Hi Sam, good work with the charts and the general points. I appreciate the article. I agree, gold (and possibly royalty companies, depending on valuation and management quality) are the only longer term options. I agree on buying miners for an upcycle in a bull market. I disagree with not buying anything in the coming months - there are some near term producer and small growing producers which will likely have a very high free cashflow even at 3500 $ gold. The market may still price them at old NPVs done at much lower prices, plus apply the Lassonde curve developer discount. So there are opportunities at this specific time.
I think right now the trade is a combination of too early and too late.
Too late to benefit from the leg up in 2024-2025. Too early to benefit from the next one, leaving the asset class in a no-man's land until the trend clearly reverses.
However 100% agree with you on the thesis, and I also have some small miners I'm looking at and which will be printing cash at 3,500, however I don't think they rerate until gold does.
The flag I wanted to plant with this article is that thesis and trade are two different things, and being right about the thesis and too early on the trade is a surefire way to destroy capital.
I agree that patience and not entering the gold trade (or any trade) into peak euphoria is key.
And patience is required, as it usually takes longer for a new base to develop that many people think.
My current perspective, though, is that the bull market cycle probably hasn’t finished. In other words, I don’t think it is likely we are at an equivalent of 2011. Just a pullback within a bull market.
In addition, it is likely that other commodities may outshine gold in the coming months and years, as is often the case in commodity bull markets.
However, like I already said and you agreed - there are quite a few underfollowed and undervalued growing producers and developers out there. With producers, I agree they usually only rerate higher once gold runs again. With developers, however, it can be another story. Execution is important, and as production is getting closer (or arriving) and the story is getting derisked, the market cap usually goes up.
The choice of companies seems a bit disingenuous. I understand that you pick Newmont due to it's size and prominence, but then you shift to Agnico as another example of why it doesn't make sense to invest in gold miners, when actually, by your own data, Agnico outperformed gold!
Thanks for the reply. I certainly do not suggest that your general claim was disingenuous. I was only referring to the choice of Agnico as an example, because they were one of the standouts. In a recent interview on YouTube, Agnico CEO actually pointed out that the only purpose of investing in a mining company should be to beat gold's performance, and that such investing framework is always on their mind. Of course that's easier said than done, but it goes to show that Agnico is a company with a different mindset.
Looking back, royalties have been by far the superior investments. When you look from 2011 peak to today, Franco Nevada and Royal Gold both did better than the metal itself.
They don't have the exposure to rising costs, they give you a marginal exposure to volume growth over the past 15 years (wouldn't count on it going forward).
If price goes the same way over the next 15 years, then they will do just fine, as most of the earnings growth has come from price (17% volume growth over 15 years for FNV, vs 7-800% earnings increase).
During the aggressive bull phases however, I don't expect they'll do better than the miners.
Why wouldn't you count on nice volume growth going forward? Remember that royalty and streaming companies don't buy only from gold/silver miners. Many times they buy gold and silver streams from copper/zinc mines, which are projected to boom during the next decade...
"Gold permabulls are mostly idiots." That one sentence had me ROFL.. :)
On a more serious note, very insightful piece on gold and precious metals! Everyone (and their mother :)) is expecting gold to rebound off of the $3600 level, and that usually means it will not.. Just the nature of markets.
The one thing that is in favor of godl is the long term trend of central banks to accumulate gold over the last 7-8 years. That does not seem to be stopping.. and they are a price insensitive buyer. Wonder what you think of that fact or you just look at technicals and say it captures everything.
Thank you for generously sharing your insights. Loved it!
Follow many gold bugs who seem to be 'buy only'. But actually some of the most experienced ones took profits near the top of the last move. Now I can see why.
Well written article that takes a more zoomed out look at miners, and haven't been able to this clarity anywhere else.
True. But when there is a bull mkt in gold the juniors are very lucrative investments. BTW, you are not drawing your lines on the charts correctly. The lower support line needs to start from the low at the left of the chart. Not from where ever it suits you. Buffett said he would never own gold.
Let's not quibble over where to draw lines, but in classical technical analysis the rules are: minimum 2 points, better if at least 3. For support lines, they should be drawn from the meaningful swing point which mark the trend. This trend was validated after 2000 was breached.
However, we could draw the line as you suggest and still reach the same conclusion today, hence my suggestion for us to not fret this too much.
Be interested in your thoughts regarding use of LEAPS on index ETF and/or lower risk bigger names like AEM when IV is reasonable - a different way to introduce convexity vs the smaller miner path.
Personally found the headaches of owning higher risk (political, inherent messiness of mining, labor issues, etc) individual names to play cycles not worth it vs what I describe.
The dilution point is the one that should end the debate and almost nobody runs the maths. Production up 13% in 14 years. Share count doubled. Production per share down 48%. The miner's margins expanded. The shareholder's claim on those margins shrank by nearly half. Operational leverage working perfectly, financial dilution eating it in real time.
The industry structurally can't replace depleting reserves without issuing equity or overpaying for acquisitions. So the gold price has to outrun both cost inflation AND dilution just for the miner to keep pace with the metal. That's a treadmill, not a trade. Except during the specific windows you've identified, when the gold move is fast enough to outrun the dilution for a few quarters.
The Schabacker quote on the downturned wedge is well chosen. Patience here isn't just technically sound. It's the only approach consistent with everything the data shows.
Another brilliant piece..... you are quickly becoming a favorite Substack Contributor. Everyone should subscribe / follow / bow down .....
Thanks for the kind words.
Much appreciated.
Hi Sam, good work with the charts and the general points. I appreciate the article. I agree, gold (and possibly royalty companies, depending on valuation and management quality) are the only longer term options. I agree on buying miners for an upcycle in a bull market. I disagree with not buying anything in the coming months - there are some near term producer and small growing producers which will likely have a very high free cashflow even at 3500 $ gold. The market may still price them at old NPVs done at much lower prices, plus apply the Lassonde curve developer discount. So there are opportunities at this specific time.
I am looking forward to more of your work.
I think right now the trade is a combination of too early and too late.
Too late to benefit from the leg up in 2024-2025. Too early to benefit from the next one, leaving the asset class in a no-man's land until the trend clearly reverses.
However 100% agree with you on the thesis, and I also have some small miners I'm looking at and which will be printing cash at 3,500, however I don't think they rerate until gold does.
The flag I wanted to plant with this article is that thesis and trade are two different things, and being right about the thesis and too early on the trade is a surefire way to destroy capital.
Hi Sam,
I agree that patience and not entering the gold trade (or any trade) into peak euphoria is key.
And patience is required, as it usually takes longer for a new base to develop that many people think.
My current perspective, though, is that the bull market cycle probably hasn’t finished. In other words, I don’t think it is likely we are at an equivalent of 2011. Just a pullback within a bull market.
In addition, it is likely that other commodities may outshine gold in the coming months and years, as is often the case in commodity bull markets.
However, like I already said and you agreed - there are quite a few underfollowed and undervalued growing producers and developers out there. With producers, I agree they usually only rerate higher once gold runs again. With developers, however, it can be another story. Execution is important, and as production is getting closer (or arriving) and the story is getting derisked, the market cap usually goes up.
The choice of companies seems a bit disingenuous. I understand that you pick Newmont due to it's size and prominence, but then you shift to Agnico as another example of why it doesn't make sense to invest in gold miners, when actually, by your own data, Agnico outperformed gold!
The royalties is the one point I will concede, and they are very different businesses to the miners. Expanded on this in another comment.
However, out of 20 or so miners I included in preparing this article, only Agnico and Royal gold did better than gold.
I don't think it's disingenuous, the claim that miners have been capital destroyers vs gold is largely validated by the data.
Thanks for the reply. I certainly do not suggest that your general claim was disingenuous. I was only referring to the choice of Agnico as an example, because they were one of the standouts. In a recent interview on YouTube, Agnico CEO actually pointed out that the only purpose of investing in a mining company should be to beat gold's performance, and that such investing framework is always on their mind. Of course that's easier said than done, but it goes to show that Agnico is a company with a different mindset.
As did the major Royalties, by the way...
Thanks Sam for the article. What do you think about royalties (less risky than miners, more risk than bullion).
Looking back, royalties have been by far the superior investments. When you look from 2011 peak to today, Franco Nevada and Royal Gold both did better than the metal itself.
They don't have the exposure to rising costs, they give you a marginal exposure to volume growth over the past 15 years (wouldn't count on it going forward).
If price goes the same way over the next 15 years, then they will do just fine, as most of the earnings growth has come from price (17% volume growth over 15 years for FNV, vs 7-800% earnings increase).
During the aggressive bull phases however, I don't expect they'll do better than the miners.
Why wouldn't you count on nice volume growth going forward? Remember that royalty and streaming companies don't buy only from gold/silver miners. Many times they buy gold and silver streams from copper/zinc mines, which are projected to boom during the next decade...
"Gold permabulls are mostly idiots." That one sentence had me ROFL.. :)
On a more serious note, very insightful piece on gold and precious metals! Everyone (and their mother :)) is expecting gold to rebound off of the $3600 level, and that usually means it will not.. Just the nature of markets.
The one thing that is in favor of godl is the long term trend of central banks to accumulate gold over the last 7-8 years. That does not seem to be stopping.. and they are a price insensitive buyer. Wonder what you think of that fact or you just look at technicals and say it captures everything.
Thank you for generously sharing your insights. Loved it!
Follow many gold bugs who seem to be 'buy only'. But actually some of the most experienced ones took profits near the top of the last move. Now I can see why.
Well written article that takes a more zoomed out look at miners, and haven't been able to this clarity anywhere else.
Thanks Sam!
overall thesis sound.
but even physical gold is never more certain than retrospective excuses when technicals fail...!
True. But when there is a bull mkt in gold the juniors are very lucrative investments. BTW, you are not drawing your lines on the charts correctly. The lower support line needs to start from the low at the left of the chart. Not from where ever it suits you. Buffett said he would never own gold.
Let's not quibble over where to draw lines, but in classical technical analysis the rules are: minimum 2 points, better if at least 3. For support lines, they should be drawn from the meaningful swing point which mark the trend. This trend was validated after 2000 was breached.
However, we could draw the line as you suggest and still reach the same conclusion today, hence my suggestion for us to not fret this too much.
It's never fun to be stuck in a down turned wedgie
lol. indeed.
Be interested in your thoughts regarding use of LEAPS on index ETF and/or lower risk bigger names like AEM when IV is reasonable - a different way to introduce convexity vs the smaller miner path.
Personally found the headaches of owning higher risk (political, inherent messiness of mining, labor issues, etc) individual names to play cycles not worth it vs what I describe.
The dilution point is the one that should end the debate and almost nobody runs the maths. Production up 13% in 14 years. Share count doubled. Production per share down 48%. The miner's margins expanded. The shareholder's claim on those margins shrank by nearly half. Operational leverage working perfectly, financial dilution eating it in real time.
The industry structurally can't replace depleting reserves without issuing equity or overpaying for acquisitions. So the gold price has to outrun both cost inflation AND dilution just for the miner to keep pace with the metal. That's a treadmill, not a trade. Except during the specific windows you've identified, when the gold move is fast enough to outrun the dilution for a few quarters.
The Schabacker quote on the downturned wedge is well chosen. Patience here isn't just technically sound. It's the only approach consistent with everything the data shows.