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Is $2,000 the New Base for Gold?
Gold has broken through $2,000, the seemingly unreachable target that gold bugs have called for since the late seventies when gold broke out of its $35 per oz prison after Nixon unpegged it from the US dollar in 1972. Silver, which has a much smaller float because most of the above ground stock is fabricated into some useful role, has woken up and delivered even bigger percentage gains. Whereas a year ago my prediction of a repricing for gold into the $2,000-$3,000 range without "fiat currency debasement" or "hyper-inflation" as a driver was viewed as off the wall, today banks are calling for a price as high as $3,000 with Goldman Sachs itself calling for $2,300 gold. The relevant question is whether a $12-$18 trillion value for the 6 billion oz above ground gold stock is a new normal for this asset class which has no yield but has the benefit that its total is only increasing by about 100 million ounces annually from new mine supply. Given how long it takes to permit and mobilize new mine supply in response to $2,000 as the new base, it will take 3-5 years before there is a noticeable supply increase. When you look at the metal price charts above, several things stand out. One is that oil has rebounded from its double whammy of a demand slow-down and supply increase from the poorly timed price war between Russia and Saudi Arabia. However, the $40-$45 range for oil is too low to support shale oil fracking in the United States which made the US the biggest oil producer in the world. Whereas during the China super-cycle there was much talk about peak oil supply, today the topic is peak oil demand as car makers continue their shift to electric vehicle production. But when you look at the bottom row of charts, lithium and cobalt, key inputs for EV batteries, are not showing much sign of life. Neodymium, the key input for the super magnets required by electric vehicles, is showing a modest uptick, but that is due to concern about the escalating "new cold war" between China and the United States. What is intriguing is the price rebound of copper, nickel and zinc, base metals whose demand is linked to global economic growth which has yet to recover on a meaningful scale from the sharp drop in H1 of 2020 caused by the demand destroying lockdown response to the Covid-19 pandemic. It is as though the market is already anticipating the massive infrastructural renewal based stimulus that is coming in 2022 when the worst of the pandemic is behind us and nations begin to rebuild as China is already doing after crushing Covid-19 with its autocratic fist. The awakening of the resource junior sector into a new bull cycle that erupted in mid June has been led by juniors with gold-silver projects, but juniors with base metal projects have also developed uptrends. Only the critical metal space which had a run in 2016-2018 during the EV explosion is lagging, probably because the market sees EV expansion stalled until Covid-19 is behind us and the China-US conflict as nothing more than pre-election posturing. Most importantly, this awakening junior resource sector bull market is very much focused on discovery exploration where the junior is controlling its value creation destiny. Given that $2,000 is the new base for gold, base metals are poised for an infrastructure spending demand boost, and a surge in discovery exploration spending that is bound to deliver surprises, possibly even world class scale discoveries such as we enjoyed in the late 1990s with the likes of Ekati and Voisey's Bay, I believe that after a decade long bear market that brought the juniors to the extinction threshold we are about to witness a broad based bull market like we have never before seen in the resource juniors.
Although the gold price has entered record price territory in nominal terms, it is still well short of the inflation adjusted peak achieved in 1980 when US inflation as defined by the CPI hit 14% and the United States appeared on its heels as the Iranian hostage taking dragged on and the Soviets invaded Afghanistan to deal with instability being exported to the Muslim dominated part of the Soviet empire which became independent countries collectively described as ChaosStan after the Soviet Union fell apart in late 1991. The inflation adjusted equivalent price today for the $850 peak in 1980 is $2,690, still well above the $2,067 LMBA peak achieved on August 6. If you take $400 as the base in 1980, the inflation adjusted equivalent today is $1,266 per oz, which means that the current price of $2,031 represents a 60% real price gain. That is puny compared to the 419% real price gain from $35 in 1972 to $400 in 1980. That gain became the basis for a gold exploration and development boom during the subsequent 25 year bear market for gold that nearly doubled the existing above ground gold stock as what had once been high hanging fruit was harvested as low hanging fruit. It also explains why the past decade was a bear market for juniors which have historically focused on gold and silver exploration. The 2003-2011 period was an exception for this gold focus as the China super-cycle reversed the long term downtrend for base metal prices. LMBA gold peaked at $1,895 on September 4, 2011 but it did not drop below $1,500 until April 15, 2013. Gold producer equities, however, had already peaked in December 2010 in the face of news that CapEx and OpEx were experiencing cost inflation well in excess of CPI inflation which subsequently spent most of the past decade below 2% despite massive quantitative easing by central banks. The juniors experienced a turnaround in 2016 when gold rallied from below $1,100 to a peak of $1,355 on August 11, 2016, but settled back into a bear market as gold returned below $1,200 which was below the inflation adjusted real price. Those identified ounces in the ground and those still likely to be found through exploration had once again become high hanging fruit. When gold broke above $1,300 in June 2019 Eric Sprott went on a spending rampage, investing over $200 million from his Kirkland Lake piggy bank in a wide range of juniors. When he looked behind him to see who was following him, he saw nobody. Gold finished off 2019 above $1,500 but you would never guess that if all you looked at was the resource junior sector which was cash starved and marginalized by the boom in non-resource juniors flogging cannabis or crypto-blockchain.
My favorite gold optionality junior during the past few years has been Midas Gold Corp which made a strategic decision in early 2016 to pursue permitting of the Stibnite gold-antimony project in Idaho which published a PFS in December 2014 that used $1,350 gold as a base case price whose economics at that price did not really clear development hurdles. The PFS showed that Stibnite would produce 350,000 ounces gold annually, which made it the biggest and most advanced gold optionality play among the juniors. The company had a showdown with backer Rick Rule who wanted Midas to stop all activity and go into hibernation as an optionality play waiting for a gold breakout. John Paulson of Big Short fame stepped up to bankroll Midas at $0.355 so that it could pursue permitting. Since then Midas has invested USD $53 million on permitting out of $210 million overall on the project, and by the time a permit is granted in late 2021, will have spent $70 million. The first financing was not enough and today the fully diluted has doubled to 506 million shares. On the one hand Rule was vindicated, but on the other hand there is nothing in the resource junior space this big and close to production as Midas which is destined to become the ultimate proxy for the destiny of the gold price. The most recent round at $0.455 in the midst of the Covid-19 market meltdown in March will tide Midas over until the end of 2021, so good bye to further dilution before a buyout. During March Midas, which was $0.62 at the start of 2020, traded as low as $0.265 even though the lowest gold price during this period was $1,474 on March 19. In July the market finally woke up after Midas confirmed for the first time that the timeline set by the Forest Service for acceptance of a draft EIS was still on track for August 2020. If this timeline holds, a mining permit could be in hand by the end of 2021. The graphic above is very important because it illustrates the degree that the market does not yet accept that gold's move above $2,000 represents a new base. The vertical bars show the after tax net present value of Stibnite at different gold prices, with the lower price representing a 10% discount rate and the higher price a 5% rate. I've modified the discounted cash flow model to reinstate the ore schedule diminished between the PEA and PFS which infill drilling has since reinstated, and boosted CapEx by 30% (an educated guess). At the current gold price the stock would be worth $5.26-$8.12 once a permit is in hand. But look what happens if you plug in a $3,000 price: a $10-$15 price range. That would only make sense if $3,000 arrived without significant new inflation. Although the resource junior sector has moved up sharply during the past couple months, its audience does not yet accept that $2,000-$3,000 is becoming a new reality for gold without factoring in any inflation expectations. Although many boats have left the dock, most have not left the harbour, though there are a few already way out to sea which will eventually sink.
Earlier this year I constructed the KRO 2020 Gold Producer Index consisting of 53 companies listed on the ASX, TSX, NYSE and TSXV which will be producing at least 100,000 gold ounces in 2020. It was down 30.7% in March from the start of 2020, was up 56.4% on August 5, and is currently up only 51.2%. If I am correct that $2,000 is the new base for gold, the gold producers will be a lot higher by the end of 2020 when quarterly financials have revealed the impact on cash flow by the higher gold price. The Robinhooders who can only trade NYSE and NASDAQ listed companies are still busy chasing bankrupt companies and stocks somehow linked to the Covid-19 pandemic. They can't move the Barricks and Newmonts, but wait until they discover the smaller producers.
The media has started to fuss about how much money is pouring into gold ETFs which is the easiest way to trade gold. The SPDR GLD ETF gold holdings peaked at 43.5 million ounces in December 2012 and subsequently bottomed three years later at 20.3 million ounces in December 2015. Since the start of 2020 the GLD has gained 11.8 million ounces or 41.3%, though it is still 2.9 million ounces short of the 2012 peak. This is a tremendous gain despite latent fear that gold will never breach the $2,000 ceiling. The world is going through a perceptual inflection with regard to what is a fair price for gold. We are witnessing a psychological switch from fear of a retreat to greed for the gains that are possible from the new base. Entire new audiences who have never thought about gold will start buying gold. By the end of 2020 the SPDR GLD gold holdings will be substantially higher than the 2012 peak.
What is driving the demand for gold? It certainly is not jewelry demand because in the Covid-19 economic lockdown context nobody is eager to buy jewelry. There are no new uses for gold that could move the needle. Some of it is fabricated into gold teeth and electronics, but not $12 trillion worth and the rising price certainly isn't encouraging demand growth from those uses. It is all investment demand. Is it a response to the retreat of the USD dollar during the past month? Not really. During March the USD surged as a safe haven while stock markets crashed and the whole world was engulfed in a panic about the spread of the Covid-19 pandemic. Exchange rates are simply moving back to where they were before the March panic. Are we in danger of the USD declining mightily against other currencies such as the euro, rouble or renminbi? Maybe in the long run if the United States continues on its current Fortress America policy path, but there are too many vested interests at stake for this to be anything more than a passing cause for anxiety.
Is resurgent inflation driving the investment demand for gold? US CPI inflation has been hovering around 2% for the past few years but in the past few months it has fallen below 1% as economic demand collapsed due to the pandemic lockdown response. The annualized rate for May published in mid June is only 0.65%. Within a week we'll get the figure for June but given the sporadic pace of reopening I don't expect it to jump back above 2% though if it does the real rate which is currently negative 0.51% for one year US treasuries will only get worse. The case for owning gold instead of near zero yielding savings deposits or bonds can only get better.
Good luck to those sitting in cash waiting for a bond market collapse. Federal Reserve Chairman Jerome Powell has already declared that the US central bank's Covid-19 quantitative easing program will continue to the end of 2021. The result is a very depressed yield curve, which is negative in Europe where about $15 trillion in sovereign debt is now negative yielding. Literally what this means is that when you invest $1 at the end of the term you get back less than $1. Savers and retirees are not happy campers, nor are risk adverse pension plans. In fact, with 0.65% inflation all maturities from 10 year down have a negative real yield, aggravated by the fact that the nominal amount "gained" each year is taxable. The purpose of this program is to print money to purchase bonds, driving the yield lower, and discouraging the recipients of the new money from reinvesting it in other bonds except perhaps higher yielding but riskier junk bonds. So this new money has flowed into the equity markets and engineered a V-shaped recovery from the March meltdown. Although the Dow Jones has not yet recovered to its peak, other major indices have surpassed the pre-Covid peaks helped along by the big technology stocks. Unfortunately, the steep drop in US GDP in Q2 of 2020 during the Covid-19 lockdown has not yet had a chance to repair itself.
In fact, the rush to re-open the economy in June without suppressing the Covid-19 daily infection rate far below the daily peak reached in April, unlike what was accomplished in places like China, Australia, New Zealand, much of Europe and east Asian countries where the leadership treated Covid-19 as a clear and present danger for its citizens rather than a re-election threat, has turned the United States into the most infected nation in the world. Daily infections appear to have peaked in July as the reopening started to reverse itself, but the infection base is very high and widespread in a large country where no restrictions on inter-state mobility exist. The regular flu season resumes in October, and maybe it won't be so bad if social distancing is maintained because the flu season thrives on the closer quarters of people as winter looms (and all those door-knob licking children go back to school, bringing home viruses that infect their parents who redistribute them at their work-places, oh, I forgot, they will still be working from home as the businesses around their offices continue to die, so maybe not a problem), but the prolonged negative impact on the economy remains in place despite the modest employment rebound. The markets can handle the negative financial reports for Q2 of 2020 because these can be treated as the result of an "act of nature" crisis, but when it drags on through Q3 and gets reported just around when infections are most likely back in an upswing, I'm not sure shareholders in operating companies that serve consumers will stay put, especially if there is an alternative such as gold and and the far more leveraged category of producers, developers and explorers in the resource sector.
All of this will come to a head around November 3, election day for the United States. President Trump has effectively declared that he will not accept as valid any outcome other than his re-election. He cannot afford to lose this election because if he does the Trump dynasty goes down in flames. No vaccine will be ready by November 3, and certainly not administered on a scale needed to assure herd immunity so that citizens feel safe going to the polls. He fears mail-in ballot voting even though common sense suggests his elderly support base might not want to stand in line at the polls with all those unmasked, asymptomatic infected young people. His new head of the US Postal Service is on a cost-cutting rampage which surely won't be helpful in November when postal employees are busy self-isolating as Covid-19 surges. And when you consider that even his appointee to the National Counterintelligence and Security Center has declared that Russia continues to manipulate social media with the goal of re-electing Trump, something one could easily avoid saying in the absence of incontrovertible evidence, it isn't just Republicans who will be inclined to question the validity of the outcome. Trump has floated 2 strategies to secure his re-election fairly. One is his escalation of the conflict between China and the United States which China has not been particularly proactive in sidestepping. The other is his law and order strategy first trotted out with his boarded up church photo shoot in Lafayette Square. The first could unify the country and secure his re-election, but it would end globalized trade and likely tank the stock market. It is unclear how a military conflict with China would affect America's relationship with the rest of the world. As long as the United States with its global reserve currency maintains the global order, gold ownership is for the worrywarts and those with too much money. Undermine that role and gold becomes everybody's hedge against the resulting uncertainty. The second strategy if escalated beyond sending border patrol thugs to hustle "protestors" into unmarked cars like some remake of an anti-Pinochet movie will spawn civil strife that undermines the ability of citizens to cast their vote freely. Gold ownership is one way to hedge against an American civil implosion caused by the suspension of democracy in the name of democracy. The graphic below in which I synchronize the performance of the Dow 10 years before its peak in 1929 and its peak in 2020 terrifies me every time I look at it. There is no reason what the US stock market did 90 years ago should have any bearing on what it is doing today. But a similar outcome is plausible regardless of the November election's outcome.
So that's a bunch of doom and gloom, but not necessarily for the junior resource sector. Trump may find a reason to resign before the November election, in which case the personality cult aspect disappears and everybody focuses on "what's next?" Getting rid of Trump does not make the Covid-19 pandemic disappear, get the economy instantly back on track, and cause peace and harmony to pervade global geopolitics. The China-US rivalry for economic and ultimately military domination will remain. The relative marginalization of the United States as the world's biggest economy will remain a trend. The clash between Boomers and Post Boomers over what to do about the runaway climate change tram problem will still be there. Depending on how crazy things get, gold could spike well beyond $3,000. But if the simpler new reality is $2,000-$3,000 gold, representing a 60% to 137% real price gain, this is a big deal for the junior resource sector. And when the inevitable infrastructure spending boom kicks in, something that Trump promised but failed to deliver during his first term, but would focus on if given a second term, market interest in resource juniors will include all metals. The KRO 2020 Favorites Index currently has 32 members covering a wide range of metal focus and exploration stage. It is currently up 94.6% with only 3 companies mustering more than 200% gains. The awakening bull cycle is less than 2 months old and has lots room to run. KRO assigns Bottom-Fish Spec Value ratings to many juniors and only elevates them to Favorite status when most of the missing pieces come together to give legs to the fundamental value creation potential. After a brutal decade long bear market we are about to make a lot of money.
The graphic below tracks the percentage of TSX and TSXV juniors which trade within set price ranges, of which the most important is that of juniors trading below $0.10 and within the $0.10-$0.19 range. Historically the best bottom-fishing has been done with stocks in the $0.10-$0.19 range because only juniors with severe financials problems or bloated structures screaming for a rollback traded below a dime. The decade long bear market, however, pushed the majority of juniors below a dime, simply because there was no audience for their stories. Bottom-fishing below a dime will be very lucrative for at least another month.
As the graphic below shows, TSXV market activity during the past decade has been dominated by non-resource listings tapped into bubbles like cannabis and crypto-blockchain. The mid 2009-2012 period was the last major resource junior bull cycle with diversified participation. The value traded blips you see in 2016-2018 were fairly focused cycles with stories like Novo's Wits 2.0 dream in Australia's Pilbara capturing the market's imagination until those stories grounded out. The main takeaway from this graphic is that daily traded value is now the highest since mid 2011 when the last major bull cycle was already fading, but nothing yet comparable. Given the general context I've outlined above, I believe that total traded value and average daily traded share price (see the graphic at the top of the KRO Summary) will eclipse that of the 2009-2012 cycle which was based on the false premise that the QE response to the 2008 crash would deliver "fiat currency debasement" and "hyper-inflation". None of that happened. That doesn't mean it can't eventually happen. But for now we are dealing with a significant real price gain in the price of gold which is extremely beneficial for the resource juniors. And if that helps out juniors focused on other metals, who is to complain, for deep down we all want to be optimistic about the future rather than pessimistic, and an optimistic future requires higher prices for metals other than gold. And sadly, the propensity for human stupidity and evil means that gold will never lose its status as a special asset class that hedges against such uncertainty.
The last graphic is the same as above except that the time scale is only from January 1, 2020. Two observations are worth noting. From the start of the year until mid June the balance of value traded alternated between resource and non-resource listings. But since mid June the relative percentage has diverged so that now resource listing traded value is generally 60% or more of traded value. The reason is obvious in the rise of the resource listing traded value (the blue) since mid June while the non-resource traded value has remained constant. The second observation is the stalagmite structure of the resource listed traded value sequence (stalactites hang from the ceiling of a cave and are not a relevant metaphor). The price range distribution chart I talked about earlier showed that since the March abyss 21% of all TSXV resource listings have dragged their sorry selves out of the gutter to trade above a dime. 32.7% are still trading below a dime, many of them because they are zombie companies, but there are still quite a few with decent management teams who are still in shell-shock mode from the decade long bear market they managed to survive. I don't think this resource junior bull market will stall during the rest of 2020 except in very unusual circumstances. I and my KRO members are going to have an extraordinary amount of fun and profit over the next few months as we sift through the juniors still stranded at the dock or just starting to putter out of the harbour. The juniors in the yellow and green working capital range groups in the graphic below are our primary targets, though there is also fun to be had in the red zombie group. KRO is a total information system that covers all the juniors and the key is the KRO Search Engine. The State of the Junior Resource Sector report which is also linked on the KRO home page is your daily guide to how this bull market is evolving. If you are past member or encountering KRO for the first time, don't wait until 2021 when everything will be flying and picking the winners with staying power will be tougher. The easy money is during the rest of 2020. We have a bull cycle awakening special deal which gives full access to the end of 2020 for USD $275.
The stalagmite structure of this resource junior market is a result of the skittish nature of this awakening from the bear slumber. While some juniors have tapped into the Eric Sprott mania, which a year after his solo 2019 foray this time around attracts a huge following whenever he disperses his Kirkland Lake piggybank withdrawals among juniors, the rest of the audience is prone to fits of worry. This is the proverbial "a bull market climbs a wall of worry". Oh, gold is down $20 today. Is it all over? Is gold heading back to $1,200? This makes no sense. Gold has been above $1,700 since mid June and yet we see this pulsating sentiment. At $1,700 plus gold none of the issues in the mainstream media matter to the resource juniors, and neither should the daily fluctuations in the gold price. Everything is screwed up and in no danger of getting fixed any time soon. One should be wholeheartedly bullish about the resource juniors. I also feel this sentiment waffling through the KRO Slack Workspace I created a couple years ago which is a private forum with various concept channels where KRO members can post comments and engage in conversations. My smart phone buzzes when KRO members post a comment. It starts at 6 am pst (because I've set it not to notify me earlier) while I'm still in bed trying to let REM sleep generate some insight I don't already possess. When it becomes a cacophony I know it's going to be a good day for the juniors. On quiet mornings I get to sleep in. We are nowhere near a peak in this new resource junior bull market. I'll know we are near a top when I need to turn off the notifications.
Consolidated Woodjam Copper Corp was assigned a Bottom-Fish Spec Value rating on January 6, 2020 based on steps taken in late 2019 to clean up the balance sheet through a debt settlement as a prelude to a revived exploration focus on in its Woodjam copper-gold project in central British Columbia. The debt settlement boosts the stake of the parent company, Eastfield Resources Ltd, to 12.6% while Gold Fields retains a 16.3% stake. A small $390,000 private placement in June 2020 boosted fully dilut...
Outcome Visualization Project as of Jul 10, 2020: James Bay
Project:James BayLocation:CanadaStage:4-Infill Drilling
Net Interest:100% WIUncapped NSR:2.0%Target Metals:Niobium
OV Project ID:1000020OVP Posted:4/10/2020OVP Retired:
Current OV ID:1000060Current OV Confirmed:7/9/2020Visualizer:JK
NioBay Metals Inc (NBY-V)
Key People: Claude Dufresne (CEO), Serge Savard (Chair), Anthony...
Outcome Visualization Project as of Jul 10, 2020: Wolfden Pickett Mtn: 1,000 tpd UG scenario
Project:Pickett MountainLocation:United StatesStage:4-Infill Drilling
Net Interest:100% WIUncapped NSR:1.9%Target Metals:Zinc Lead Copper Silver Gold
OV Project ID:1000025OVP Posted:7/9/2020OVP Retired:
Current OV ID:1000071Current OV Confirmed:7/9/2020Visualizer:JK
Wolfden Resources Corp (WLF-V)
Wolfden Resources Corp announced on July 8, 2020 that it had begun a 5,000 m drill program at its 100% owned polymetallic Pickett Mountain project in Maine. A major concern for exploration programs this summer is the recent surge of Covid-19 infections in the United States; fortunately Maine is one of the few states where infections are low and not rising at an alarming rate. After a disappointing attempt in 2019 to expand the existing resource of 4,080,000 tonnes reported in January 2019, Wolf...
Wolfden Resources Corp started off as a Bottom-Fish Spec Value rated 2020 Favorite at $0.12 on December 31, 2019 and was upgraded to a Good Spec Value Favorite at $0.165 on July 10, 2020 following KRO's publication of outcome visualizations for the polymetallic Pickett Mtn project in Maine. The West and East lenses were discovered by Getty during the 1980's but never developed because the deposit wasn't large enough to develop and further exploration was not pursued as oil companies gave up on t...
NioBay Metals Inc was initially assigned a Bottom-Fish Spec Value rating on December 14, 2018 based on its 100% ownership of the James Bay niobium deposit in northern Ontario 40 km south of the Moose Cree First Nation town of Moosonee. NioBay acquired the project in June 2016 from a group headed by Barrick for $25,000 and 5 million shares. The carbonatite deposit was found in 1965 as part of a regional geophysical program. Bechtel completed an economic study in 1967 which it updated in 1979. Abo...
Sonoro Metals Corp was assigned a Bottom-Fish Spec Value rating on December 14, 2018 based on the company's plan to advance the 100% optioned Cerro Caliche gold-silver project in Mexico as an open-pit, heap leach operation that would start at a small scale with the dual purpose of demonstrating the recovery model and generating sufficient cash flow to fund future expansion of a much larger scale operation. Tracker April 11, 2019 describes the recent history of Sonoro, in particular the role of J...
Imperial Mining Group Ltd was assigned a Bottom-Fish Spec Value rating on July 21, 2020 based on its 100% ownership of the Crater Lake scandium project in northern Quebec and recent developments which indicate that the chicken-egg problem plaguing the arrival of primary scandium supply has a solution. This problem is, how do you get offtake orders so as to fund CapEx of a primary scandium mine that will more than double global supply, when end users first want to see reliable primary supply at a...
Midas Gold Corp expects to release its Draft Environmental Impact Statement in August 2020 which will kick off a 45 day plus public comment period, following which Midas plans to publish its long awaited feasibility study. The Final EIS and Draft Record of Decision is expected to be published in Q2 of 2021 which should result in a Final Record of Decision in Q3 of 2021. Since raising CAD $55.2 million from John Paulson in early 2016 to start permitting the Stibnite gold project in Idaho, Midas h...
Scandium International Mining Corp was downgraded to a Bottom-Fish Spec Value rated Favorite at the end of 2019 after having a Good Spec Value rating since 2016 based on the DFS for the Nyngan scandium deposit in New South Wales of Australia. The mining lease was granted in May 2017 and in October 2017 the 20% project stake held by SIL Investments LLC (the Evensen group) was converted into a 20% SCY equity stake. My hope was that the Evensens would use their network to attract a combination of d...