The gold market is very compressed right now. Higher costs, increased geo-political risk and uncertainty about the price of gold (and silver) have taken a massive toll on stock values in the mining sector. The upside is pretty big if European or American stimulus were to show up. Even hints of these QE packages are causing market swings.
In the chart below we can see that gold bullion and the gold stocks have diverged in the last several years. A big part of the divergence is steadily increasing costs to replace mined ounces. However, if the price of bullion breaks out of this descending wedge and returns to it's upward trajectory I expect the stocks to return to an upward trajectory as well. I also expect that inflationary actions from the central banks will drive the event. It could be a rapid and profitable move for those willing to take on the risk.
*chart from ycharts.com
GLD shown in orange (bullion ETF)
GDX shown in blue (gold miners ETF)
For the vast majority of investors it is best to ignore the individual stocks and stay with the structured investments.
- (GLD) -Tracks the price of gold
- (DGP) -2X Leverage fund tracking gold
- (DZZ) -2X Leverage fund shorting gold
- (GDX) -Tracks a balanced group of mining stocks
- (GDXJ) -Tracks a group of junior mining stocks
- (NUGT) -2X leverage fund for Mining stocks
- (DUST) -2X leverage fund shorting Mining stocks
Weather you are buying and holding, or wanting to trade, these are good ways to do that from the long and short side. If you are not doing a ton of research just stay with these ETFs.
Research and time are the only two things that I know of that can enhance returns with individual investments in this area. I should mention that having some good luck can make you some money in the gold markets as well. I prefer trying to stack the odds in my favor.
Researching gold in the ground is very straight forward. A gold company can find it, measure it, talk about it, get some money and dig it up. The process is more than well understood. Geology and basic economics are your friend for this, there are very few unknowns when it comes to gold in the ground. Research should also include geopolitical risk which is a serious wild card in mining.
Here are a few of my criteria for researching a company with a new deposit. Please note that I'm not a geologist.
- Site locations in South Africa, Mexico or Canada
- Grade of deposit, recovery rates, cost to produce
- Open ended drill results, for future discoveries
- Close to producing mining districts
- Full ownership of deposit
- Management ability and experience
- Positive feasibility reports
- An edge that makes them better
Time is your friend and enemy. It can take years for a mine to come into production. During that time the geopolitics can get to you for sure. If you have time you can get in early and reap some nice rewards. Do not get involved with the hype, early stage juniors are not tough to find, do not ever buy on rising price technicals. Research and watch three or four juniors and when the pain is greatest, make your move. Please remember that you will NOT be missing your once in a lifetime chance, so put your emotions aside.
I'm watching a couple of junior non-producing companies, let's go over them. These are great classic examples of risk/reward.
Kimber Resources (KBX):
- Mexico,Sierra Madre location
- Near surface high grade silver decent grade gold, recoverable, low cost production possible from high grading an open pit and above a shaft system
- Wide open deposit showing up all over the place
- Many major producer close neighbors
- 100% owned
- Management is very disciplined and focused on shareholders
- Feasibility studies were positive but to early
- The edge for KBX is the near surface deposit, i feel like these guys are driving for production
- High grade gold deposit, recoverable, favorable production cost
- Deposit is open several directions, including depth
- RIGHT NEXT DOOR TO THE MOST PROLIFIC MINE IN CANADA
- 100% owned*
- Management is average
- Feasibility is good
- The edge for RBY is the nugget effect. The debate is passionate about the final production grade that will be attained
* large stock positions may be owned by other mining companies.
Both of these stocks have seen much higher prices. They have also seen much lower prices. Trading in gold juniors is very risky and you must be prepared to bear the loss of your investments. I do believe that the upside here is well balanced with that risk.