• Noel Ong

The four-letter word that drives the price of gold

Another Samso Insight for the Metals and Mining sector


Here's what I learnt from Rick Rule on what drives rapid market reaction and finding those Warren Buffet moments. Is this market sustainable or is it a bubble waiting to explode?


Read on to find those golden nuggets.


Was 1987 the mother of all crashes?


In my nearly 30 years in the mineral resource industry, I have never seen or participated in a rush like the last five months. Prior to the stock market crash of 1987 when I was sitting in the Reid Library (University of Western Australia) counting what percentage of the Porsche 911 I had, I thought this was the easiest thing. Investing in equities was simple. The crash came and that car was no longer in the picture. Just as well it was in theory.



As it turns out, for me, that crash would turn out to be one of many "crashes" for me to experience over the last three decades. As a geologist, there would be even more ups and downs.


If we had thought that the 1987 crash was a mother of all crashes, the chart below will tell a different story.

Figure 2: ASX200 from 2010 to 2020

The 2008 drop would have to be the biggest and that was due to naughty bankers. Rightfully too as they are the masterminds of the world financial system. The recovery was pretty fast for the bigger companies. For the rest of the small-cap sector, and the mineral resources sector, it was literally being dragged through the desert and then the thorny bushes and then through the salt fields. And when we resurfaced, we found that the water source was not working and those that worked were leaking.


For those people who were in the corporate sector, raising money was a hard slog. I remember listing my company in 2009 and then wondering how we were going to raise more money in the future.


Equity markets - 2020


Today, August 2020, for me, in terms of investing in shares this is a surreal feeling of Deja Vu for me. I have seen stocks take off from $0.005 to $0.072 on not much news and activity. The company has not announced anything so how is one to make an informed decision. This is not to say that the company is bad, it is what the market, in general, has been doing since that faithful last week in March.


Figure 3: Kairos Minerals Limited (ASX: KAI) share price chart. (source: Commsec)

The company I am referring to is, of course, Kairos Minerals Limited (ASX: KAI). The Pilbara has this history of sparking a rush lately with the Conglomerate Gold rush in late 2017 and now what I call the Hemi Goldrush. The Hemi Goldrush is all about the discovery of the Hemi gold deposit by De Grey Mining Limited (ASX: DEG). De Grey made an announcement on 17 December 2019 and it was on for the young and old.


Anyone that had something that was close by and had some essence of similarity would attract the attention of eager punters. You would have thought that was the case but, punters were still few and far between. As you can see the share price of Kairos was pretty much underwater until that last week of March


Figure 4: The share price journey of De Grey Mining Limited (ASX: DEG) (source: Commsec)

The share price for De Grey did not really start to move until February and took off around the same time as the whole market in the last week of March 2020. Hemi was touted as the next gold mine in the Pilbara and that may still be the case. It was a brand new discovery that made De Grey the darling of the market. Not too long before the discovery, when the company was trying to raise money, they were being shunned and how fortunes favour the brave.


On another chapter, Calidus Resources Limited (ASX: CAI) which was completing a Feasibility Study on its Warrawoona Gold Project seemed to be on hiatus. Everyone was waiting for the completion of the study. Hence this meant that they were not attracting too many suitors but again, sprang to life on the last week of March.


Figure 5: Calidus Resources Limited (ASX: CAI) (source: Commsec)

When I looked at some of these projects on its technical merit, I was puzzled at what was so good and why on earth would anyone want to put money in them. It became clear that the market was no longer reacting to substance but rather on the power of a driving market scene was going global.




Rapid Market Reaction


Uncertainty crept in and the wonderful four-letter word FEAR was driving the price of gold up.

As the gold price started to move up and the reality of COVID became clear, for some reason, the market went into overdrive. Companies that had just an inkling of money being raised, potential projects being acquired was driving share prices in multiples of 10x and 20x. Everything was on the move. Investment decisions were being made not on technical merit but that fact the stock was going to "fly".


When I looked at some of these projects on its technical merit, I was puzzled at what was so good and why on earth would anyone want to put money in them. It became clear that the market was no longer reacting to substance but rather on the power of a driving market.

There were conversations about money being raised everywhere. There are too many examples to list and too many names to mention that were influencing the rising sentiment.


During this time, I had a couple of conversations with Rick Rule and we had a couple of Coffee with Samso to talk some sense of this market. Rick Rule is the Senior Managing Director of Sprott Inc. and the President & CEO of Sprott US Holdings.


Check out these episodes of Coffee with Samso with Rick Rule


Gold, Equities, Sprott Management and Australian Gold Exploration

(Not the best of recording)


Markets and Commodities with Rick Rule

Rick shares some great points and the one that sticks to my mind are the following:


People buy GOLD when they FEAR
They buy Silver when they are GREEDY.
If the price of gold is at a level that is considered more than a demand vs Supply vs Insurance, there is something drastically wrong in our world.
In the begining, Invest frist and Speculate later.

I have taken on board these comments and I am looking at this market and thinking that one should now start to Invest and Speculate later. All the first three statements are now in play. This is not to say that the market is about to blow up, but rather to say that it is time to look at the substance rather than the speculative "plays".


What is Substance?


Let us look at some of the ones that are pretty obvious in the market now. One would ask the obvious question. Have they peaked? Is the gold price going to come back? Are we going to see a major pullback?


The answer to this question is simple. DYOR (Do Your Own Research) and don't let FOMO (Fear Of Missing Out) drive your thinking.


I would look for near producers that are undervalued and have lots of upside for growth. I agree that there are very little left in this category but I have two that I feel will do well (Hint: Don't stop reading now :-)...). If you look hard enough, you will find them. Warren Buffet finds them so you can as well. As he says, he only needs to find one or two a year and that will do him well. When he finds them, he goes in big.


After many years of "speculating", I am now a practitioner of this method. This is a sign of old age and preparing for a slower pace of life :-) I am now in the school of "trying" to find those Warren Buffet moments and then backing the truck into it.


There are many opportunities to "punt" but there are only one or two that you will "invest".


Which Commodity?


In terms of Gold, I think that the government stimulus which is happening all over the world now will keep gold price buoyant and most likely go up depending on how COVID plays out. Remember that prior to COVID, the inflationary issues associated with printing too much money was already rearing it head out of the pack.


As for the base metals, I think all major and minor economies are just entering the next phase of rebuilding and so base metals will attract strong demand. I believe that copper will be the star of this batch. Dr. Copper is never wrong!


There is the transition to EV (Electric Vehicles) and Renewable Energy, so the likes of Nickel, Lithium, Cobalt (?), REE and Uranium will be in strong demand.


I just had an interesting conversation with an associate who is heavily into the trading of Spodumane (Li). He has some good reasons that point to a Lithium recovery. Hard rock lithium recovery.


What do I like?


I like Blackstone Minerals Limited (ASX: BSX) because they have a very good project in Vietnam. This is a mine waiting to happen. This is a mine within the market for Nickel Sulphide. This is a mine with a great partner in EcoPro. So what is there not to like?


Figure 6: Blackstone Minerals Limited (ASX: BSX). (source: Commsec)

My only regret is that I had to sell my holdings way too early. Looking at Figure 6, I am sure they are going to be a shining nickel company. Let us hope management still remembers how to spell Samso.


I have been a great sideline supporter of this project from late last year. I am pretty sure the share price was around $0.15. Currently sitting over $0.40 is a true testament to the hard work from the management of the company.


One that I have a holding in and I am happy shareholder is Hot Chili Limited (ASX: HCH). Again, from my DYOR article on porphyry deposit in Chile - Copper Porphyry Districts - Chile & Associates - I have learnt that this is well managed and is a giant waiting to come out of the woods.


Figure 7: Hot Chili Limited (ASX: HCH) (source: Commsec)

There have been a couple of Coffee with Samso with Christian Easterday and I remember our discussion was on how the public never really understood the potential of the adjacent porphyries in El Fuego.


If you watch the Coffee with Samso and the Rooster Talk I have done with Christian, you will slowly understand that this is one of those Warren Buffet moments. Even at the $0.039, the market capitalisation is only AUD77M. Go figure that.


Conversations with Christian Easterday


Coffee With Samso

Rooster Talk

The beauty of HCH is that the market is still unaware of the value creation. The persistence of management to keep delivering milestones is commendable. it is not easy to stick to this task for ten years and work through some tough times.


Conclusion


I don't think this market is going to burst. However, I do feel that the small-cap market is now so speculative, the safest way is to look for value. I know this last statement goes against everything that a small-cap "investor" would do.


My thoughts are based on the fact that this market is the best I have seen. In fact, if you look around the world, almost every exchange that I have some insight to is up and is as active as the ASX.


The advice from Rick Rule is resonating in my mind as I write this. Invest first and speculate later. Gold is rising so FEAR is in the air. Silver is rising so GREED is near. The best way for me to create some form of insurance is to find those Warren Buffet moments.

Disclaimer

The information contained on this website is the writer’s personal opinion and is provided to you for information only and is not intended to or nor will it create/induce the creation of any binding legal relations. Read full Disclaimer.

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