The Paper Market Has Lost Control Of Pricing Gold Surrendering It To Physical Gold Buyers
In this report I discuss i-80 Gold, Agnico Eagle, Alamos Gold, SilverCrest Metals, McEwen Mining, Meridian Mining, Goliath Resources, Dryden Gold, Canadian Gold Corp., NevGold and Borealis Mining.
Let me make it official, the pricing of gold is out of the hands of highly leveraged paper traders and in the hands of those supplying it and demanding it.
For way too long, the paper traders have been able to push the price around to clip their small profits off daily swings in the price with highly leveraged paper derivatives. With a bias in North American trading to put pressure on the price. It doesn’t really matter to me who it is, I leave that to the conspiracy theorists.
I’ve been watching the gold price for 30 years, and a common trend has been gold firms up in after hours trading and then gets hammered when the futures trading switches to US trading. It was an easy trade and traders love easy trades. But, lately it has been getting harder as it firms up in after hours trading and keeps firming up in US trading.
The reason for that is the power of the buying of physical gold in China, India and the central bankers in the BRICS nations. Even American consumers are joining the physical gold buying party.
Wells Fargo analysts believe that Costco has revenue of $100 to $200 million a month from selling physical gold. A significant ramp up since they first entered the market in the summer of 2023.
Costco are some of the smartest retailers on the planet. They understand supply and demand like few others. They spotted an opportunity to sell gold to their customers. They figured out there was a demand out there that wasn’t being met, and did their research to figure out where to source supply and made it easy for their customers to buy it.
At the pace they are buying and how fast they are selling it, plus the insatiable buying from Chinese, Indians and the central bankers in the BRICS nations, there is a looming shortage of physical gold. Which is what is driving the powerful move in gold.
This isn’t like paper currencies that can be printed until the cows come home, there are constraints on gold supply.
While gold is trading at record highs, the supply from mining has peaked. The miners would love to produce more gold, but they can’t. This is a structural issue that has been going on for many years.
We are seeing head grades at mines in decline, fewer discoveries, not enough mines in development, and explorers are starved for capital to explore. Miners are forced to look at lower grade projects, in tougher jurisdictions to mine, long permitting processes and huge capital costs to build mines.
During the gold bull market from 2001 to 2011, a lot of miners high graded their mines, but that is over as can be seen in the decline in the head grades at mines. Another issue from back then is that a lot of the majors bought iffy projects at high premiums that they are sitting on and it will take much higher gold prices to ever be brought into production.
They are warehousing a lot of questionable resources and reserves, if that wasn’t the case, they would be turning their assets into mines. They have had many years to go through permitting, while prices have been healthy, yet they aren’t increasing production.
The structural issues actually started well before the 2001 to 2011 gold bull market. Back then gold was very cheap, so money was tight for exploration to get more projects into development and turn them into new gold mines.
It wasn’t just a money problem, it was also a people problem. I got into the mining business in 1993 when I was in my late 20s. Back then, I didn’t see many people from my generation entering the business or in it. That trend actually started in the 1980s after gold had a tremendous run during the 1970s and then fell off a cliff.
When I entered the mining business, there were mostly the generation older than me. It was such a bad problem that it was called The Lost Generation in the mining sector. This caused a long term problem because the older generation didn’t have a lot of youngsters to pass their knowledge down to.
I was very fortunate, because I was a sponge for information, and had a pretty good memory, and was blessed to work with extremely talented geologists, geophysicists and geochemists. I had a great classroom of teachers to learn from, but I was one of only a few students in the classroom.
There is something that I found out from working with brilliant people, they love to teach and are very good at explaining things in a way that everybody can understand. Even me, someone that is not a geologist. They taught me so well that many geologists that I talk to think I’m a geologist. I’m always flattered by that and point out that I am not a geologist, but worked with amazing mentors in geology and am a very seasoned explorationist.
Due to The Lost Generation issue, it was like I had private tutoring in geology from some of the most talented geoscientists in the business. Sure, the 2001 to 2011 gold bull market brought new people into the business, but by then a lot of the people in the generation before me were retiring and sadly some of them passed away.
The result of that is the problems caused in the industry by The Lost Generation have never been fixed. And it is an extremely difficult problem to fix due to the generation before me not having enough people to pass their hard earned knowledge down to.
Back in the 1980s and 1990s, major mining companies were run by rock guys, they had strong exploration budgets. Then in the late 1990s, the price of gold was so low, that the lawyers and bean counters took over running majors and got rid of the rock guys. They looked at the numbers and thought why do we need to spend money on exploration and there were fewer rock guys to explain to them that they needed to replace what they mined each year.
Which is a key reason that when the 2001 to 2011 gold bull market happened, they had to go out and buy smaller companies to grow their resources and reserves. But, because they didn’t have the rock guys leading, they bought a lot of iffy projects. Which brings us full circle to why they can’t increase production, even while gold is trading at record highs.
Buying a smaller company to try to replace what they mine each year, doesn’t increase the industry's gold production, it merely shifts assets from one company to another. Which is why gold production has peaked, while gold is at record highs.
This completely flies in the face of Economics 101 that teaches when the price of a commodity goes up, production of that commodity will go up. The problem is that for much too long, the work to build the foundation of the gold mining sector has been breaking down.
When I got into the mining business, South Africa was the dominant producer of gold. They didn’t do enough work to replace what they mined each year with new mines and have fallen from number 1 to number 8. This is a perfect example of what happens when you don’t plan for the future.
There are also geological issues to consider. Take Nevada for example. They are one of the best jurisdictions for gold mining and a massive producer of gold. The turning point for the state came 50 odd years ago when heap leaching came along.
This enabled the state where there were plenty of low-grade oxide deposits to turn into a prolific gold mining jurisdiction. The deposits outcropped so they could be walked on. Even though they were low grade, they could be open pit mined and use low cost heap leaching to make them money making machines.
But, something is happening that few talk about. Almost all of the outcropping oxide deposits have been found in Nevada. There will be a shift that few mention, mining in the state will have to transition from mining oxide deposits, to going deeper for sulphide deposits.
This issue has been pointed out to me and my audience on many occasions by Ewan Downie who leads i-80 Gold. He is positioning his company for the future of mining in Nevada when the transition from mining oxide deposits to mining sulphide deposits happens. He sees the writing on the wall, it is clear as day, whether people want to pay attention or not.
To get the gold out of sulphide deposits, you need to use very high heat to cook them up to recover the gold. The miners in Nevada are poorly prepared for the transition from oxide mining using heap leaching to mining sulphide gold deposits.
In the state of Nevada, there are only a few facilities to do the process of getting gold out of sulphide deposits. They are owned by big companies, i-80 Gold is the only junior miner that has one.
They aren’t cheap to build, nor are they easy to permit, so there is a looming gold production issue coming for gold mining in the state of Nevada. i-80 Gold not only has the processing facility for sulphide deposits, they also have sulphide projects with high-grade gold. They are preparing for the future and due to the quality of their deposits, they have the ability to grow into a significant player in the gold mining business of the future in Nevada.
I really enjoyed my recent interview with Rick Rule. He is a highly successful mining stock investor. Something that stood out to me from the interview was when he talked about why would an investor want to own a gold miners index fund when you are buying the good, the bad and the ugly.
He was making the point that it is much better to try to focus on the good and avoid the bad and the ugly. I couldn’t agree more, and have always tried to focus my picks on what I consider the best in breed no matter if I’m looking at majors, mid-tiers, small miners, developers or explorers.
When it comes to major gold miners, I think the best in breed is Agnico Eagle. They have been reporting record reserves, record production and record operating cash flow. They are outperforming their major mining company peers and are positioned to keep doing that as gold prices go higher.
Moving down to the mid-tiers, my top pick in that category is Alamos Gold. They are a low-cost gold producer that is increasing their production with new low-cost gold mines. In a bull market for gold stocks, astute investors like to focus on companies with exceptional free cash flow because it makes those companies financially strong. They can buy back shares, pay dividends and make strategic acquisitions. Alamos is a sharp buyer of assets, it is a cornerstone of their business plan and they execute on it brilliantly.
In the small miner category, SilverCrest Metals is my highest conviction pick. They are a new gold and silver miner only a few quarters into full commercial production. When they went into full commercial production they had $100 million in debt. Since then, they have paid off all the debt, and built up cash, plus are holding on to some of their gold and silver production because they don’t need the cash. The gold, silver and cash are now more than $100 million. That spectacular turnaround is because they are a low-cost producer of high-grade gold and silver. Basically, they have a free cash flow machine at their Las Chispas mine.
Often when a gold stock bull market gets underway, the higher cost gold miners can significantly outperform because the higher price of gold makes their profit grow at a rapid pace.
When looking in this category I think it is important to look for those that are doing the work to bring their costs down. McEwen Mining fits the bill for me in this category. Plus, they have the added bonus of owning 47% of McEwen Copper which has one of the top 10 undeveloped copper mines in the world, that is also in the lowest cost quartile for undeveloped copper mines. Practically every major gold miner wants to increase their exposure to copper, McEwen Mining is ahead of the curve in this trend.
In the developer category, my top pick is Meridian Mining. They have a gold-copper VMS project in Brazil with exceptional metrics in their preliminary economic assessment. Highlights include a high IRR of nearly 60%, low capital costs to bring it into production and a very rapid payback of the capital costs of less than a year.
Exploration is my favourite category in the mining space. When it comes to companies that have made a gold discovery, Goliath Resources is my highest conviction pick. I think, based on the drilling results they have had over the past three years on their Golddigger project, that they have the making of a Tier 1 gold discovery.
A small gold explorer that I believe has the potential of making a big discovery is Dryden Gold. They are in Dryden, Ontario, which is close to Red Lake, Ontario. Red Lake is a prolific mining camp, while Dryden is underexplored. Dryden is a Red Lake lookalike. An important difference that stands out to me is that in Red Lake, Goldcorp had to go down 1000 metres to hit the high-grade coarse gold. When they did, it was a company maker. Dryden Gold’s ground has high-grade coarse gold within 100 metres of the surface.
Another small gold explorer I’m fond of is Canadian Gold Corp which has the Tartan project in Manitoba. Historical mining was focused on the near the surface portion of the orogenic gold system. Minimal historical holes were drilled deeper into the system, but they did hit high-grade over big intersections for this style of gold system. Since Canadian Gold Corp. got their hands on the project, they have drilled deeper and showed that the system continues to depth. They are currently drilling and have pending assay results I’m excited to see.
NevGold Corp. has the Nutmeg project in Idaho and just added a new project near Hercules Silver. I’m a big fan of their Nutmeg project, they have a 1.25 million ounce gold resource in the oxides that is open and a bonus of the project near Hercules and a very good project in Nevada. I’m also very impressed with their ability to pick up high quality projects. The target below the oxides is a cluster of epithermal veins. With the very good grades in the oxides, there is excellent potential the epithermal veins could have high-grade gold. They are planning a bunch of work for the Idaho projects and I think they will have excellent news flow.
My favourite going public pick is Borealis Mining, they are currently private and moving through the final stages to be a public company. While private, they have been able to raise $15 million, put together an impressive group of marquee shareholders and a powerful board of directors. This is all because of the quality of their project in Nevada. When I first looked at the project I saw a 20 square kilometre alteration zone, with historical mining on a small portion of it and no drilling on the rest. I then got my hands on a paper that mentioned it is one of the largest alteration zones in all of Nevada and it has the geological characteristics of South America’s top gold mine Yanacocha. This weekend I will be interviewing their CEO Kelly Malcolm to present their story to my viewers.
In Closing
The companies in this report are my top of mind picks in various categories in the gold stock food chain.
All the best,
Allan Barry Laboucan
Disclosure
i-80 Gold is a sponsor of Rocks And Stocks News, and Allan Barry Laboucan is a shareholder. Goliath Resources is a sponsor of Rocks And Stocks News, and Allan Barry Laboucan is a shareholder and holds warrants to buy additional shares. Dryden Gold is a sponsor of Rocks And Stocks News, and Allan Barry Laboucan is a shareholder. NevGold is a sponsor of Rocks And Stocks News, and Allan Barry Laboucan is a shareholder. Borealis Mining is a sponsor of Rocks And Stocks News.
Rocks And Stocks News does not make buying or selling recommendations. The reports are for information purposes only. Sponsors pay a fee to Rocks And Stocks News for content creation. The business model of Rocks And Stocks News is to fund research and reporting on the sector, picks and sponsors through corporate sponsorship. We are thankful to sponsors for enabling commentary free of charge to readers and viewers of the reports. When reporting on sponsors it is on behalf of the sponsors discussed in the portion of the report mentioning the sponsor. Before making any investment decision it is important for you to speak with your financial advisors to consider your risk profile. It is also important to do your homework. To help in that process, Rocks And Stocks News means to be a gateway by doing reports and interviews of management of sponsors and picks. The reports and interviews should not be considered investment advice. Allan Barry Laboucan is the founder and owner of Rocks And Stocks News, he has worked in the mining sector since 1993 and has been reporting on the sector since 2005. He has worked with and been mentored by very talented geoscientists in geology, geochemistry and geophysics. He uses the skills he has picked up during his career to assess sponsors and picks in the reports. Whether a company is a pick or a sponsor they go through the same filter and are reported on when important news is made that Allan Barry Laboucan wants to discuss on the Rocks And Stocks News platform. He may own shares in sponsors and picks for investment purposes.