A renewed bull market for bullion and gold equities is fast-emerging against a global backdrop of economic doom and gloom.
Investors are piling into gold-backed exchange-traded funds (ETFs), physical gold and long-neglected gold mining companies, especially ones that own rich deposits. In fact, gold prices have risen around 15% in the past six weeks alone. And quality gold stocks have done far better.
Equities aside, investors are once again embracing gold’s historical role as a safe-haven hedge against economic meltdowns and as a reverse proxy for the greenback.
Bullion’s resurgent trajectory has been so pronounced that it blew through a technical resistance level of US $1,200 an ounce with ease last week. Now some experts are suggesting that this well-primed bull rally for gold may be far from over.
They include Paul Ciana, a technical strategist for Bank of America Merrill Lynch, who foresees a possible near-term jump to US $1,550 an ounce.
Among those gold stocks that have been on a tear lately is the ultimate poster body for the gold industry, Barrick Gold, which is the world’s largest producer. Its share price has more than doubled since October to around US $12.
Notably, the few remaining gold juniors that have sizeable gold assets and are still cashed-up have been particularly strong performers, too. (More on this in a moment.)
However, are the fundamentals in favour of continued upwards momentum for bullion and gold equities really that compelling? To answer that question, let’s consider the litany of economic troubles that have hammered global stock markets in recent weeks.
First, Federal Reserve Board Chair Janet Yellen dashed any remaining hope for interest hikes this yearduring her semi-annual congressional testimony last week.She even hinted that the feds may experiment with negative interest rates. Already, Japanese and European banks have taken this unprecedented, desperate step to stimulate their stumbling economies.
Additionally, investors are fretting over the health of China’s economy, plunging oil prices, a weakening U.S. dollar and new worries aboutEurope’s drawn-out sovereignty debt crisis. All of which suggest that we’re on the cusp of a global recession.
The massing of so many storm clouds has driven the bellwether S&P 5oo index and the Dow Jones industrial average down as much as 10% so far this year.
This is why some of the smart money (as well as fearful money) is flocking to gold holdings as a hedge against all these potentially calamitous events. So says James Butterfill, head of research at the global asset management firm, ETF Securities.
“Investors are returning to gold as a core diversifier and safe-haven investment,” he says. “Given the increasingly challenging investment and economic environment, we expect this trend to continue.”
However, many investors are achieving considerable leverage over bullion’s ascendant spot price by buying certain undervalued, over-sold gold juniors. In terms of percentage growth, some of these stocks have risen 50% or more in recent weeks.
One such example is Exeter Resource, which until now had been languishing in a four-year bear market, along with its peers.
It has around US $17 million in the bank and no debt. It also benefits from a successful management team that sold another of its gold/silver exploration companies, Extorre Gold Mines, to mining heavyweight Yamana Gold for CDN $414 million in 2012.
Most importantly, Exeter owns by far the largest undeveloped gold discovery in Latin America in recent years – the sprawling Caspiche deposit in Chile – which hosts a massive mineral resource of almost 40 million gold ‘equivalent’ ounces. (The ‘equivalent’ term refers to its combined gold, silver and copper content).
This deposit benefits from an oxide cap consisting of 1.7 million gold ounces that’s both literally and figuratively the icing on the cake. By way of explanation, this near-surface component of the Caspiche deposit can be mined for a low projected all-in sustaining cash cost (AISC) of $676 an ounce.
By comparison, many of the world’s major miners are paying upwards of $1,000 an ounce (ASIC) to extract gold, which today makes for perilously low profit margins at best.
Logistically, Caspiche’s oxide gold cap can be mined by way of heap leaching (a relatively inexpensive and uncomplicated process to separate valuable metals from its host rocks). An average of 148,000 ounces of gold per annum is expected to be mined this way for the first five years, and 122,000 ounces a year over the life of the oxide zone.
The Caspiche deposit has another big advantage by way of a higher grade gold-copper zone within the larger overall deposit. Also, Exeter has recently outlined low, initial capital cost mining options that start with the oxide gold zone, then transition to mining the higher grade gold-copper zone.
One of these mining options projects an average of 344,000 gold equivalent ounces per annum to be produced over an anticipated 42-year mine, mindful of the fact that the deeper and far more plentiful sulphide-based ore promises to be more expensive to extract.
The economics in favour of Caspiche becoming a profitable mine are further sweetened by its fortunate location among a cluster of lucrative gold mines in one of the world’s most lustrous mineral belts. This is where over 100 million ounces of gold have been discovered to date. Hence, the region has ample mining infrastructure already in place, which translates into the prospect of additional cost-cutting synergies.
The Maricunga gold belt also offers another key geopolitical advantage to wary gold stock investors. Specifically, Chile is a politically stable democracy that has long been mining-friendly, especially since this capital-intensive industry has long been the backbone of its economy.
What matters most is that this monster deposit offers a very scalable production profile -- one that promises good output at a low cost for the first few years. And low-cost mines are what the mining industry desperately needs right now.
Nonetheless, the stock has been heavily oversold over the past several years. With that in mind, it still represents a rich vein of opportunity for speculators who see the potential for considerably more upside for Exeter in the near-term. This explains why Exeter’s share price has already appreciated more than 50% in recent weeks.
Exeter isn’t the only instance of top-tier gold mining developers that have rich assets, proven management and healthy treasuries. Elsewhere in the world, Novagold Resources, has two company-maker deposits in Alaska with combined resources of over 31 million ounces of gold. But Novagold’s share price is comparatively expensive.