With the summer of 2016 passing by at an alarming pace, I
think it is important to take a few moments away from the enchanting beauty
of Georgian Bay and review a number of the key elements that have
characterized 2016's breathtaking advance in gold, silver and the associated
mining, development and exploration stocks. While gold bullion is ahead 26.6%
year-to-date, the gold mining stocks have demonstrated their incredible
contained leverage and why, when the market operates properly, they are
vastly more rewarding than the physical metals themselves. However, the 2016
advance has had many analysts questioning the integrity of this latest move
as the HUI (NYSE Arca Gold BUGS Index) and the XAU (Philadelphia Gold and
Silver Index) have defied gravity, the laws of physics, the Law of
Diminishing Returns, and just about every other law that historically pertains
to the behavior of stocks.
Every single one of my colleagues in the business of
precious metals investment has been bucked off this rampaging bull at least
once or twice this year while the quality of portfolio content is doing what
it always does as the advance occurs: the Barrick Gold Corps (ABX:TSX; ABX:NYSE)
and Newmont Mining Corps (NEM:NYSE) of the world are being replaced by Foo Foo Mines and No Name
Resources on the assumption that the leverage in owning a 20-cent penny
explorer is superior to owning a company actually producing and selling gold
and silver. This dangerous tendency is referred to as "trickle
down," where one takes a premature profit on a large-cap name and
realizing the error, replaces it with a mid-cap that also gets turfed too
early, being again replaced with a small-cap, and so on and so forth until
you wake up one morning and realize that your entire net worth has wound up
in the hands of 10 or 15 masterful Vancouver promoters. And that is a
nightmare scenario because the primary corporate objective of the typical
Vancouver promoter lies not in the realm of a new gold discovery or near-term
cash flow or added reserves, but rather in the novel concept of
"distribution" and by that I don't refer to the
"distribution" of profits to shareholders by way of dividends but
rather the distribution of the one-cent paper they manufactured when they put
the shell together.
Before I am assailed by my West Coast friends for
improperly and unfairly disparaging these "entrepreneurs," there
are plenty more where they came from in Toronto, London, New York and
Melbourne, so every so often, take a peak at your holdings and try to review
the quality of the holdings. Any portfolio carrying over 50% content listed
on the TSX Venture Exchange (TSX.V) should be pruned and upgraded immediately
(although the temptation to take that last "flyer" on Glitter Gold
or Lastchance Lithium can be overwhelming).
Before I launch into another tirade on these constant
interventions and manipulations going on daily in every market on every
continent on the planet, I want to display a number of charts that will, I
believe, put valuations for gold and silver companies into a more palatable
perspective. Look at this two-year chart of VanEck Vectors Junior Gold Miners
ETF (GDXJ) that I have owned since mid-late-2015 at an average entry point of
around $17. From the chart below, latecomers to this golden jamboree of a
party are thinking that they "missed it" and are rather reluctant
to take the plunge. To wit, if you are anchored in the 2016 trading period
only, you are most certainly afflicted with financial vertigo as the dizzying
moves in the big name gold and silver miners have been simply awesome.
Now take a look at the same ETF going back to 2009 that
depicts the severity of the 2011-2016 bear market and the recent recovery.
There are two important takeaways from the six-year chart. The first is that
the GDXJ appears to be well ahead of gold in terms of valuation, but since
gold and silver stocks ALWAYS lead gold and silver bullion prices, the GDXJ's
performance year-to-date bodes very well for the outlook for physical metal
prices into Q4/2016 and beyond. The second takeaway is that as long as gold
and silver bullion stay within their well-defined uptrends, the GDXJ could
have another triple in it before the "crazies" show up. This is the
reason I was running around like a rabid Saint Bernard last fall and early
winter to the point where my antics were making Cujo look like Lassie. The
evidence is irrefutable: the depth of the 2011-2016 bear market is what set
up this massive rebound and subsequent bull move and based upon the amplitude
of the collapse, the GDXJ has a lot farther to go.
And what about those penny stocks masquerading as
"gold and silver exploration and development companies"? Are they
really as dreadful as it appears from my earlier remarks? The answer is an
absolute "No!" because despite my tongue-in-cheek ridicule of the
TSX Venture Exchange, it is critical to remember that many (if not ALL) of
the major discoveries of the last 35 years were germinated by the old
Vancouver Stock Exchange (now the TSX Venture Exchange) with many
life-changing fortunes made via the exploration successes of Barrick, Dia
Met, Diamondfields, and more recently Goldcorp Inc.'s (G:TSX; GG:NYSE) $520
million acquisition of my 2015 favorite, Kaminak Gold. Similar to the
illustration shown above for GDXJ, look at the chart of the TSX.V
year-to-date.
The TSX Venture Exchange started off timidly back in Q1
but as happens in all golden bulls, the speculative allure of the penny
stocks has caught on with the TSX.V now up over 100% since January. Investors
are today banging their heads on their desks, frustrated that their mid-caps
are stock in a trading range while the penny dreadfuls are soaring. The
problem lies in the fact that the internet grist mill of gargantuan marketing
campaigns by the newsletter community are now inundating inboxes with every
other form of social media blitzkrieg designed to pump and promote designated
junior names for a "fee," which has been escalating sharply as the
stakes behind "distribution" are recognized.
Since the TSX.V is always the hardest-hit when the
inevitable correction arrives, the doubling of values since last January has
everyone trying to determine whether the leverage of the penny explorers
outweighs the predictability of their more senior brethren. The chart below
again depicts the severity of 2011-2016 but since I take it back to 2006, the
point where the TSX.V reached its apex at 3,307, there can be no doubt that
there is still considerable and undeniable upside remaining, albeit with
enhanced risk and added volatility.
The last two weeks of the month of August is typically a
slow one in North America with most people on holidays trying to squeeze in
the last days of what is an exceedingly short summer, especially north of the
49th Parallel, where the sight of a turned leaf in August can
bring on depression. For gold and silver investors, it should be viewed as a
strategic accumulation period where illiquidity creates opportunity. With
diminished volumes, there are occasions where large blocks of stock come open
at depressed prices so sharpen your pencils and focus your screens on the
names that are what I call "Consensus Buys." Bob Moriarty of
321Gold.com recently put out a blockbuster commentary on Gold Standard Ventures Corp. (GSV:TSX.V; GSV:NYSE), which recently reported an impressive intercept in Nevada. GSV
is a company that I have followed for the past four years but have never
recommended it and, sadly, never owned it. In the case of GSV, as I said with
Kaminak all through 2014 and 2015, it is a company that now MUST be owned
because the Nevada behemoths like Newmont and Barrick will NEVER allow GSV
into their turf.
I refrained from talking about the COT report because it
was essentially a non-event but what WAS important was that despite the huge
gold price drop into the August 3rd NFP (jobs) report, the
Commercials have only covered a modest 11,086 contracts and are still short
well over 300,000 contracts of synthetic gold. That means that the Cretins
are going to pull out all the stops to crush the advance and will be thumbing
their large, bulbous noses at us at every turn. In the end, the magic fiat
manufacturing machines are going to go berserk and the average citizen is
going to look at his or her 60% year-over-year increase in rent or food or
electricity and then THEY will go "berserk" in their own fashion.
Juicing asset prices while depriving the working classes of wage increases is
criminal and dangerous and if you think for a moment that it won't be felt in
North America and Europe, you had better give your collective heads a very
large shake. The new generation is going to put an end to this devious
monetary deception and all of the old "Champagne Socialists"
sitting in the front of the aircraft debating the horrors of capitalism with
two bankers and a parliamentary aide while sipping on bubbly, feet up and
caviar on the side table, are ALL in for a very rude awakening.
All charts courtesy of Michael Ballanger.
