Tuesday, June 14, 2016

Bull Market in Australian Gold Mining Shares

It has been a long time since I've written about gold mining shares, but thought I would touch on them briefly given the explosive upside action we've seen over the past 6 months.

I posted the following on Twitter late last year highlighting the bull market in gold stocks:
I put my money where my mouth is having bought Silver Lake Resources (SLR) in July and Medusa Mining (MML) in September (first two since adding Norther Star Resources, NST, in 2013):
These have paid off nicely with MML's share price sitting at almost double my entry price and SLR over triple (both still being outperformed by my position in NST which is up more than 7 fold since I bought in 2013).

Decent gains already, so is it too late to buy now? Andrew Mudie of The Motley Fool thinks so:
"Call me crazy, but with the numbers above, I think it’s too late to jump into gold stocks. Of course, the major risk to that theory is that any of the six issues above has a big impact and results in a huge flight to safety for money all over the globe. If this does happen, however, I believe equity markets as a whole will retreat (even gold stocks) so placing all your eggs in the gold basket could be risky too."
And looking at the performance of the XGD (S&P/ASX All Ordinaries Gold Index), suggests the bull run may be getting long in the tooth...

2008 - 2011: XGD increased around 200% over 2.5 years.

Click Chart to Enlarge
2014 - 2016: XGD increased around 180% over 1.5 years.

Click Chart to Enlarge
It is understandable that some would look at the recent performance of gold mining stocks, especially the past 6 months which has seen the XGD increase over 105% compared with the XJO (ASX 200) which has barely broken even, and consider it an opportunity missed.

Click Chart to Enlarge
However, my view is that this bull market in gold stocks is only just getting started. That doesn't mean I think you should go and dump your entire life savings into gold stocks tomorrow (all your eggs in one basket as Mudie puts it), but I do think it's worthwhile having a healthy allocation to precious metals in the current environment and a portion of that allocated to the more speculative miners. You could stagger your entry, as Houses and Holes put it on Macro Business today...
"The prospect of a convergent Brexit and Chinese slowdown should leave Aussie gold investor breathless given it will both boost the yellow metal and trash the AUD.

All pull backs on gold now are buying opportunities with the usual caveat that if risk really does get trashed at some point then the flight to safety to the US dollar may hit gold short term. In that even it’s buy with both hands time given it is also the signal for imminent QE4."
Here's some further points to consider:
  • The XGD is still 44% below the highs of the 2011 peak (mind you, many companies in the index would have seen shares on issue rise), while the Australian price of gold is less than 5% lower than it's all time high.
  • While the XGD has been trending higher for 1.5 years, gold miners elsewhere (e.g. HUI Gold Index) only bottomed 6 months ago. XGD is likely to follow global sentiment in gold miners.
  • Gold is likely in the early stages of a new cyclical bull market, which I still expect will culminate in a bubble phase (to the secular bull market) at multiples of the current price. Gold shares will follow.
  • The XGD spent longer basing before this recent move higher (compared with the 2008/2009 bottom which was a sharp 'v' spike lower and higher).
While the XGD doesn't go back that far (it was only launched in 2006) we can see that over the course of the bull market in gold there have been longer and strong runs in gold stocks. For example the HUI rose more than 6 fold over 3 years in the early 00's and there are many indicators which suggest gold and related stocks reset to (oversold) sentiment levels from that era. Also, Australian gold mining companies such as Newcrest Mining (NCM) have shown in the past that they can run strong for more years than a couple:

Click Chart to Enlarge
I was a very active speculator in gold and silver explorers and miners over 2009 to 2011. I made a small fortune, then lost a good portion of my profits in the downturn that followed. Some of that is documented here on my blog as well as the Hot Copper forum where I was a regular poster at the time. Some examples of success included, riding Cobar Consolidated Resources (CCU) from 6c and selling out between 60c and $1 (my first 'ten bagger'), trading in and out of Silver Lake Resources (SLR) several times from 30c to several dollars, riding White Cliff Minerals (WCN) from around 8c and selling out near 30c... and that was just a few (of many multibaggers I had). Sadly toward the end of the boom in gold/silver miners I got burned by several that reduced my net profit in the sector substantially, these included Castlemaine Goldfields (CGT), which lost over 50% of it's value very quickly when the mine startup didn't go to plan and I sunk some capital into Bassari Resources (BSR) options, which expired worthless.

I am playing the market a little more conservatively this time around and have concentrated on mid-caps which are already producing gold profitably, but are leveraged to the price of gold should it continue to rise. I am considering adding some juniors, particularly those with exposure to silver.

I don't know that I will get back to writing the long research articles I have in the past for those companies I am buying/own, but here are a few tips for those looking into the sector (learn from my successes and mistakes):
  • I found Gold Nerds an invaluable resource for sorting through prospective gold shares a few years ago. Not subscribed currently, but likely to re-subscribe in the near future.
  • For juniors, focus on those which are proving up resources/reserves rather than those about to start production (poor grades through a new mill poses much greater threat to share price than a few bad drill holes).
  • Look for companies with low or no debt, tight capital structure and avoid those using speculative financing strategies (such as issuing shares for capital), see Gold Anomaly (GOA, now CGN) for an example of what happens...
  • Don't hold the gold miners once you think a medium term top for gold prices are near or in, no matter how solid you think the company fundamentals are.
  • A gold bar won't ever be worthless, but a gold miner can be, don't invest capital in miners which you aren't prepared to lose in it's entirety.
& finally, keep this old nugget in the back of your mind at all times:

"A gold mine is a hole in the ground with a liar standing on top of it."

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