This gold stock rally is the real deal!

Friday, 12 November 2021 — Albert Park

[2 min read]

Dear Reader,

What a difference a week can make in the stock markets!

Last Thursday, the Federal Reserve announced that it would taper its QE program. Gold and precious metals jumped in response!

Have a look at the chart below. It shows the price of gold in US and Aussie dollar terms since the start of the year:

You can see a distinct upturn in the gold price in the last week.

The rally in gold stocks has already started.

Some traders are tentative after the sharp rise and drop in early August, and two other earlier gold rallies petered out.

Don’t be one of them!

I’m adding to my gold position.

Have a look at the charts below showing the performance of the ASX Gold Index [ASX:XGD] and also the relative performance of some of the largest gold producers:

You can see that the gold index is outperforming all of the large gold producers.

This is quite interesting.

Normally, the largest gold producers lead the gold index in a recovery. This is because the smart money moves the sector with the quality producers.

This time is different.

The reason is most of these large producers expanded their operations and raised capital to do so. This has caused their share price to rally slower due to a larger shareholding.

Another interesting feature of this rally is that the mid-tiers have been carrying the flag.

Companies like Perseus Mining Ltd [ASX:PRU] and West African Resources Ltd [ASX:WAF] have broken all-time highs.

Gold mining companies in poll position

In the past, the bottom of the market cycle for gold would see mining companies selling their mine assets because their cash balance is running low. Many operations would be loss-making due to a cost squeeze.

Again, things are different this time.

Almost all the ASX-listed producers are generating great operating cash flows. The margins have been very rich thanks to the gold price rising more than AU$2,000 an ounce in 2019.

There are some headwinds. The staff shortages caused by border closures and a rising oil price could cut into the margins of the producers.

However, the market knows this. I believe that now is a great time to build your gold stock positions for the following reasons:

Firstly, companies have never been this well positioned in terms of operational performance and financial stability.

Gold company boards are now exercising better discipline in managing costs and avoiding overpriced acquisitions.

Even Newcrest Mining Ltd [ASX:NCM] holds more cash than debt. The company paid down more than $4 billion of debt in the last five years.

Secondly, governments around the world are now increasing their debt-driven spending to try and revive their economies ravaged by lockdowns and vaccine mandates. They know they have made a big mistake in their decisions and are now trying to borrow their way out of stagflation (low growth, rising costs of living). Inflation is not going to be transitory, make no mistake about that.

Thirdly, investors have warmed to this sector in the last six weeks. The Evergrande debt crisis caused a sell-down in gold stocks and brought it to the bottom. Hindsight now suggests to me that we saw capitulation selling in gold stocks. So the weak hands are now gone.

The next few weeks could see gold and gold stocks climb that wall of worry. Those that buy after climbing the wall of worry will miss out on a big chunk of the rally.

If you share in my view that this gold rally is genuine, consider taking advantage of my gold stock advisory service now!

If you want to try your hand in earning big returns punting on the next explorer to make it big, sign up to the Gold Digger Summit.

Be sure to check it out, as I believe the returns from the gold rally will last only a short while.

God bless,

Brian Chu,
Editor, The Daily Reckoning Australia