A ‘potent mix’ for tiny gold stocks

Tuesday, 16 September 2019
Adelaide, Australia
By Bernd Struben

  • Putting the N.I.T.R.I.C. method to the test
  • ‘The takeover story’

Today we planned cast our net across three key commodities caught in the global spotlight.

Namely gold, oil and rare earths.

OK. Technically that’s 20 commodities. There are 17 metals in the rare earths category, after all. But I’m happy to lump the likes of dysprosium, lutetium and ytterbium in with their 14 cousins if you are.

However, with AFAU removing Friday’s broadcast of the ‘2019 Gold Mania Summit’ from their website tonight, we changed tack and opted to throw all the focus on gold. Tomorrow we’ll take up with the other two.

If you’ve been following along with Port Phillip Insider — or have watched the ‘2019 Gold Mania Summit’ — you’ll know the three primary drivers of the gold price. Those are basic supply and demand, gold as a safe haven in uncertain times, and central bank interest rate policies.

Last week we covered how zero-bound and negative interest rates are helping to spur gold into a third epic bull run. Or, as global strategist Jim Rickards and Australian gold expert Shae Russell say, the third gold mania phase.

With the US Fed likely to cut rates again when they meet tomorrow (tomorrow night Aussie time), gold should get another leg up in the early days of the third mania phase.

The drone attacks on Saudi Arabia’s oil fields over the weekend also gave gold a fresh boost. This time as a haven asset.

From the Australian Financial Review:

Gold gained 1 per cent on Monday after attacks on oil facilities in Saudi Arabia fuelled concerns of a further escalation in Middle East tensions and pushed investors towards safe-haven assets.

“The Saudi Arabian situation is driving gold prices higher as people are looking for havens, (watching out) for any negative fallout, both economic and political,” said George Gero, managing director at RBC Wealth Management.

At time of writing, gold’s eased back down just below US$1,500 per ounce. But there’s a growing consensus among commodity analysts that gold’s bull run has a lot further to run.

Citibank’s commodity research team, for example, is forecasting gold at US$2,000 per ounce inside two to three years. TD Securities has targeted US$1,650 by end of 2020.

Shae Russell and Jim Rickards are even more bullish on the yellow metal. They forecast gold will hit US$1,650 early in 2020. And reach an astounding US$10,000 per ounce in three to five years.

They explain why here.

More, after the markets…


Overnight, the Dow Jones Industrial Average closed down 142.70 points, or 0.52%.

The S&P 500 closed down 9.43 points, or 0.31%.

In Europe the Euro Stoxx 50 index closed down 31.66 points, or 0.89%. Meanwhile, the FTSE 100 fell 0.62% and Germany’s DAX closed down 88.22 points, or 0.71%.

In Asian markets Japan’s Nikkei 225 is up 25.52 points, or 0.12%. China’s CSI 300 is down 1.01%.

In Australia, the S&P/ASX 200 is up 3.32 points, or 0.05%.

West Texas Intermediate crude oil is US$61.96 per barrel. Brent crude is US$68.16 per barrel.

Turning to gold, the yellow metal is trading for US$1,498.74 (AU$2,184.16) per troy ounce. Silver is US$17.81 (AU$25.96) per troy ounce.

One bitcoin is worth US$10,261.73.

The Aussie dollar is worth 68.62 US cents.

Putting the N.I.T.R.I.C. method to the test

If gold does continue to march higher, well positioned gold stocks will be among the biggest winners. And microcap gold stocks — those that succeed — will lead the pack.

Let’s turn the clock back to gold’s second mania phase, to see what I mean. As a reminder, the second gold mania period ran from 2000–2008. During the latter half of this time, between January 2004 and February 2008, gold went up 133%.

That’s a tidy gain.

But a select group of microcap gold stocks went up a lot more. Like Aquiline Resources, which saw its share price soar by 10,309% during that same time frame.

Or the granddaddy of them all, Seabridge Gold. See for yourself how its share price tracked during the second gold mania phase:

chart image
Sources: Bloomberg / 2019 Gold Mania Summit
Click to enlarge

You read that correctly. Seabridge Gold shares gained an incredible 29,644% when the stock went ballistic. Take that bitcoin!

Now you can see why Shae Russell spends her days hunting for stocks that could deliver similar gains in gold’s third mania phase. One she and Jim believe is just getting rolling.

Using her proprietary N.I.T.R.I.C test, Shae uncovered five of the most promising microcap gold stocks. Stocks she believes could deliver investors $37 for every $1 rise in the gold price.

But make no mistake. Microcap stocks are risky. Here’s Shae with more on her top five gold microcap plays:

These are not established businesses. In some cases, we’re talking about firms that haven’t even broken ground yet…but their geological surveys tell them they’re sitting on a big gold deposit. These companies could be selling for a couple of cents a share.

This is what I mean by “pure speculation”. If a company like this digs up the gold they believe they’re sitting on, that two-cent share could go to four…six…even eight cents in a matter of days.

But if all they dig is a big hole in the dirt, that two cents could drop to a cent – or lower – just as fast.’

Shae’s favourite gold microcap plays — as well as the N.I.T.R.I.C test they must all pass before she even considers them — are covered in the broadcast of the ‘2019 Gold Mania Summit’.

As I mentioned above, AFAU is planning to pull that footage from their website at midnight tonight. So if you haven’t watched Shae along with her colleague Jim Rickards and host James Woodburn yet…

You can still click here to watch the entire Summit now.

And if you prefer reading to watching, a transcript is available at the same link.

‘The takeover story’

There are a few ways that tiny gold companies can see their share price fly.

One obvious path to success is to strike a big vein of gold. It doesn’t take a brain surgeon — or a commodity investment analyst — to tell you what happens when a $10 million company digs into $100 million worth of reasonably accessible gold.

Another path to a soaring share price can be via acquisitions. When a much larger company attempts to acquire a junior miner they generally pay a premium price for the stock.

And as you can see in the graph below, with gold prices heading north, the hunt for acquisition targets is heating up.

chart image
Source: Bloomberg
Click to enlarge

As Bloomberg reports:

Gold is near a six-year high, and industry shares are up about 60% in the past 12 months. Meanwhile, the amount of gold reserves still buried in mines is down by more than half from a 2011 peak. It’s a potent mix that may push miners toward consolidation over expansion for growth.’

China Gold International Resources Corp is one of the major producers in the market for deals up to some US$2 billion (AU$2.9 billion).

Also from Bloomberg:

“We need more pipeline, especially in gold production,” Jerry Xie, executive vice president, said in an interview on the sidelines of the Denver Gold Forum on Monday. “We’re currently looking for acquisition opportunities quite aggressively. We’re doing this on behalf of our parent company, not just for ourselves.”

The miner, listed both in Canada and Hong Kong, is targeting companies with assets in operational stages that have ramp-up plans. The company is comfortable making purchases with a price tag at roughly $1 billion to $2 billion, Xie said.

I asked Shae about this earlier today. She told me the takeover story was part — though far from all — of what could see her gold microcap recommendations shoot the lights out.

She also offered this bit of useful information. It helps explain why gold reserves have plummeted since 2011. And why acquisitions are on the upswing.

Big gold miners don’t like spending money on exploration. It brings in too much risk to their share price.

In the 1980s, major gold miners did over 75% of all exploration and the rest was left to the piddly little explorers. Now that figure has reversed.’

With the ‘piddly little explorers’ now doing the lion’s share of the exploring, they’ve taken on all the share price risk the big boys want nothing to do with.

That means if they run out of cash before finding a juicy target, they’re probably done for.

It also means when they do strike that target they could find themselves in a bidding war that will hand early investors many times their original investment.

It’s a high risk high reward game. And it’s not for everyone.

But the story itself is well worth being on top of.

You can get that at the ‘2019 Gold Mania Summit’ by clicking here. Remember though, AFAU plans to pull that off their website at midnight tonight.

That’s a wrap for today.

Be sure to tune in tomorrow for our editors’ latest takes and tips on the turbulent oil and rare earths markets.