Navigating the Crossroads: Reflections on Gold, AI, and Market Dynamics

From the HRA Special Delivery: Issue 1252

While gold continues to fight back and hold the +$2000 price range, sentiment is bad.  It’s hard to compete with AI and chip companies that add market cap equivalent to the GDP of many countries in a single day.  I really don’t like the idea of an “us versus them” market scenario, but it feels like that is what we’ve got now.  Most gold producers beat expectations with their financials, but expectations were low, and we continue to see significant increases in AISC.  Gold producers need to get enough cost control so that more of the increases in the gold price go to the bottom line, rather than suppliers.  More miners generating expanded margins would help a lot, though we still need to get past the “boring old mining” label.  While plenty of industry advocates are yelling (correctly) that all the hopes for a greener economy, not to mention more basic things like economic growth, are meaningless without expanded metals production, this doesn’t seem to be drawing in many new fans for the sector.  That’s not news, of course.  Mining has been fighting this PR battle for decades.  The us versus them market scenario really only applies to precious metals, in any case.  If Wall St enters a bear market it won’t do base metal miners any favors, though I suspect we would see a big rally in gold and silver and, ultimately, the companies exploring for them.  I’m hoping we just see better gold prices and a stable market.  At some point that should start drawing some money back to the sector.

While I don’t see an immediate reason we should see a big top on Wall St, there’s no doubt the speculative froth and concentration of gains in a small number of companies bears an uncomfortable resemblance to past bubbles, notably the dot com in the late 1990s. Plenty of bears got their asses handed to them being early calling a top on that market, even if they were ultimately very right about it.  I will avoid crying wolf for that reason.  Valuations are getting crazy, especially if we’re not going to get markedly lower interest rates.  That said, most of the “magnificent seven” (six? five?) are generating good revenue and profit growth, which was not really the case for many of the short-lived dot com stars of the late 1990s, so I would not lean on the comparison quite as hard as some do.  Even so, with all the major economic blocks, other than the US, entering or in recession, you must wonder how long the US economy can just keep steaming ahead.  The US is less export dependent than any other major economy, but still…

For the mining sector, it may come down to a “the cure for low expectations is high prices” scenario.  That would not be an overnight solution, but much higher prices for most metals are inevitable if the permitting timelines continue to lengthen at the same time that percentage growth in metals use per year also increases thanks to electrification. There’s no other way to square the circle.  Poor sentiment and production growth means, at some point soon, most metals in heavy use will be much, much more expensive.  Someone is going to make a shit ton of money on that trend.  The not so easy part will be figuring out in advance who that someone will be, before its obvious to all, and how long we need to wait for it to unfold.

That is part of what I’m trying to do, though as you know, I direct most of my efforts to looking at early-stage companies.  Even in a poor market, discoverers get attention, even if only from the same bunch of traders that have been following the sector forever.  Discovery that shifts the market’s perception of the exploring company’s resource potential from “zilch” to “lots” will continue to be the most reliable generator of outsized gains.  Alas, it will also be the toughest part of the process to forecast with any confidence.  That being the case, I still think it’s important for resource stock traders to have several drill speculations and early-stage discoverers.  Exploration is a tough business as we all know, and Mother Nature is unforgiving. Most targets don’t work out, though I try to find ones with enough legs that the company exploring it will provide exit opportunities along the way, even if the project doesn’t ultimately work out.  It’s important to trade around drill programs, but also important to have enough conviction to hang on when a Great Bear or SilverCrest comes along.  Not easy, I know.

Regards for Now,

Eric Coffin

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