HUI Gold BUGS Index Chart Analysis
The HUI Gold BUGS Index represents the 15 largest public gold miners worldwide. The Elliott Wave structure of the move up from the January 2015 low is a very clear impulsive structure. Following an impulsive wave structure is always a retracement of the move itself to a quantifiable retrace Fibonacci level, then to be followed by a minimum measured move similar or greater in size to the previous impulsive move.
This well recognized technical analysis and Elliott Wave axiom provides for a highly reliable and measurable directional bias. The internal structure of the correction against the move up through 2016 provides further support, as it is a very clear ABC corrective structure, again adhering in picture perfect fashion. We are expecting slightly more downside to occur in the HUI into the 124 region before a move up to a minimum price target of 367-550, a 3 to 4.5 fold increase. This would be the Bullish Scenario. The VERY Bullish scenario would suggest a move in the HUI to 1055 for an 8.5 fold increase or greater. The entry into miner stock positions for either the Bullish or VERY Bullish scenarios is exactly the same, thus providing a clear low risk to high reward entry into the sector.
Gold Chart Analysis
Gold is providing additional evidence to that of the HUI, having also completed a solid impulsive structure off the 2015 low, followed by a classic “picture perfect” ABC corrective structure. While the chart for Gold supports our observations in the HUI Index, we believe the correction in gold may have bottomed into the December 2016 low, and that it is presently correcting against the move off this low instead. In layman’s terms, the chart pattern in gold is more supportive of the VERY Bullish scenario. We are expecting a pullback in Gold to the 1,150 – 1,135 range before it commences its larger move up. The most probable upside target for Gold in the Bullish scenario is 1,796; and in the VERY Bullish scenario a move to 1,945 or higher before a small correction that continues to further upside.
GDX (VanEck Vectors Gold Miners ETF) Chart Analysis
The GDX is just another piece of supporting evidence to that of Gold and the HUI Goldbugs Index, having also formed an impulsive move up off the low it formed in early 2016. Our expectation is that GDX will conclude its correction against the 2016 rally into the $15.56 - $15.19 per share region. A measured move in GDX would provide a minimum price target of $40-$49 per share in the Bullish case. In the VERY Bullish case, it would slice through upside resistance to a minimum of $71 per share before consolidating and then heading much higher.
Note the triangle and whiskers at the bottom of Figure 3. Our Hurst Timing model suggests GDX is coming into a 20-month trough sometime between now and March 2019, and more ideally into January 2019. Our Hurst Timing has proven prescient on a multitude of asset classes we monitor and provide analysis, and is yet another technical indication that this sector is coming into long term support before a major rally occurs.
S&P 500 Inversely Correlated to Precious Metals
Figure 4 is a chart for the S&P 500 Index, showing its move off the March 2009 low. The pattern and Fibonacci extensions are adhering perfectly, with (3) hitting and reversing in a small correction at the 1.236 extension (as expected), and resistance at the 1.764 extension soliciting another recent downside reaction. From an Elliott Wave analysis perspective the S&P has provided sufficient adherence with reactions at key extension levels to provide a high probability expectation for the balance of its pattern through the mid 2020’s.
There are two immediate possibilities which exist in the S&P 500: 1. Upside continues into the first quarter of 2019 into the 3,317 region; or 2. The high was established at the 1.764 extension at SPX 2,946. In either case, our Hurst Timing Model suggests an intermediate high to conclude between early September 2018 and late March 2019, followed by 14-18 month correction into late spring of 2020, with a price target of 2,128 – 1,846 (green circle 4), or an approximate 25-35% correction, to be followed by a large resumption to the upside. It is during this corrective move into mid 2020 in the S&P 500 that the precious metals miners sector will rally inversely to equities.
FTSE Gold Mines Index / S&P 500 Index
The FTSE/S&P is at the lowest level it’s been since 2000, right before gold bottomed in the $250 region before heading to a high of $1,900 in 2011. Figure 5 demonstrates that gold – relative to equities – is at an “extreme” low. A simple reversion to the mean would coincide with our Bullish scenario. Note that when gold relative to equities becomes this oversold an “overshoot” to levels over the mean becomes probable. This occurred when gold bounced back to the mean in 2005, and then continued to overshoot well over the mean between 2005 and 2011. Again, we are focused on the high confidence portion of the move up, which would be the reversion to the mean itself.
A telltale sign to any market segment coming to an intermediate or long term low is when consolidation starts to occur. Financially sound and well managed larger companies begin using excess cash reserves to acquire smaller, less financially stable companies who own rich gold or silver reserves. Through a down cycle, sector companies cut costs and gain efficiencies out of necessity, while others riddled with debt are unable to do so, to the extent it creates buying opportunities for participant companies in the same fashion as it does for investors. A recent example is the US Airline industry post-recession, forming a low that resulted in several large mergers, wherein two short years later the average market cap doubled in value.
Recently, Barrick Gold Corporation merged with Randgold Resources to form the world’s largest gold mining company. There have been a smattering of smaller mergers announced recently as well.
Peak Gold is occurring in 2018. Peak gold occurs when most major, easily discoverable and exploitable deposits of gold have already been found. It represents a point in time when collective worldwide production for gold and silver begin to diminish. The result of hitting peak gold is a change in the demand supply equilibrium in favor of less supply than demand thus creating an extremely bullish scenario for gold and silver prices.
Micro Fundamental Analysis
There are over 1,000 publicly traded miners worldwide. By excluding the companies with very low market capitalization, resulting in the share float being very small, one can quickly reduce the list to a more manageable 250. Through a very rigid fundamental analysis approach, we have narrowed the list of what we refer to as the 20 “best of the best” publicly traded miners. It doesn't take a huge portfolio of miners to participate, just a portfolio comprise of the right shares.
In performing analysis of the sector candidates, we focus on the following areas:
- Jurisdictional Risk – The risks associated with miners located in unstable geopolitical environments, or where labor forces present difficult obstacles to mine efficiently and predictably. Resources in stable jurisdictions are critical to long term performance.
- Reserves and Resources – When purchasing a company’s shares, we are effectively purchasing three things – 1. Their proven and measured reserves and total resources; 2. Management’s ability to extract those reserves in a cost efficient manner; and 3. Current assets relative to short and long term debt.
- Financials and Enterprise Value – The Enterprise Value of a company takes into consideration the financials relative to the market cap, and assumes one is purchasing the entire company. To illustrate, if a company has a market cap of $100M, current assets of $80M, and debt of $10M, then the enterprise value is $30M ($100M - $80M current assets + $10M debt). We focus first on the Enterprise Value, and then we consider the price per ounce of all proven, measured and probable reserves based on the EV.
- Enterprise Value Per Ounce – The EV per ounce considers the cost of each ounce of proven, probable, and measured resources. The EV per ounce provides a relative comparison of the cost of one company’s shares to another.
- Net Present Value – We assume they will mine all proven, probable, and measured resources over the next 10-years, then subtract their all-in cost of production, and discount the net earnings over 10-years at a 10% discount rate. This provides an excellent sense of the value of one company compared to that of another. Mining will vary of course, this simply provides a consistent comparison between candidates.
- Chart Pattern – we chart the long term price patterns for each of the core miners to confirm adherence between the technical chart patterns and what we’re seeing in our fundamental approach. Each pattern stands on it's own.
To illustrate an example of our findings, let’s consider Argonaut Gold, Inc. (Sym:OTCPK:ARNGF). The chart pattern and Fibonacci retrace levels for ARNGF suggest we’ll enter long at $.80 per share. At this price level, Argonaut’s market cap would be $142M, while its current assets are $123.5M, and total liabilities are $88.5M, resulting in an Enterprise Value of $106M, considerably less than their current market Capitalization.
Argonaut has total resources of 12.9M ounces of gold. Based on their Enterprise Value relative to proven, probable, and measured resources, at $.80 per share investors are purchasing these resources for $19.42 per ounce. To provide a comparative perspective, when performing the same analysis to Newport Mining (Sym:NEM), one of the larger cap miners, the Enterprise Value to resources is $321.55 per ounce. Said differently, in the context of Newport Mining’s share price compared to Argonaut’s share price, investors are paying 16.5x more for Newport shares than Argonaut shares.
The adage – “when the tide goes out, all vessels drop”, is ever present in this mining sector. This means that well managed financially strong and reserve rich companies drop proportionately to those less desirable. However, as the underlying metals perform, these financially solid reserve rich shares will rise exponentially. The disparity has created enormous value for investors willing to capitalize on such opportunities – provided they do their homework.
Lastly, the chart pattern for Argonaut is perfectly matched to the fundamental attributes of the company, suggesting an intermediate to long term low will establish in the $.80 region, with a price target of over $15.00 per share, offering up a 20-30 fold increase over the next 2-3 years as the price of gold completes its corrective move against the drop from 2011.
There are many such gems similar to that of Argonaut Gold, Inc. from within the precious metals mining sector, and through our comprehensive and rigid fundamental analysis approach, we have cultivated a diversified strategic miners portfolio comprised of both gold and silver miners creating a balanced portfolio consisting of small, medium and large cap companies.
Timing is Critical
The timing to allocate capital to the precious metals sector is between now and March, 2019. It is uncommon to find a candidate rich sector, where both the technical and fundamentals are as attractive as is current in the precious metals mining sector. It is even more uncommon when key sectors exhibit such a clear inverse correlation to each other, as is being offered with the mining sector vs. that of general equities. Investors who allocate 10% of their capital to this sector now can effectively hedge other equity exposure.
The risk to reward skew that is presently being offered by this sector is very uncommon as well, offering a 5-8 fold increase in the lessor of the two bullish scenarios, with the potential to provide significantly greater performance. Coupling these attributes with a well-managed approach that is highly focused on risk management creates an incredible opportunity for investors.
Disclosure: I am/we are long ARNGF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.