Gold News

Gold Can't Go Any Lower

Well, not for the mining sector it can't...
GWEN PRESTON launched Resource Maven with almost a decade of junior resource-focused journalism under her belt.
Focusing on early-stage exploration and development stories, Preston here tells The Gold Report why the summer months could be time to establish positions in the "best of the best" at valuations the mining sector has not witnessed in 20 years...
The Gold Report: At a recent investor conference in Vancouver you said that the market is at the "bottom" for gold and other metals. Please give us some reasons why this is the bottom.
Gwen Preston: First, the price of gold can't go any lower. The current range of $1170-1210 per ounce represents gold's lower-end price range. That's because all-in sustaining costs for the industry now average about $1100 per ounce when you include the interest that major gold producers pay on their debt. There absolutely is demand for physical gold, and the price has to be at least what it costs to produce the metal.
So there is a supply-driven, cost-driven bull market outlook for gold. A gold-driven rally for mining stocks would be okay, but even better would be a rally that's supported by higher prices for a range of metals – and that's what we're looking at. A good number of metals will have supply constraints over the near to medium term, which should result in gains in value. That list includes zinc, platinum, nickel, uranium and diamonds. It's not just gold that's going to go up.
Then there's the fact that the sector is so reliably cyclical. Investors are moving in and deals are being made. You can see it in things like the volume in the Market Vectors Gold Miners ETF (NYSEArca:GDX) or the Market Vectors Junior Gold Miners ETF (NYSEArca:GDXJ). You can see it in the merger and acquisition (M&A) activity and in the new vehicles being established for experienced mining management teams, whether it's a small producer buying a bankrupt gold mine because it's available for such a ridiculously low price or it's China buying hard assets. These things happen at the bottom of the cycle.
TGR: The Market Vectors Junior Gold Miners ETF has certainly been trending higher this year but how does it accurately represent the junior mining companies that are developing or exploring assets but not yet producing?
Gwen Preston: The Market Vectors Junior Gold Miners ETF doesn't really represent explorers or developers, but that doesn't mean it isn't useful. When our sector as a whole turns from a bear to a bull market it will not all go up at the same time. First, the producers will move as metal prices start to climb and producers provide leverage to those metal prices. Then the developers and explorers will start to move. It's a staged process. If you look at the major producers, as represented by the Market Vectors Gold Miners ETF, it's been trending upward for six months. The junior producers, as represented by the Market Vectors Junior Gold Miners ETF, have been trending upward for about six weeks. The developers and explorers are still primarily moving sideways, with some gaining and some losing but with many lining up in a heartening manner.
TGR: The time-tested adage is that mining investors sell their positions in May and go away from the market until late August or September. Is there evidence that investors sold their mining shares en masse over the previous six weeks?
Gwen Preston: No, certainly not in the same way that has so often happened in May. It's amazing how reliable that sell-in-May-and-go-away adage is, even in bull markets such as those that occurred in 2004-2007. Even in those bullish years, the summers were down. But that phenomenon hasn't happened yet in 2015; so far we're moving sideways.
One thing to watch is whether or not the TSX Venture Exchange makes gains this summer. Over the last 25 years, there were only four years when the Venture Exchange gained during the summer. Those were all years where the market was changing from bear to bull. It gained in 1993 and in 1995 when there were runs coming. It gained in 2003, which set up a big run. And it gained in 2009, which set up that recovery run. I don't know if it's going to happen but if it starts to happen, buckle your seat belts.
TGR: How should investors play this space over the summer months?
Gwen Preston: You need a big picture perspective. Right now is the time to establish positions in the best of the best. As I said, I don't know if the rally will start this summer but in a sense it doesn't matter. What matters is that we are at the bottom. Investors need to figure out which companies truly represent the best of the best and take advantage of the fact that we're looking at the lowest valuations in the mining sector in 20 years. Investors should establish a quality portfolio of everything from explorers to developers to producers and then try not to worry if prices slide a little because, broadly speaking, this is the bottom. If we start to see the Venture Exchange gaining over the summer months all that will mean is that the rally is coming sooner, so there will be a bit more pressure on establishing those positions more quickly.
TGR: The S&P TSX Venture Composite Index is at about 700. Do you think it will be above 1,000 by the time we see 2016?
Gwen Preston: Above 1,000 might be a bit optimistic. Again, I don't know when the rally will come, just that it will come eventually. There are many macro forces that are having an impact on this rally, the dominant ones being the US Dollar and US markets. If the US markets turn down, that would move investors out of those markets and into new places. That search would quickly turn up mining stocks as the most undervalued assets. But the timing of a rally is difficult to predict.
TGR: You tell readers to take money off the table once they have made some gains. How do you determine the timing?
Gwen Preston: The mining sector is a roller coaster and stocks do crazy things. My rule, at least while we are bouncing along the bottom, is that once your investment is up 25%, take some money off the table. Generally that recommendation range is from selling a quarter to a half of your position. It depends on the specifics of the equity and the situation. By doing that, you can significantly lower your cost base, which means your potential for gains is just that much greater. That money that you have taken off the table is then available to redeploy if there's another opportunity. It's important to have the flexibility to move into new opportunities. There are lots of good opportunities out there right now.
TGR: Could you leave us with one last tidbit of market intelligence that investors could use?
Gwen Preston: Be demanding. There are still many companies out there telling interesting stories about their projects, but what we're looking at right now is arguably an unparalleled opportunity to establish a high-quality portfolio of mining assets to ride a significant market rally. Be demanding in the equities that make it into your portfolio. Come up with a list of requirements that you need and only buy equities that meet all of those requirements because they are out there. It takes research. It takes time, but be demanding and only buy the best because they will rise faster and farther.
TGR: Thank you for talking with us today, Gwen.

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