How can you tell if there is a Precious Metals Rally?

In retrospect, a major Precious Metals rally is easy to spot.

Gold ran to an all time high from 2005 to 2011. However, there was a drop on the way up for the financial crisis of 2008.

If we zoom out a little we see that in the 2011 rally, gold actually traded higher than it previous peak price in early 2008 before falling off.

My own view is that we'll know we are in a major precious metals rally when gold tops its previous high of $1889/oz. My book is called Gold $3000 | Silver $60 because I suspect those will be close to the peak prices achieved in the next rally. Essentially, I expect gold to come close to doubling its 2011 high over the next couple of years. Yes, it could go higher, much higher, but that would be event driven and none of the events that could drive gold to $5000 or $10,000 are very probable.

What is probable are ordinary course price pressures. The advent of negative and near negative interest rates, deficit spending without end, the gradual decline of the UD dollar as a "safe haven" are all going to contribute.

The appetite of central banks for gold has been increasing with Poland, China and Russia leading the charge. There has also been a rise in demand for gold backed ETFs which, in turn, means more gold is being purchased,

The gold producers are producing more gold than ever but the rate of growth in that production has been slowing.

We are certainly not going to have a gold "shortage" to drive up the price; but there is every chance that the majors will find themselves bumping into physical and financial limits to gold production. Where the gold price was fairly stable from 2012 forward, multiple factors seem to be pushing it higher.

The early stages of a gold and silver rally are apparent to people inside the business but opaque to the general investing public. It is not until gold, in particular, reaches a fairly arbitrary number, in this case I suspect its 2011 high of $1889, that the media and a wider audience begins to pay attention. At that point, the precious metals rally will be between a third and half over.

In Gold $3000 | Silver $60 I make the argument that in a major rally the truely significant profits will not be made in the metals themselves or the major producers or even mid-tier and small producers - although they will all do well - rather it will be the junior explorers and developers which will see their share prices go parabolic.

However, right now, the junior market with a very few exceptions is just limping along. Good results are still being treated as liquidity events. This parallels the junior experience in the 2008/2011 rally. In the earlier rally it was not until the last third of the rally that the junior market really took off.

For the moment the signs suggest we are at the beginning of a rally. In particular, we have seen the senior producers as represented by the GDX move up towards 2016 highs. (But still well off 2011 prices.)

The more junior GDXJ is well below its 2016 highs and massively below 2011.

The TSX-V (which includes beaten up oil and gas, pot and crypto companies) remains flat on the floor.

If we are at the beginning of a significant rally no one has gotten around to telling the stock market yet. Which is typical of the beginning of precious metals rallies.

So has the precious metals rally started and will it be similar to 2011? Or will it be a false start rally like 2016?

Either way, the junior market is poised to take off. The only question is when?

Perversity in the Junior Market

I have been following Victoria Gold (V.VIT) for at least eight years. I have visited their Yukon site twice and spent a fair bit of time talking to CEO John McConnell. I know the company and its prospects well.

On September 17 Victoria Gold poured its first gold a month ahead of schedule and right on budget.

First Gold Pour at Victoria Gold's Eagle Mine Yukon

On September 12 Victoria Gold closed at $0.64. You would think that with the completion of the mine and the first gold pour the share price would go up. You would be wrong. On the 17th it traded at $0.61, on the 18th it closed at $0.56 and today it is trading at $0.52.

What happened?

I have no idea and I very much doubt anyone has. It could have been a single large investor taking profits on shares bought years ago in 2014 for $0.09 or it might have been people who were tired of holding shares they bought for $0.74 in 2017. Plus the price of gold is off a bit. And, obviously, the market's appetite for VIT shares is temporarily sated.

However, I suspect the biggest reason for what I am pretty sure will be a short term drop in the share price is that when it poured its first gold, Victoria went from being an exploration development company to an operating gold miner. What that does is change the way in which a company is evaluated and it places limits on the company's "blue sky" potential.

In my book, Gold $3000 | Silver $60 I talk about how different sorts of companies will respond in the coming precious metals rally. There is no doubt in my mind that V.VIT will do brilliantly and I suspect it will trade on up to $1.50. (Although it may consolidate its outstanding shares and/or be taken private by its dominant shareholder Orion Mine Finance.) However, as a producer, while the shares will be rerated they will be closely tied to the price of gold and the performance of the mine.

If the gold price doubles the chances are excellent that VIT will, at least, double right along with it. But the 10X or 25X returns in a serious gold rally will be coming from companies which are pure explorers.

Hence the seeming perversity of the junior market. The wild, and profitable, gyrations of junior explorers reflect the far greater uncertainty as to their project's value. A solid, producing, proven mine like VIT's has effectively eliminated that uncertainty and with it the speculative frenzy junior explorers can attract towards the last third of a major precious metals rally.

Right now, in my view, especially with the sell-off, Victoria is a buying opportunity. Tripling your money is never a bad thing.

But if the rally gets going, it might be a good idea to look down the road to McConnell's wife, Tara Christie's, early-stage exploration company, Banyan Gold ( V.BYN). Same part of the Yukon, just down the road from the Victoria Gold mine and same VP Exploration - Paul Gray. But Banyan is trading at $0.055. In a major precious metals rally, one good drill hole and Banyan could easily hit $1.00. And, at the moment, there is virtually no downside risk.

Down Days

Gold off $32, silver down $0.34...

Gold and silver stocks falling.

Yikes!

What happened to the rally?

In the early days of a rally there is always the question of whether the rally is real and sustainable. Is it a rally or is it a "blip"?

While Gold $3000 | Silver $60 takes as its premise that there is a rally underway, I might have got the exact timing wrong. Which does not, in fact, matter.

Whether we are at the beginning of a precious metals rally or whether that rally is a few months off, the fact is that gold and silver are going to be re-rated in the relatively near future. Buying into the junior explorers and developers at the current relatively low prices simply prepares an investor for that re-rating. The precise timing might be interesting at the margins, but the core premise of the book - that extraordinary returns will be achieved by early investment in gold and silver juniors - is unchanged.

If you look at the 15 year gold price above you'll see that on the way up there were plenty of down days. For traders those are opportunities, for those of us who are not in and out of the market every fifteen minutes, down days are noise.

In fact, it is reasonable to ask if the rally has actually begun to be reflected in the junior market at all. The TSX-V is something of an indicator for the juniors and it is still lying on the bottom:

Historically, once a precious metals rally is underway, the TSX-V shakes itself off and heads upwards. But it usually takes a while for the metals rally to translate into advancing share prices for junior explorers and developers.

Of course, individual companies may beat the market because of discoveries, news, marketing and increased investor awareness. Paying attention to the companies which are getting attention is worthwhile. However, trying to time the market on a day to day basis is not likely to be worth the effort. Saving $0.02 on a $0.15 share looks important but, if that share goes to $1.00 the important thing will be owning it in the first place.

Beginnings

Gold is hovering around $1547 as I write. Up $21 or 1.9% on the day.

Silver has a run and is trading at $19.27. Up $1.09 or 5.97% on the day.

The excitement was palpable and traffic surged to the point that CEO.CA shut down at one point during the day.

Some of the stocks I follow did very well with BHS up 25% and GPLY up 9%.



V.BHS     $0.15      +25%
V.GPLY   $0.24      +9%
V.GPY     $0.425    +3.6%
V.VIT      $0.63      -3.08%
T.MOZ    $1.43      +3.62%
V.WGO   $1.11      +0.91%
V.ATC     $0.23      -2.13%
V.ABN    $0.14      +3.57%
V.ECR     $0.20      +2.56%

However, this is barely the beginning of the long term rally which Gold $3000 | Silver $60 is predicated upon.

The fact is that there are a lot of people who have been holding junior resource stocks through the long bottom which extends back to the last rally. For many of these people, a short term rally in junior resource stocks is the liquidity event they have been praying for.

There are also plenty of investors who will want to trim their positions in particular companies or take profits. People were buying and financing BHS at $0.075. The opportunity to take a double on at least part of their position would have been tempting today.

The beginning of a rally means that a lot of investors with very little experience with or exposure to junior resource stocks will take a look at the market. As metals prices rise, those investors will become more inclined to pull the trigger on a few interesting juniors. It is a slow process and there will be fits and starts.

As I point out in Gold $3000 | Silver $60, typically, the big gains in junior resource companies come in the last third of the rally.

Right now we are barely into the first third and there are undervalued juniors all over.

We'll know the rally is gaining traction when we see daily increases in the price of gold and silver. Once that starts to happen, junior companies will start gaining investor interest and their shares will, in my view, rise far faster than the metals they are exploring and developing.

Gold $15.42 | Silver $18.18 FOMO

Silver in USD - $17 we hardly knew you

Gold flew through $1500 and silver has breached $18.

Which means gold is halfway to the $3000 I think it will reach in a sustained rally and silver is coming up on the 1/3 level to $60.

It is very easy for investors to conclude that now that the metals are running they may have missed out on the opportunity to jump into the stocks which will ultimately benefit from that rally.

I point out in my book Gold $3000 | Silver $60 that the gold and silver explorers and developers tend to lag the moves in the metal market.

Here are some of the gold and silver juniors I follow as at 10:45 Pacific

$BHS      $0.105        +0.005
$GPLY    $0.215        -0.005
$GPY      $0.345        -0.005
$WGO    $1.07          -0.02
$TIG       $0.43          -0.06
$ATC      $0.245        +0.005
$ABN     $0.15          -0.005

The fact is that it takes a while for the market to revalue junior explorers and developers even at the beginning of a gold and silver rally. Indeed, most of the really life changing profits in such a rally occur towards the end of the rally rather than the beginning.

At the moment, the excitement generated by rising gold and silver prices is confined to the long suffering junior company investors who have been holding some of these shares for years.

What makes the juniors rise is a more general perception that gold and silver are going to go up and keep going up. That, in turn, draws peoples attention first to the metals themselves, then to the gold and silver ETFs, then to the senior producers, eventually to the mid-tier producers and then, finally, to the gold and silver juniors.

However, as I point out in Gold $3000 | Silver $60  where the metals may double or triple in value, the junior shares, carefully selected, can experience 5x to 50x share price increases as the rally takes hold.

Right now junior explorers and developers are still trading near their lows.

Smart investors will take advantage of this slow start to build positions which have very low cost entry points.

Missing the very low entry points will be an error but a recoverable one if the rally takes hold as the junior explorers will likely continue to be grossly undervalued well past gold $2000 and silver $30.

Playing the Precious Metals Rally

It looks very much as if the gold and silver markets are in the starting phases of a major rally.

I have written a short - 10,000 words or so - book on how best to make serious money in such a rally.

You can get the book for Kindle or any other ebook reader or pretty much any device at https://amzn.to/2ZdF6jB

The essential premise of the book is that in a rally junior exploration and development companies will appreciate far more than mid-tier producers or senior miners. And shares in those companies will also outperform the metals themselves by a wide margin.

Historically, the sequence in a major rally is that the metals rise, then the ETFs, then senior producers, mid-tier producers and, finally, when the rally is well established, the juniors begin to shine.

Right now, most of the juniors are doing pretty much nothing. Which is completely typical at the beginning of a rally.

For the juniors to gain traction they need to gain attention. That attention arrives when there is real excitement in the gold and silver markets.

It is always tough to spot the exact moment investor attention turns to a particular sector and part of the argument in Gold $3000 | Silver $60  is that getting that exactly right may not matter much. The gold and silver juniors have been so badly beaten up that most are bargains at current prices.

I'll be posting about real bargains and how  to find them over the next few months as we wait to see if the rally I am expecting emerges.