If you’re a gold bug, there’s reason to celebrate. In my opinion, the yellow metal hasn’t looked as good an investment in over six years.
That’s not news for readers of my advisory, Gold Stock Trader. As I explained to them last week:
‘Gold must close above major resistance [at the end of July] for us to get excited. That target is around US$1,260 per ounce. The yellow metal is currently trading at US$1,261 per ounce. Looking at gold today, it seems poised to break out.’
Gold closed at US$1,268 per ounce last month. The yellow metal remains at seven-week highs today.
The outlook is starting to look more positive for gold bulls. That said, I’m letting the numbers — not my opinion — do the talking. I’d love to see gold shoot significantly higher. But there’s still a bit more work ahead before gold enters a bull market. Yet, while we wait for it to come around, you shouldn’t sit on your hands.
I believe now is the time to start preparing for the next gold bull market. If you don’t already own a handful of the best junior gold stocks, you’re doing yourself a disservice in my view.
Why gold prices are pushing higher
The Sydney Morning Herald reported yesterday:
‘“While legislative, security, and economic risks abound, none of these risks have yet to truly materialise into a risk-off, gold positive event,” says Christopher Louney, commodity strategist at RBC Capital Markets.
‘“The market certainly has gotten used to uncertainty and the high level of geopolitical risk, thus leaving gold to trade against the dollar, equities, rates, etc.”‘
A weaker US dollar is the main driver of gold’s price action, in addition to the spate of flashpoints emerging as global tensions rise.
North Korea’s progress on ballistic missiles has spooked the market. The US hasn’t taken North Korea’s actions lightly. It flew two supersonic B-1B bombers over the Korean Peninsula on Sunday.
The US wants China to control Kim Jong Un’s behaviour by restricting trade between the two neighbours.
US President Donald Trump tweeted on the weekend:
‘I am very disappointed in China. Our foolish past leaders have allowed them to make hundreds of billions of dollars a year in trade, yet they do NOTHING for us with North Korea, just talk. We will no longer allow this to continue. China could easily solve this problem!‘
I’m a fan of what Donald Trump is trying to do. But I believe he is wrong in this case — China can’t do much more than what it has. It could cut core exports to North Korea. But that could potentially cause a humanitarian problem and refugee crisis. That’s something China wants to avoid.
Kim Jong Un is uncontrollable. I don’t see how this issue will end well for the world.
In light of those reasons, the gold price continues to push higher on the back of fear. That might not be good news for global security. But it is for gold miners.
A positive feeling
The Sydney Morning Herald reports…
‘…Australian gold producers are set for a solid reporting season, say experts; the dramatic mining downturn having forced companies to streamline exploration processes and some recent small cap discoveries piquing the interest of the market.
‘“Generally, Australian gold miners have done remarkably well to take costs out and take advantage of the gold price in Australian dollar terms,” says Victor Gomes, co-portfolio manager of UBS’ small cap fund.
‘“And you would have thought that gold would have lifted, with rising interest rates in the United States and the winding back of quantitative easing, you would have thought it would have peeled off in US dollar terms.”’
Let’s quickly run the eye over some of Australia’s major gold producers.
Evolution Mining Ltd [ASX:EVN] owns six gold projects across Australia. It delivered record production during last quarter. The company dug up 218,100 ounces at a breakeven cost of AU$825 per ounce. That said, despite the record result, its share price has mostly gone sideways this year. And it’s still trading below last year’s high:
[Click to enlarge]
Regis Resources Ltd [ASX:RRL] owns two Australian projects. The company produced roughly 90,500 ounces at a breakeven cost of $870 an ounce. That was a record quarter for its main Duketon project. Regis’ share price has done well since December. But, despite trading around 2017 highs, the share price is still trading below last year’s high, as you can see below:
[Click to enlarge]
Saracen Mineral Holdings Ltd [ASX:SAR] owns two gold projects in Australia. It produced 80,000 ounces at a breakeven cost of AU$1,127 per ounce. That’s an all-time record for a quarter. The share price is trading near 2017 highs. But, again, given the record result, it hasn’t really impressed. Like Evolution and Regis, Saracen is still trading below last year’s high:
[Click to enlarge]
It’s clear that investor capital is avoiding gold producers for now. That’s because the market isn’t sure what to make of gold. But, as explained above, the yellow metal hasn’t been in better shape for more than six years.
Here’s the catch…
I believe gold’s next bull market will be ferocious. And it could take off sooner, rather than later. Should the bull start to rage, if history is any guide, investors could potentially make large gains. If you want to make the most money, you need to back the right miners.
And yes, you could focus on gold producers. But I don’t think it’s the right time to back them. And, given the share price charts above, it seems like a lot of people agree with me. Gold needs to climb higher before the producers turn around for the best. And while you could miss out on some of their biggest gains if the yellow metal pushes higher, don’t lose any sleep over this.
The junior end of the market — especially the small explorers not digging up and selling gold — offers the most potential rewards in my view. That’s where I’m focusing my attention at Gold Stock Trader. History suggests that junior gold stocks tend to run hard following the producers. In fact, I believe the best juniors are likely to significantly outperform the producers.
There’s a lot to like about the smaller end of the market…
‘Penny gold’ miners need to hit the golden mother lode…or unveil a major resource upgrade that exceeds expectations…or get taken over by a bigger rival…or announce an exciting acquisition. And any of these things could play out at any moment.
It’s a very exciting market that we’re looking to invest into.
Remember, previous gold bull markets have shown how much money can be made if you back the right stocks. The idea is to hold the best portfolio of junior gold stocks for the next gold bull market. So don’t wait for the gold price to turn around. In my view, you should start investing now…before the bull market rages.
Editor, Markets & Money