Gold In The Modern World: 2018 Outlook – VanEck Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ)
2017 has been an exciting year in the markets. All-time highs seem to fall every week, the market has shaken off three Federal Reserve rate hikes as no big deal, and there is so much bitcoin to talk about that it makes a head spin.
It’s also been an exciting year on the Seeking Alpha Marketplace. Marketplace is our platform for authors to offer investing services that go beyond what they can do in public articles. In 2017, we went from 75 authors on the platform to 155. Those authors have a wide range of expertise and backgrounds. And while 2017 has felt like a year where everything has gone in one direction – up – we wanted to draw on this diverse array of backgrounds.
So, we’re doing a Year End Marketplace Roundtable series. Over the next 2 weeks or so, we will be featuring expert panels giving their outlook on 2018 in corners of the market ranging from Tech to Energy, Dividends to Alternative Strategies, Gold to Value Investing. We hope you’ll find these discussions useful no matter how you invest.
Today’s roundtable covers gold, including the rising rate environment, what bitcoin portends for gold, and where the market might go in 2018. Our panel:
Note: Questions were sent out on November 30th, before the most recent Fed hike and any other relevant events.
Seeking Alpha: Like most investing decisions, buys or sells of gold are informed by the macro context. The Fed raised rates at least twice this year, and the global economy has sent up some green shoots. How does that inform your investing approach, whether you focus on the actual metal, ETFs, or miners?
Gold Mining Bull: This doesn’t affect my investing approach as I don’t pay much attention to macro context. I look more at gold supply and demand, as well as valuations of miners. My preference is junior gold miners, developers and exploration companies, with the purpose of gaining leverage to gold prices. I think there is a lot of value in this sector, but you have to pick them carefully. I place a heavy emphasis or focus on the quality of the management team, insider ownership/buying, low-cost mines or development projects, and politically-favorable mining jurisdictions, among other factors.
Avi Gilburt: If we look back over the last few years, we would remember that the expectations of the Fed raising rates created the expectation that it would have a negative impact upon the gold market. In fact, I remember back in late 2015, when we were going in heavy on the long side in the metals market, most were quite certain of the drop below $1,000 gold, especially with the expected rate increase. Moreover, this stands in contrast to the wide expectations that QE3 would have been exceptionally positive for gold. Yet, when QE3 was announced, we then saw gold simply tank. So, anyone following the Fed’s actions for their investment decisions for gold have been on the exact opposite side of the price reaction.
Victor Dergunov: I try to focus on all the moving parts that surround and influence the gold market. Macroeconomic developments, inflation, interest rates, economic and monetary policy, and geopolitical events all play a role when it comes to gold prices. I am not too concerned that the Fed is raising rates. In fact, I see this is a good thing, because if the Fed is raising rates this means inflation is present, and inflation plays a prominent role in influencing gold prices to the upside. Also, I think that gold will have a much better shot at going higher following the December rate hike, as another rate increase is not likely to materialize until the second half of 2018, which is bullish for gold.
jsIRA: I turned bullish on gold after Fed raised its Fund interest rate for the first time in December 2015. I remain bullish on gold’s long-term prospect and believe that gold will at least re-test 1,350 area or may even have a breakout move in 2018. My investment focus is on gold futures, 3X gold miner ETF pairs – NUGT/DUST & JNUG/JDST – as well as individual gold miner stocks.
Geoffrey Caveney: In December 2015 and December 2016, gold *bottomed* right about the same time that the Fed raised rates, then gold shot up early in the New Year. It looks to me like everything is in place for the exact same thing to happen again this December and in early 2018. We have already seen gold and miners rally in just a couple trading days since the rate hike. I expect much more in January and February.
Simple Digressions: In the short and medium-term, the markets are driven by investor’s sentiment and one of the best tools to identify this sentiment is the Commitments of Traders report. In my weekly Marketplace updates, I discuss a few self-invented market sentiment indices (gold, silver, US dollar, US treasuries and a few other instruments) – in my opinion, these tools help much in taking well-grounded investment decisions.
SomaBull: Gold has responded favorably to all rate hikes since the Fed began the process of normalizing rates back in December 2015. The more the Fed increases the funds rate over the next few years, the higher gold will go in price. Rates are increasing for a reason. You simply can’t have the stock market hitting all-time highs and other assets increasing in value – yet have interest rates still near record lows – and not have a spike in inflation. This will happen. The environment is perfect for gold right now. My focus continues to be on the gold miners as you not only get incredible value at the moment but also incredible leverage.
Itinerant: The macro environment does not seem overly supportive of a sustained gold price rally going into the new year, and I am bracing myself for more choppy sideways trading in 2018. Protecting the downside, and finding opportunities with upside regardless of short-term metal price fluctuations will be as important as ever. This approach has worked very well in 2017, and it will most likely work again in 2018. And if gold takes off after all, then I’ll take that as a welcome bonus.
SA: How much do you pay attention to bitcoin, given it’s often considered an alternative storage of wealth ala gold (if a lot newer and more speculative)? If so, what are your thoughts on its rise and or the implications for gold investors?
GMB: If you were to ask me, in 100 years, 50 years, or even 10 years, which will be more prominent: gold or bitcoin? The answer is obviously gold. I’m not even sure bitcoin will exist in less than a decade. Like many others, I think it’s in a bubble that will eventually pop. Gold, on the other hand, has been money and a store of value for thousands of years. It’s not manmade like bitcoin or paper currencies. It’s scarce, and getting the darn stuff out of the ground is pretty difficult, it takes years and it is capital intensive, and often dangerous, whereas bitcoin was “mined” using computer software. I think over time, more investors will come to trust gold as a store of value and measure of wealth, as opposed to bitcoin or other digital currencies, especially if or when inflation rises.
AG: Gold, bitcoin and the stock market are all different markets, and should be analyzed each on their own. I can no longer count how many people discuss how gold is a “hedge” against market volatility. Yet, the historical price relationship between gold and the stock market does not support this premise (see first half 2016 as well as the multi year rally of gold and the stock market into 2007, whereas they both saw large percentage declines in 2008). I feel people are making the same mistake now with bitcoin in attempting to paint it as an alternative to gold, or as a hedge against stock market volatility.
VD: A lot to be honest, as of late, probably just like so many other people now do. I actually made my first purchase of bitcoin recently, when the price was a little under $10,000. I was obviously late to the bitcoin party, but as they say, “better late than never”. On a serious note though, I am a big believer in bitcoin, and I think the price will go significantly higher in the next 5-10 years. Perhaps a lot higher than most people believe, $500,000 per a Bitcoin is out of the realm of possibility 5 years from now.
In regard to gold, I don’t think the implications of bitcoin are that relevant for the gold market. Bitcoin and gold are two different things and people who invest in gold are not necessarily the same crowd that invests in bitcoin. However, if bitcoin were to crash or have a significant correction, I could see this driving some additional demand towards gold.
jsIRA: I paid attention to bitcoin only recently. I do not think that it has any influence on gold direction. Gold still repeats its trading patterns seen in 2015 and 2016: up the first 8 months then down the next 4 months. The pattern, however, may change in 2018.
GC: I pay a lot of attention to bitcoin, I have written about it, and I made my readers and subscribers some money on it this year. But right now, I have pared down my bitcoin holding to a slim 1%-2% of total portfolio. It is starting to look like a bubble, the price is moving too far too fast, it is too popular, people who have never owned a stock in their lives are buying bitcoin, and not just Millennials and techies. In any case, I don’t see any negative implications for gold. Notice that gold has not fallen much during bitcoin’s rise. Gold can hold its own while bitcoin grows, and gold may possibly stand to benefit if and when the bitcoin price falls or crashes.
SD: I do not pay any attention to bitcoin. For me it is just an artificially created speculative instrument. I am sure the current bitcoin mania will end very badly for those taking part in this game but… at the end of the day, it is the real value that wins (particularly gold). So… let the mania continue…
SB: Bitcoin is a bubble and it will burst. I remember the 1999-2000 internet bubble very well, I believe the bubble in cryptocurrencies is in fact even bigger in terms of speculative excess. These “currencies” are being valued now at over half a trillion dollars. 10 years ago they didn’t even exist. When you have Buffett and other well respected investors sounding the warning on bitcoin, it’s best to listen. Bitcoin will survive, but it will crash first. It will make another comeback attempt and try and threaten gold’s dominance once again, but that will be off in the distant future. And even then it will fail to overtake gold as I simply don’t believe it’s a viable alternative to the precious metal. I do see the rise of cryptos as a sign that investors are concerned about the long-term stability of global fiat currencies.
IT: It’s a bubble, and someone or something will prick it in 2018. I am staying far away from bitcoin and all its look-alikes at this stage.
SA: What was the big story or lesson learned for you in 2017?
GMB: Go with my gut more and trust my instincts. If a stock looks like an extreme bargain, sometimes there isn’t a catch and you have to take a chance. Also, get better at evaluating earlier-stage exploration companies before making an investment – in particular, evaluating drill results and the quality of a management team. A few explorers have been somewhat of a drag on my portfolio this year. In retrospect, I could have done a better job evaluating them.
AG: Back in 2015, we set a target for the SPX in the 2,537-2,611 region. And, now, towards the end of 2017, the market reminds us that bull markets love to extend past standard targets.
VD: I have to say that the biggest story for me in 2017 was bitcoin and cryptocurrencies in general. I didn’t pay much attention to the cryptocurrency space prior to this year, but it has definitely captured my attention. After performing proper due diligence, I see now that cryptocurrencies may represent a real alternative to the current fiat based monetary system down the line. This phenomenon opens the door to perhaps enabling some cryptocurrencies to become “the currencies of the world” someday. They could ultimately challenge the status quo in a big way, and for that, they are likely going a lot higher from here.
jsIRA: The biggest story has to belong to BITCOIN, its price ran up as big as 1,900% in 2017. But how many investors paid attention to it at the beginning of this year? Very few I believe. We are developing our own software programs to try to dig out future multi-baggers before their runs and achieved some degree of success. But more work to be done.
GC: “Financial Asset Inflation”. This is the story of global markets in 2017. Stocks, bonds, bitcoin, gold, base metals, and even oil now – they are *all* going up. People don’t see “inflation” because *consumer prices* on food, etc., are not skyrocketing. But in global financial markets what we see is precisely inflation. That’s why value investors can’t find anything to buy. Everything is “too expensive”. And yet interest rates are still fairly low. If you are a manufacturer purchasing base metals and other raw materials right now, your *real* interest rate is falling steeply. And falling real interest rates are good for gold, when inflation exceeds the nominal interest rate.
SD: Market trends last and last. The best example is the US stock market being in its ninth year of a bull cycle and… still marching up. It places us, contrarians, in a very difficult position.
SB: Gold is showing a nice gain for 2017, but the big story is the consolidation in the sector is lasting longer than expected and there has been a significant divergence between the precious metal and gold stocks this year. 2017 has been much more of a stock pickers market when it comes to the miners. Some are up 20-40%, some are down 10-15%, others are flat. This definitely hasn’t been like 2016 when most stocks in the sector were strong across the board. However, there has still been plenty of money to be made if one was in the right gold mining stocks. The Gold Edge portfolio is showing solid gains for 2017, even though the HUI and the Junior Gold Miners ETF (GDXJ) are down slightly YTD.
IT: Fatal flaws eventually bite – even if many other aspects of a project or a mine look irresistible. Primero Mining (NYSE:PPP), Tahoe Resources (NYSE:TAHO), or Torex Gold (OTCPK:TORXF) are examples of companies with apparently great projects; and all three got hit very hard in 2017 by the manifestation of flaws that investors had been very happy to ignore, as there were plenty of other attractions with these projects. It’s important to identify such flaws early, resist the temptation of an otherwise attractive project, and move on. It’s an old lesson, and it was resoundingly confirmed again in 2017.
SA: What are you preparing for in 2018? Any big themes to watch out for?
GMB: M&A has been somewhat quiet lately, but I think we’ll see it pick up in 2018. I wouldn’t be surprised to see at least 2 or 3 companies in my portfolio get bought out at premiums. I think we’ll continue to see mid-tiers and majors target low-cost, low capex projects for acquisitions, projects that would be economical even with gold at $1,000 per ounce. I think we’ll see deals similar to Alamos Gold’s (AGI) takeover of Richmont Mines (RIC) and Endeavour’s (EXK) takeover of Avnel (OTCPK:AVNZF), where a larger company ($2+ billion market cap) purchases a smaller company ($100 million-$800 million market cap) for a low-cost mine or development project. Major acquisitions ($1+ billion) seem less likely until gold prices rise above $1,400-$1,500 per ounce.
AG: We are preparing for the resumption of the bull market in the metals complex. We are also preparing for a larger degree pullback in the equity market before we set up to rally over 2,800 SPX.
VD: 2018 should be a very interesting year, I have three sectors I am overweight in for next year, energy, financials, and big tech. I think these segments have a lot of growth potential, offer great value, and many companies are actually still quite cheap. I am also very curious to see what happens to Bitcoin and the whole crypto space next year. Are we going to get a major correction, will bitcoin hit $50,000, can we have both in 2018? Just to be clear, I do think BTC is going to hit $50,000 next year, correction or no correction. I am also interested in what’s going to happen with gold. Ultimately, I think inflation perks up in 2018 and gold can have a big year, $1,500-$1,550 is my 2018 year-end gold target for gold. Finally, there is Tesla (TSLA), those who follow my articles probably know I am a huge Tesla optimist. I own the stock, and the first quarter of 2018 is going to be crucial for the company. So, obviously I’m going to be observing those developments very closely.
jsIRA: The market’s bull run has lasted almost 8 years. It may have some room to run in 2018. My theme for 2018 is still the same: this year’s dogs may be next year stars. I am looking for beaten down stocks with improved fundamentals to invest. My target is to find out stocks which will give us at least 100% return in 2018.
GC: First of all, financial asset inflation continues to grow. Second, gold and gold miners finally have another big rally, after struggling for a year and a half after the summer 2016 peak. Big question: can gold break above $1,400? It has rallied into the $1,300s many times the past couple years, but never above $1,400. If gold can do that, it could be a whole new ballgame and a new higher stage of the gold bull market. By the way: Stocks can keep going up while this happens.
SD: As I have answered in Question 3 – market trends last and last so, consequently, I do not expect nothing special in 2018. However, my market sentiment indices constructed for gold and silver indicate that we may be ahead of another strong move up in the precious metals (such signals appear one or two times a year).
SB: I believe that the sector will finally breakout of this consolidation phase and we will see a strong run in both gold and the miners in 2018. We are about to start Phase 2 of this bull market, where the solid and steady gains take place over a period of several years. We are entering the heart of the bull market.
IT: I am preparing for more sideways trading for gold; a moderately bullish environment for base metals; and plenty of hype in the sexy materials needed to produce EVs.
SA: What is one of your best ideas for 2018, and what is the story?
GMB: Pure Gold (OTCPK:LRTNF) is at the top of my list for takeover candidates in 2018. They’ve got the goods at Madsen, a past-producing gold mine in Canada. The 1.7+ million ounce resource carries gold grades of more than 9 g/t in all categories, among the highest in the sector. Low initial capital (just $51 million, mainly due to existing infrastructure) and low projected all-in sustaining costs ($714/oz) makes this a high margin gold mine (figures according to an updated technical study). Even though the technical study uses just 54% of its resources, the study still gives the project an after-tax value of $258 million – far exceeding Pure Gold’s market cap of $99 million. The economics should only improve with further mine optimization work and drilling. Finally, insiders own 3.6% of the company, with significant ownership from three strategic shareholders: AngloGold Ashanti (AU) (11.4%), Robert McEwen of Evanachan Ltd. (8.1%), and Goldcorp (GG) (7.2%).
AG: I would be watching the metals complex closely. The rally we are expecting to take begin in 2018 has the potential to be even stronger than the one seen in early 2016.
VD: I have quite a few ideas for 2018, and I mentioned some in the previous section. So, my greatest potential money-making idea is staying long bitcoin in 2018. The reasoning is rather simple, the supply is limited, the demand is enormous, the hype is stupendous, and more and more money should continue to flow into BTC. This is not the middle or the end to this “bubble”, bitcoin is still in its infancy for the most part and the “bubble” is likely to get a lot bigger and could go on for a lot longer than most people expect. However, the idea that I care most about is Tesla. This company is at a crucial point in its existence, and as many may well know it is a battleground stock. If the company can demonstrate to investors that it is able to efficiently produce the Model 3 vehicle in early 2018, its stock is going to be very difficult to stop. I am a strong supporter of Tesla, I believe I have a good understanding of the company, the challenges it faces, and the enormous potential value Tesla can deliver to investors. I have a $550 price target for TSLA for year’s end 2018, and I strongly believe Tesla will ultimate become one of the most valuable companies in the world.
jsIRA: I will publish my “Top Picks for 2018” series in the next two months on Seeking Alpha.
GC: I have to start with honest full disclosure: I save my very best ideas for subscribers to my service. But here is what I can share here: Junior gold miner stocks with high leverage to the gold price are set to be huge winners in 2018, just like in early 2016. Let’s take International Tower Hill Mines (THM) as a good example. It may not be the best gold mine project in the world, because it has lower grade and higher cost to build and mine, but it has excellent *leverage* to the gold price. Right now, when the gold price is below $1,300, most investors see little value in it, because it will cost about $1,450-$1,500 per ounce to build the mine and then get its 8 to 12 million ounces of gold out of the ground. So right now the stock price is very, very cheap. But if the gold price is $1,700, suddenly those 8 to 12 million ounces become massively profitable to mine.
Now, I’m not predicting or expecting $1,700 gold in 2018. But if gold even breaks above $1,400 in 2018, for the first time since 2013, more and more investors and traders will begin to prepare for and anticipate $1,500 and $1,700 gold. The money will rush back into stocks like THM. They won’t wait for the actual $1,700 gold price, if they see the momentum in that direction.
Keep in mind, I’m not always a gold bug or a gold bull. This past spring, I cautioned people to get out of most junior gold miners. The momentum was weak and the stock prices still had plenty of room to fall. Which they did from September to December. But now I see the sector bottoming, and the stock prices have come back down to bargain values again. So this is the time when I love to be a buyer again. THM is just one example, like I say there are many others, and this is what my subscription service is all about.
SD: Amerigo Resources (OTCQX:ARREF) – it is a small copper processing company operating in Chile in cooperation with one of the world’s largest copper producers, Codelco. The company is in the middle of an ambitious development program. Using various valuation metrics, the company is strongly undervalued now.
SB: There are many great stories in the gold (and silver) miners going into 2018. I save most of those for subscribers of The Gold Edge, but I have shared one recently on Seeking Alpha for non-subscribers. The company I’m referring to is B2Gold (BTG), and the reason I like it so much is their new Fekola mine is now up and running and far outperforming expectations during the ramp-up stage. The company just raised production guidance for 2017 to 580,000-625,000 ounces of gold because of the strength of Fekola. Next year, production will surge to 925,000-975,000 ounces thanks to the contribution from this new mine. AISC will drop to $800 per ounce as well. The shares haven’t priced in any of this expected growth as they have been held down by the recent decline in the HUI. But the stock is trying to breakout and will likely take off if the HUI stabilizes. This is one story where I don’t think you need a rising gold price to see share price appreciation. I expect BTG to perform very well over the next 12 months, assuming that all operations remain on track and there are no jurisdictional issues that BTG has to contend with.
IT: Vendetta Mining (OTC:VDTAF) is getting close to crystallizing the value of its Pegmont zinc-lead project. I am expecting a sale and a sizeable premium to the current market valuation. It’s one of my high-conviction long positions going into 2018 which I have been following closely together with my subscribers for some time now.
Thanks to our panel for their comments, lots of different views on where gold may be headed. If you’d like to check out any of these authors’ work, try the links below.
We are in the first week of our Year-End Roundtable series. If you’d like to get alerts on each day’s publication, as well as all the latest on the Marketplace, make sure to follow our account below.
Tomorrow’s Theme: Energy
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Geoffrey Caveney is long THM. SomaBull is long BTG. Victor Dergunov is long TSLA, NEM, GDX, GDXJ, gold futures, silver futures, and Bitcoin. Itinerant is long VDTAF. Avi Gilburt is long physical metals and various mining stocks, hedging as appropriate. Simple Digressions is long GDX and CEF, as well as gold futures. Gold Mining Bull is long LRTNF. jsIRA is long AGI, EGO, XNET, SRAX and GROW.
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