Gold And Silver Broke Through 6-Year Base, Mining Shares Present Great Values

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Includes: AAAU, AGQ, BAR, DBS, DGL, DGLD, DGP, DGZ, DSLV, DZZ, GLD, GLDI, GLDM, GLDW, GLL, IAU, IAUF, OUNZ, PHYS, PRPCF, PSLV, QGLDX, SGOL, SIVR, SLV, SLVO, UBG, UGL, UGLD, USLV, USV, ZSL
by: John Lee, CFA
Summary

Gold and silver boosted by first Fed rate cut since 2008 crisis.

China is buying gold as the trade war drags on; Russia joins the party.

Ray Dalio says gold will be a top investment during the upcoming “paradigm shift”.

Silver is set to outperform gold based on gold/silver ratio.

Silver miner shares present excellent entry points.

Gold broke through 6 year resistance eyeing $1,660, Silver is set to outperform gold, boosted by first Fed rate cut since 2008 crisis

The Federal Reserve cut interest rates on Wednesday (July 31, 2019) for the first time in more than a decade. It was trying to keep America’s record-long economic expansion going by insulating the economy from mounting global threats.

Source: US Federal Reserve

August 1, 2019, just a day after Fed rate cut, US President Donald Trump said the US would place a 10 per cent tariff on $300bn in additional Chinese goods. This escalation of the trade war between Washington and Beijing is a new threat to the global economic outlook. The announcement unsettled financial markets on Friday, which led to haven buying of bonds and a broad equity sell-off.

Gold chart shows 6-year technical breakout above $1,380/oz. Head and shoulder pattern indicates imminent reaching of $1,660/oz

China is buying more gold as the trade war drags on; Russia joins the party.

The rise China’s gold holding reflects the Chinese government’s “determined diversification” away from dollar assets, according to Argonaut Securities (ASIA) Ltd analyst Helen Lau. She added that retail demand has also picked up. At this rate of accumulation, China could buy 150 tons in 2019, she says.

China adds to gold reserves for a sixth straight month

“It’s a diversification away from the U.S. dollar, particularly given the trade tensions and the potential technology cold war that’s evolving,” says Bart Melek, global head of commodity strategy at TD Securities. “We have to remember that gold is nobody’s liability.”

Russia’s total gold reserves top $100 billion as central bank adds another 600K ounces in June

The Russian Central Bank bought 200,000 ounces in May, 550,000 in April, 600,000 in March, one million in February, and 200,000 in January.

During the last decade, Russia’s gold reserves have gone from 2% to 19% (as of the end of 2018 Q4), according to the World Gold Council.

With central banks rushing to buy gold, other institutions and retailers will surely follow.

With real estate crumbling, investors rush to gold and silver

  • Manhattan real estate had its worst first quarter since the financial crisis, according to a report from Douglas Elliman and Miller Samuel.
  • Sales fell 3 percent in the first quarter, which marked sixth straight quarterly decline.
  • That is the longest decline in the 30 years that the real estate appraisal firm has been keeping data.

With the housing market toppling, it’s no surprise investors are turning to gold and silver, the hard assets whose value has stood the test of time.

Ray Dalio says gold will be a top investment during the upcoming “paradigm shift” for global markets

Hedge fund multi-billionaire kingpin Ray Dalio is seeing a case for gold as central banks (1) get more aggressive with policies that devalue currencies and (2) are about to cause a “paradigm shift” in investing.

Dalio, the founder of the world’s largest hedge fund, wrote in a LinkedIn post that investors have been pushed into stocks and other assets that have equity-like returns. As a result, too many people are holding these types of securities and are likely to face diminishing returns.

“I think these are unlikely to be good real returning investments and that those that will most likely do best will be those that do well when the value of money is being depreciated and domestic and international conflicts are significant, such as gold,” the Bridgewater Associates leader said.

Silver is set to outperform gold based on gold/silver ratio, silver mining companies present excellent entry points.

At 90, the gold/silver ratio is the highest it’s been in 25 years. The average level since 1990 has been 67.

7.23 iotw chart2

Source: Kitco.com

Silver performed well historically after an extremely high gold/silver ratio reading is reached, with an average gain of close to 10% over the ensuing 12 months after the gold/silver ratio hits 90.

Source: Kitco.com

Silver could hit $28/oz in the near term, catching up to gold.

Silver mining companies mine and refine silver from the ground. The profit margin increases exponentially in percentage terms with rising silver prices.

For example, a silver miner with an operating break-even silver price of $14/ounce, has a profit margin of $1/oz at $15/oz silver price. The profit margin at $16/oz silver (merely $1 increase in silver from $15/oz) is $2/oz, which translates to 100% increase in profit margin.

Besides applying traditional sales and earnings multiples to value silver miners, investors also add optionality to the valuation (i.e. the value of the amount of silver in the ground). Here I highlight some silver mine-producing and silver development companies.

Silver Producer League:

Pan American Silver Corp (AMEX: PAAS) Market Capitalization US$3.5 billion, 2018 Production 25 million oz silver equivalent , Resources over 1 billion oz silver

First Majestic Silver Corp (AMEX: AG) Market Capitalization US$2 billion, 2018 Production 20 million oz silver equivalent, Resources 620 million oz silver

Hecla Mining Co (NYSE: HL) Market Capitalization US$980 million, 2018 Production 35 million oz silver equivalent, Resources 191 million oz silver

Silver Development-Stage Junior League:

Silvercrest Metals Inc (TSX:SIL, AMEX: SILV), Market Capitalization US$ 500million, 2018 Production nil, Resources 87 million oz silver

Prophecy Development Corp Corp (TSX:PCY , OTCQX: PRPCF), Market Capitalization US$17, 2018 Production nil, Resources: 51 million oz silver

*Information collected from respective company websites. silver equivalent = silver, gold and other byproduct metal production

Prophecy’s Pulacayo-Paca project has 30 million indicated silver ounces, 21 million inferred silver ounces; and only 30% of the known mineralization explored. With 95 million Prophecy shares outstanding, investors are getting half an ounce of silver in the ground for every share of Prophecy. Production is planned for 2019 at 1 million silver oz on a trial mining basis.

Prophecy’s Pulacayo-Paca silver grades are at 256g/t open pit and 455g/t underground, ranking Pulacayo near some of highest-grade silver deposits in the world (silver resource and grade from www.prophecydev.com).

With past drill intercepts such as 1,031 g/t Ag over 25 meters (PUD 109), and 1,248 g/t Ag over 10 meters (PUD 118), Prophecy is preparing to drill Pulacayo-Paca in the fall; investors might just rediscover this silver giant sleeper in the midst of bullish silver run.

Bottom Line

In summary, gold and silver appear to have broken out of multi-year consolidation. With the U.S. presidential election coming in 2020 and the Fed’s having little stomach for a market correction, analysts agree that the path of least resistance for interest rates is down. This will bode very well for gold, silver and precious metals mining shares in the next 12 to 18 months.

Disclosure: I am/we are long PRPCF PCY. Business relationship disclosure: I am the chairman of Prophecy Development Corp, a silver mining company.

Additional disclosure: I am the chairman of Prophecy Development Corp, a silver mining company.