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The Dow on Gold’s terms
 The number of ounces of gold it takes
to buy one share of the Dow is the Dow/Gold Ratio. For example, at the time
of writing this article the Dow was at 17,511 while gold was at US$1,277.40.
It requires 13.70 ounces of gold to buy one share of the Dow, 17,511/1,277.40
= 13.7, so the ratio is 13.7.
The historical low point in the Dow/gold ratio was reached in 1980 at
1 to 1.
In 2000, a bull market took the Dow to nearly 42-times (10,900) the
price of gold.
The National Inflation Association (NIA) reports that the median
Dow/gold ratio over the past 100 plus years is 5.83.
The NIA expects a return to the median Dow/gold ratio in 2015. At the
time of their report the Dow was at its new all-time nominal high of 17,138.
Making gold’s fair value, based on their long term median Dow/gold ratio of
5.83, almost $3,000.00 oz.
In-situ Inferred Value
Your author believes, based on in-situ inferred value, shares of
companies involved in the precious metals sector are undervalued.
In January 2000, with gold at $260 an oz the in situ value companies
were willing to pay for inferred gold was 3.55% of the spot price; $8.50oz
In 2005 with gold at $444 companies were buying inferred gold at 7.2%
of spot; $34.00 oz.
Today with gold at $1200.00 oz companies are paying just $12-15 for
inferred gold; 1 to 1.25%.
Company stage – risk v. reward
Juniors are risky, managing that risk is what investing in the junior
resource sector is all about – in a nutshell it’s all about when you invest.
Some people invest extremely early because of management, some on the
possibility of what a property might host, some people will wait and invest
as you start to drill and build resources thus reducing their risk. You pay
less because there is more risk or you pay more because there is less risk, only you can decide the level of risk you can tolerate
and how much patience you have to sit while developments, the story, plays
out.
My favorite stage junior is a junior in the post discovery resource
definition stage (also known as brown field stage companies). These companies
have all ready found something, the share price has settled back after the
initial discovery (never chase a company whose share price has already
exploded, the share price has had its run, for now the moneys been made. I
try and enter after the excitement has died down and the share price has
settled back) and the company is going in to see what they have and hopefully
produce a 43-101 compliant resource estimate and build upon it. The risk has
been greatly reduced, the waiting time for a discovery non-existent and the
reward very nice considering the much lower amount of risk.
For nearer term producers - for those further down the development
path towards a mine - you have:
- Preliminary Economic Assessment (PEA) or
scoping studies are done to examine potential mining scenarios and
economic parameters - A PEA or scoping study is an important milestone
for a mineral project, it’s the first step in a company’s economic
and technical examination of a proposed mine
- Preliminary feasibility studies or
pre-feasibility studies are more detailed than PEA’s and are used to
determine whether or not to proceed with a detailed feasibility study.
They are also used as a reality check to determine areas within the
project that require more attention
- Feasibility studies will determine definitively
whether or not to proceed with the project. A feasibility study or
bankable feasibility provides budget figures for the project and will be
the basis for raising capital to build the mine
Remember all these different stage studies are only yes/no decisions
on whether to move to the next stage. NONE of them mean you are going mining,
there’s no mine till every stage is completed, permits approved and the
necessary financing has been arranged.
Because these companies are well advanced along the development path
a lot of the guesswork about grade, size, costs and metallurgy have been
taken out of the equation for us. They have done sufficient work to give
investors a certain level of confidence that their project will successfully
move towards being a mine. The later stage companies (those doing
feasibility, permitting and money raising) can have an excellent entry point
for investors - they often enter a quiet period when they are doing the
advanced studies and raising money to go into production. They often base (a
flat share price) for quite a while through this period - possibly a good
time for accumulation of their shares if you believe in the story. After the
money is raised for production investors can see they are going mining - cash
flow is just over the horizon - and the share price will often break out of
its trading range.
With producers you have to look at the balance sheet, consider their
plans for the future and judge for yourself the ability to meet those plans.
Remember cash flow is king, but can they grow that cash flow? These large
well established producers have the least risk and the least upside. But
gains could be steady and maybe they pay a dividend.
Conclusion
The number one rule of investing is ‘always buy an asset that is
priced below its replacement value.’ The cheaper you can pick up quality
assets, knowing the price HAS to rise, the better. When the asset is a
financial instrument, such as gold and silver, it’s time to start acquiring
it for the long term.
Gold and silver are, in this author’s opinion, extremely undervalued
financial instruments. A portion of every investors portfolio needs to be
dedicated to holding gold and silver bullion.
But historically, and perhaps especially so today for all the reasons
listed above, the greatest leverage to rising precious metal prices has been
owning the shares of junior resource companies focused on acquiring,
discovering and developing precious metal deposits.
If you want to own the cheapest gold and silver you can find to reap
the maximum coming rewards buy it while it’s still in the ground.
Great Panther Silver Ltd. (GPR:TSX; GPL:NYSE.MKT) is on top of the list of producers that are well positioned
to take advantage of an uptick in gold and silver prices.
Kootenay Silver Inc. (KTN:TSX.V) discovered, and is developing, the Promontorio project into an
open-pit mine in Sonora, Mexico. The company recently drilled one of its many
prospects on its immense project and discovered another significant
high-grade silver deposit, La Negra.
New Carolin Gold Corp. (LAD:TSX) is an exciting gold project. The company is working old
mines in an underexplored area in southwestern British Columbia. Success here
could open up a lot of people's minds about junior mining overall.
CanGold Ltd. (CLD:TSX.V) is working on earning a 100% interest in the Guadalupe de los
Reyes gold and silver project in Sinaloa State, Mexico. The next stage of
work will involve pre-feasibility stage drilling.
Terraco Gold (TEN:TSX.V) is a gold focused company with assets in the western U.S. that
gives investors and shareholders exposure to gold equity ownership through
gold royalties and gold in the ground.
NioGold Mining Corp. (NOX:TSX.V) has started a Phase 1, 40,000 meter definition drilling program
on its Marban deposit.
Theia Resources (THH:TSX.V)has the right to earn a undivided 60-per-cent interest in the Fox
and 2 X Fred properties located in the Nechako Plateau of central British
Columbia
After you’ve made your investment, you need to show some patience and
let your chosen management team go to work for you. Watch and wait. If you’ve
made the correct decisions, management conducts successful programs and does
a creditable promotion job you will reap considerable rewards.
Are there quality post discovery precious metal focused resource
definition stage juniors on your radar screen?
If not, there should be.
Richard Mills
Richard lives with his family on a 160 acre ranch
in northern British Columbia. He invests in the resource and
biotechnology/pharmaceutical sectors and is the owner of Aheadoftheherd.com.
His articles have been published on over 400 websites, including:
WallStreetJournal, USAToday, NationalPost,
Lewrockwell, MontrealGazette, VancouverSun, CBSnews, HuffingtonPost,
Beforeitsnews, Londonthenews, Wealthwire, CalgaryHerald, Forbes, Dallasnews,
SGTreport, Vantagewire, Indiatimes, Ninemsn, Ibtimes, Businessweek,
HongKongHerald, Moneytalks, SeekingAlpha, BusinessInsider, Investing.com,
MSN.com and the Association of Mining Analysts.
Please visit www.aheadoftheherd.com – We’re telling you things everyone
else doesn’t already know.
Free highly acclaimed newsletter featuring today’s
investable junior resource companies.
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please contact him for more information, rick@aheadoftheherd.com
***
Legal Notice / Disclaimer
This document is not and should not be construed as
an offer to sell or the solicitation of an offer to purchase or subscribe for
any investment.
Richard Mills has based this document on
information obtained from sources he believes to be reliable but which has
not been independently verified.
Richard Mills makes no guarantee, representation or
warranty and accepts no responsibility or liability as to its accuracy or
completeness. Expressions of opinion are those of Richard Mills only and are
subject to change without notice. Richard Mills assumes no warranty,
liability or guarantee for the current relevance, correctness or completeness
of any information provided within this Report and will not be held liable
for the consequence of reliance upon any opinion or statement contained
herein or any omission.
Furthermore, I, Richard Mills, assume no liability
for any direct or indirect loss or damage or, in particular, for lost profit,
which you may incur as a result of the use and existence of the information
provided within this Report.
Great Panther Silver Ltd. (GPR:TSX; GPL:NYSE.MKT),
Kootenay Silver Inc. (KTN:TSX.V), New Carolin Gold Corp. (LAD:TSX), CanGold
Ltd. (CLD:TSX.V), Terraco Gold (TEN:TSX.V), NioGold Mining Corp. (NOX:TSX.V)
are all paid sponsors of Richard’s site aheadoftheherd.com. Richard owns
shares of New Carolin Gold.
This article is not paid for content.
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