

That’s the bottom line. History’s ultimate Safe Haven is currently on sale – just as markets are beginning to gyrate wildly and many investors are heading to the sidelines.

As noted in a recent Stockhouse article, investors who are currently pulling their money out of markets haven’t solved a problem, they have merely created a new one for themselves. Outside of equities, how do investors generate a return on their wealth, as (real) inflation devours our savings and fixed investments pay near-zero interest?

Gold bullion is a wonderful wealth preservation vehicle that is currently dramatically underpriced. But gold mining companies offer explosive upside potential – backed by the world’s best Safe Haven.

Value opportunities

There are currently dozens of junior and mid-tier gold mining companies with strong management and highly prospective assets, whose current valuations can only be described as “absurd”. Here are a few companies that provide strong growth potential but (given the extremely turbulent market conditions) also offer a reasonable degree of security for investors.

Click to enlargeAgnico Eagle Mines Limited (TSX: AEM)  Having already described the Senior Gold Producers as poorly managed under-performers, a rare exception in this category is Agnico Eagle. What separates AEM from the other Seniors is that this is a gold mining company that is still run as a mining company, continuing to do significant amounts of organic development. Perhaps the best way to illustrate this difference is via its chart.




SpotlightGold_AEM10yr-(2).jpg

SpotlightGold_ABX10yr.jpg
(click to enlarge images above)

Despite 7+ difficult years for the gold mining industry, AEM has done a better job than almost any other gold mining company of maintaining shareholder value. This is in stark contrast with Barrick Gold Corp. (TSX: ABX), billed as the world’s largest gold producer – that has wilted badly. As noted in our Sector Spotlight for cannabis, the one time that growth-oriented investors might want to add positions with large-cap companies is at an obvious trough, where even premier names are available at heavily discounted prices.

Click to enlargeCardinal Resources Limited (TSX: CDV)  When can a gold exploration company be said to provide investors with “a reasonable degree of security”? When it’s sitting on top of a 6.5 million ounce Indicated gold resource, that starts at surface, with district-scale additional exploration potential.

More recently, this TSX-listed gold junior announced substantial resource conversion: a maiden 4.76 million ounce Probable reserve – adding still greater certainty to the Company’s huge Namdini Project. Concurrent with this Cardinal has produced a prefeasibility study (PFS) for Namdini that projects US$1.4 billion of (pre-tax) free cash flow, even at current (and woefully inadequate) prices for gold.

Click to enlargeGran Colombia Gold Corp (TSX: GCM, OTCQB: TRPFF, Forum)  This high-grade, mid-tier gold producer is arguably still flying under the radar of investors. Why? The Company experienced operational issues at its flagship Segovia Mine at the same time that the price of gold was in the process of bottoming. Cash costs were too high, and debt soared.

Management turned things around, simultaneously, with respect to both production and the balance sheet. The bottom line: several quarters of rising production, declining cash costs, and a much stronger financial position. Huge long-term upside with its huge Marmato Project, with already nearly 4 million ounces of M&I resources, along with 4+ million ounces Inferred.

Click to enlargeWallbridge Mining Co Limited (TSX: WM, OTCQB: WLBMF, Forum)  Why Wallbridge Mining? Two words: incredible grades.

  • 260.4 g/t Au over 7.02 meters
  • 311.1 g/t Au over 3.06 meters
  • 141.2 g/t Au over 7.06 meters
  • 144.96 g/t Au over 1.77 meters (incl. 262.18 g/t Au over 0.97 meters)*
  • 137.63 g/t Au over 4.10 meters*
  • 122.35 g/t Au over 2.20 meters*
( *  Indicates true widths)

As the Company moves its flagship Fenelon Mine Project methodically and cost-effectively toward production, the bulk sample that WM is currently extracting is expected to yield between 19,000 and 26,000 ounces of gold and generate in excess of CAD$30 million – because of the exceptional grades. Additional upside potential through the recent acquisition of the nearby Beschefer Project + the Company’s portfolio of Sudbury nickel assets.



 
FULL DISCLOSURE: Cardinal Resources Limited, Gran Colombia Gold Corp, and Wallbridge Mining Co Ltd are all clients of Stockhouse Publishing.



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Comments

Goldcross
Technical Signals For Gold And The CGLD Mining Shares Technical Signals For Gold And The CGLD Mining Shares - https://investorshub.advfn.com/boards/read_msg.aspx?message_id=146468567 Read more at https://stockhouse.com/companies/bullboard?symbol=v.cgld&postid=29300234#61zf306s1RhH2Imv.99
(271)
January 31, 2019

shaker13
FYI: This is one is brand new with a tiny float nobody has heard of that everyone will be talking about very soon. Do your due diligence, you won't be sorry https://www.casaminerals.com
(56)
January 4, 2019

wayned
Nobody ever comments on the gold that disappears into electronics . Tiny amounts in everything from laptops to servers to micro waves to garage door openers . The list is endless . Most of this gold has not been and never will be recovered . In Canada , most end up in landfill . Laughable when companies like Best Buy have an environmental tax added to your bill .
(23)
January 4, 2019

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