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Golden Spikes Are Becoming the Norm

A pattern of gold spikes in reaction to uncertainty is part of building a bull run.
Aug 1, 2016

Happy Monday to all, a sentiment that should ring especially true with my Canadian peers enjoying a long weekend. I enjoyed a regular weekend – two 25-km days running in the mountains – and then boarded a flight this morning for Toronto, to position for a pending visit to Integra Gold’s Lamaque project.

A busy weekend to round out a busy week spent at Sprott’s Natural Resources Symposium, which was a fantastic conference. Very good speakers, an impressive lineup of companies, and highly engaged attendees made for an informative and useful week.

To end the week the US announced that GDP growth in the second quarter had managed just 1.2%. In response, gold shot up.

Two days prior it had done something quite similar:

That was in response to the Federal Reserve not raising rates. And a month before that we saw gold make a more dramatic move:

That was in response to the Brexit vote. These repeated, sharp gains in response to undesired news events matter because they demonstrate one thing: gold has become the Go To investment when news of economic uncertainty hits.

Friday’s GDP number was a serious miss. The market wanted to believe things were doing better – expectations were for 2.4% growth – which means reality was only half of what people expected. Ouch. The US dollar fell 1.2% in a day.

Meanwhile, incredibly, US markets continue to hit all-time highs. The S&P even gained on Friday, following that GDP number.

It’s a perplexing world. US retail investors continue to pull money out of stock mutual funds: in 2016 US stock mutual funds have suffered net outflows 27 of 29 weeks. Rationales revolve around fear of a crash because of the length and extent of the bull run, an uncertain world pushing money into ‘safe’ investments, and poor mutual fund performance.

But what’s crazy is that bond mutual funds are getting inflows. Yes, bonds: despite offering terrible yields, investors are turning to bonds in their search for security.

Gold’s reaction to these news events shows, though, that investors are increasingly aware that it is another safe haven. And that is very important. For gold to go on a real bull run, masses of retail and institutional investors alike have to decide that the yellow metal is an essential hedge against uncertainty. That pushes money into gold ETFs and lifts the price.

As that happens, a subset of the masses realizes gold can be more than a hedge – it can also be a way to profit. That subset of generalist investors starts investing in gold miners. After making money with the miners, they pour over into the developers and, eventually, the explorers.

This phenomenon has only just gotten underway. Gold has a lot of momentum yet to gain. Buckle up!

Today’s snippet from last Wednesday's Maven Letter includes a brief on Eurasian Minerals’ news last week, a look at how smoothly the money taps are flowing for miners, and the last part of the editorial.

As always, if you enjoy these Maven Mondays I suggest you sign up for a free trial of my subscription service, the Maven Letter, which comes out every Wednesday. To sign up, CLICK HERE.

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Eurasian Wins at Russian Roulette

Eurasian Minerals’ (TSXV: EMX) shares jumped 31% on Monday and notched higher today to reach $1.40, a 42% gain against Friday’s close – and for good reason.

As some of you will already know, Eurasian is a project generator. The company’s highly competent technical team scours the globe for mineral exploration opportunities. When they find something interesting they stake the ground, set up the capacity to advance it (figure out the permitting setup, establish the appropriate business vehicles, find local expertise, and collect historic information), and do enough exploration to prove their point: that the ground deserves some attention.

Then they find a partner. Eurasian options all of its projects out to partners, preferring to see other people spend to advance its assets than spending its own dollars. In exchange, of course, the partner earns ownership of the asset, but Eurasian gets payments and retains a royalty (often including advance royalty payments). It’s a business plan that enables early stage exploration without the need to constantly raise money and dilute shareholders.

Eurasian’s royalty portfolio now pays out several million dollars annually, enough that the company has not raised money since 2011 despite the terrible bear market. And with cash available Eurasian was able to keep exploring during mining’s dark days, which means its exploration portfolio is now brimming with assets attracting interest from other explorers.

There’s another aspect to Eurasian’s business model: strategic investments. The company’s cash means it can invest in opportunities where it sees major upside. And it is one of those investments that has the market taking notice.

Eurasian owns 41% of ICG Copper, which owns 51% of the Malmyzh copper-gold project in Far East Russia. Malmyzh is huge: pit-constrained resources on the four porphyry centers that have been drilled to inferred status total 1.7 billion tonnes grading 0.34% copper and 0.17 g/t gold, for 12.5 billion lbs. copper and 9 million oz. gold. Those four deposits remain open at depth, another ten porphyry targets are untested, and there are zones of higher grade mineralization that have not seen enough drilling to be included in the resource.

Details aside, what matters here is

  • Malmyzh is already a massive copper-gold deposit and it offers significant growth potential.
  • Malmyzh is well located in terms of infrastructure: road, rail, power, and water are all nearby and the topography is gentle.
  • Malmyzh is also well situated in terms of Russia’s drive to develop its Far East.

Eurasian has had exposure to this huge asset for ages, but on Monday the asset became far more valuable: the Russian government signed off on letting IGC and partner Freeport McMoRan own and advance the property. You see, Malmyzh is so big it fell under Russia’s definition of a ‘strategic asset’, which gave the government the right to buy the asset and advance it for the benefit of Russia.

Had that been the decision, the upside for Freeport and IGC Copper – and, by extension, for Eurasian – would have been capped at whatever amount Russia was willing to pay.

Instead, Russia let it go. The Russian government has never taken over ownership of a hard rock asset so I expected this to be the outcome, but the project carried a massive discount until the decision actually came down.

Now, with ownership guaranteed, IGC and Freeport can figure out what to do with Malmyzh. There is a lot more drilling to do. There is mine planning. And (most importantly) there are M&A talks to complete. IGC Copper does not want to build a massive mine in Far East Russia. It does want to crystalize the value of its massive asset by selling its stake to whoever does want to build a huge and long-lived mine.

That would be a game-changing event for Eurasian, which as I said owns 41% of IGC Copper. A deal for Malmyzh would return huge value for EMX. That’s why EMX shares are up 41% this week – and could continue climbing.



Financings Everywhere

In the five trading days since my last letter, I count $381 million in closed big financings for mining companies. Another three financings were increased from their original amounts over the week, to total $184 million. Reams of smaller raises I did not even try to tabulate. And the week before saw $190 million raised by just two companies, alongside other smaller amounts.

Those are big numbers. Some of the increases are wow: First Mining Finance announced a $16-million raise two weeks ago and just increased it to $27 million while Klondex announced a $100-million raise that it upped to $114 million.

And money is available to explorers too. Many are still trying to run at or near empty, wanting to stretch the dollars from their last raise a little longer until their share prices are a little higher. But company after company that I talk to tell of banks and funds offering money left and right. The difference versus this time last year could not be sharper.

The money taps are flowing folks.

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On The Macro

Lots of gold analysts factor in data points that you’ll notice I don’t discuss. Supply and demand is one of them (there is too much above-ground stock of the yellow metal for that to matter, today at least). The Commitment of Traders report is another (it describes the short and long positions of gold market speculators and participants; my general take is that COT positions matter in a bear market but can and often do get overrun in a bull market, especially a new one, so these days I am paying little heed).

What matters is investment demand: how many people want to increase their portfolio’s exposure to gold? For a huge number of people, gold exposure is as simple as an ETF position, which is why I do pay attention to the amount of gold held by the biggest gold ETFs, like GLD.

I point this out today in case gold’s slide in the last few weeks has anyone concerned. The fact is, the amount of gold in GLD has barely changed in recent weeks. Even as the price of gold declined some 4% over the last few weeks the tonnage of gold held by GLD remained almost stable, and that followed a three-month period in which the price of gold stayed sideways but GLD’s gold count climbed almost continuously.

Since investment demand is by far the most important factor in the gold price, the constancy of GLD’s vault increases reinforces the narrative that this is only a summer setback. The ease with which miners, developers, and explorers are raising money also suggests good support across the sector, as do the consistent trading volumes on the GDX and GDXJ.

And despite this setback, gold remains above its pre-Brexit levels and easily above its long-term averages.

And remember: we are just starting gold’s strongest season. August and September are gold’s best months of the year, reliably, so the pullback we’ve just gone through might wrap up soon. If gold follows its seasonal patterns and gains over the next 60 days, the fall will truly be insane for the sector.