Stocks Of Explorers, Developers And Miners Of Gold, Silver And Copper Are Underloved - This Too Shall Pass

I've seen this movie before, prior to and during the early days of the 2001 to 2011 metals bull market. When the stocks got rolling, they made fortunes for investors that were in before the crowd.

Gold had a strong day today, closing at a new record high just short of $2800. A couple of things seemed to affect it, one of those was the much cooler than expected jobs openings report that was one of the lowest in over two years. Which is a clear contrary indicator to Powell’s Goldilocks narrative.

The jobs market is much softer than Powell et al at the Fed are comfortable with, despite them trying to say everything is fine with jobs and the economy. If they really believed the narrative they are trying to pitch, they certainly wouldn’t have cut rates by a half-point at their last meeting.

Another factor that is playing out is that since the Fed cut rates, the yield in the bonds has gone up which is making their efforts to go into a rate cutting cycle more challenging. The Fed wants to cut rates because they know that keeping them where they are is throwing the jobs market and economy under the bus. 

Then of course the gorilla in the room is the unsustainable level of debt, and the potential for it to grow more troublesome with the next president. The cost of servicing the debt is the straw that will break the debt camel’s back. Kicking the can down the road is getting harder by the day.

The fly in the ointment for them is that debt buyers are on strike, driving the yields higher while the Fed wants to make a series of rate cuts. The bond vigilantes are getting in the way of the Fed’s rate cutting plans while they sell the ‘Goldilocks’ narrative. 

They have a decision to make immediately, do they manage the yields by increasing their balance sheet, or stop cutting rates. Halting the rate cuts will send the message that they got it wrong when they cut by a half-point. While increasing their balance sheet tells everybody that Goldilocks is stumbling. 

My guess is that they will start manipulating the yields by increasing their balance sheet while also staying on the course of cutting rates. I don’t think they can afford a buyer's strike to last long in the debt market as it will make them the buyer of last resort sooner than later and the longer they wait, the more they will have to increase their balance sheet. Plus, they have to be very careful about throwing the jobs market and economy under the bus.

I’ve said it before and will say it again, heads gold wins, tails gold wins.

Gold is in a powerful bull market that can’t be denied. The one-year chart is going from the bottom left to the top right. It keeps making higher highs and higher lows with each new high being a new record high. In addition, each basing period after a rally is getting shorter in duration and tighter in the range.

Another bullish trend that has been taking place since gold made an important breakout above $2100 in early March, is that each hundred dollar milestone is getting passed more easily. The spot price of gold hovered around $2500 for around a month from around mid August to early September. Then it went through $2600 easily, and $2700 was a piece of cake. It looks like it will go through $2800 hundred like a hot knife through butter. Each hundred dollar milestone is getting easier, which gives me confidence that we will see $3000 before the end of this year.

Looking at technical indicators without having a good grounding in the fundamentals of supply and demand is problematic. Supply has peaked because the supply chain is broken. While Chinese and Indian retail buyers hold onto gold for dear life. Plus, the central bankers of the world are loading up on gold as they have made gold the second largest reserve currency, passing the Euro this year and putting the USD in its crosshairs. 

Even the generalist investors in the West are joining the gold bull market as we have seen outflows in the gold ETFs turn into inflows over the past couple months.

Technical analysis without a strong grounding in fundamentals is a recipe to get whipsawed. I’ve seen it just recently with technical analysts that are ‘gold bulls’ calling for a correction when gold hit $2700. That didn’t happen. Instead it blasted right through $2700 like nothing and is about to go through $2800. 

Fundamental analysis without paying attention to technical analysis is a good way to get timing wrong. Back in the 2001 to 2011 gold bull market, I was a frequent guest on Canada’s business news channel BNN. I quickly realized that hosts liked to talk about the fundamentals, but the viewers wanted timely stock picks. Which taught me that being a hybrid analyst, well grounded in both technical and fundamental analysis is the best way to go as a market commentator and a stock picker.

Whether you look at things from a chart perspective or a fundamental perspective, they are both signalling heads gold wins, tails gold wins.

In addition to being extremely bullish on gold, I am even more bullish on silver. The supply and demand fundamentals are tremendously bullish as physical demand is far outpacing physical supply. I can say with confidence that the deficit will keep growing. 

Silver benefits from being a monetary metal like gold, but it is also being gobbled up to make solar panels. The costs of solar panels have come down dramatically which makes it a great alternative energy source in several places around the world that have plenty of sunlight throughout the day. I live in Mexico, and see solar panels everywhere and I hear on a regular basis that businesses want to use them more and more.

It took awhile for silver to join the gold bull market, which it always does. While gold is consistently making new record highs, silver still has a lot of upside to go to reach its record highs.

When gold had a major breakthrough in early March, silver went along for the ride. In the middle of May it topped and then had a correction, while gold was basing then took off. Silver had an important bottom in August and has been rallying beautifully since then.

Since hitting that August low, it has been making a series of higher highs and higher lows. I can see two key catalysts in the immediate future that will help silver make new record highs. One is the powerful bull market in gold and the other is the remarkably high paper short position while physical silver is in a deficit.

That short position looks astonishingly risky for the shorters. They have to believe either supply will increase or demand will drop. I don’t see either of those things happening.

Much like gold, the miners are struggling to increase production and replace old mines with new mines. Plus, there aren’t nearly enough silver mine development projects and too few explorers with important discoveries that can move into the development stages to fill the void in new mine development. The supply chains for silver and gold are broken from the major miners down to the explorers.

I’m also very bullish on copper and after it was in a basing period from the third quarter of 2022 until it also had a strong rally that started in March of this year. During the basing period it bounced around between $3.50 per pound to around $4.00. Then when it broke out it made a new record high on the futures price over $5.00. Then it dropped back down to $4.00 in early August. 

Since then it made an important higher low in early September, followed by a higher high around $4.60 in late September. Recently, it looks like it is forming an important base at just under $4.40 that is tight and looks like it will be over quickly and ready for a new higher high well above $4.60.

The supply and demand story for copper is extremely bullish. Demand is strong and looks to get even more powerful in the short-term and long-term. The power grids in many developed economies are broken and in developing economies they need to be built from scratch. 

Technology from our computers and phones use a lot of copper to connect to the internet and for our cloud computing needs. Then out of the blue AI has burst onto the scene over the past year or so. This is an energy hog that makes the internet and cloud computing look like child’s play.

It astonishes me that AI stocks and tech stocks command insane valuations, yet most investors don’t seem to ask where all the energy and copper needed to make the dreams of these tech companies to become reality is going to come from. 

The builders of AI data centers already see the energy needed is going to become a huge problem which is why they are ready to turn on mothballed nuclear reactors and are in a rush to see small nuclear reactors become a reality. That is only part of the equation to make AI dreams happen. The other is that they are going to need a dramatically higher amount of copper.

Adding additional stress to the copper supply chain are electric automobiles. Initially the hype was that they would replace internal combustion engine cars. That won’t happen anytime soon, but electric vehicles are going to keep increasing market penetration.

The prices are coming down and that will continue as China is making impressive electric vehicles that they offer at lower prices than Tesla and other major car makers. Price is only one of the key variables that has to be overcome to reach mass market penetration.

Another is charging times that are inconvenient in a world where all consumers want instant gratification for everything. They don’t have the patience to sit for a half hour or longer to charge their batteries and they want charging stations everywhere like gas stations.

Not only do the electric vehicles need a lot of copper, the charging stations do as well, plus to charge at home they need to rewire their electrical systems at home. The ancient power grids in developed countries aren’t even close to being ready. They are so ill prepared that high or low temperatures cause rolling blackouts in major American cities. 

Imagine what would happen in densely populated cities if everybody owned electric vehicles and came home at the same time from work, then plugged in their electric vehicles. They would crash the ancient power grids every evening.

Innovation always marches forward, but it will need Dr. Copper’s cooperation and the miners aren’t prepared now or long into the future.

Copper discoveries dropped off the shelf over the past two decades, which means that there aren’t enough copper mine development projects in the pipeline to help the miners increase production and replace their old mines with new mines.

The demand stories for gold, silver and copper are certainly different. In the case of gold it is about gold being the soundest money and the Death Spiral of Debt causing the world to return to the Gold Standard. For silver it is a combination of monetary demand and for solar panels. With copper it is about it being the most critical metal that is needed to make everything electric and make those products work.

But, there are common themes when it comes to supply for all of them. Not enough grassroots exploration, so there aren’t enough important discoveries that can then turn into development projects. So now and for many years into the future, there aren’t enough new mines in development that will help the miners increase production and replace their old mines that are being rapidly depleted with new mines.

The supply chains of gold, silver and copper are broken from grassroots exploration to major mines. A key solution to this problem is much higher prices for the metals that results in crucial grassroots exploration, which leads to many more important discoveries that turn into mines under development and ultimately into new mines.

Higher metals prices aren’t the only solution. There are other stumbling blocks, one that is only really talked about by a small number of mining people is the people problem in mining. Exploration and mining are hard jobs, and young people prefer high paying tech jobs over mining jobs. The problem of not enough people in the mining sector has gone on for a few decades and it needs to be fixed but as is often the case, a problem that took decades to create takes a long time to fix.

Another hurdle is excessively long permitting timelines that are a worldwide problem in every important mining jurisdiction. Politicians and consumers say they want all the modern products  but fail to realize that to make that happen requires mining. They are going to have to learn to hug their miners.

Time is another massive issue. It takes a lot of time to do the grassroots exploration work that leads to important discoveries, and mines under development that then need to be permitted and built. The metals needed don’t come from Jack’s metals beanstalk.

In addition to the problem of not enough people in the mining sector, and the time needed to turn grassroots projects into discoveries that pass the economic tests to become future mines, then the biggest problem is money.  

The supply chains for gold, silver and copper, from grassroots exploration to a future mine requires a lot of money. But, investors are more interested in driving up Wall Street stocks to insane valuations than putting serious money into the pipeline of metals needed for everything mentioned above.

We are at a wakeup call time in history. More investors need to come to terms with how important mining is to the modern world and fund all stages along the supply chains in a much more significant way. 

Or Gracie is going to turn out the lights.

All the best,

Allan Barry Laboucan