As longtime readers know, Doug is a legendary speculator who’s made a fortune in the gold sector. He says this year’s rise in gold is just the beginning… and now’s the time to take advantage.
Below, Doug tells me why…
Chris: Doug, as you know, gold is on the rise. Do you see this trend continuing? And if so, what’s a specific catalyst that could send the gold price – and gold stocks – higher?
Doug: Oddly, even as gold has moved from $1,100 to $1,500, these crappy little junior mining stocks, the explorers and developers, have gone nowhere… But the big ones have done okay.
Why might that be? It may be because they’re just too small. In a world where big companies have market caps from $500 billion to a trillion, junior miners aren’t even small caps. They’re not even micro caps. They’re nano caps – some are almost picocaps. They don’t even exist as a viable asset class for fund managers. And professional managers are much more important than in the past.
The whole world has become very financialized. It’s one consequence of the many trillions of new currency units that have been created since the crisis started in 2007; most of that money has flowed into stocks, bonds, some types of real estate, and various institutional financial products. The public no longer buys individual stocks. They buy ETFs, mutual funds, and things of that nature. But those vehicles, and institutions like pension funds, can’t buy small, risky stocks. They don’t qualify under the “prudent man” rule for fund managers. They’re too small to assign an analyst to. Big brokers even loathe to let individuals buy them. This has actually created a very big opportunity.
They are very under-owned relative to what they have been in the past, and relative to the price of gold. This has created a particularly good opportunity to run counter to the trend and get into small resource stocks.
Chris: Got it. Is there anything to keep in mind when speculating on gold stocks?
Doug: Mining is one of the worst businesses in the world. Even if you get lucky and find a deposit, you have to spend much more money developing it, to show that it may be economic. Let me emphasize the “may be economic.” And if it seems to be, after tens or hundreds of millions in drilling and engineering, then you build the mine. Which may cost billions. And your troubles have just started…
The problem is that all of this investment is upfront – cashflow is always years in the future, if it ever comes. An additional danger is that most of the governments in the world are bankrupt today… they’re greedy to charge taxes, royalties, fees, and various shakedowns. The only good news is that governments will no longer try to confiscate your mine and try to run it the way they did before the Soviet Union collapsed – they’re pretty stupid, but they’re not that stupid anymore. They’ve learned that nationalizing something and trying to run it the way the Soviets or the Chinese did before Deng Xiaoping, is just asking for trouble. Nationalization is no longer a risk; they want to keep people around that know how to run the mine. The risk today is that they will tax it, directly and indirectly, as much as they possibly can. The current political environment, plus increasing “save the planet” ecohysteria, makes mining stocks more like burning matches than ever. Mining’s been the crappiest industry in the world since World War 2, but now it’s really dangerous politically, too.
In the past, you never had to worry about NGOs [non-governmental organizations]. You know, professional do-gooders – they didn’t really exist until the ’60s. Now there are thousands of them and they love to zero in on mining as one of the most evil industries.
In the past, you never had to worry about the so-called indigenous people. They weren’t an element. Somewhat later on, they were happy to see the miners come in because they might actually give them a job, teach them something, and make their worthless, middle-of-nowhere land worth something. But now they’ve learned to perform shakedowns.
These are among the many political factors that make mining a really bad business. The problem is, if you want civilization, you need the things that are mined. The industrial world is created out of things like nickel, copper, aluminum, lead, zinc, cobalt, iron and all the other elements. Most of the 92 naturally occurring elements, and most of their compounds, are mined. They don’t magically appear. In any event it’s becoming more unprofitable and expensive to mine. And that’s very destructive of progress itself.
Chris: How can mining be such a bad business yet present such a big money-making opportunity?
Doug: Well, right now, copper is a good example. For years, the world has been using more copper every year than has been discovered. Most of the copper mines in the world are old and running down. When the ore is gone in a deposit, you’d better have another one.
And as the world uses more copper every year, copper usage has been growing two or three percent per year forever. You’ve got to mine that much more copper every year. But who wants to make the huge investment that’s necessary in order to do that, to take it from discovery to production? Nobody with any sense, at least at current metal prices.
Where does this end up? At some point, there’s going to be a real supply/demand squeeze and the price of, not just copper, but all of these metals, is going to explode because they’re almost all in exactly the same position. That makes now a very good time to get interested. The fundamentals that I’ve been talking about, from the political problems to the supply/demand situation, are all pointing in the same direction. The supply is actually starting to drop for most metals while the demand continues to go up.
Another factor is that right now it’s hard to make any money mining. I mean, yes, you can make some money, but not a lot, adjusted for risk and the time value of money. Most mines are marginal; most metals are selling at or even below their true cost of production in most mines. There’s going to be a real supply/demand squeeze. I’m not saying tomorrow morning or even next year, but it’s going to happen. When it does the psychology of investors will change radically.
Mining stocks can again become the new darlings, which they have been a number of times in the past. There was a time, about 30 years ago, when all the oil companies wanted to buy mining companies. And they did, for outrageous prices. Of course, although oil and mining are both resource businesses, they’re totally different in character. It was a disaster for the oil companies to buy the mining companies, certainly during a price bubble. But metals and mining companies are ultra-cyclical; there have been a number of bubbles in the past, and there’ll be bubbles again in the future – as hard as it is to imagine now, during what’s been one of the longest and worst “busts” in mining history. I’m looking forward to the next bubble. They’re great fun.
Chris: Sounds like everything is lining up for mining stocks right now. Is there anything else interesting happening in the sector today?
Doug: The world has totally changed from the days when a couple of prospectors with a mule would go out and find a fortune. The Treasure of Sierra Madre days are long gone. And so is all the low-hanging fruit. People have been looking for metals since day one of civilization, and the easy to find high-grade stuff sitting on the surface has almost all been discovered.
What’s left is mostly in places that are politically challenging. Places you want to avoid because the natives make it impossible to do anything.
When you do find a deposit today, it’s likely very low grade. In Roman times you could only really mine ultra high-grade deposits, an ounce or maybe a minimum of half an ounce per ton. Or perhaps placer deposits. Now you can mine not even a 10th of an ounce, you can mine deposits that are 100th of an ounce per ton. 2,000 pounds of rock have to be transported, crushed, and treated to recover just a teeny weeny bit of metal. Doing that is necessarily very high tech, and very capital intensive.
The methods of finding metal are more and more high tech using satellite imaging, geochemistry, geomagnetics, geostatistics and all kinds of things far beyond gut feel and eyeballing things the way prospectors used to do.
Chris: Now, longtime readers know that you have a proven method when it comes to evaluating the best resource stocks in the world: the “Nine Ps”…
Is it time to add a 10th P to address the new tech entering the sector?
Doug: That’s a good question. Dave Forest, who writes our International Speculator newsletter, is an active geologist, and always looking for new science that can be applied in the field. No doubt mines are going to become even larger scale, and lower grade. You’ll have to process ever more rock to get a given amount of metal. That means they’ll have to be even higher tech, and higher in capital costs.
Here’s the takeaway of all this. The 2,000 or so publicly traded explorers, developers, and junior miners are the source of the great majority of future economic deposits. The big companies do very little exploring. When the market gets hot for them again – right now there are very few people who even know they exist, much less care – the whole sector could go wild. The sector as a whole could go 10-1, with some standout companies going 100-1. Some even more. It’s happened in the past, and I’ve owned several of them.
But nothing, including markets, lasts forever. In the future, we’re going to mine the asteroid belt. That’s still a couple of decades away, but that’s where all the metals are going to come from in the future. One of the advantages to that is working in a zero-gravity environment, where pollution and energy are non-problems. In addition, the asteroids themselves are ultra-high purity and grade deposits. That’s where mining is headed and it’ll change everything. But how long from now is that going to be? I’ll guess a couple of decades.
The Greater Depression will likely hurt consumption of base metals but it’s going to help gold; I’m reasonably confident gold is going to be re-instituted as day-to-day money. I’ve touched on various factors on the base metals, but I’m generally much more bullish on gold.
All of the world’s governments are continuing to print up money by the bushel basket full. Not just the US, but all over the world. And as this goes on, it’s going to evidence itself in retail inflation. At the same time both stocks and the bond markets, which are at all time highs, could collapse. People will panic out of securities. Where are they going to go? I think they are going to panic into gold. And gold mining stocks in general, and small explorers and developers in particular, should be huge beneficiaries.
I’m a buyer.
Chris: Great stuff. Thanks, Doug.
Doug: You’re welcome.
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I’ve been in for a few months now-which probably means it soon tanks.
Gold is and always has been a YA Tittle pass….LONG.
But…as the dog said when they cut his tail off… “It won’t be long now”. …good move CC.
Dollar Cost Averaging. I started purchasing metals at the low end following the 2008-9 debacle…but I continued to buy all the way up to the tippy top peak. My only solace was dollar cost averaging between the low and the high. The day silver goes back to $50 bucks (gold 2k)..I’ll be one happy camper. (but the world may be in the crapper. Oh Well.)
See Bee,
Just don’t sell. They are going much higher.
“I’m reasonably confident gold will be re-instituted as day-to-day money.”
No, it won’t. PM will be hoarded. I’ll tell you why.
When gold shoots the Moon everyone will want some. Poor folks will be left behind and in the midst of an economic slowdown it will be hard to come by. There’s too much talk of an SDR or gold-backed currency as the central banks will have TONS of metal on hand. The banks will re-value gold just like Roosevelt did and most of it will be removed from circulation, then digitized and re-distributed as a globalist e-currency much like SchittCoin.
Miners that have a good balance sheet and reliable production will have excellent profits. I have a bunch of undervalued Hecla shares. If, or when HL management clears up their problems it could be a fairly profitable stock to own, but not until silver goes above $20 and gold hits a new high.
Physical gold is not an “investment” or a vehicle to “trade”. It’s an intergenerational insurance policy. Want to invest? Buy stocks. Want to trade? Buy pork belly futures. Physical gold is held and held tightly.
L.E.G.A.C.Y – W.E.A.L.T.H.
As always enjoyed your latest about the guy in the bar that heaved on his shirt. Will be passing it on to the old men at the dog park on Monday. The one about the Italian volunteer firemen has gained a lot of mileage.
PI,
True story for the old men in the dog park…it’s kinda, sorta of a combo of both jokes.
I was 35 in 85 and had spent the night getting bombed ‘with the boys’. Didn’t do it often, but I did it all the way that night.
Thought I would sneak in at 3 am (I was supposed to be home about midnight), my wife is a sound sleeper. As I glided into the driveway with the engine turned off and lights off, to be super quite to stealthily sneak into the driveway, I ran into the garage door at about 5 miles an hour.
(Slight miscalculation in the drunken dark and our two dogs were now barking up a storm!)
When I opened the car door I stumbled getting out and fell over on my back…and like a turtle on his shell I couldn’t get up.
Then I started laughing…and I couldn’t stop.
Suddenly my wife was looking down at me with her arms tightly folded across her lovely bosom… giving me a look that could wither a cactus and said: ‘What happened asshole?’
I put on the most innocent expression I could muster and said in a thoughtful slur: “Bad Fakes”.
Then I started laughing uncontrollably again.
I would have slept on the couch…but I only made it to the kitchen floor.
Ahhhhh…the good ole days.
Cute story. And YES they were “good ole days”. Got lit up by a local PD in that time period. He comes to the window and says “Sir do you know you’re driving all over that double yellow line?” I said “Well, you try drivin’ with one eye closed.” He laughed and escorted me to the city line……..Different time. Different cops.
The precious metals markets have been rigged for a very long time. True price discovery is not allowed. I quit buying when the price hit $1,200 and haven’t bought in a long time. Buying gold in a rigged market is like playing the ponies in a rigged race, unless you know who the designated winner is, you stand the chance of getting screwed. What is the true price of an ounce of gold?
Mygirl,
“What is the true price of an ounce of gold”?
One interesting way to come to that determination outside the rigged markets is the Debt Clock.
That would put Gold & Silver in unrigged markets at:
Gold at $7,606.00 (fiat dollars) an ounce.
Silver at $918.00 (fiat dollars) an ounce.
(That would be high for Silver as the Gold to Silver ration is 8 to 1, and historically is around 15 to 1, but today it is all out of whack with Silver being way undervalued at around 90 to 1).
https://usdebtclock.org/
These are older articles but make strong points.
*Right now in Venezuela people are buying houses for an ounce of Gold. An ounce of Silver buys enough food for months (a good reason to have that ounce in junk pre-64 FDR dimes) that is 14 different transactions.
HOW MUCH IS GOLD REALLY WORTH?
“With that in mind let’s rephrase our original question. In other words, “How much is money worth?” In the simplest of terms, money is worth whatever it can be exchanged for. The value of money is in its purchasing power.”
* https://www.linkedin.com/pulse/single-ounce-gold-can-now-buy-house-venezuela-because-weissmann
Gold is fundamentally a bet on economic collapse. If you do buy gold, the metal, not the stocks or certificates, make sure you also buy some guns and ammo and build a food supply.
Are any of Doug’s earlier postings accessible? As and old guy whose Dad used to be in the hog raising business, I was very interested in the article about pork in China, particularly the comment thread.
I am too old to get back into the market even relatively safe puts and calls, but like to be alert to trends.
I respectfully disagree Robert…Gold bought in 99 was up 600% by 2010. It was the trade of the decade, and it will surpass that performance after 2020.
Buy some guns and ammo and build a food supply…then buy some silver…before you buy Gold.
Horses in front of the wagon.