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Gwen Preston – “Maven Monday”

 

 

 

 

 

It’s not been a great few weeks for metals investors. Gold slipped back to $1250 per oz. against US dollar strength before regaining some ground. Stock markets are confusing, with tariffs and a flattening yield curve causing concern but continued good economic data (some of it from a flurry of orders before tariffs hit, but anyway) in the US keeping markets afloat…though well below their January highs.

 

Gold is acting like a US dollar-priced commodity and so has weakened. Against that, I optimistically point out that gold miners have stayed largely sideways. The year-to-date chart of the GDX shows that:

 

 

 

 

Whether a lack of selling in large cap gold miners against a sliding gold price is a sign of strength or might mark a bottom is the kind of topic that can be debated at length. I would say it does suggest that gold equity investors see better days ahead. Whether those days start next week – not so likely, as July is not usually a great month for gold – or next month, investors seem to be holding their positions and waiting.

 

The Maven Letter this week started with an announcement that I am sharing here today: I am launching a second newsletter and all Maven Letter subscribers will get it free of charge. I go through the what and why of that decision – and why I think you should pay attention to both publications.

 

Introducing Maven Metals

 

A big announcement this week for Maven readers: I am launching a second publication. And Maven Letter subscribers will get it free, as part of their subscription.

 

Let me explain my rationale.

 

The Maven Letter will remain my flagship publication. It will continue to carry up-to-date analysis of the metals space, from metal pricing and stockpile changes to exploration news and corporate deals. It will also host all the in-depth commentary I derive from site visits, whether about the realities of exploring in Colombia or the detailed geology of a project in Ghana.

 

But that depth of information is not appropriate for everyone.

 

And if I’m at all correct in expecting generalist investors to rotate into metals and miners over the next few years for this sector’s reliable outperformance late in economic cycles, all of these arriving generalist investors will need guidance suited to their levels of risk and knowledge.

 

As Maven Letter subscribers, you all know a good amount about metals: about geology, permitting, seasonality, politics, and so on. Alongside that knowledge, you have reasonably high tolerance for risk – you put up with the high risks of exploration and development for the chance at big returns.

 

Maven Metals – the new letter – will be more basic. Its editorials will explain how the sector works and why it outperforms the rest of the market late in economic cycles. It will explain the risk-reward balance inherent in this sector…but its recommendations will remain on the low-risk end of the spectrum.

 

While the articles will largely go through concepts you already understand, I would still suggest paying attention to the recommendations.

 

The concept will be the same as in the Maven Letter: the recommendations will be what I am buying and selling. It shouldn’t surprise that I also buy and sell the larger, lower-risk stocks of the mining space. Of course I get most excited about discovery stories with tight share structures, because the opportunity for a ten-bagger does that!

 

But ten-bagger opportunities only exist when the metals space as a whole is rising. And when that is the case, the sector’s low-risk entities also do well, leveraging metal price gains to rise 30 to 200% over a few months to a few years. And they do it with much, much less risk.

 

Let’s be honest: the exciting exploration stories that we buy are as likely to fail as to succeed. I use my knowledge and network to try and improve those odds but risk is inherent in exploration.

 

A few stock successes can easily overcome many more failures, as the wins are so significant, but the high-risk end of the metals market remains a game of odds. So if the market is moving up as a whole, every metals investor should also have in his or her portfolio bigger, more advanced companies that will ascend with the sector without all the risk.

 

That’s why I contend that Maven Letter subscribers should consider the recommendations in Maven Metals.

 

I also imagine all of us have friends and relatives who might be somewhat interested in metals or might be aware that resources offer outsize opportunity these days, but who know little about the space. If you do, I would ask you to suggest they subscribe to Maven Metals. For the number of letter writers and analysts in the mining space, there is very little out there that serves the lower risk, more novice investor. I intend to offer that product.
 

 

 

Setting the Scene

 

There’s a reason I’m doing this right now: because I expect metals to outperform the market in the near and medium term.

 

I’ve gone through this argument before.

 

  • Metals reliably outperform the market in the late phases of economic expansion, because of basic fundamentals: demand simply outstrips supply. This time around metals are entering that phase as one of the only undervalued sectors in the market, which amplifies the opportunity.
  • The stock market is highly valued and volatility and risk are increasing. In that context, metals & mining stocks offer rare fundamental value and upside
  • The energy metals movement is further fuelling this opportunity – from copper to cobalt, the world is very short of the metals essential to electrification

 

 

The metals argument is simple:

 

Global growth + rising inflation + insufficient metal supply
= Metals and mining stocks are set to soar.

 

 

And their outperformance will be all the more impressive against a broad stock market where returns are diminishing and risks rising.

 

As this argument gathers pace, investors of all types will turn to our sector. That is exactly what the space currently needs: new investors with new money. When this happens, when generalist investors flood into the mining space, the impacts are dramatic. Right now investor allocations to our space are historically low. A small increase in this allocation would mean billions flowing into miners.

 

 

 

 

Those dollars would help the ratio of miners to their metals return to something more normal. From 1983 to 2008 the XAU Philadelphia Gold & Silver Miners Index averaged a ration of 0.25 to spot gold. Today that ratio sits at 0.065.

 

 

 

 

There are some legitimate reasons for the ratio to be lower. Miners today in general have more shares outstanding, for one, and many miners misallocated reams of capital, which actively turned investors away from the space. But nevertheless the conclusion stands, taken from Sprott Global’s Trey Reik:

 

“We view the 75% decline in the relative valuation between prominent gold miners and their sole output (gold) as an investment opportunity offering compelling reversion-to-the-mean potential.”

 

Whether investors see opportunity in this kind of chart or whether they see a major copper supply deficit looming as electrification barrels ahead or whether they did well or missed out on previous metals bull markets – when this market gets going, there will be ample reasons for investors to rotate in.

 

That flood of interest means the mining space will offer opportunity across its spectrum, from large miners to tiny explorers. Every participating investor should know which part of that spectrum suits him or her best – but if your answer is High Risk Juniors, you should also include some low risk leverage in your portfolio.

 

 

Large miners and royalty players and the like offer a nice cushion of gains in a metals bull market by simply levering rising investor interest and metal price gains. And Maven Metals will provide guidance on exactly that.

Posted July 10, 2018

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