Gold and gold miners are finally having a huge rebound
after five years of a brutal bear market, and we are having a spectacular
year so far. Recently gold and silver are shaking off the potential summer
weakness. We have been seeing very weak physical demand from China and India
in the past few months due to high prices: Chinese demand was down 30-40% and
India's was down 70-80% in Q2 versus the same period last year. In the
meantime we have some Federal Reserve officials signaling that more interest
rate hikes are coming up.
However, gold and silver are still looking very strong in
the shoulder month of August. This year's gold and silver rebound
tracks the strong rebound of 2009, the period when gold and silver rebounded
off the brutal 2008 crash. Following the 2009 playbook, we should have a good
second half if gold and silver continue to follow in the footsteps of 2009.
As you can see from the charts, gold started to take off big time after the
summer consolidation in 2009, first at the end of August and early September,
exploded parabolically, and peaked in early December. If you look at the
monthly gains of 2009, two-thirds of the annual gains happened during the
three-month period of September, October and November!
Seasonally, gold and silver usually bottom around August. When the summer
ends, jewelry shops are busy buying precious metal for the holiday seasons,
starting with the Indian wedding season into Jewish Hanukkah into the
Christmas holidays into the New Year and finally the Chinese New Year. Even
the recent report of weak physical demand for gold from China and India may
indicate that jewelry shop precious metal inventory there is low. They may have
to play catch-up in the second half to restock the inventory, and that can
drive the gold price even higher.
As traders, now we need to prepare for a similar move of gold and silver
in the next three to four months. This type of opportunity happens only once
or twice in a decade and I don't wish to miss it. We want to build up our
positions in the month of August in case a similar move of gold and silver
happens again later this year.
How to trade? If you are not very familiar with the gold mining industry,
I strongly suggest you stick with exchange-traded funds (ETFs): SPDR Gold
Trust (GLD) for gold, iShares Silver Trust (SLV) for silver, plus Market
Vectors Gold Miners ETF (GDX) and Market Vectors Junior Gold Miners ETF
(GDXJ) for gold miners. There are other physical-metal-backed ETFs for
long-term holding. You can also try the leveraged ETFs, futures and options
if you can tolerate the risks. Gold and silver miners are extremely difficult
to analyze, and they fool even the seasoned experts all the time. Don't take
any unnecessary risks.
For people like me who have been in the industry for a long time, there
are actually a lot of opportunities. The recent rebound of mining stocks has
been very uneven. There are many very good value stocks if you look around.
Here is a rough comparison of four of the ten largest gold miners in the
world. You can see a huge valuation gap between Goldcorp Inc.
(G:TSX; GG:NYSE)/Barrick Gold Corp. (ABX:TSX; ABX:NYSE) and Kinross Gold
Corp. (K:TSX; KGC:NYSE)/Gold Fields Ltd. (GFI:NYSE). I understand Goldcorp is one
of the best-run gold miners and Barrick is a darling of the funds, but does
that justify the huge 100-200% valuation gap? If you believe this gold rally
is for real, then I see these stocks converging in the next year or two when
investors start to put valuations into their calculations. Here are the
ten-year charts for these four stocks versus GDX. I see them converging,
which means Kinross and Gold Fields could have 100% upside in addition to any
appreciation of GDX.
See Full Size Image
If you go down the food chain to the midtiers and juniors, I wish to
remind everyone that this sector broke a lot of investors in the past downturn.
Personally I saw friends who were almost completely wiped out. Did the
industry change its behavior to be more friendly to shareholders? The honest
answer, unfortunately, is no! You don't have to ask me, you can ask Rob
McEwen, former Goldcorp chairman, and other honest industry insiders about
it. I was following the industry carefully during the downturn; sadly most
companies still didn't want shareholders' input, only their money.
Insider ownership has been very low compared to other industries, thus
there is little motivation to help existing shareholders to even recoup their
original investment. I have seen shareholder revolts, but these revolts
seldom succeeded. One of the few exceptions is Klondex Mines
Ltd. (KDX:TSX; KLDX:NYSE.MKT); shareholders successfully went to court,
fired the management team, and Klondex became one of the very few successful
stories during the past downturn. But stories like Klondex are very rare, as
many juniors wiped out most of their investors. Fortunately I saw the
downturn of gold coming and led my subscribers to underweight gold and gold
miners in 2012 and avoided a lot of this carnage.
Going forward, I really like gold and silver miners who successfully
delivered new mines during the downturn. The midtier companies I own are OceanaGold
Corp. (OGC:TSX; OGC:ASX) and B2Gold Corp.
(BTG:NYSE; BTO:TSX; B2G:NSX). Both successfully built mines in this
recent downturn, on time and on budget. Both underpromised and overdelivered,
they are extremely rare cases in the recent downturn. If you remember the
long list of bankruptcies, like Allied Nevada's, that wiped out shareholders
completely, the old memory is too painful to recall. The reason to continue
investing in these companies is that they have an experienced in-house team
that can deliver and a management team that at least really cares about
shareholder value.
I also own companies that were building new mines during the downturn and
are now finishing them or are close to finishing them, companies that include
Pretium
Resources Inc. (PVG:TSX; PVG:NYSE), K92 Mining
Inc. (KNT:TSX.V) and Maya Gold & Silver Inc. (MYA:TSX.V). Now everyone
wants to build the next new gold mine. But during the downturn, only the best
deposits were put into production. Pretium is finishing up a world-class mine
in north British Columbia. It should start pouring gold next year, 500,000
oz/year (500 Koz) at costs well below $500/oz.
K92 should be in production this month or next. The company is quiet about
its production guidance because it wants to underpromise and overdeliver. We
should see it starting with 40-50 Koz at very low cost and going higher from
there.
Maya is ramping up its production as we speak. The new Zgounder mine (85%
owned) is targeting 1.4 million oz (1.4 Moz) of silver per year at total
costs just over $10/oz and cash costs just over $6/oz. We didn't see many
silver mines starting up when silver was around $15/oz. This mine, when fully
ramped up, likely beyond 1.4 Moz/year, will be one of the great new pure
silver mines built in the past few years.
Finally I wish to emphasize that these mines that have been built during
the down times are truly world class. They are targeting sub-$1,000 gold and
sub-$15 silver prices. When they are fully up and running, they will be some
of the lowest cost mines in the world.
I also like exploration companies that carefully navigated the downturn,
keeping costs and dilution down. A couple of these companies I own are Gold Standard
Ventures Corp. (GSV:TSX.V; GSV:NYSE), GoldQuest
Mining Corp. (GQC:TSX.V) and Paramount Gold
and Silver Corp. (PZG:NYSE.MKT; PZG:TSX). Gold Standard Ventures has been
a spectacular stock during this downturn. The management team put their heads
down and consolidated the whole district. Gold Standard gained the support of
Goldcorp and OceanaGold, the two most successful companies during this
downturn, at premium to its share price. It also made a strategic investment
in Battle Mountain Gold Inc., which was dead for many years because of its
very high royalty rate. The company bought down the royalty to a reasonable
level and is now ready to explore.
GoldQuest's management was able to raise money and shore up its balance
sheet in the good times, and kept their heads down and did exploration and a
preliminary feasibility study at minimum dilution in the downturn. Now the
share price has rebounded and the company is ready to go to the next phase.
Paramount hasn't moved much like other exploration companies, likely due
to the fact that it just completed a merger. It is a spinoff of the old
Paramount, which was sold to Coeur Mining Inc. (CDE:NYSE) during the bear
market. It is one of the few winners of mines in the past few years. Now the
company picked up another property during the downturn. It has two sizable
gold projects, one in Nevada and one in Oregon, both in preliminary economic
assessment (PEA) stage. Paramount has a total of over 5 Moz of Measured and
Indicated resources, and a market cap of about $35 million. It is one of the
few U.S. listed and U.S.-based exploration companies with proven management
that is still quite cheap.
In summary, the rebound of gold has striking similarities to 2009, the
year after the 2008 crash. If history repeats itself, we should see the most
appreciation of the gold price starting in September, the beginning of the
annual gold run. I am excited about it.
As always, when to book profits is the most important question for any
investment, but especially in the volatile gold and gold mining industry. I
was fortunate that I sold silver at $49-50/oz back in 2011 and led my
subscribers to underweight gold and gold miners in 2012. I will be certainly
watching the gold market very closely and hopefully will navigate through
this gold bull market as successfully as the last time.
Chen Lin manages a family fund and writes about it in the
popular stock newsletter What Is Chen Buying? What Is Chen Selling?,
published and distributed by Taylor Hard Money Advisors, Inc. While a
doctoral candidate in aeronautical engineering at Princeton, Lin found his
investment strategies were so profitable that he put his Ph.D. on the back
burner. He employs a value-oriented approach and often demonstrates excellent
market timing due to his exceptional technical analysis.