I have just been sent a copy of a new Newsletter being put out by Peartree Securities – which reckons to be the largest provider of mining flow-through capital in Canada so knows something about junior mining. While the newsletter theoretically looks at Canadian resources in general it is most relevant to the hugely depressed junior gold sector and could well be being initiated at a most opportune time for investment in this volatile part of the market.
True resource analysts have been calling the bottom in the gold price dip for the past couple of years – and still gold has trended lower. As we have pointed out before, the lower the price falls, though, perhaps also the lower the downside investment risk in percentage terms. Gold has been fairly steady in its current range in US dollar terms of late and while some analysts – notably from the bullion banks – are calling for further falls still, triggered by US Fed interest rate raising forecasts. We are of the opinion that, even so, any further downside is definitely limited given the likely minimalist rate raising that may be contemplated by the Fed if and when it actually takes place. While holding gold may not generate any interest, rates are still likely to remain in negative territory in real terms after any initial raise – a factor which just doesn’t seem to be being taken into account by the investment sector.
Peartree’s President and Head of Mining, Trent Mell, is keen to point out that in Canadian dollars, which have been falling in value against the US dollar benchmark, many metal prices are well above their low points. As he puts it: “In US dollar terms, many metals are testing 5-6 year lows. Gold has bounced to a recent low of $1,085 – but barely. However, in Canadian dollar terms, gold hit a 5-year low of C$1,280 almost 2 years ago, on December 31, 2013. It now sits almost 14% above that level. “
Mell goes on to note: “Resource investing can be as lucrative as it is volatile. Fortunately, Canadian producers have a natural hedge in CAD denominated input costs, so we should not lose sight of the fact that the CAD is down 12% YTD against the USD. “
And while Mell is talking about the Canadian gold juniors in this context – a very similar situation applies to the Australian gold juniors too. If anything the Australian dollar has fallen even further against its US counterpart, again putting investment in Australian gold juniors into a different perspective than is generally perceived by the global investment community which only appears to think about gold in US dollar price terms.
But back to Canada – Mell comments: The S&P/TSE Canadian Mining Index is 70% off its 5-year high, so might this be a good time to be looking at investment opportunities? Dennis Gartman thinks so and he is calling for a bottoming by year-end. We are also starting to see a return to the sector by large institutional players, including the $191 billion CalSTRS pension fund.”
While many poorly financed junior golds are really struggling at the current gold price, others are doing rather better and Peartree feels there is definitely considerable upside in good assets with strong management teams in what it describes as the best mining jurisdiction in the world.
Mell and Peartree make some valuable points here. Interestingly chart king Nick Laird of sharelynx.com has just come up with a series of charts showing that gold is actually at, or near, all-time highs in a number of currencies – many of which you will probably never have heard of like the Swaziland Lilageni or the Moldovan Leu (at least I hadn’t!) – but also in the currencies of some significant gold producers like the Ghanaian Cedi, the South African Rand, the Argentinian and Colombian Pesos, the Turkish New Lira etc. This can totally change the economic perspective of mining gold in these countries. In those tied to the US dollar, miners are not so lucky – as witness Nevada’s gold production falling to the lowest level since 1988, as has been reported recently, although gold production in the state has been on the decline for some years now.
The first issue of Peartree’s Perspectives Newsletter may be downloaded from the Peartree securities website – www.peartreesecurities.com