From Streetwise Reports: Peak gold production may be at hand, says Tom Beck, founder of Portfolio Wealth Global, and explains why he believes the market has entered the buyout phase.
What I will show you today could change the entire precious metals landscape.
Large-cap gold companies are in crisis mode–that’s the truth. Most of them have operational costs, which are near or at $1,250, so they’re employing thousands of workers daily, dwindling their only asset, gold, and at the end of the day, they have little to show for it.
Courtesy: Katusa Research
We’ve already heard from the CEOs of Barrick, Newmont and other multibillion-dollar mining conglomerates that peak gold production is at hand, but now we know that even the proven reserves on the balance sheets have retraced to 2004 levels.
In the gold sector, what triggers the institutional money participants–those that will buy our shares from us two to three years down the road for many multiples of what we paid for them in 2017–is a buyout phase.
These institutions don’t mind paying more, even much more, as long as they know the companies will immediately use the funds to make astute acquisitions.
The institutional New York and London funds, for instance, usually become aggressive when large-cap companies are pressured into paying huge premiums for quality, near-term projects with proven ounces in the ground at economical levels.
CEOs of mining companies hate one thing more than anything else: spending valuable cash on exploration that may or may not pan out.
Just to give you a recent example, Royal Dutch Shell spent $5 billion drilling oil exploration off the coast of Alaska. The results brought nothing to the table, and $5 billion were gone. On top of that, a project like this is hard to bring into production, anyway, with $50 oil price. In contrast, CEOs can just shop for proven resources in the ground with zero risk–that’s much smarter.
We already know this business is uniquely cyclical, so much so that it leaves emotional scars when you get it wrong, but what I want to stress is that the Gold Bugs Index (HUI) is trading at exactly the same price as it did in 2004 when gold reserves were at this level.
Courtesy: Stansberry Research
The next four years saw gold shares rocket higher. I mean, some people built entire careers, bought yachts, homes, and exotic cars, and became legends in the mining circles due to the performance of their companies during this four-year period.
Portfolio Wealth Global is disciplined enough to hold our core positions for four years. To make sensational fortunes, Rick Rule recently told me that you have to have as much conviction as the CEO of the company, who gets up every day to work the deal, no matter what the spot price is trading for.
Most of the world has been scoured when it pertains to gold deposits. Centuries of digging and drilling for gold means we’ve found most of the large deposits. Therefore, annual gold discoveries have been in free fall the past 10 years.
Courtesy: Katusa Research
I hope you know where I’m going with this.
The big gains will come from under-the-radar companies–not those that ETFs own, but the disregarded ones that are genuinely cheap.
Think of it this way: Gold’s price decline since 2011’s $1,925 peak has been translated into far less revenue for gold companies, which led to less money being spent on project development and exploration.
The activity in this sector is quiet and doesn’t excite traders.
The only people making plays in the gold sector today are contrarians, who are utterly confident in the people they partner with to over-deliver for them when the time comes.
This is what a market bottom looks like.
Courtesy: Katusa Research
Now, anytime you see capex shrinking by more than 50% in five years, you need to become very alert, because this equates to Apple telling shareholders that starting tomorrow, they will be cutting research for the iPhone 8 by 50%–investors would freak out.
But what would happen when the CEO says a few years later that they’re back at it, charging forward on all cylinders? Well, you already know, because that is exactly what happened when Steve Jobs returned at the beginning of the century to lead Apple, making it the most valuable company on the planet.
One buyout, one story that makes its way through the wire and causes other CEOs to follow suit and you’ll be looking at your screen, and as long as you don’t have an allergy to the color GREEN, your Cinderella story will be alive and kicking.
The entire industry is shaking and standing still. No one wants to be first to make a major acquisition. It’s risky to be a pioneer, but one will, and when he does, we’ll be happy campers.
The VanEck Vectors Gold Miners ETF (NYSE:GDX) was unchanged in premarket trading Thursday. Year-to-date, GDX has gained 8.03%, versus a 11.63% rise in the benchmark S&P 500 index during the same period.
This article is brought to you courtesy of Streetwise Reports.
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