What will it take for juniors to move?
On January 7 gold broke above $1,600 per ounce for the first time since 2013, on the back of retaliation by Iran against the United States. As often is the case, this move in gold prices occurred during afterhours trading. By morning, gold had retraced the key level. Gold stocks never so much as benefited from the excitement, instead suffering a harsh day in the red. For investors focused on the juniors, the day proved particularly painful.
This price action sparked calls from frustrated investors curious to make sense of the erratic moves. One of those calls came from a good friend of mine who posed a question that has become the inspiration for this week’s article – How is it that at $1,600 gold, the juniors are priced at 1/10th of where they were last time when gold was at the exact same price in 2013?
This is a fantastic question. The answer is critical for junior resource investors, as it has far reaching implications that are instructive on how to profit from the upcoming move.
Remember that junior resource companies are fundamentally unlike major mining companies. Mining companies produce gold with an aim to generate profit by selling that gold at a higher price than the cost to extract it. As such, a comparison between the valuation of major mining companies today versus the last time gold registered these levels is a worthwhile exercise. Let’s take a look…
Back in 2013, the HUI Gold Index, was priced roughly 40% higher than it is today, with gold prices at the same $1,600 level, (see below chart). This represents a meaningful price discrepancy, but one that is explainable.
For example, a lower overall cost of production in 2013 could be one reason for the discrepancy. Another possible justification is differing market conditions. In 2013, gold stocks were retreating from exuberant valuations reached in 2011. Whatever the case may be, major mining companies certainly present a discount against these prior levels.
Moving over to the juniors, running that same comparison would reveal a far greater price differential. In fact, in 2013, juniors were trading at multiples above where they are now. So why the severe disparity?
It is important to remember that junior resource stocks have zero grounding in traditional valuation metrics. Junior companies never make a dime. In fact, they constantly raise money and are valued based on the pulse of the market, and at the whim of investors.
So much of this investor sentiment revolves around the momentum of the market. The context of $1,600 gold, therefore, is far more important than the price itself.
In year 2000, gold bottomed around $250 per ounce. It then began its journey on an eleven-year run that would blow through the previous all-time high of $850 per ounce, ultimately rocketing all the way to $1,900. Junior resource investors active in the early 2000s will recall that junior stocks did not kick into gear until 2003 as gold was approaching $400 per ounce. Valuations did not get truly explosive until gold was on the heels of its all-time high.
By the time gold registered $1,600 in 2013, it had already eclipsed the high from the 70s, posted a near test of $2,000, and created an all-out junior mining stock frenzy. Even if gold was on the decline by 2013, investor sentiment remained elevated thanks to the incredible fortunes made.
Simply put, the atmosphere today is a near polar opposite of 2013. Gold has been bottoming for the better part of six years. Mining has been a lackluster performer, up until recently. Junior investors from the last cycle are tainted and much of their capital has been lost. The type of investors who own gold and gold mining stocks are wearing blinders with the junior sector fully out of view.
As far as investor sentiment is concerned, we are back in 2002. Gold may be 300% higher than in 2002, but the awakening of investors has just begun. The spark required to ignite the frenzy is still in the makings. And it is not until talk of gold reaching its previous high of $1900 morphs to include a bit of imagination and speculation of where it will go next, that juniors will fly.
In a recent discussion I had with legendary investor Frank Giustra, he asserted that juniors would not explode in value until gold reached an all-time high again. Metaphorically, I agree with him completely. I suspect that a bit of a junior move is already afoot and we could get some market exuberance well before $1,900, but his point is well taken.
Frank is more aware than anyone that while juniors always move last, they always move the most. Unlike gold and major miners where liquidity allows quick entries and exits, investors cannot get exposure to juniors on such a whim. Significant positions in quality juniors take time and the benefit of a bear market to accumulate. And so, despite the fact that juniors will move last, capturing those gains requires foresight and patience.
This is why it is important to establish a diversified junior portfolio before the move happens, and why I have been working towards taking Palisades Goldcorp public in 2020 – to provide investors with a vehicle to get access to a select group of junior companies. If you are interested in learning more about Palisades Goldcorp, visit our website at www.palisade.ca .
Until next week,
Founder & Executive Chairman
Palisades Goldcorp Ltd.