Gold's Long Game: Some Down, Lots of Up Written by Gerardo Del Real
Posted July 7, 2016
There’s a debate going on right now amongst new and veteran speculators in the gold and junior resource space.
On one side is the camp that argues that nothing goes straight up and that gold, and the junior mining equities, are in for one last reminder of that rule that could see gold, and the juniors, pull back briefly but violently.
7.7.16 gold chart
For those new to the gold or junior resource space, at the start of 1975 gold traded in the $198-per-ounce range, by August of 1976 gold traded at a 31-month low of $105.50 an ounce.
Over the next four years, gold hit a high of $850 an ounce, a 750% gain.
In the other camp is the side that argues, correctly, that gold pulled back nearly 50%, but had you held on, the gains would have justified the roller coaster ride and that we are at the start of a similar gold bull market.
I tend to agree with both sides, and no, that’s not me hedging. That’s me saying that both will ultimately be proven correct.
I do believe we'll see one last shaking of the gold tree, but that it will be brief and one of the best opportunities in decades, maybe ever, to buy junior resource companies.
The argument that nobody is having, is where gold will be a year from now, or two years from now, or even five years from now. There seems to be a pretty consistent consensus there and that consensus is that gold will be higher. Much higher.
Which brings me to my next point. Luzi-Ann Javier of Bloomberg recently wrote an article with the headline “Cheap Gold Mines Disappear as Buyers Splurge for Surging Bullion.”
The basic premise of the article is that mine buyers are paying higher premiums and doing so more frequently. Javier cited that, “the number of acquisitions worth at least $1 million rose 14 percent last year to 192, the first increase since 2010.”
She went on to add that “The average premium paid on deals worth at least $1 million is about 42% in the current quarter, up from 29% in the first quarter, data compiled by Bloomberg show. The 60 deals pending or completed in the quarter are the most since the fourth quarter of 2011, the year that bullion surged to a record high of $1,921.17 an ounce."
The last point may be the most important. Reserves were valued at $178.43 an ounce in the second quarter, the highest since the first quarter of 2013, data compiled by Bloomberg Intelligence shows. In the third quarter last year, the average was $90.90.
That’s a huge increase in less than a year and the fact that mid-tier and major gold producers have the same reserves, valued at nearly twice what they were valued at just three quarters ago, means that those companies looking to acquire quality gold assets will be willing to pay a higher premium.
gold producer reserves value chart
There were very few companies in the junior resource space that used the latest downturn as an opportunity to acquire distressed assets on the cheap and add value to long-term shareholders. The companies that did so, and their shareholders, have already started to reap the rewards.
Poster Comment:
Two charts at source.