The Gold Report:
Based on your technical analysis, you called the bear market in
December 2007 and the bottom, followed by a rally in February
2009, weeks before the market turned. Your Daily Gold Premium
market portfolio was up 10.5% in June of this year compared to an
overall junior gold stock market that was down 9.5% during the
same time. How have you fared in the last five months and what
trends are you seeing in the next year?
At the end of last week, our premium service model portfolio was
up about 9% on the year. Market Vectors Junior Gold Miners ETF
(GDXJ:NYSEArca), the junior gold stock exchange-traded fund (
) I use to compare performance, was down about 18% and Market
Vectors Gold Miners ETF (GDX:NYSEArca), the large-cap gold stock
ETF, was down about 1%. The last few months have been difficult
for a lot of equities. As far as the trends, I try to focus on
relative strength. The large-cap gold stocks have been
consolidating for most of the year. Silver had that intermediate
top early in the year with a parabolic blowoff move. Since then
I've been focusing more on gold. In the near term and into next
year it looks like gold is going to outperform silver. The larger
gold stocks have been showing better performance than silver
stocks and juniors. Relative strength is very important. You've
got to find and focus on the leaders because they will lead the
next move higher.
In a recent newsletter, you said that gold stocks are moving
closer and closer to a major breakout, which is likely to produce
a multiyear acceleration that would set the stage for the birth
of a bubble. Can you explain what you mean by that statement?
The Market Vectors Gold Miners ETF and the AMEX Gold BUGS Index,
used by some analysts, reflect the large-cap unhedged gold
stocks. They've been in a consolidation phase since the fourth
quarter of last year. Even a three- to five-year chart shows that
the consolidation has been in a tight range, which is generally
bullish. Every time the consolidation makes a low or goes to the
bottom area, the weak hands are selling out. So, the stronger
hands accumulate more and more shares and eventually the buying
demand overwhelms the selling and you get a very strong
Sentiment indicators, such as how much money is invested in
gold stocks, tell me that it's an under-owned sector. There may
be more and more people moving into the metals, and gold
specifically, but the gold stocks really haven't performed well
in the last year or two. So, if we get this breakout, it's going
to produce a strong move for probably two years.
A bubble would start after a strong move for a couple of years
followed by a long consolidation or a sharp pullback. The next
move higher would signal the beginning of a bubble. Looking at
market cycles and at other people's research, a lot of market
cycles tend to last 17 or 18 years. This bull market for precious
metals is in its 11th or 12th year-a point when it is going to
start to accelerate. So, we're not that not far away from the
beginning of the bubble, which could be in two to three
Did gold stocks really get that far ahead of themselves that they
needed to be in this long consolidation?
They did need to be in a long consolidation because we had a very
strong move from the 2008 bottom. Market Vectors Junior Gold
Miners ETF went from about 15 to 65. That's a large move in only
about two years. After a very strong advance, it takes a lot of
time to work off the overbought condition. It can be worked off
either as a sharp, short correction or over time with
consolidation. Market Vectors Junior Gold Miners ETF or the AMEX
Gold BUGS Index has not had a sharp correction to work off those
huge gains. So, the consolidation has gone on over time. I do
think that these stocks are very undervalued, with improving
fundamentals. I look at the gold:oil ratio as a leading indicator
for what kind of margins you could expect for the gold producers.
Oil represents 25% of the cost of mining, so, it's critical that
silver or gold outperform oil and do better than the other cost
The performance of the juniors versus the established companies
seems to indicate that there's not much speculative interest yet
in the juniors. What's going to happen there?
That's a great point. The sector is still very under-owned and
the juniors are underperforming. It also depends on how you
classify the juniors. Personally, I prefer the established
juniors-companies maybe with a $200 million (
) market cap or a little larger, because at that point you know
that they've made it. The true juniors, with a $20-30M market cap
are stocks that are really risky. They perform well when you get
a huge increase in speculation, as we saw in '06 and '07 and
obviously, early '09 when everything came off the bottom.
That sector of the market should do very well in the next
couple of years and when the bubble begins. A lot of people who
invest in those types of situations just assume that because gold
is going up, juniors automatically do well and you can pick these
penny stocks that are going to go up fivefold or tenfold
immediately. To be really significant, a junior has to find well
over a million ounces (Moz) in a good area where there are no
political and permitting issues. Or a junior needs to be able to
put one large mine into production or multiple smaller mines.
The junior gold index in your newsletter shows a descending
triple-top pattern. Is that building into an upside breakout or
will it continue going to lower highs?
I do think the bottom is in. My index classifies juniors. A lot
of the companies in my index were juniors two years ago and
they've been very successful, so the average market cap may now
be $500M to $1 billion (
). A junior index is going to go up over time and the companies
are not going to be cheap juniors forever. Let's just compare it
to Market Vectors Gold Miners ETF, which has been in a strong
consolidation where the lows have remained the same over time.
It's like a rectangle. My junior index has a downward sloping
channel, with lower lows and lower highs. But, I do think the
index has bottomed and it had a nice rally in the last month.
It's just going to take a little bit of time for it to work its
way back up to the highs. Obviously, I believe the large caps are
going to break out first, followed by my junior index, and then
the true juniors and the exploration plays.
You have a model portfolio in your publication with a pretty
broad cross-section of resource stocks. Tell us a little about
your selection criteria for assembling this portfolio.
We look for a combination of strong fundamentals, technicals and
management teams with a proven track record. We want companies
that are well funded and are not going to do a dilutive financing
anytime soon that puts pressure on the shares. We like companies
that are involved in the right areas including Alaska, Nevada and
some very successful ones in Mexico. Fundamentally, we're looking
for good value. If it's a producer, we're looking at cash flow.
If it's not a producer, it's the price per ounce in the ground,
the potential for expansion and the potential profitability of
the project should it become a mine. If a company is in a good
area, it may get taken over, as a couple of our stocks have been
and that's why they're no longer in the portfolio.
Technically, a lot of mining share prices consolidate for a
long time and then have a very strong move higher. You don't want
to buy anything that has gone up too far, too fast because that's
very dangerous. At the same time, we don't want to buy anything
that is showing persistent relative weakness, because if it keeps
trending down, there's a reason. There are more sellers than
buyers and the company is not doing enough to attract more
buyers. This is a pretty strict criterion for us, which is why
we've had decent performance in a year that's been difficult for
a lot of people. I don't want to have more than 15 companies in
the portfolio and right now we have 11.
Two of your most recent additions are Franco-Nevada Corp.
(FNV:TSX) at the high end of the price spectrum and Corvus Gold
Inc. (KOR:TSX) at the low end. Why did you add those now?
I decided to add Franco recently when I believed the market was
bottoming. It was an easy call because it's been a great company
and a great performing stock over the last couple of years in
terms of relative strength. It makes new highs ahead of its
peers. It came down from about $48 to $34. We got in at $35.
Today, the stock was trading close to $42. You want to buy this
type of company when it has a correction like that. That's why we
bought Franco rather than a risky junior.
Corvus is following the project generator model. I have
visited all of the company's projects. Its flagship is the North
Bullfrog project in Nevada and it also has a portfolio of
projects in Alaska, which it has joint ventured out. Corvus
Gold's management team has a tremendous history. It ran
International Tower Hill Mines (ITH:TSX; THM:NYSE.A), which made
a substantial discovery in Alaska. The head of Corvus, Jeff
Pontius, and his partner Russell Myers have worked together for a
long time and had huge success with Tower Hill and have since
moved onto Corvus.
When we recommended Corvus, it had about a $20M market cap
with $8M in cash. The new NI 43-101 on North Bullfrog shows 1.4
Moz Inferred and I think there's potential there for more than 2
Moz. Corvus also has the Terra project in Alaska where its joint
venture partner is going to start small-scale production next
year giving them some near-term cash flow. When we visited the
project last summer, the company was just about to begin
constructing the mill. Corvus also has another project in Alaska
called the Chisna project, where the scenario is really
spectacular and some good drilling results were reported a few
days ago. With the amount of cash it has, Corvus is not going to
need to raise money any time soon. I'm just really optimistic
about Corvus and if someone has a two- or three-year timeframe, I
think this is one of the top speculations in my book.
First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:Fkft), Fortuna
Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BLV) and Argonaut Gold
Inc. (AR:TSX) have been your top portfolio performers, in that
order. What are your expectations for them now?
I'm more optimistic on Argonaut and Fortuna Silver than First
Majestic, which has been a huge winner for us. The relative
performance of First Majestic has really tailed off in the last
few months. Remember this company had a massive rise in its share
price in the last 18 months or so. When you have a very strong
rise like that, it's going to take some time to digest those
Fortuna Silver has a new mine in Mexico called the San Jose,
which began commercial production in September. Its silver
production is going to see substantial growth in the near future.
Fortuna Silver has been the strongest silver stock this year. In
2008 and 2009, Silver Wheaton Corp. (SLW:TSX; SLW:NYSE) was the
best performer. From the second half of 2010 until a couple of
months ago, First Majestic was the strongest performer.
I have a hunch that in the next 12 months or so, Fortuna
Silver could be the big winner in the silver group. The company
has very strong fundamentals, is making a lot of money and has
tons of cash.
Argonaut Gold came to the portfolio from Pediment Gold because
Argonaut Gold acquired Pediment, which was a recommendation of
ours back in late 2009. Argonaut is showing exceptional relative
strength and a few days ago made a new 52-week high. The stock
has been trending higher this year while most juniors have been
trending down and large caps trending sideways. Argonaut has
fantastic management. It's the former management team that was
with Meridian Gold when they sold Meridian a couple of years ago
to Yamana Gold (YRI:TSX; AUY:NYSE; YAU:LSE) for about $4B.
When Argonaut acquired Pediment, the market cap of the company
was around $300M. Here's a management team that sold a previous
company for $4-5B and now they're starting up a new company with
a low market cap. Argonaut is a textbook example of a company
that we see becoming $1B market cap some day.
Argonaut has one mine in production at about 75,000 ounces a
year. It has two other projects, which it acquired from Pediment.
I believe both of these projects are going into production in the
next 24 months. The company is highly profitable, has a lot of
cash and has warrants out that will bring it a significant amount
of cash. It's a really fantastic company and it continues to be
my favorite gold stock.
Which other ones do you like in your portfolio at this point?
On the silver side, I also like Endeavour Silver Corp. (EDR:TSX;
NYSE:EXK). It's been a very strong performing stock. Endeavour's
relative strength is right there next to Fortuna. It's a
profitable company that has grown very consistently, both
financially and operationally, over the years. It has two mines
in production and over $100M in working capital, mostly cash. I
believe the company is going to need to make an acquisition at
some point to get a third mine into production.
We do have a couple more speculative ones in the portfolio.
One is a company named CMC Metals Ltd. (CMB:TSX.V), with a market
cap of only about $15M and about $2M in cash. The company's focus
is on two properties. The Silver Hart project in the Yukon is a
very high-grade silver property with significant base metals. A
year ago, it took a bulk sample from it and received a nice
amount of cash flow. This summer it extracted a 1,700-ton bulk
sample with a grade that could be 100 ounces per ton
(oz/t)-potentially 170,000 oz silver, which could gross the
company about $5M with a $3M profit. CMC could do similar bulk
samples for the next couple of summers.
Earlier this year, CMC acquired 50% of a past producing gold
mine in California called the Radcliff mine in the Death Valley
area. Echo Bay Mines owned Radcliff in the early 1990s and had an
internal resource estimate (non NI 43-101 compliant) of about
280,000 oz gold. Some 100,000 of that is high grade at about 0.75
oz/ton gold. CMC Metals also owns a mill nearby called the Bishop
Mill. It has partnered with the private company that owns the
other 50% of this operation. Ore has already been stockpiled
there and CMC is looking to start milling in the next couple of
months. We should probably hear more news in the coming weeks or
after the holidays.
If CMC is able to get this gold production up and running,
it's going to be very profitable with substantial cash flow
relative to its market cap. This is a speculative stock, which is
trading well off its highs. I believe it has limited downside
with upside potential that could produce a five or tenbagger.
But, this is one that you really need to do your own research
Is there anything else you'd like to mention or any final
thoughts that our readers can take away as to how they should be
playing this current market situation?
We've had a difficult year but I think we're coming to the end of
the sector consolidation. Market Vectors Gold Miners ETF has a
strong support that's well defined. Over the next month or so,
I'm expecting more consolidation, but with an upward bias. In the
next three months, you should probably expect a breakout to new
highs. At that point you're going to see a lot of the juniors
start to get a bid and perform better. But, right now I think you
want to focus on the more established companies that are showing
some relative strength. Make a list and look to accumulate your
favorite stocks on weakness.
And, wait for the year-end selling to subside.
That is also true with juniors who've had a tough year. There's
probably going to be some tax-loss selling there. So, that's
definitely something to keep in mind.
Thank you for your insights and for some very good ideas.
Thanks for having me.
Jordan Roy-Byrne, CMT, is a Chartered Market Technician, a
member of the Market Technicians Association and a former
official contributor to the CME Group, the largest futures
exchange in the world. He is the editor of
. His work has been featured in CNBC,
Barrons, Financial Times, Alphaville, Yahoo Finance,
BusinessInsider, 321gold, Gold-Eagle, FinancialSense, GoldSeek
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1) Zig Lambo of
The Gold Report
conducted this interview. He personally and/or his family own
shares of the following companies mentioned in this interview:
2) The following companies mentioned in the interview are
The Gold Report:
Franco-Nevada Corp., Fortuna Silver Mines Inc., Argonaut Gold
3) Jordan Roy-Byrne: I personally and/or my family own shares of
the following companies mentioned in this interview: Argonaut
Gold Inc. and Franco-Nevada Corp.
4) Argonaut Gold Inc., Corvus Gold Inc. and CMC Metals Ltd. are
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