Is it Finally Time to Shine?
Many people have been surprised by the very recent surge in gold mining stocks but such is the junior mining sector, filled with twists, turns, and surprises! I have been thinking that we will/would see a bottom in this 3 year bear cycle solidify this summer before seeing a possibly dramatic shift in price action this fall/winter. I had surmised July/August before a rally so the move the past week or so has been startling to me as well. It remains to be seen if this pop is a head fake before another grinding downward for the rest of the summer in the junior miners and also for precious metals prices themselves. Personally, I don’t know which scenario it will end up being or if the bottoming process even gets extended out longer than this summer, anything is possible. But, I want to be positioned for the next up cycle and after a 3 year cyclical bear market where many gold stocks are down 70-80-90% from 2011 highs, I think we’re getting super close to a new bull.
The mining stocks tend to lead the metals as we know so action like we’re seeing now is exactly what we would expect to forecast a move higher in gold and silver. I have a couple of themes/messages in the issue. First, it is enormously important to determine if a sector is in a bull or bear market as that will determine the trend of 98% of the stocks in the sector. For those of you who have read the classic book: Reminiscences of a Stock Operator about the late/great Jesse Livermore, that was one message he tried to drive home. From my memory (I haven’t read the book in probably 15 years) Jesse’s character referred to an old market veteran who when asked about why a stock was rising would reply “well, it’s a bull market so…”. Why is a stock or dropping? “Well, it’s a bear market, so..” In fact, only after many years of being a market student did I finally absorb this extremely important message.
Frankly, I think of this every time a subscriber writes me “Eric, what’s going on with Timberline?? Do you still like it….any news coming? Etc etc “. My thought is “it’s a bear market, so…”. The fact is that a rising tide will lift all boats. Certainly, we will look to maximize profits in the next bull cycle by finding stocks that are undervalued and haven’t popped yet, may be bought out, have various catalysts to boost their performance, and/or to seek out the premier story’s in the sector. However, GDXJ is what you want to own if you don’t want to be a stock picker but want exposure to the sector:
GDXJ is a basket of many junior gold stocks that is liquid and diversified. I myself like to pick outperformers, trade, and maximize my profits in a bull cycle to make potentially much more than just buying/holding an etf. The point is that GIL subscribers that have owned gold/silver stocks the past 3 years have generally taken it on the chin. When the next cyclical bull market for gold, silver, and mining stocks begins in earnest, GIL subscribers will make quite a bit of money.
That blanket statement won’t be true for everyone obviously as some people are always on the wrong side of the emotional curve and end up like Eddie Mush:
Mush is a character from my favorite movie of all time: A Bronx Tale. If you haven’t seen it you are missing out! Now, what’s funny is who was expecting junior gold stocks to start ripping right now, in June?? Not many of us but the markets tend to confound and confuse the masses, leaving the large profits to the few. Currently, after 3 years of brutality, I think we’re on the cusp of what will minimally be a very profitable bull cycle in precious metals and mining stocks. At maximum, we may very well marvel at how cheap some of the stocks are on our screen now and where they go in the next couple of years. I believe gold is taking a mid-secular cycle breather after 12 straight years up, before resuming the very bullish trend higher, ending in a “blow off top” or “mania phase”.
This is very important because either you agree with me or you don’t. Either I’m going to end up right (and very rich!) or end up wrong (and at least rich in spirit!). If the 12 year secular/long term bull market in gold ended in 2011 and we entered a new long term bear market, then we’re going to have a lot of frustration going forward. However, my conclusion is that when the bull topped in 2011 it wasn’t the top of the bull market secular cycle for some very simple reasons. How many people in your family, work place, or friends had 10% or even 5% of their investable assets in physical gold, silver, and mining stocks at that time? I think back and there definitely was a lot of enthusiasm amongst a small “gold bug” community of investors but as far as general investor participation, it wasn’t even close. I’ve seen statistics on this and the number was well under 1% of global asset allocations in 2011 after a bull market that went up 11 straight years!!! Can you imagine how many taxi drivers would have been talking about investing in gold and how much cocktail party chatter would have been occurring if that was the top? It simply didn’t happen and the stats prove it. Upon a quick search of this topic:
There are a couple of other fundamental reasons for my yet long term bullishness. The amount of money printing that has occurred globally has been utterly staggering over the past decade or so, particularly since the 2008-2009 economic crisis. Looking back over centuries, every single fiat (paper) currency in history becomes worthless! Since the fed can print money out of thin air without a balancing mechanism, human nature will dilute the paper into oblivion, there is nothing new under the sun. It just takes time so people don’t notice it! It’s actually a hidden tax on society and we’ve paid a very hefty tax this past 40 or so years since the gold standard was abolished:
But we saw subtle deterioration of the dollar’s purchasing power until 2008:
The numbers are truly staggering when you look into it closely. Gold is a store of value and purchasing power…it has played this role for millennia and 2014 is no different than 1000 B.C. in this regard. Even alternative currencies like Bitcoin have caught on due to the mistrust of our world governments and the current extraordinary debt the United States is carrying:
My point here is that in the current global economic environment, gold (and silver) are appealing and prudent to own. Not to mention, the current bear market in mining stocks is up there with the most brutal in history. We are currently approaching the second longest in recorded history (as of May we are the 3rd longest ever recorded and become number 2 in September) and the severity of decline is amongst the most brutal EVER:
The funny thing with mining stocks is the worse the decline the greater the bounce! That’s one point that speaks to the possibility this brutal market is the precursor to a mania phase. Lastly in terms of my simplistic thinking as to why we aren’t done. If we take the percentage move from low ($35) to high ($850) in the last bull market in gold (1970’s) and CUT THAT IN HALF in terms of the expectation for this current bull cycle (even though we could argue all day to what is outlined above that this bull should be 2 to 10 times as powerful), we arrive at $3200 gold.
That takes the low in 2000 of under $300 into account. Also, the interesting thing is that when people talk about $3,000 or $5,000 gold, it “sounds” extreme but that is a psychological trick. Why? Because from 2000 to 2011 gold went up about 650% ($280 to $1800 plus). For gold to go to $3,000 from current prices, it’s only one third of that!!! Going to $5,000 is only 2/3 of what the market has already done. Some of you remember the work/writing I did about the Pareto Principle, which says 80% of the gains in a bull market happens in the last 20% of time. If that actually ends up true in this case, $3,000 gold is going to look like peanuts. I’m not interested in hyping gold up saying I think it’s going to $10,000 plus. It’s possible but I have no idea. I just think my $3,000 is not only reasonable but quite likely.
Can you imagine what stocks like New Gold (NGD) or even Timberline Resources would be trading at if gold hits $3,000 an ounce? It would be unbelievable to witness (especially if we own a bunch of gold/silver stocks!!!) but I think that’s exactly what is coming down the road ahead of us. If I’m wrong, well GIL has proven we can find big winners outside of just gold/silver stocks so I’m confident we’ll hit another couple out of the park like Zenyatta…whether it be Poly Shield or Cardero etc. But if my worldview on this topic is somewhat accurate, we can make a bloody fortune in the next few years or so. But, you have to be positioned well ahead of time to enjoy the monstrous profits that would come with an environment where we even see $2,000 gold (a measly 70% move up! About 1/10th of what we’ve already witnessed).
I started buying gold in 2003. I got into the big bull move pretty early on (I remember buying gold coins around $400) but I made an error. I weighted my holdings toward gold stocks versus the physical metals. In hindsight, owning the metal is what you want to focus on in the first 2/3 of the bull, perhaps weighting 2/3 physical 1/3 shares. But, in the last 1/3 of the bull cycle, the mania phase, is where all the leverage is for the miners. Because of how beaten down the miners have gotten and the point above, I think the much bigger percentage move will eventually favor the mining stocks over physical. Frankly, it comes down to your personal risk tolerance. A very conservative investor that is bullish on precious metals may want ½-2/3 holdings in physical gold with the remaining 1/3 in physical silver and GDX/GDXJ. However, someone who wants to swing the bat could have 1/3 in physical gold, 1/3 in physical silver, and 1/3 mining stocks. Or, 2/3 mining stocks and 1/3 mixed between physical gold/silver.
You get the point I’m sure and these are ultimately your decisions and responsibility. My main objective is to recommend and do 3 simple things for my subscribers:
- Encourage each of you to own 5-10% of your investable assets in physical gold/silver
- Pick specific and unique high risk/reward stocks for growth and speculation
- Get you to be on offense/be buyers now while the precious metals/mining sector is down and take profits/play defense later when the market is looking quite rosy and euphoric
Premium/Elite members get much more particular to #2. But, if all of my readers at least benefit from #1 and #3, I will be quite pleased. This weekend’s Barron’s had some good commentary on the dollar (posted just below) and was a good reminder that at the end of the day, gold is money/cash and I feel good owning a lot of it.
HOW LONG WILL AMERICA’S “exorbitant privilege” persist?
That was the description of the U.S. dollar offered by Valéry Giscard d’Estaing, the French finance minister under Charles de Gaulle in the 1960s and later president himself. With a monopoly on the world’s reserve currency, America could print dollars, exchanging those greenbacks for goods and borrowing cheaply in world markets.
At the time, there was some constraint on the U.S. printing press, in the form of the Bretton Woods currency arrangement that required Washington to exchange dollars for gold (with foreign governments and central banks) at a rate of $35 an ounce. On Aug. 15, 1971, President Richard Nixon abrogated that promise; less than two years later, the dollar was untethered to float, or more precisely, sink.
Even so, the dollar has stayed at the center of the currency solar system. Greenbacks remain the storehouse of value for other central banks; hence their designation as a reserve currency. More important, the dollar has been the key currency for international finance and trade. The U.S. has the deepest and most liquid financial and banking system, so the dollar is used as the medium of transaction and investment.
That has accorded America an exorbitant privilege, as the French have asserted. Because the world uses greenbacks both as a store of value and a medium of international exchange, the U.S. alone can supply that demand. The world also wants Coca-Cola, Marlboros, Boeing airliners, and Microsoft software, but those must be produced at a cost. The U.S. can create dollars at zero cost, without limits.
This has important implications. First off, the U.S. can exchange those paper dollars (or their electronic equivalent) for real, tangible goods produced abroad. Businesses buying and selling goods around the world need dollars for their transactions. And Uncle Sam can borrow in greenbacks that only he can create.
Governments, central banks and corporations around the globe also have assets and liabilities, and dollars predominate on both sides of the balance sheet. Borrowing is most readily done in dollars, owing to the depth of U.S. capital markets. Dollar assets also are the most liquid, making them the preferred depository for global entities.
But that exorbitant privilege—which allows the U.S. to buy and borrow more cheaply than otherwise—has limits.
Russia, for one, is pushing back. Following U.S. sanctions over Crimea, Russia wants to use the ruble, the Chinese renminbi and other Asian currencies to settle trade. Russia recently agreed to a $400 billion deal to supply China with natural gas, which would reduce the former’s dependence on Western Europe as a customer. Reducing the dollar’s role in the gas sales further distances Russia from America and its Western European allies.
China has made arrangements with other trading partners to eliminate the dollar as the intermediary in dealings. Brazil, for which China has displaced the U.S. as its No. 1 trade partner, is settling some trade using its own currency, the real, in exchange for renminbi.
These developments suggest at least a waning in the dollar’s role. There are no obvious candidates to supplant the greenback in the short term. But, as history has shown, currency regimes have a finite lifespan.
In that regard, DoubleLine’s Jeffrey Gundlach last week offered a fascinating timeline of the reign of various nations’ currencies in modern history. Portugal dominated from 1450 through 1530, after which its Iberian neighbor, Spain, would predominate through 1640. The Netherlands had the world’s main currency from 1640 to 1720, after which France was on top until 1815. Following the end of the Napoleonic Wars, Great Britain had the dominant currency until 1920, when the baton was passed to America.
But the world is actively seeking an alternative to the greenback. Major nations don’t want to pay the virtual toll in the cost of acquiring dollars to conduct trade. The maturation of their own financial markets increasingly allows them to bypass the dollar-centric financial system.
Meanwhile, nations abroad complain they are jostled by the wake created by the waves of U.S. policy. When the Fed embarked on quantitative easing to expand dollar liquidity, the fall in the greenback pushed other currencies higher, harming those nations’ exports. Last year, at the suggestion the Fed would taper its bond buying, those same nations worried that the resulting capital outflows would hit their currencies and force interest rates higher.
In other words, the rest of the world is growing weary of being exposed to Washington’s economic-policy shifts. And as governments, central banks, and private entities seek alternative stores of value, demand for dollars also will diminish.
***Back to Eric
Things change, empire’s change, and paper currencies all become worthless in time. I believe, despite most Americans view of generally despising gold as an investment, it is gold’s time to shine again going forward. Now, let’s look at some of our favorite stocks!
First off, if I had to pick 3 junior gold mining stocks that I believe are terrific investments that will outperform GDXJ, I would pick the following for every portfolio (securities that have large enough market caps that GIL won’t make a big impact on the share price also because the volumes are significant-versus , say, TLR/PGOL):
-New Gold (NGD)
-Rubicon Minerals (RBY)
-Crocodile Gold (CRK.TO/CROCF)
Premium members are up quite nicely since initial recommendations on these 3 in Q4 of last year. However, if we’re in for another surge in gold the next few years, each of these stocks should trade multiples higher of their current valuations. NGD/CRK are producers and RBY is a world class deposit moving towards production. On the smaller and more speculative side my new top pick is Patriot Gold Corp (PGOL). There is a lot of new information here and I’m working on a full research report right now that will be sent to Premium members in the next week or so. For now, suffice it to say I think Patriot has the potential to be a $1-5 per share stock in a couple of years and is currently quite undervalued and undiscovered. Much more to come on Patriot Gold Corp.
Timberline Resources (TLR) is still one of my favorite junior gold stocks. However, it is evident that TLR has had problems with the state of Montana in getting the Butte Highlands project into production. The deal with Wolfpack Gold is a positive for us and ensures Timberline not only survives but has a shot to develop Lookout Mountain/South Eureka, which has always been the company’s flagship project. I am disappointed in the unending delays in Montana as that would be a very nice catalyst for Timberline by generating cash flow. However, I now via Butte as a bonus and believe Timberline can be a very sexy/valuable Nevada junior gold pure play going forward. I’ve been to South Eureka and it has the potential to be a several million ounce district.
Timberline has been frustrating for many of us but the company can, and I believe will, thrive in a better market. At minimum, we’ll see a move back to 25-30 cents early on in a junior market rally which, keep in mind, is nearly a triple from current prices (11 to 30 cents). It would be foolish to sell TLR at these prices. It’s true that there are other junior’s I like better because of stronger cash positions, production, etc but Timberline remains a favorite and being strong in Nevada will pay off in the future when M&A activity heats up in the area.
Zenyatta Ventures (ZEN.V/ZENYF) continues its volatile patterns as we await the Preliminary Economic Assessment (PEA) that will be out in the next 2 weeks. My guess is we see it this week. With such a key piece of news coming so soon, I’d rather comment in detail after it’s out and we can analyze the data. I don’t expect any major surprises on the upside or downside in terms of the economics at Albany. But, as time marches on I think we are getting closer to a surprise in the stock price…to the upside (although a financing could bring a brief dip in price). I continue to believe that we will see Zenyatta Ventures be acquired in the future. Also, as we move closer to production, buyers of our graphite will begin to secure supply agreements. Tesla Motors (TSLA) has big plans for a Lithium Ion Battery gigafactory and they will need a LOT of high purity graphite.
I don’t claim to know how far down the supply chain Tesla wants to go in terms of acquisitions. But, my personal guess is that if they plan on sourcing their synthetic/high purity graphite in North America, they will buy a bunch of it from Zenyatta. Where else are they going to get their synthetic caliber supply?? Flake deposits are everywhere but Zenyatta’s Albany graphite is exceptionally unique and I’m not a chemical engineer but I’m guessing odds are better than 50/50 that ZEN does a deal with Tesla in the next 12 months. I’m not convinced the stock will take off right after the PEA is out but by this fall/winter I see things heating up considerably for Zenyatta’s stock.
Medallion Resources (MDL.V/MLLOF) has raised $700,000 alleviating fears that they were running on fumes. They may raise another $300k in the next week or two maxing the offering out at $1 Million, which I think is likely. I believe Medallion is about to begin delivering on the news we were hoping for late last year. With cash in the bank and the likelihood that we’ll see potentially substantial news flow between now and the end of the year, I have begun buying more shares this past week. I strongly doubt that we’ll see the stock go much lower and the upside remains enormous over the long term. As you can see on the next page’s chart, this 12-15 cent area has been a major support level for a decade (the chart goes back 10 years for a longer term perspective).
So, even if our long term $2 target seems very far away, history has been very consistent in that Medallion’s stock was a very profitable bet at current prices. Rare earth stocks have continued to suffer for 3 years along with gold, coal, and other sectors that we follow. However, Medallion remains a very unique play in the space with one of the shortest paths to production in terms of time and cost. I believe RE’s will catch a bid again and when they do, Medallion has the potential to surprise us on the upside. I strongly encourage GIL members to accumulate shares in MDL while it’s under 20 cents. Many people got very excited when the stock ran last summer/September in the mid-high .30’s and bought on emotion. Well, even though the progress has been slow, there has been progress and I think it can accelerate swiftly from here. Buy Medallion now while it’s cheap. New investor’s get a major bargain and existing investors have a great opportunity to bring your cost average down.
Cardero Resource Corp (CDU.TO/CDYCF) is a tremendous contrarian speculation at current prices. It looks like the stock may break out of its down trend in the next week or so (10 cents is now resistance…a move above 10 on volume is a break out/buy signal). The metallurgical coal sector via our proxy Walter Energy (WLT) may just be experiencing a dead cat bounce currently as coal stocks have been quite oversold. But, now that mines are being shut down left and right and supply constrained, the upturn in prices may be coming sooner than people think. Cardero is my favorite because they have a substantial asset but aren’t burning cash via unprofitable production and employing a huge staff to run a mine. The company has rock solid financial backing and is not going anywhere! So, nibble-nibble and build a position here because sooner or later this stock will go way higher once coal turns. I’m not only sticking with Cardero but I buy more every week and now own over 1 million shares, which is substantial for me.
I have a lot of information coming on Poly Shield (SHPR) in the coming weeks. I feel like I have a way for GIL subscribers to have all of your questions about SHPR answered via a full detailed research report by me and a webinar by CEO-Rasmus Norling. Both are in the works!
Lastly, I will be releasing a new 20 cents to $2 within 2 years stock this week. I’ve released 3 of these to date. The first went from 20 cents to a high of $5 (ZEN). The 2nd and 3rd, even though now they are below the 20 cent mark (Medallion/Timberline), both doubled within 60 days of being put on the list. The next one is a small cap energy stock that is geographically very unique and has an excellent management team in place. This company will grow fast and very few investor’s know about it yet.
GIL has a nice mixture sector-wise of unique recommendations. Even though I will continue to focus on gold/silver companies, we have a junior coal (Cardero), rare earth (Medallion), clean tech (SHPR), graphite (ZEN), and this week an oil/gas play for subscribers to consider owning. Spreading money across these ideas gives some sector diversification in addition to our main focus, gold orientated stocks. For our very wealthy subscribers, some of these stocks are too small to load up on and make a difference. However, people can buy $100,000 or so in most of these stocks (not all at once in some!) and with some of their risk/reward profiles as possible 5-10-20x candidates if they work, making a million bucks on a small cap security is worthwhile to most of us. But, I do want to mix it up a bit more and focus on more ideas like NGD/RBY where we have $250MM to $2 Billion market caps and GIL won’t make a huge dent in performance.
So, more liquid/larger capitalization recommendations will be forthcoming alongside our smaller cap speculations. Personally, I play them all! I’m buying a $110 per share healthcare stock on the open and own many multi-billion dollar market cap companies as long term investments. But I still like swinging the bat as well….that’s not going to stop. Just remember, if you like what we say here there are options to get more ideas and early picks via our Premium membership. It is dirt cheap now but once we’re in a new bull cycle, I will be tripling the subscription rates unless you’re already a subscriber. I would encourage those of you that resonate with the opening data in this issue and align with my thoughts on a new gold bull cycle beginning soon to consider subscribing:
This issue has included quite a bit of free content. But, this is a “mid-year review” issue of sorts and details on our individual picks may in some cases be saved for just Premium/Elite members. But, I hope everyone enjoyed the read and the ideas! Happy father’s Day to all of you dad’s out there and cheers to a great week ahead.
Disclaimer: Eric owns shares in NGD/CRK/RBY/TLR/PGOL/ZEN/MDL/SHPR/Cardero