The September 2021 MIF presentation Why the Resource Junior Hesitancy? dwells on the question, why in the face of strong precious and non-precious metal prices have the resource juniors performed so poorly since Q1 of 2021? After the 2008 financial crisis resource majors and juniors underwent a surprisingly strong recovery in 2009-2010. But although gold did not peak until August 2011, gold producers and developers peaked in December 2010 and their price trend diverged from the gold price trend. As it turned out the market correctly anticipated a decade long bear market for metals. Once the Republicans gained control of the House in November 2010 they blocked all efforts by the Obama administration to use fiscal stimulus to help the American economy recover. The area where fiscal stimulus would have been most productive would have been to fund renewal of infrastructure, ideally in a transformational manner that supported a shift toward a clean energy base. It was left to the Federal Reserve to use monetary policy in the form of quantitative easing to prevent the US economy from fading back into a recession, the primary effect of which was to create a long running general equity bull market that rivals that of the roaring twenties before the 1929 crash and ensuing decade long depression. Even when Trump became president in 2017 with a promise to renew infrastructure the Republican controlled House and Senate refused to help Trump keep his infrastructure promise. They happily expanded the US debt through an unfunded corporate tax cut with bogus predictions about trickle down effects, but they supported nothing that would materially Make America Great Again. Not surprisingly the resource sector did not participate in the equity bull market until first gold took off in mid 2020 as the covid pandemic escalated, and then in Q1 of 2021 when other metals soared on the prospect that the new Biden administration would push for both a clean energy transformation and infrastructure renewal.
During the second quarter the market's enthusiasm for resource stocks stalled as it became apparent that the Republican Party had turned the covid vaccine into a political opportunity to sabotage a post-pandemic economic recovery in the hope that the Democrats would lose their razor thin control of the House and Senate in the November 2022 mid-term elections. The market tends to remember the most recent past and as far as the resource sector is concerned, it fears another lost decade as the United States stumbles onwards, fretting about the rise of China and adopting an End Timer fatalism toward climate change. The conditions and arguments are present for not just growing metal demand beyond existing supply capacity, but also for diversification of supply which is of particular importance to resource juniors not focused on gold.
The growing importance of ESG considerations, especially with regard to blockchain supported verification of raw material ESG credentials, and including the "Governance" concern about a company's long term vulnerabilty created by "just-in-time" supply chain strategies geared to secure short term profitability, is creating an opportunity for juniors to find and develop deposits that aren't just the "biggest and best" in the world. China grew into the second biggest economy on the back of globalized trade, but it is now engaged in a great power rivalry with the United States whose path is clouded with uncertainty. This represents the strongest case for higher real gold prices that are not just an adjustment for inflation. The financing boom of the past 12 months has left resource juniors in the best financial shape since the bear market began in 2011. Copper is above $4/lb, and gold at $1,750-$1,800 represents a significant real price increase not explained by recent inflation. Almost every metal is trading at higher prices, and if the IMF's projection that the global economy will grow 30% to $28 trillion over the next 5 years becomes reality, the increased raw material demand will not be met if prices sag back to 2011-2020 levels. If the market were truly concerned that the twenties will skip a roaring pandemic comeback and skip straight to a thirties style depression, we would already have seen a 15%-30% pullback in general equity markets. So why does the audience for resource juniors appear to have vanished?
In the case of gold juniors part of the problem is that the traditional audience for gold stories has had a free market, libertarian mindset, but that may always have been an illusion. Trump looked into the heart of what makes a Republican tick and saw a craving for a master-slave relationship that legitimizes coercion inflicted by "slaves" on others within an autocratic political structure. The only freedom this type seeks is freedom from having to make choices such as taking a vaccine that might have a side effect and may not work as well as hoped. Better to have things like catching covid and being hauled off to an ICU and ultimately the morgue just happen to oneself. It is this fatalism of the End Timer mindset that stands in the way of a full-blown post pandemic economic recovery that also deals with the cascading consequences of climate change.
Every Boomer is now over the age of 55, and by 2030 the last one will have hit the 65 retirement age. This generation controls most of the world's wealth but it to a large degree seems to see itself as a Last Generation that is very reluctant to secure a future for younger generations it will not live to experience. The traditional gold bug did not think like this; the traditional gold bug saw gold as a means to navigate beyond whatever misery governments inflict on the world. Although the gold bug was prone to apocalyptic hand-wringing, there was always the assumption of surviving, if not oneself, then at least one's children and grandchildren. But now, oh Gold, why have they forsaken thee?
Worrying about the disappearance of the traditional audience for resource juniors is probably a waste of time. The more important challenge is, what does it take to attract the younger generations to the resource junior sector? The problem is that the younger generations are hooked on momentum gambling for which resource juniors are only suitable during brief periods such as when a major new discovery is breaking out or the metal of which the junior has ounces or pounds in the ground is skyrocketing. But outside those moments of frenzy all that a resource junior, thanks to the finite valuation limit of a future mine, can offer is an opportunity for fundamental outcome gambling.
Gambling on a resource junior is tied to the exploration-development cycle for a project, which unfolds over time, with "events" punctuating key milestones along the way which reshape what the future fundamental outcome might look like. Visualizing a potential outcome and establishing a fair price to pay now for a bet on that outcome is not easy. Unlike momentum gambling where you don't need to know anything except the principle that the "trend is my friend" (until it isn't), fundamental outcome gambling is hard work. The junior resource sector needs to teach the younger generations how to visualize potential outcomes and it must also provide the information audiences need to construct their fundamental outcome bets. The 43-101 rules do severely restrict the amount of arm waving resource juniors can do compared to the winner-take-all stories of non resource juniors. This will not be an easy challenge and it requires the help of third parties such as myself.
In the case of the four companies in my MIF session I have constructed visualizations of plausible outcomes that allow me to see what sort of gain is possible if the bet pays off. Fundamental outcome gambling is not the same as trading which is just market direction gambling. Bitcoin is popular because it doesn't represent anything except itself. There are no real world grounded limits to the value of a Bitcoin because it serves no purpose. Unlike money it does not facilitate price discovery. If the plug were pulled on all the computers facilitating Bitcoin transactions, it might trigger mental health crises that suck up physical resources such as is happening now when anti-vaxxers end up hogging all the ICU units at the expense of ordinary people who get medically unlucky, but the world would otherwise not notice. In contrast buying a resource junior is to place a bet on the value of whatever the junior may discover through exploration, or, in the case of an existing deposit, what it will end up being worth when it has been walked through all the feasibility demonstration stages. Unless the younger generations learn how to place fundamental outcome bets on resource juniors, this sector will disappear.
The images below are a graphical presentation of the rational speculation model applied to outcome visualizations created for the flagship project of each company in John Kaiser's MIF session. All 4 companies are currently KRO Favorites. Each graphic is a link to an unrestricted version of the Outcome Visualization which updates nightly to reflect current stock and metal prices as well as the USD:CAD exchange rate. It also shows the impact on the future value at different metal prices. The more detailed OV Report that includes the OV assumptions is restricted to KRO members.