Are The Gold Stocks Telling The Truth Or Gold
Gold is at record prices in practically every currency, while gold stocks are being priced as if they are worth less than worthless.
In Charles Dickens’ famous novel A Tale of Two Cities, he opens with, “It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness…” which perfectly describes the dilemma between gold and gold stocks.
While gold is trading at record prices against practically every currency worldwide, the gold stocks are beaten down. They for the most part are being thrown away as if they are not only worth less but worthless.
Currently, the gold price is making those that have bought it look very wise, at the same time those that have bought gold stocks are looking beyond foolish. The deeper question is which one is right?
The market never lies about what something is priced at today, but you can’t make money based on today’s price, to make gains you need to be on the right side of where it is going in the near or long term depending on your investment time horizon. Those that get on the correct side of a developing trend stand to make terrific gains.
Especially when you get in before the crowd arrives in an asset class that is particularly unloved before it changes direction. I’ve seen this movie before when it comes to gold stocks. After the Bre-X scam unravelled in 1997, going from a CAD $6 billion valuation to nothing, it sent gold stock investors running for the door on practically every gold stock.
Culminating in brutal sentiment during the years 1999 and 2000. But as is often the case, the swings are too far in both directions. Back then, the gold stocks swung much too far to the depressed side of the pendulum.
The age old saying for investors is that the goal is to buy low and sell high. The first move to make that happen starts with buying low. Most gold and gold stock investors consider themselves contrarians. But, when the valuations are horrible, they usually sit on the fence.
Of course behind every trade is a buyer and a seller, so even though some are willing to sell on historical lows, others are buying. I contend it is smart money buying and those that like selling on the lows are making that decision precisely at the wrong time.
Over my career working in the mining sector, I’ve heard commentators say that they are waiting for a capitulation moment when stocks get hammered down on high volume. It sounds good on paper, but as is often the case, reality is different.
What tends to be the signal of a turn for a bear market is that volume dries up when the lows are in and ready to change direction. We are seeing that happening with the TSX Venture Exchange Index which is a good proxy for what is happening with junior gold stocks.
In the chart below, which I got from the TMX Group’s website, you will see the index is not as low as it was in March of 2022, but the volume is much lower. I would point out that the volume has been drying since the first half of 2022.
You have to go back to the years 1999 and 2000 to see prices and volume this low, which preceded the 2001 to 2011 gold bull market.
Even the largest gold miners have been suffering this year. Below are the 52-week charts for Newmont and Barrick, the two largest gold miners in the industry. They both recently hit their 52-week lows and then started to move off the lows.
No matter where you look along the gold stock food chain, from the biggest to the smallest, they are getting no respect. The further you go down the food chain, the worse it gets.
Another important indicator I follow is how gold stocks are being priced relative to what they have in the ground. Currently, many gold stocks have valuations that value their gold in the ground for less than $10 per ounce. Often, the ounces in the ground are trading for less than the cost of finding those ounces. In a good market for gold stocks, the value of the ounces can exceed $100 per ounce, considerably higher than the cost of finding those ounces.
This is another parallel to the valuations in the years 1999 and 2000. The ounces in the ground value then, as now, was very depressed. In the 2001 to 2011 gold bull market, the value of gold in the ground in takeovers was often valued well north of $100 per ounce.
No matter how you slice it, the gold stocks are at depressed levels, especially considering the price of gold.
I believe the reasons to be bullish on gold are many, in fact, I made a compelling list of the reasons you can find here.
So here we are, gold has strong arguments that it can go higher in US dollar terms, possibly much higher than many in the gold market believe is possible. Several central bankers believe it is wise to hold less US dollars and US debt, while they are positioning for somewhat of a Gold Standard.
This trend has continued throughout the Free Money Era after the 2008 global economic collapse and gained momentum in 2022 and 2023. It would not surprise me at all if 2024 exceeds the highs in buying reached in 2022 and 2023.
Is 2024 the year that gold stocks join the golden party? I feel strongly that there is a high probability of that happening and that we are already seeing green shoots.
To gain confidence it is happening I’m watching the valuations of the gold stocks from the biggest to the smallest. The first movers are the ETFs that track the gold stocks, and most importantly that they and the biggest gold miners bottom and start to move higher from those bottoms. This is happening now.
Then I want to see more positive price movement on the mid-tier gold miners, followed closely by the new mine developers and the explorers. I believe this type of action is immediately in front of us.
Another signal is more mergers and acquisitions, which is also happening. I also want to see recognition by the majors that they see they need to get more active partnering up with or taking out developers and explorers. I would like to see more of this type of action in 2024.
We could have some seasonal trends that look to be shaping up nicely. One is the January Effect which is prescient at predicting which sectors will be bullish in the year ahead. This is when many institutions look at their asset allocation to prepare for the year ahead.
A couple of key indicators of what asset classes will have strong January Effects are preceded by what happens in the first week of January, and before that are the asset classes that have a strong late December rally known as a Santa Claus rally.
Looking at Newmont and Barrick, we have seen them hit their 52-week lows recently and rally off those lows. They are signalling they could have significant Santa Claus rallies, followed by stronger performance in early January and powerful January Effects.
I will be watching closely to see if the smaller miners, developers and explorers see similar trends. I suspect they will.
All the best,
Allan Barry Laboucan
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