Gold explorers setting up like it’s e arly 2019 again

Friday, 20 August 2021 — Albert Park

[3 min read]

Dear Reader,

Can you believe that the price of gold has bounced up quite a bit in the last six to seven trading days?

Can you say AU$2,500/oz?

You did not read wrong. It is touching that level.

The last time the price hit this level was in early January 2021.

At this level, you would think gold stocks would be well into the next leg up.

The good news for you is that they are not.

Why is that good news?

This could be a great entry point for you.

I’m convinced. Let me present my case…

Opportunity opening up for gold stocks

The price of gold has recovered almost 15% from its low in March. The ASX Gold Index [ASX:XGD] recovered 17% over the same period.

Normally, the ASX Gold Index could rise further than that of gold because gold stocks are leveraged to the price of gold.

Let’s look at gold against the ASX Gold Index since 1 January 2019.

That’s a broad sweep of data…

It also captures the period before the major rally in mid-2019. The figure below shows the relative performance of the two:

You can see that the ASX Gold Index rallied three times the amount compared to gold from May to September 2019.

The decline was more violent in early 2020 as a result of the sell-off resulting from the coronavirus outbreak. Same with the subsequent recovery from April to September 2020.

Interestingly, since November 2020, the gold price and ASX Gold Index have closely tracked each other. And the ASX Gold Index is trending down even as the price of gold is trending up.

What I am seeing is a potential opportunity in buying gold stocks…

The Federal Reserve bluffed again

Now, going forward, it is entirely possible that the price of gold could fall and push gold stocks down further.

The price of gold seems to be hanging on every word from central banks and government officials regarding the state of the economy.

Any suggestion from the Federal Reserve of tapering QE is supposed to suggest the economy is recovering. That, or because inflation is running out of control and they have to raise the Federal Funds Rate to quash it.

The central bankers and financial pundits obviously are holding out for the former. But reality is they won’t even succeed doing the latter.

The Federal Reserve released their minutes from the August meeting. They recognise the weakness of the economy due to the Delta variant of the coronavirus.

However, they are going to look into tapering QE nonetheless because they believe inflation may remain for longer than expected. So next week they will review their options at the Jackson Hole Summit.

I am calling them out on their bluff. They will again fold, and the market will see that they are going to let inflation run loose.

Junior explorers lining up in the launch pad?

The lull in the price of gold has brought gold stocks into a bear market since last September. If you look at the levels individual producer stocks are trading at last August and now, most are down 20–40%.

That is quite a battering even as gold is clearly not in a bear market. The bull market thesis still holds very strong.

If you look at the speculative end of the market — the small-cap explorers — many of them have given back 60–70% of their gains.

This may feel like 2012–13 once again. I beg to differ. Gold is behaving like it was in early 2019. It has held firm and seems to be setting up for a strong rally.

What happened to gold stocks once gold took off? You saw it in the chart above for the ASX Gold Index.

I have some exciting insights for you.

I constructed an equal-weighted index of a selection of gold explorers and developers from the Gold Stock Pro portfolio, plus a few others on my watchlist for future recommendations. It comprises 28 companies across the early stages of exploration to approaching the production stage.

The reason for using an equal-weighted index is to prevent undue distortion of ‘winners’ that would come with a market capitalisation weighted index. Size does not matter, only the company’s returns.

I compared the performance of this index of speculative gold stocks with the ASX Gold Index and the price of gold since January 2019. This is what it looks like:

I think the graph speaks for itself. These explorers completely left gold and larger gold producers and developers in the dust.

Now, you cannot say that the index favours the winners over the losers. They all are equally represented in this index.

They have retreated since peaking in late-May when investors had high hopes that they were riding the next rally. That was dashed in June and it has since failed to make a break.

I believe the most astute mining investors are already quietly accumulating in this end of the market. If the price of gold is behaving as it was in January 2019, the ride could be spectacular.

My hope is you will reflect on what you’ve read here. You may want to act soon as the time is right.

Our Gold Stock Pro campaign launches next week.

Join me and let me do the hard work for you in picking the right stocks for you to capitalise on the upcoming rally in gold.

God bless,

Brian Chu,
Editor, The Daily Reckoning Australia