Hard Asset Rally Is Kicking Off

No matter what happens with politics — Trump versus Biden — life and the economy roll on.

Among other things, I follow the mining space. I spend a lot of time with relatively small mining plays called “junior” companies.

And from what I see in the markets just now, things are beginning to shape up for a solid rally in junior mining shares as we cross over to 2021.

Meanwhile, I’ve heard from contacts in the field. And there’s a junior mining share rally baked into the cake, come January.

We’re looking at serious upside for several reasons.

Let’s dig in…

Recently I said “the time is NOW to buy mining shares.”

I explained that year-end tax-loss selling often drives down the share price of many junior mining plays and that even exceptionally good companies often take a hit around this time of year.

Selling typically abates by early December and many companies’ share prices are at or near seasonal lows. That’s the time for bargain hunting.

About mid-December, there’s usually a sniff of a rally. It can be choppy, but it trends through the last couple of weeks of the year. (These tend to be slow weeks in the markets, because many big players are off on holiday.)

But as the year rolls over, there’s typically a strong January rally for junior miners.

Whether you trade in-and-out or you invest for the long haul, you can often set yourself up well by participating in the December-January trend.

That’s where we are now.

So, let’s look at things from both the macro-angle, and also at the granular level.

First, on the macro-side let’s look at two of my favorite metals — gold and copper.

I like gold because it’s the world’s key monetary metal.

That is, the price of gold is generally an inverse measure of the strength of the dollar. When the dollar is strong, gold prices tend to fade. When the dollar is weak, gold prices tend to move up.

Currently, the dollar is weakening for many reasons.

I discussed one scenario for the “doomed” dollar recently, in the context of the possibility of Janet Yellen running the U.S. Treasury, here.

Meanwhile, I like copper because it’s the world’s key industrial metal.

That is, copper goes into countless products that make up modern society. Think of automotive, aerospace, heavy equipment, appliances, computers and much more. Lots of copper in all of these items.

In essence, when the world economy is growing, industry needs copper.

Here’s a chart of the price of copper ($COPPER) and gold ($GOLD) over the past year:

Copper and gold

Copper and gold, per StockCharts.com.

From the chart, gold had a strong first half. It surged through much of the summer. This had to do with low interest rates and huge federal spending on COVID relief. Then we had a fall fade for gold as election gridlock kicked in.

Right now, we’re seeing a year-end gold rally. It’s courtesy of the Fed keeping interest rates down and Congress closing in on another trillion-dollar COVID relief bill.

Meanwhile, per the chart, copper prices tumbled in the first quarter as global COVID impacts unfolded. This trend was driven by everything from international trade shutdowns, to factory closures, to just plain lack of definition over how bad things might become.

But from late March to now, the price of copper has been moving up, up and up. This is the market doing what it does, offer forecasts. And obviously, people — meaning industrial users — are buying copper. Industrial activity is strong and getting stronger.

Indeed, it’s worth noting that one key market for copper is China. The Chinese are buying boatloads of the red metal; or more accurately, they’re buying ore that contains copper as I discussed here.

On the investment side, look at three of the world’s largest copper producers: Freeport McMoRan (FCX), Southern Copper (SCCO) and BHP Mining (BHP).

Here are their stock charts for the year:

Copper plays

Copper plays: Freeport, Southern and BHP.

As you can see, the share price for all three companies dropped in the March crash. Then they recovered nicely in the past nine months.

All three companies are multibillion dollar values. They’re far from junior plays. But they illustrate the macro point about copper and steady, increasing global demand.

As the world moves past the initial phases of COVID, industrial demand is strong, certainly for copper.

In sum, it’s fair to say that the charts for gold, copper and big copper miners tell us plenty. We’re looking at a rally here.

Let’s get more granular now.

In the past two weeks, I’ve been on the phone and on Zoom calls with over a dozen management and technical teams from small, junior mining plays. They work from Alaska and the Yukon down into Peru and Chile.

There’s one common theme embodied in a couple of sentences that I’ve heard from pretty much everyone!

“We completed our drilling program. The results look great in the field. But the labs are backed up and we don’t have the assays back.”

What are they saying?

The companies with which I’ve spoken spent the summer and fall working in the field, mapping, and especially drilling holes to sample rocks that might become an ore body.

The drill samples are in a variety of labs, in Canada, the U.S., Mexico and countries in South America.

But labs are jammed up in terms of getting work completed. This is an international issue.

Part of the problem is COVID-related, with legal requirements that affect workflow. Part is just a shortage of labs, benches, equipment and trained chemists.

Quite a few company reps have told me that they expect to have results back in January and February.

But based on what the geologists saw in the field when the drill cores came out of the ground, many companies are upbeat in terms of what the lab results ought to indicate.

Nobody can come right out and say, “Hey, based on what we saw in the core shack and the field assays under the quick tests we can conduct, we have XX grams of gold per ton.”

No, that’s improper under the securities laws. You can only say what you can document.

But the geologists can say things like, “When we pulled core out of the pipe, we saw the altered zones just where we expected them.”

Or, “We drilled right into the structure we expected to find.”

If you understand a particular company’s project, these kinds of comments are intriguing.

For example, just the other day I spoke with company reps for a gold play in Nevada. The claims are a short drive (and not too long of a walk) from the Cortez Hills Mine, operated by Barrick Gold. I’ve visited the site pre-COVID.

The company just put out news concerning the fall drill program. The geologists are certain that they found the exact structures they were looking for, indicating an extension of Barrick’s already prolific mine. The alteration is there. It’s exactly on trend.

But the samples are still in the lab. “They promise us numbers in mid-January,” said the head geologist.

Even more intriguing is that this is Carlin-style gold. The name comes from a particular locale in Nevada.

In this kind of Carlin host-rock, gold is sub-microscopic. It’s definitely not visible to the naked eye. You might not even see it under a standard microscope. Almost always, you need an electron microscope to visualize the gold particles.

Or you can just do the chemistry to extract material from a sample.

But Carlin gold is “elephant country,” as they say. Heck, in the past 40 years Nevada has delivered tens of millions of ounces of gold from Carlin-style deposits.

And now this small junior player has defined geologic structures and alteration, right on trend from Barrick’s Cortez Hills Mine.

There’s more work to do, and of course we have to wait for the lab results. But it’s promising.

This is just one example. I’ve heard similar stories about upbeat drilling in Northwest Territories, the Yukon, Idaho, Montana, Nevada, Arizona, Mexico, Peru, Chile…

But lab results are backed up.

The takeaway?

When those numbers come out in January and February, we’re going to see some seriously good pops for any number of junior companies.

So, how can you play this?

As I’ve said many times before, Whiskey is not a model portfolio newsletter. We don’t make investment recommendations or track names. There’s no ongoing buy-sell commentary. That’s for the paid newsletters.

But I can give you a few ideas. And let’s focus on gold just now, versus copper.

First, I want to give a shout to a gold-focused newsletter published by my colleagues Jim Rickards and Dan Amoss. You can find more information on their Gold Speculator newsletter here, along with subscription information.

Otherwise, if you’re not familiar with the mining space — let alone the junior mining space — it can be a rollercoaster ride. And if you don’t want to get into stock-picking, I like two professionally managed funds that track the gold/silver space.

Both are run by Sprott of Toronto, which has been in the precious metals business for many years.

For exposure to the large cap side of the gold space, look at the Sprott Gold Miners ETF, which trades on Nasdaq under the symbol SGDM.

As the name implies, SGDM deals with big names like Barrick, Newmont and more.

For exposure to a well-run group of junior mining plays — much smaller companies than the above-mentioned Barrick, Newmont, etc. — I like the Sprott Junior Gold Miners ETF, on Nasdaq at SGDJ.

SGDJ holds a collection of junior players with less familiar names, but the Sprott team is there to keep an eye on things for you.

In a rising gold/silver market, both of these Sprott ETFs should do well. In fact, I’d add, any good stretch for the juniors will actually well-outperform the large cap guys.

Either way, though, with one or both of them, you’ll be in the proverbial boat that rises with the golden tide.

Meanwhile, we’re still at the beginning of a strong hard asset rally. Gold, copper and many other metals are destined to rise in price due to inflation and scarcity.

If you don’t follow the metals space, you ought to.  There’s serious money to be made here.

On that note, I rest my case.

That’s all for now… Thank you for subscribing and reading.

Best wishes,

Byron King

Byron King
Managing Editor, Whiskey & Gunpowder
WhiskeyAndGunpowderFeedback@StPaulResearch.com

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Byron King

A Harvard-trained geologist and former aide to the United States Chief of Naval Operations, Byron King is our resident gold and mining expert, and we are proud to have him on board as the managing editor of Whiskey & Gunpowder.

This “old rock hound” uses his expertise and connections in global resource industries to bring...

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