As Gold Takes Breather From Breaching New Highs Key Questions are How Much Higher and How Much Longer
The price of gold has been in retraction mode since breaching a new all-time high of $US2,070.05 on Aug. 6, 2020, but anyone who thinks this marks the end of Gold’s current bull run isn’t paying close attention. Sure, gold has dropped almost 8% (as of Aug. 25) since that recent all-time high, and the price may even revisit the previous all-time high of $US1,869.90 that marked the end of the last gold bull run on September 6, 2011. But we posit that this just marks a pause in the action and that it won’t take much for gold prices to find renewed vigor and soon be reaching for ever new highs. We also believe that the juniors will prove to be major beneficiaries of what we predict will be a long-sustained bull run in gold.
And we’re not the only ones who foresee this sustained bull run. Consider that the world’s most savvy and successful investor recently took a first-time ever position in the gold sector by purchasing 20.9 million shares in the world’s largest gold mining company. This is an investor who has long eschewed gold because it “has no utility,” and who is known for almost always investing for the long term. Warren Buffett, you’d likely agree, is no dummy, and his purchase of a 1.2% stake in Barrick Gold (NYSE: GOLD) at share prices close to all-time highs speaks volumes. Not only did Buffett reverse his long-term disdain for the precious metal, but he did so while ignoring one of his own mantras of buying company shares when downtrodden.
Far More to the Gold Story Than Buffett’s Entry Into Sector
Buffett’s Aug. 14th play on GOLD seemed to drive a nice pop for the share price, overall sector, and commodity, but the pop has since proved short-lived as prices for all three have been in relative decline since Aug. 18th. But, really, a few days or even weeks does not typically break a bull market. We believe the current downdraft is a continuation of declines that started on Aug. 6th, as a correction of sorts to the sustained 15% price surge gold pushed out since July 16th (25% year to date). We expect gold’s rally to continue in short order, given a number of important catalysts currently in play within the sector.
First off, nothing has really changed with gold since we reported on its strength and positive outlook in our June 26th blog “Gilded Explorers: Trillium Gold Mines.” Governments continue to print “Monopoly” money which will sooner or later give rise to the spectre of inflation, which will almost assuredly drive investors to safe havens like gold. Meanwhile, gold miners are enjoying the highest operating margins they’ve seen in four decades, and, despite calls from analysts to protect these margins by hedging, producers on the whole seem utterly disinclined to do so. This strongly suggests that mining executives are betting that gold is just in the nascent period of what will be a long, strong, sustained rally.
Decline in Reserves, Lack of New Discoveries Boon for Junior Miners
A rising tide lifts all boats, but there are many indications that this new bull market in gold will be especially beneficial for the junior mining companies. The two most powerful factors that will drive share price increases for small cap and microcap mining companies are a decline in gold reserves and lack of new gold discoveries. This is a result in part to the recent bear market in gold, which led to a decrease in exploration budgets. While these two factors represent a potential millstone to major producers they provide opportunity to the juniors. Consider that no mining companies have made a major gold discovery in the past three years and that only 25 significant gold deposits have been discovered over the past decade. While the majors are still pulling gold out of proven reserves, they face the prospect of dwindling flows from their aging mines. Meanwhile, junior mining companies are significantly ramping up exploration aided by hundreds of millions in new financing.
In fact, the ramping up of new exploration is already approaching levels not seen since the last gold bull market ended in 2011. With the major mining companies concerned about their reserves, any discoveries by a junior company will likely instigate a proverbial gold rush into small cap and microcap gold mining companies.
Warren Buffett’s recent entry into gold may have put a spotlight on the major gold mining companies, but their future success is dependent in part on finding new gold and increasing gold reserves. That’s where the junior mining companies come into play, and likely where this bull market’s biggest surges in share prices will occur.
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