Deep Gold, Big Profits
Wednesday, 15 July 2020
By Greg Canavan
In Monday’s Insider, I warned about the bubble in ‘buy now, pay later’ stocks.
The timing was good.
Yesterday, the market turned on the sector.
Afterpay fell 7.2%…
Sezzle plunged 12%…
Zip Co fell 7.7%…
And Splitit sank 6.7%.
Openpay bucked the trend. It surged 9.2%. Perhaps investors see relative value?
The catalyst for the sell-off occurred in the US the night before. The NASDAQ was cruising along, as it usually does, in the green. Towards the close though, the sellers came in. The index finished the day down over 2%.
It partially recovered these losses in last night’s session. But the NASDAQ underperformed the Dow and the S&P 500. That’s worthy to note.
If the NASDAQ continues this underperformance in the weeks ahead, it could spell the end of the tech bubble.
It’s a sector I’ll continue keeping a close eye on for you.
If tech represents intangible future benefits and blue-sky opportunity, gold lies at the other end of the spectrum.
Solid, tangible, real…what you see is what you get.
But, like tech, gold has also benefitted from the huge amount of money central banks have created over the past few months.
The reckless use this new money to open Robinhood accounts and buy Tesla, while the cautious see the monetary debasement occurring all around them and buy gold.
That’s the neat version of things.
But no doubt, all this money printing is leading to speculation in the gold market too. The trick is to find out where and by how much.
In terms of speculative positioning, the first place I look is the futures market. Specifically, I look at the ‘managed money’ category.
Currently, managed money is net long 139,000 gold futures contracts. This is up from the low of 91,000 contracts in early June, which itself was the lowest reading since May last year.
But it’s well off the highs reached on a number of occasions in the past year, which saw managed money net long positions hit around 250,000 contracts.
So today’s speculative positioning in the gold market is showing no signs of frothiness.
That’s probably because of all the action happening in other markets around the world. Still, gold has managed to make its way to over US$1,800 per ounce with little fanfare.
While there will be corrections along the way, this augers well for future gains.
There is, however, more speculative activity happening in gold related stocks, especially at the smaller end of the market.
In Aussie dollars, the gold price is around $2,600 an ounce. As a result, a lot of capital is flowing into gold exploration. At these prices, a decent gold find could lead to explosive share price gains.
In many cases, you’ve seen explosive share price gains just on the hope and expectation of a gold find!
But here’s the important thing to understand…
Most of the near surface gold in Australia is gone.
To find the big deposits, explorers are going increasingly deeper. It’s an expensive business. But the high gold price makes the risk/reward trade off better than ever.
One of the gold stocks in my portfolio has been mining its open pit deposits for the better part of 10 years. The deposits are close to mined out. The gold is still there…it’s just much deeper. They are now transitioning some of these open pits to underground mining operations.
According to our resident gold expert, Shae Russell, this is a trend that will continue in Australia.
She spoke at length about it with Woody in a presentation she calls ‘Deep Gold’.
You can watch it here.
Shae is the editor of the Hard Money Trader service. Right now, her focus is on explorers operating in four key exploration regions around Australia.
Some of these regions remain relatively under-explored. But Shae reckons the high gold price and the prospect of deep, lucrative gold deposits make them prime property for the new Australian gold rush.
Be warned though. Gold exploration is a hugely expensive, and a risky enterprise. That’s why so many explorers are raising capital right now. The market is flush with cash, and they’re taking advantage of it.
Before diving into the sector though, make sure you watch Shae’s presentation. She reveals the four exploration provinces you should be focusing on right now.
She’ll also take you through her NITRIC-X system. A high gold price doesn’t guarantee success. You need a system for evaluating prospective ground and the management teams working this ground.
Shae’s system does this.
Again, it doesn’t guarantee that every pick will be a winner. But it does improve your odds of success.
You can improve you odds of success to by watching Shae’s presentation. Click here to do so.
What are the prospects for the Aussie dollar gold price? Will the bull run continue?
I see a few key threats to the gold price.
- A resurgent global economy that would put upward pressure on interest rates (and therefore downward pressure on gold).
- A return to responsible central banking (a low to non-existent threat).
- A resurgent Chinese economy, which would boost the Aussie dollar and therefor weaken the Aussie dollar gold price.
In the short term, both 1 and 3 are a risk. But gold is usually smart enough to work out whether any stimulus related economic rebound is sustainable or not.
Scenario 2 is that unlikely I don’t know why I even added it in.
As far as scenario 3 goes, I’m particularly sceptical. China, in my view, is in all sorts of trouble. Recent stimulus measures will hide its issues, but by the end of the year, China’s problems will be laid bare.
If this is the case, the Aussie dollar will head down again. Gold will protect against this renewed currency devaluation.
The conservative way to play it is to buy gold bullion and sit tight. Or, if you want more bang for your buck, have a crack at some gold explorers.
Just make sure you watch Shae’s presentation first.