Tuesday, March 7, 2017

A Funny Thing Happened on the Way to the Gold Rally -- Update

Three years ago, I wrote a column for Beyond the Dollar about my experiences at the PDAC. The link to that article on their website is now broken. But the article showed up in my Facebook feed anyway, like a bittersweet reminder of an old romance.

Have things changed in the intervening three years? I think so. And yet so many things remain the same. Again, we have the annual March sell-off in gold. What sado-masochist scheduled the PDAC in March, anyway?

So there's a lot that remains the same. Here, below, is the original article that I published three years ago. And below that, I'll write why things are changing.

A Funny Thing Happened on the Way to the Gold Rally

Sean Brodrick 
March 6, 2014

I’m writing from the Pessimists and Downers Association of Canada – excuse me, the Prospectors and Developers Association of Canada (PDAC), the world’s biggest mining conference. Never before have I been in a group of people sitting on literal gold mines and yet so down in the mouth at the same time.

In a way, we can’t blame them. The action in gold mining stocks played out as absolute carnage for nearly three years. And it seemed every time the miners stuck their heads out of their holes to sniff the air, they’d get whacked on the heads with a stick. Being the mole in a game of Whack-a-Mole will make anybody bitter and jumpy.

Finally, gold and gold miners have started to rally. Gold is up 12% so far this year… and the Market Vectors Gold Miners ETF of gold stocks is up twice as much! But you wouldn’t know the good news from the mood at PDAC.

As I walk through the PDAC this year, held in Toronto, which is deep in winter’s icy grip, I find it fitting that the standard uniform for Canadian business is a black suit with a black overcoat. Many (not all) of these guys are acting like they’re in mourning for something… maybe for the better days of Canadian mining.

And it’s not just a mood, it’s statistical. Jeffrey Christian of CPM Group points out that many mining companies have been deferring, “mothballing,” or cancelling development projects due to the slumping gold price. In all, he calculates that one-third of all the scheduled projects have been scuttled indefinitely. And if you’re wondering about silver projects, we’re seeing the same thing in that space. Low prices for too long means one project after another has been shelved.

That’s pessimism.

Well I have news for the mourners in black overcoats: better days lie ahead. And I believe they’re coming sooner than you think.

I mean the thing about miners, engineers and geologists is that they hate to sit idle. So as the prices of gold and silver came down, mining companies cut costs to the bone. They redesigned their projects and turned over every rock to find a dollar. Sure, some companies went belly-up. But that just meant that other companies got to pick up great projects for a song.

So we have low-cost miners and developers that picked up projects on the cheap, run by guys who know how to squeeze a dollar until it screams. The best ones not only are going to make money, they’re going to make a LOT of money. All they need is for the price of gold to go up… some.

It looks like they’re starting to get their wish. Gold has rallied sharply since mid-December. And look at the effect that rally has had on junior miners, as tracked by the Market Vectors Junior Gold Miners ETF (NYSE: GDXJ)…

Someone who definitely understands the positive reality underlying all the doom and gloom is Rick Rule, chairman of Sprott U.S. Holdings.

“Bear markets are like sales,” Mr. Rule told a packed room at PDAC. And since junior miners as a group were down 75% from their peaks, it was like “the market is 75% less risky.”

“You’ve been here through the pain,” Mr. Rule added. “Why not stick around for the gain?”

Now, I should say that both Rick Rule and Jeffrey Christian believe we’ll see lower gold prices before we see higher gold prices. Maybe they’re right.

On the other hand, I’m finding a nice collection of miners who make money at current gold prices… and will make a heck of a lot more money at higher gold prices. Maybe prices will go a bit lower. But I don’t think investors should worry too much about catching the exact bottom. There’s just too much potential upside to risk missing the move.

After all, the Chinese are buying gold hand over fist. The world’s central banks keep accumulating gold, even as they pooh-pooh it for the general public. India is likely to lift its restrictions on gold imports sooner rather than later, unleashing a flood of pent-up demand. And ETFs are buying gold again and it was ETF selling last year that hammered gold prices into the pit.

So to my gloomy friends in Canada, I’ll put it in terms you can understand. In the words of the great Canadian rock band Barenaked Ladies:

“Odds are we’re gonna be alright.
Sure things go wrong, but I’ll take my chances.
Odds are long, so why not play?”

I’m coming back from Canada with new recommendations. If the market is 75% de-risked, as Rick Rule says, and I agree with him on that, then I’d say the odds are these stocks are going to do all right.

In fact, I’d say the bigger risk is doing nothing. Sitting on your hands could cost you a lot of money.

Whatever you do, good luck and good trades,

Sean Brodrick

UPDATE: Okay, that was then. Now, it's 2017. And yeah, things are different. Here is what is different in one chart ...

This is a chart I showed at my PDAC presentation. I just touched on it at the show, so I would like to give a longer explanation now.

This is a lo-o-ong term chart of the Philadelphia Gold & Silver Index, a basket of gold miners. I'm using this because the GDX doesn't go back that far. The point is, gold is cyclical. Therefore, gold miners are also cyclical. We just came out of a 4.5-year bear market in gold and miners. 

Looking back over the even longer-term, cycles in gold last, on average, 4 to 5 years. They can go longer or shorter. But since this cycle started at the beginning of last year, it would be very unusual for it to end now.

As long as we're in a bull market, pullbacks are a gift.

I am finding some very exciting companies at the PDAC. You should be making your shopping list, too.

I'm not your investment advisor. Do your own due diligence.

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