Calling contrarians, sceptics, and the recalcitrant

Monday, 23 August 2021 — Albert Park

[2 min read]

Dear Reader,

If you ever wanted to know how tricky the market can be, take a look at gold stocks right now.

The Aussie dollar gold price is $2,491 per ounce.

This is around its highs for the year, and only a whisker under the all-time Aussie highs it hit last year. Are gold stocks booming?

No! In fact, it’s the complete opposite.

They are languishing, showing no momentum whatsoever — despite the big producers making a fortune.

For example, Regis Resources Ltd [ASX:RRL] has an ‘all-in’ sustaining cost of around $1,400 per ounce.

So they are creaming nearly a thousand bucks for every ounce they can sell (aside from their hedging contracts).

And they are shooting to produce 500,000 ounces this financial year.

That’s big revenue and free cash flow considering the stock only has a market cap of $1.8 billion.

Here’s a chart my colleague Greg Canavan sent me last week.

It shows the performance of gold stocks relative to the ASX 200…

That, says Greg, makes gold stocks as cheap as they were in 2018.

That sticks out for me. Here’s why. I gave my subscribers at the time a recommendation to buy a stock called Chalice Mining Ltd [ASX:CHN].

It has some exciting gold exploration targets in Victoria near the great Fosterville mine.

I can still remember that the stock traded for 12 cents despite having 10 cents in cash. It also had other projects on its books.

Here’s an amazing quirk of fate. I recommended the stock for its gold projects. But it went on to hit a massive lode of other metals out in WA.

One subscriber wrote to me this year to say he turned $3,000 into $190,000.

He held all the way from 2018, through the COVID bust, to now, and may reap further benefits in the years to come.

That’s the latent power in the junior sector of the stock market. Of course, for every tale like that there is many of woe and disappointment.

Why bring it up?

It’s to do with the risk.

Chalice, in 2018, had been so forgotten that there was no premium in the price for its projects, its management, or its very credible history over many years.

Even if they never made that big strike, you were highly unlikely to get wiped out in a big way.

Your money might have stagnated for as long as you held it.

That’s the way the gold sector looks to me right now.

They’ve been so beaten up that there’s little premium, blue sky, or other investor fantasies in the price.

You can buy for assets and cash flow and take your chances on exploration or gold price appreciation knowing your risk is about as reduced as you can get it.

That doesn’t mean you’re guaranteed to make money. There’s always the chance the stocks go lower, or the opportunity cost burns you in some other way.

That’s the reality of the market. It’s a messy business of risk versus reward and the trade-offs you’re prepared to make.

But if you’re ever going to have a lash at the gold sector, now’s the time to get interested.

Having observed investor behaviour for a decade now, many probably won’t give it much thought. Isn’t lithium the next hot thing?

People like to follow narratives and the herd in general. I get that.

But as a Daily Reckoning reader, your heart must lie with the contrarians, the sceptics, and the recalcitrant.

You know the market gives you nothing unless you work for it and you feel uncomfortable.

If you don’t, then you’re deluding itself. Pleasant narratives and conventional thinking rarely lead to big profits.

If you’re prepared to take the unconventional path, I suggest you go here to see why gold stocks could be the place to be for the next 12 months.

Best wishes,

Callum Newman,
Editor, The Daily Reckoning Australia