The commentary below is from Investment Research Dynamic’s latest issue of
The Mining Stock Journal. Click the link to learn more about this valuable news-
letter: Mining Stock Journal
The graphic below (courtesy of Crescat Capital) shows the spread between the price of gold
and the median all-in sustaining cost of production across the top 50 miners by market cap:
In one of my many conversations with Viva Gold’s CEO, Jim Hesketh (Viva Gold stock is
absurdly undervalued relative to what it is potentially worth), he referred to periods when the
spread between the price of gold and the all-in cost to get the gold out of the ground and
processed occasionally goes through “sweet spot” periods.
We’re in one of those “sweet spot” periods now. In fact, based on the graphic above, its by far
the largest sweet spot in at least that last 13 years. What this means is that every penny
increase in the price of gold above a company’s ASIC falls straight to cash flow and net
income. It’s my contention that the market has not yet remotely priced this dynamic into the
valuations of mining stocks.
For those who are not yet aware, the U.S. Department of the Interior added silver to its draft
list of critical minerals for 2025. This designation is a result of the role silver plays in energy,
defense and national security. This potentially will lead to government investment for domestic
production and make it easier to permit silver projects. It could also entail “fast track”
permitting for silver mining projects, along with tax incentives. Since this designation was
announced, silver has jumped 16%. Of course, it would be difficult to separate the price-effect
from this news from the general bull move unfolding in both gold and silver.
That said, the gold-silver price-ratio is still over 80. This is several multiples above the longterm(
100’s of years) GSR, which is below 20. Since 2000, the ratio has ranged between 35
and 110. However, over any modern-era time-frame over which you want to run the numbers,
silver is historically quite undervalued relative to the price of gold.
The surge in gold finally caught some attention on CNBC (LINK). It was hard not to chuckle,
however, as I read the report. It cited that “financial advisors generally recommend limiting
gold exposure to less than 3%” of an investor’s portfolio. Hell, why bother owning it in that
case? The article also cited an advisor who said she does not have any gold in client
portfolios “because of the temperamental nature of any trendy investment.” I had a good
laugh over that.
On the other hand, foreign Central Banks appear to be hoovering gold right now. A report from
Crescat Capital cited by Bloomberg showed that the percentage of gold exceeded the
percentage of Treasuries held in Central Bank foreign reserves for the first time since 1996:
Given the economic uncertainty in the U.S., combined with the inability of the current
Presidential administration to reign in the rate of deficit spending, and thus the continued
expansion of Treasury debt issuance, it’s a good bet that the blue line (gold holdings as a %
of foreign reserves at Central Banks globally) will continue to rise. My bet is that it will
continue to rise along the steep uptrend line that has occurred since early 2023. This, in turn,
will push the price of gold even higher.
Another factor driving the bull move in gold and silver is the expansion in the Fed’s balance
sheet. The M2 measure of the money supply hit an all-time high as of late August, which is
the latest update per the St. Louis Fed’s FRED monetary database. Not only is this fueling the
bull move in gold and silver, to the extent that a commensurate amount of wealth is not
produced that would “back” the increase in the Fed’s money-printing, expect to pay more for
goods and services in the coming months. This also explains the bull move in the general
stock market, which tells us that the money printed by the Fed is piling into financial assets
rather than into the real economy.
A week ago Bank of America issued a research report which recommended investing in
mining stocks. From the report: “Bank of America sees nearly $1 trillion market cap potential
for miners.” Note that references the total market cap of publicly traded mining stocks. It’s
been awhile since I’ve seen anyone discuss the market numbers, but over the last 20 years,
at least, the combined market cap of all publicly traded mining equities, on average, was less
than the market caps of each of the top-10 stocks in the S&P 500 individually. My guess is
that this gap in valuation comparison will quickly close.
Finally, I’m sure most of you know of Jeffrey Gundlach, who is a highly respected professional
money manager. He appeared on CNBC last week and stated that he believed holding a
25% portfolio allocation in gold “is not excessive.” I would not be surprised if he’s positioned
even more aggressively than that, particularly in his own portfolio.
A subscriber who was sitting on a call options position with fat profits in SVM asked if he
should take profits or continue to hold. I said that I personally would book profits in the calls.
When using options, profits can disappear as quickly as they appear. The stock had popped
over $6 from $5.10 two days earlier. It also put in a “hanging star” red candle, which typically
signals that the stock will likely retrace at least part of the spike higher.