LBMA conference feedback – far from optimistic for gold!

Well, the first full day of this year’s LBMA/LPPM conference is now behind us as delegates leave the conference venue at the Vienna Hilton hotel to attend the conference dinner at the Liechtenstein Garden Palace, but there is little else to be of good cheer about given the general opinions of the speakers at the event.  Gold has now effectively been in a bear market for the past three years, despite a bit of a pick-up over the past month, but most of the speakers so far seem to expect precious metals to resume their downward trend.  Indeed three out of the four members of a conference panel on gold investment – and the panel moderator – all reckoned that not only would the gold price continue to fall, but that it could continue its decline for at least a couple more years and head down towards the $800 an ounce level.

As I pointed out in an article on this published on sharpspixley.com – LBMA: Little cheer for gold investors from LBMA conference panel this was extremely similar to the consensus of a panel discussion on paper gold at the Denver Gold Forum a month ago at a time when virtually every bank analyst was predicting falls down to $1,000 and below, but ever since then the gold price has continued to confound, and is currently some $40 higher than it was at the time of the Denver event.

But talking to delegates in Vienna, who mostly come from what might be considered the more realistic side of the gold sector rather than from the mining companies, which in effect tend to be optimists just to be involved in the mining business at all, there would seem to be few dissenters from the panel’s consensus view.  If you are a contrarian now may well be the time to buy!

So what is there that might be going for the gold price?  Global political developments – particularly in the Middle East, but also in Eastern Europe and southeast Asia – have the potential to flare up.  Eurozone finances are still fragile.  There are elections due in a number of countries which could impact global gold supply.  Beware of ‘unknown unknowns’ as one speaker at the LBMA conference noted.  There also appears to be a strong degree of support for the metal if it falls below $1,100, although perhaps this hasn’t really been tested.

Also Chinese demand, as expressed by the Shanghai Gold Exchange (SGE) deliveries level, which has already exceeded 2,000 tonnes year to date, and is 300 tonnes higher than at the same time as in the record 2013 year (See: Shanghai gold deliveries surpass 2,000 tonnes already this year) needs to be taken into account.  These figures may well be enhanced by gold demand from the financial sector, which isn’t included in the consumption assessments by the major precious metals analytical consultancies, but nonetheless still takes gold off the markets – unless or until it this financial  element is liquidated or otherwise unwound.

We have come across the occasional opinion here, though,  which is gold supportive, seeing further improvement in the price by the year end and a continuation of this trend in 2016 – but this hasn’t tended to be the consensus.  Perhaps we’ve just been talking mostly to the gold pessimists!

So perhaps the gold outlook isn’t quite as dismal as one hears for the most part here in Vienna – but then those looking for a continual price fall are mostly seasoned gold traders and analytical veterans so their views certainly can’t be dismissed.  Indeed many profess to be gold believers overall, but are still looking for short to medium term falls.

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Day at the Denver Gold Forum – How to invest in junior golds

This year’s Denver Gold Forum got off to a good start Sunday afternoon/evening with early registration, a well provisioned opening reception and an opening keynote address.  The reception featured also seventeen junior gold, silver and pgm miners/developers which attracted decent attention from the assembled throng.

The opening keynote was from Adrian Day of the eponymously named asset management company.  Day was giving attendees his expert advice on  investment in gold mining companies – a sector which has been on the decline for the past four years since gold came off its September 2011 brief peak, but which could well be offering tremendous upside should gold be on the recovery trail once more.

The past three years in particular have seen numerous occasions when investment advisers have been calling a bottom to gold’s decline, only for the price stutter and fall further.  Could this be the time to climb in and make mega profits assuming one picks the right stocks.  The optimistic investor may well feel it to be so – and it is perhaps fair to say the lower the gold price falls the less the potential downside, but it still remains a potentially very volatile market.  Definitely not one for widows and orphans.  Some will feel that the best time to re-enter it is just when all the mainstream analysts are calling for ever lower prices – as happened when gold fell to its recent low point of around $1,080.  It’s always the successful contrarian investor who makes the maximum gains when a depressed market recovers.

It’s probably fair to say that the mood amongst attendees spoken to at the opening reception was more upbeat than four years of almost consistently falling precious metals prices should sensibly suggest.  The view amongst those optimists still remaining in the sector – and perhaps one needs to be an optimist to have stuck with it, or even be involved in precious metals mining and investment at all – is that recent price movements, and a demand picture which appears to be rather stronger than mainstream analysts would credit, may at last be supporting a change in sentiment.  If this is indeed the case it could at least begin to arrest the drastic falls seen in gold and other precious metals prices seen of late.  Even some of the bank analysts so adamant that gold would fall to $1,000 or less only a few weeks ago are beginning to see light at the end of the tunnel.  But then perhaps for the contrarian that’s a negative sign!

Adrian Day’s keynote evening address was something of an investment primer for investors in this volatile, and risky market when one looks at junior golds – particularly explorers.  But again the potential rewards in investing at the bottom of the market in a junior miner or explorer which comes good can be immense and it’s these potentially massive rewards which keeps investors coming back.  He quoted a Newmont Mining executive’s comment as a warning that only around one in ten thousand geological anomalies outlined in preliminary exploration may come good – and even those which appear promising may not end up as viable mining operations.  A sobering comment, but at least most of the juniors which come to the market are at a slightly more advanced stage than just the delineation of potential anomalies.

Day’s presentation was pretty much a statement of the investment principles one should follow for investing in such a potentially volatile market.  In many cases the advice was obvious – but too often just not followed by the retail investor, much as casino gamblers may find themselves taking unaccountable risks which might be avoided by rational initial thought, but so often occur in the excitement of the moment.

Some of the points Day made were as follows:

  • Diversify one’s investment – but not too much. Excessive diversification is often an indicator of basic ignorance of the sector
  • Invest enough to make a difference if you’re right
  • Don’t go overboard on a specific sector or stock
  • Follow a policy of moderation in all things. Experience shows that things can always get worse however bad they have become.
  • Keep a cash reserve in place. If you need money unexpectedly it always tends to come at the worst possible time.
  • In such a volatile market as the junior mining/exploration sector you need to follow the markets closely and trade accordingly
  • Hang on to long term winners. A rigid sales pattern of say always selling when a stock doubles is not necessarily a good policy.  Stop loss sales can be a bad policy in the junior gold sector given its inherent volatility
  • Separate trading stocks from core holdings
  • If something basic goes seriously wrong with an investment don’t hesitate to sell. Hoping that it will get better is not a good investment strategy.  Be ruthless.
  • Be very cautious about what you don’t know. Take trouble to know the company in which you are investing
  • Know your investment style and stick to it – you need a working hypothesis
  • Avoid following the herd
  • Look for specific investment entrance point opportunities
  • Make sure to balance potential risk and reward.
  • Look for potentially fatal flaws – lots of projects have fatal flaws – it’s a tough business!
  • It’s critical to impose buy and sell limits on broker transaction instructions

As Day pointed out, if he wasn’t an optimist he wouldn’t be involved in junior gold investment – particularly for exploration stocks.  One has to understand that losing on some investment decisions in this volatile sector is part of the game.

You must do your due diligence.  Check balance sheets and cash positions.  If a stock is going to have to go to the market to raise money this may well provide an opportunity to buy later at a lower price.

Any recommendations?  Day likes royalty stocks like Franco Nevada and Royal Gold.  They carry much less risk than the miners and explorers.  Similarly some of the best gold majors like Goldcorp, Agnico Eagle and Randgold have proved themselves as good operators and will be among the first for institutions to climb back into if they see sentiment returning to precious metals.  These though are the safety plays and will not provide the kind of potential upside the juniors may do in a sharply rising price environment.

All good advice, but advice which is so often ignored in the heat of the moment.

Today the full Denver Gold Forum programme swings into effect with the first keynotes  from Maureen Upton looking at Mining Social Licensing and David Cox at the impact of low metal prices on exploration and the impact on the future supply pipeline.  These will be followed by two streams of presentations from mainly mid-tier gold, silver and pgm miners, followed in turn by a panel discussion on the paper gold market which is certain to draw a lot of interest.

The afternoon will see further corporate presentations and the evening will be rounded off with a Special Opportunities reception featuring 14 junior miners/developers explorers.  A full day ahead!