April 24, 2014

Why are the Stocks so Low?

Why are the stocks so low?

Many people have asked me why junior gold stocks are so low right now.

I have played in this sandbox for a long time and I’ve never seen anything like this.  If you had told me 10 years ago that gold would be at $1,700, I’d think you’re crazy.  Back when gold was $600 – $700 they used to have a regular gold debate on BNN between a gold bull and a bear, and the bear stated repeatedly that “my children’s grandchildren will never see gold at $1,000.”  He still appears on Market Call, by the way, so I won’t mention his name.

Gold has far outperformed its commodity counterparts since the recession.  Oil is barely squeaking above the $100 mark, compared to its peak of $140.  Copper and the base metals are also still well below their peak.  You would have been forgiven for thinking that the housing bubble of 2005-2007 was really an everything bubble.  But clearly the case for a coming gold bubble is now stronger than ever, with gold not just exceeding but blowing away its pre-recession peak, as well as every other commodity.

From my 12 years experience in this sector, I have seen all the different asset categories fluctuate relative to each other, but I have never seen it this extreme.  The gold price and gold stocks are so out of whack it’s almost ridiculous.  Consider this:  If you could start a one-man mine in this gold price environment, how much would you need to stay afloat?  Well, if you could mine even a half an ounce a day you’d have a comfortable salary with only half the income being used to pay yourself, and the other half for costs.  How much is half an ounce?  Some prospectors pan that much in a day in the Yukon (maybe we should all go and do that!).  A cube of that much gold would have sides of 9 mm.

For a gold junior, if you could build a mine with even 10,000 ounces of yearly production, you’d have a company with $17 million revenue on your hands.  This is a small, basically artisanal mine with a few workers.

So why are the stocks so low right now?  Well, I wish I had the crystal ball.  But my experience in this market over 12 years is telling me this is the opportunity of a lifetime to get into quality junior gold stocks and wait about 3-4 years.  You’ll probably 10-20 fold your money.

Comments

  1. I agree that we have a huge buying opportunity on our hands now, although the exact timing of the bottom is always a tricky thing.

    I started investing in gold stocks in early 2003, although it hasn’t been continuous (gotta get out sometimes to make money over the long haul in this sector IMHO) so I have seen some ups and downs. The current pricing is still way more rational than fall 2008, when I bought NGD for less than cash-on-hand.

  2. David Mills says:

    Been into the gold thing since 1976, and I do agree this may turn out to be a great opportunity – I’m on the buy side right now, but other than market momentum going downhill for the juniors, I think there are a couple of fundamental reasons these stocks have been in the dog house as a whole.

    First, the GLD ETF allows someone with a trading account to buy and sell gold without company risks, taking away some of the potential cash for juniors. Same for HGU and HBU, etc. on the TSX.

    Second, most of these juniors are cash burners, not cash producers, and with the debt/liquidity issues all around the western world, there is less appetite for a cash burner.

    Third, there is a weariness in the investing community for junior’s management paying themselves very well, taking options at low stock prices, and doing dilutive financings while the shareholders loose and loose so often. For a cash burner, this is perceived as an insult to the retail investor (rightly or wrongly).

    Fourth, retail investors are getting more and more scared of HFT and just how the markets seem set up to favor the big investors while leaving the retail investor in the dust. Real or not, this is a pervasive perception that is rampant.

    Fifth, there are many who still believe in gold who are selling their gold juniors to put the same money in the producers which have been on the rocks as well. Hard to not notice a company like Goldcorp, undervalued, paying a dividend, growing production year after year, and doing what they say within cost. Safety (low risk) and at least a 50% upside when the momentum train turns around – and getting a dividend while waiting.

    One cash burner I do like is CKG on TSX, although it may be a tad overbought as I write this.

    All the best, great site.

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