This commentary plus the quickie review of Gatos Silver is an excerpt from the February 3rd issue of my subscription newsletter. You can learn more here: Mining Stock Journal
Gold is trending higher in correlation with the 10-yr Treasury yield. This is what happens when the Fed begins an interest rate hike cycle, contrary to the mainstream narrative that gold moves inversely with interest rates. I didn’t show the comparison chart because it was “messy.” The RSI/MACD momentum indicators are positioned bullishly – at least for now.
GDX and silver both are also in an uptrend but it’s not as pronounced. Gold has been resilient at the $1800 level, even with China closed for this week in observance of the Lunar New Year. Imports into both India and China have picked up considerably over the last 12 months. I expect that continue if not increase in the quantities imported.
I think the next bull move is beginning, though as with the stock market, I expect increased two-way volatility. I continue to see significant downside risk to the stock market that might affect the pm sector briefly. But I’m also seeing indications that a lot of money is flowing into all flavors of precious metals (GLD, SLV, Comex futures, physical). Premiums for sovereign minted silver bullion coins have risen considerably over the last few weeks.
It’s still not clear whether or not the Fed will actually hike the Fed funds rate in March. If it does start to raise rates, I don’t expect the Fed to follow-through with the number hikes being discussed by Wall Street (6-7). The economy is rapidly deteriorating. The Fed will eventually have to reverse its monetary policy stance or risk a severe financial and economic crisis. This will be jet fuel for the precious metals sector.
Gatos Silver (GATO, GATO.TO – US$3.47) – GATO was massacred on January 26th after it reported on January 25th that there were errors in its resource estimate from July 1, 2020 that could lead to a reduction of 30-50% in the resource estimate. The Company is working with independent consultants to figure out what went wrong and to produce a revised resource estimate.
The stock plunged 69% on January 26th from US$10.17 to $3.17. It fell another 37 cents to below $3 the next day. It has since dead-cat bounced to $3.47. Several subscribers asked me if it was worth taking a position in the stock. I like to have more information before diving into a potential turnaround play. GATO will still be producing silver profitably. But we have no idea what the resource estimate will look like or how it will affect the mine life. It’s possible that the stock could double or triple from here but the stars have to align.
Other than a continued decline in the share price that correlates with any decline in the sector overall, this is probably the bottom. But keep in mind that the Company will be facing numerous class-action lawsuits as well has having regulators breathing down its neck. It might be worth taking a flyer on December $5 calls if you can get them below 80 cents (December is longest option expiry) or August $2.5’s, if you can get them close to the current bid.
Note: with ITM calls, you want to minimize the premium to parity paid. But the option will move almost 1:1 with the stock – up or down – so if GATO falls another $1, you’ll lose that much on the call. With the December $5’s, the full risk is the price paid for the call. I may take a shot at the December $5’s but only in my personal account. I also want to make it clear that I am not recommending buying into GATO yet. I’m just laying out some ideas if this is a risk you want to take.
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Many of the junior exploration/development companies I cover, recommend and invest in have the potential to 5-10 baggers from their current down-trodden level. You can learn more about my newsletter here: Mining Stock Journal information. I do not take compensation of any type from mining companies and I have been doing my own research in the sector for over 20 years.