The situation in the precious metals sector remains tense – miners have broken above the declining resistance line, while gold hasn’t.

Briefly: In our opinion no speculative positions are justified from the risk/reward perspective.

The situation in the precious metals sector remains tense – miners have broken above the declining resistance line, while gold hasn’t. However, taking Friday’s intraday move in the USD into account, we can say more about the gold-USD link. Let’s take a closer look (charts courtesy of http://stockcharts.com).

Click here for reference chart.

Much of what we wrote previously remains up-to-date:

(…) the session itself was very specific. We marked similar sessions (similar volatility + significant volume) on the above chart with orange rectangles. It turned out that these sessions didn’t necessarily mark the final bottoms, but they have practically always (at least recently) been followed by short-term rallies (very short-term in early December 2013). Consequently, while the medium-term trend remains down, the short-term implications are bullish.

(…) we also saw a move below the previous April low and the immediate invalidation thereof, which by itself is also a bullish sign.

Gold has indeed moved higher, but it hasn’t moved above the declining resistance line, so the short-term outlook here is rather mixed. We have already seen a short-term rally that was possible based on the above-mentioned comments, so this move might be over or close to being over. The volume was not low during Friday’s move higher, but it was not high either, so the implications are rather unclear.

The same goes for the silver market, the situation is a bit more bullish than not, but overall rather unclear.

Click here for reference chart.

The mining stocks to gold ratio moved higher on Friday after a daily decline and overall closed slightly lower than it had on Wednesday. We don’t view this action as a breakout just yet.

Click here for reference chart.

If we take a look at gold stocks from a broader perspective, we get a picture in which gold miners are declining in tune with the previous declines. By zooming out we stop to see individual short-term upswings and downswings and start to see the general direction in which the market is moving. At this time, the trend that we see is down and the pace at which gold stocks decline is normal – there has been no divergence so far. The implications are bearish.

Click here for reference chart.

On a short-term basis, we saw a breakout in the GDX ETF, which, of course, is a bullish sign. It hasn’t been confirmed yet, and given what we wrote below the 2 previous charts, it’s not strongly bullish just yet. The overall pace of the decline and the lack of breakout in the GDX:GLD ratio make waiting for the GDX’s breakout necessary.

There is also another ratio that we would like to comment on today.

Click here for reference chart.

The above chart features the junior mining stocks to the general stock market ratio. In the majority of cases when the ratio of volumes was huge, gold was about to form a top or at least pause the rally. The signal was a bit too early in the early part of this year, but please note that gold’s price at this time is lower than it was when we saw the huge ratio of volumes.

Last week we saw a huge spike in the volume ratio – a record one. As explained above, the implications are bearish.

Click here for reference chart.

Meanwhile, the previously-completed head-and-shoulders pattern in platinum was invalidated in the final part of last week. The invalidation itself is a bullish sign and the above chart now suggests higher platinum prices (which also, to a smaller extent, indicates higher prices for gold, silver, and mining stocks).

Click here for reference chart.

We started today’s alert by writing that we can say a bit more about the gold-USD link. The USD Index moved lower in the first part of Friday’s session and taking this move into account, we now have a clearer picture.

Comparing the 2 most recent price moves (mid-April move higher in the USD and the last several days of lower values) in the USD and gold we see that they were quite alike. The dollar corrected some of its rally and gold corrected some of its decline. There’s not short-term underperformance or outperformance to speak of and the implications are neutral.

There is, however, one thing that can tell us more about the near future of the USD and precious metals prices and that’s the fact that the turning point is just around the corner. In the first days of May, we can expect to see a local extreme in both markets. At this time, the short-term direction is up in case of the precious metals and down in case of the USD Index, so we are quite likely to see a downturn start in metals and miners within a week or so.

We were asked if we still think that there is real downside in the precious metals sector. The answer is yes, because the medium-term trend is still down in metals and miners (note the pace of decline in the HUI Index) and the medium-term trend is still up in the USD Index. The negative gold-USD link remains in place. We are keeping our eyes opened and will monitor the market for signs of strength.

The bottom line is that the situation in the precious metals market remains too unclear to open any speculative position and the medium-term trend remains down. The situation in gold is unclear, unclear with a bullish bias for silver and mining stocks, bullish for platinum, but with bearish indications coming from the USD Index and the juniors to other stocks ratio. “When in doubt, stay out” – and so we do.

To summarize:

Trading capital (our opinion): No positions
Long-term capital (our opinion): No positions
Insurance capital (our opinion): Full position

Thank you.

Przemyslaw Radomski, CFA of Sunshine Profits, Guest Contributor to MiningFeeds.com

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Gold’s sharp selloffs since mid-March have been mostly driven by American futures speculators’ heavy selling.

Gold’s sharp selloffs since mid-March have been mostly driven by American futures speculators’ heavy selling. These traders dramatically slashed their long bets on gold while ramping up their shorts. The resulting deluge of supply flooded the market and temporarily overwhelmed demand. But intense bouts of gold-futures selling quickly burn themselves out, and today’s is waning. Thus gold’s upleg is due to resume.

While many stock traders view the gold market through the lens of the mighty GLD SPDR Gold Shares ETF, it is still gold-futures trading that usually dominates price action. While GLD certainly can move the gold price on trading days with particularly large builds or draws from differential GLD-share buying or selling, these are fairly rare. The vast majority of the time gold and therefore GLD are driven by futures.

While the very successful GLD ETF was born in late 2004, American gold futures started trading three decades earlier in late 1974. That’s when gold ownership finally became legal again in the United States. Over the great gulf of time since, the US gold-futures price gradually became the global standard for measuring gold. Everything else, including GLD share prices, cues off what is happening in gold futures.

And it is the American speculators who dominate US gold-futures action. They are constantly buying and selling gold futures based on sentiment, technicals, and news. When their buying or selling grows lopsided, gold moves accordingly. While the total numbers of long and short gold-futures bets are always perfectly equal in the zero-sum futures game, the speculators (as opposed to the hedgers) drive the trading.

They’ve been very bearish on gold since mid-March. That was soon after Ukraine’s geopolitical crisis hijacked a young gold upleg. Between the mid-December gold bottom right after the Federal Reserve started to taper its third quantitative-easing campaign and late February, gold powered 12.7% higher to $1340. Crimea didn’t first make the news, traders hadn’t even heard about it yet, until several days after that!

The Ukraine tensions amplified gold’s gains in early March, driving it to $1383 by mid-month. But right after that the Crimean people overwhelmingly voted to secede and join Russia. The very next trading day, gold started selling off. Despite Russia continuing to mass troops, armor, and artillery along Ukraine’s border, the American futures speculators figured Russia taking Crimea would magically resolve that crisis.

So they sold gold futures, driving the gold price and those of all the gold tracking ETFs led by GLD lower. Since futures are such a highly-leveraged hyper-risky game, this selling fed on itself. Speculators only need to keep $6500 in their margin accounts to control a single 100-ounce gold-futures contract! And at $1300 gold that’s worth $130k. Running extreme 20x leverage to gold doesn’t leave any wiggle room at all.

So futures selling begat more futures selling, flooding the market with supply that kept coming even as Ukraine quickly started to heat up again. And the resulting gold weakness dragged down GLD share prices and spawned high levels of bearishness. But this process is waning, as American speculators have already dumped so many long-side gold contracts that their total longs are now about as low as they’re likely to go.

My charts this week illustrate this high-odds imminent gold reversal that will be driven by American speculators’ futures selling petering out. The green line shows the total long-side gold contracts this group of traders holds, and the red line their total short-side gold contracts. These key metrics have very high positive and negative correlations respectively with the gold price, which is shown here in GLD terms in blue.

Gold and GLD price levels are dominated by US gold-futures trading! Gold rises when speculators buy gold futures, both in the form of adding new long-side contracts and covering existing short-side ones. The last episode of heavy gold-futures buying happened in January and February. Speculators first bought to cover shorts, and later bought to open longs. And GLD prices surged dramatically as a result.

Exactly the opposite has happened since mid-March, when speculator futures buying shifted to selling. GLD fell as speculators sold through both liquidating existing long contracts and adding new short ones. The resulting deluge of new gold supply overwhelmed normal investment demand, so gold’s price fell on balance. But this heavy selling, particularly on the critical long side, is waning after burning itself out.

Some essential context makes American speculators’ total long and short gold-futures bets much easier to interpret. 2013 was an extremely anomalous year for gold. Not only was it gold’s worst year in nearly a third of a century, the precipitous plunge last April led to gold’s worst quarter in an astounding 93 years! There was absolutely nothing normal about the gold markets last year, they were off-the-charts crazy.

So to understand how speculators’ gold-futures bets in this chart stack up historically, we need some normal baseline. The most logical one is the period from 2009 to 2012, which was after 2008’s once-in-a-century stock panic and before 2013’s once-in-a-lifetime gold panic for lack of a better term. Averaging the total gold-futures longs and shorts held by American speculators over that 4-year span yields a normal baseline.

They held 288.5k long-side gold contracts and 65.4k short-side ones on average, during that long secular slice of time that included both massive gold uplegs and brutal corrections. As of the latest weekly Commitments of Traders report that discloses their gold-futures holdings, speculators were down to just 185.8k long-side contracts and up to 98.2k short-side ones. They remain far more bearish than normal.

To streamline this analysis, I added up the weekly deviation from those 2009-to-2012 average levels of both longs and shorts. It is rendered above in yellow. Note the nearly perfect inverse correlation between this deviation and the GLD price in blue. GLD sells off when this bearish deviation from norms rises, and rallies when it retreats. This ironclad relationship is why GLD traders have to follow gold futures!

GLD prices surged dramatically in February and early March primarily because futures speculators were buying gold through adding longs and covering shorts. This is readily evident in the weekly CoT data on their total long and short positions shown above. These reports are current to each Tuesday’s close, so in CoT terms GLD rallied 8.0% between February 4th and March 18th on heavy gold-futures buying.

During that 6-week span speculators bought a staggering 80.2k gold-futures contracts! 44.1k were new long positions, while 36.0k were covered shorts. This averages out to 13.4k contracts being bought per week when GLD surged, or the equivalent of 41.5 metric tons of gold bought every week. So much marginal futures demand on top of normal investment demand quickly catapulted gold and therefore GLD prices higher.

This was massive futures gold buying! According to the World Gold Council, total global investment demand for gold averaged 30.2t per week in 2012 and 14.9t per week in 2013. Last year’s number was so low only because of the epic differential selling pressure American stock traders put on GLD, forcing it to hemorrhage 40.9% of its holdings. Outside of ETF selling, 2013’s gold investment demand hit an all-time record high.

So with normal investment demand being on the order of 30.2t per week, you can see why an additional 41.5t of gold-futures buying can catapult the gold price up so fast. But unfortunately after the Ukraine crisis hijacked psychology among gold-futures traders, they started hammering their sell buttons again. Between the CoT Tuesdays of March 18th and April 15th, GLD share prices lost 3.9% on futures selling.

During that 4-week span ending at the latest CoT report, American futures speculators sold 58.3k contracts through both liquidating longs and adding shorts. This works out to a weekly rate of 14.6k contracts, or the equivalent of 45.4t of new gold supply hitting the markets weekly. Obviously that is enough to even overwhelm 2012’s average weekly investment demand of 30.2t, so gold prices naturally fell dramatically.

But for several key reasons, I suspect this episode of heavy gold-futures selling is either waning or over. The rate of the long liquidation has moderated dramatically, with speculators’ total longs back down near major 2013 lows where gold launched. The recent short ramp is relatively minor too, suggesting much less bearish conviction among traders. And gold has been finding support near its 200-day moving average.

Let’s start with the longs. Futures speculators’ aggregate bets are a fantastic contrarian indicator for gold. Without fail historically, the lower their long-side bets and the higher their short-side ones, the more likely gold has carved a durable bottom and is on the verge of a major new upleg. Those uplegs are initially sparked and fueled by short covering, then new long buying, and then other gold investment demand takes over.

You can see this progression above, gold started surging in January on big futures short covering and then accelerated in February on new long buying. When these long bets start rising again after their latest pullback, gold is going to resume rallying. And we are nearing or at that point. Notice above how the green speculators’ total-longs decline is moderating dramatically. This long liquidation has run its course.

Over the past 4 CoT weeks of this gold selloff, speculators reduced their long-side gold-futures bets by 15.7k, 9.5k, 9.1k, and then 3.5k contracts sequentially. This latest CoT week saw long-side futures gold selling at less than a quarter of the initial week’s wave! Without long liquidations, gold will start rising again on other investment demand which will force the highly-leveraged futures shorts to buy to cover.

And this latest CoT week’s total speculator longs of just 185.8k contracts is extremely low and totally unsustainable. It isn’t too far above the absolute low of 170.2k seen in mid-December when peak gold despair hit. At that point futures speculators were as bearish on gold as they’d been since the stock panic fully 5 years earlier. And out of that earlier short-lived bearish sentiment extreme, gold would soar.

This next chart extends this gold-futures CoT data on speculators’ total long and short bets back to that stock-panic year of 2008. Gold itself replaces GLD as the blue line. Not only are such low levels of total speculator gold-futures longs unsustainable and short-lived, after that stock-panic episode gold would blast 166.5% higher over the next several years! Extreme futures bearishness births massive gold uplegs.

2013 was gold’s worst year in nearly a third of a century, and bearishness was as high as I’ve seen it in my trading lifetime. There is absolutely nothing that could happen to gold this year that would even remotely approach such an epic swing to bearishness. And as the first chart shows more clearly, even throughout that entire despairing second half of 2013, speculators’ total longs rarely fell below 175k contracts.

Their strong support zone, the point where futures speculators stopped liquidating longs even when gold kept grinding lower, ran between 175k and 185k contracts. That’s right where they are again today! And if all the extreme gold carnage of last year couldn’t force their long-side bets lower, it is really hard to imagine that support breaking this year. That means the only thing speculators can do now is start buying again.

And on the short side, the recent ramp up is relatively minor too. While the long-side liquidation erased most of February’s buying, the short surge in the past month barely carried total shorts back to late-February levels. That suggests futures speculators aren’t as convicted on the bearish case for gold as they wrongly were in late 2013. And they sure shouldn’t be after gold’s strong rally earlier this year, pre-Ukraine.

So when gold starts rallying again as the long-side liquidations stop and reverse to buying, odds are the traders on the short side will be quicker to cover. They’ve seen gold rally powerfully in early 2014, carve a strong Golden Cross technical buy signal, and then stabilize near gold’s 200dma which has turned higher again. Not even the torrent of futures selling could force gold back down to retest late-2013 lows.

At 20x leverage to gold on maximum margin, gold only has to rally a few percent to make all the new shorts really nervous. And over 1/5th of the speculators’ current gold-futures short positions were added in the last month alone! They’ve bet against gold despite its strong upleg in 2014, and they will buy to cover fast when gold starts moving decisively higher again. Short covering always feeds on itself too.

And once we see the equivalent of 45.4t of weekly futures selling slow and then reverse, gold is going to fly again. The fact that this metal bounced in early April in the face of that heavy futures selling, rather than falling back down near $1200, shows strong physical demand somewhere in the world. It will certainly push gold higher again as the heavy futures selling unleashing the deluge of gold supply abates.

And both gold-futures buying and GLD differential buying pressure are going to be big parts of gold’s accelerating upleg. As of that latest CoT report, speculators’ total longs are still 102.7k contracts below their 2009-to-2012 average levels in normal markets. That is the equivalent of 319.5t of gold buying merely to mean revert! And shorts were 32.8k above their normal average, another 102.0t of guaranteed futures buying.

So merely to unwind 2013’s extreme gold-futures anomalies, not even to overshoot towards the opposite extreme as mean reversions always do, futures traders are going to have to purchase the equivalent of 421.5t of gold. Since futures are so highly-leveraged and risky, mean reversions are often fairly rapid like we saw in 2009. So if this next one takes a year, futures traders will add 8.1t of average weekly gold demand.

And GLD’s holdings were crushed last year by that record mass exodus from its shares. As gold’s new upleg resumes on futures buying, and the wildly-overvalued US stock markets inevitably roll over, stock investors will once again be attracted to gold. If they even restore half the GLD positions they sold last year over the coming year, that is another 276.3t of new gold investment demand! That would add 5.3t weekly.

So the prospects for gold soaring in the coming year on mean reversions in speculators’ gold-futures positions and stock investors’ GLD positions are amazing. And with the heavy futures selling of the past month already waning, this new investment demand should begin soon. Ironically it may actually be the same Ukraine crisis that futures speculators wrongly assumed was over that soon reignites major gold buying!

Russia never backed down even after winning Crimea, continuing to mass a huge invasion force along Ukraine’s border. Ukraine has even proved that some of the same individual Russian special-forces insurgency operatives that fomented the Crimea uprising are active in eastern Ukraine. And Russia has all but threatened to invade Ukraine if that country takes any action to stop the Russian-soldier-led revolution!

Gold certainly doesn’t need a geopolitical boost to rally, as its strong early-2014 upleg proved. But Russia invading or annexing more of Ukraine certainly wouldn’t hurt gold demand either. Are you ready for this mean-reversion upleg in gold to resume? While gold and GLD will do great, the gains in the loathed gold and silver miners will dwarf those of the metals. They are the ultimate contrarian bet today.

The bottom line is the heavy futures selling that hammered gold in the past month has likely run its course. Speculators’ aggressive liquidation of their gold-futures longs left their total positions down near major lows. Not even the once-in-a-lifetime extreme bearishness of late last year could push them much lower, which means this selling is likely done. That ends, and the new shorts will be forced to quickly cover.

And the great majority of last year’s extreme deviation of speculators’ futures positions from normal levels still has yet to be unwound. Their long-side bets are still way too low, and their short-side ones remain too high. These positions will continue to mean revert, and eventually overshoot, their normal averages. This heavy futures buying will add major gold investment demand, greatly amplifying gold’s upleg.

Adam Hamilton, CPA of Zeal LLZ, Guest Contributor to MiningFeeds.com

The bottoming process for gold and silver shares has been arduous as they’ve oscillated back and forth for almost a year.

The bottoming process for gold and silver shares has been arduous as they’ve oscillated back and forth for almost a year. We noted a month ago that the failed breakout in March was strong evidence that an interim top was in place. Heading into this week it looked like the miners would fall further before finding support. However, over the past two days the sector clearly reversed its short-term course. For now this appears to be a rebound from an oversold bounce.

We plot GDX, GDXJ and SIL in the chart below. As of Monday’s low, the miners were very oversold in a small space of time. From recent highs GDX was down 18%, GDXJ 27% and SIL 21%. Thus the miners were ripe for a bounce. The bullish reversal on Monday coupled with confirmation on Tuesday signals that a rebound is underway. The initial upside targets are the open gaps from six days ago and the 50-day moving averages.

Click here for reference chart.

Is this low the right shoulder of a head and shoulders pattern and the low that springboards the sector to a sustained advance?

It is really difficult to tell. My gut says no. Most of the precious metals sector failed to rally all the way back to the 2013 summer highs. We previously noted, this in addition to the strong weekly reversal was a sign of weakness. It seems unlikely the market would begin a major move higher only a single month later. Thus, we think more weakness is possible after this rally. However, we always should keep an open mind when the outlook is uncertain.

The chart below plots the strongest indices which includes Canadian indices such as the TSX Global Gold Index and ZJG.to (the Canadian GDXJ) as well as GLDX (explorers), SILJ (silver juniors) and TGLDX (Tocqueville Gold fund). While a right shoulder could be forming it appears that more time and consolidation could be necessary. The time between the left shoulder and head is about five and a half months. Translate that forward for the right shoulder and June could be apt for the next low.

We should be vigilant and note the various possibilities. Inflation is starting to creep higher, by the preferred indicators of the market. Last week the Labor Department reported that wages increased at the fastest pace in more than four years. Both the CPI and PPI accelerated from February to March. The WSJ reported that big banks are ramping up lending. Meanwhile, commodity prices (CCI index) broke out of their multi-year downtrend and have held firm close to 12-month highs.

The capital markets only care about the margin. Just a small sustained increase in inflation expectations could drive precious metals to confirm a bottom and the miners to begin a move that would break out of this long bottoming base. We are not saying this is imminent. We are thinking about what could be the driver of the future breakout in this sector. In the meantime, we sold all hedge positions yesterday and continue to actively research the sector for the absolute best opportunities. The next few months could be your last best chance to accumulate the companies poised to benefit from the coming revival in precious metals.

Article written by Guest Contributor to MiningFeeds.com, Jordan Roy-Byrne of The Daily Gold.

William Gibbs, CEO of American Sands Energy.

Over the past month, I’ve had several conversations with William Gibbs and Daniel Carlson, CEO and CFO respectively, of American Sands Energy Corp., [Ticker: AMSE], of which I’m a shareholder. Assuming the conversion of all the recently issued Series A preferred shares to common, AMSE has a fully-diluted market cap of approximately $50 million and no debt. Readers should take a few minutes to review the company’s corporate presentation. On page 11, the company estimates that by 2017 it could generate $39.4 million of annual EBITDA from an initial phase, 5,000 barrels of oil per day, “bopd” operation. That’s based on an assumed $80 WTI oil price, compared to the current WTI price of $104. The company plans to operate at 5,000 bopd for about 4 years while it builds a much larger facility which would allow for the production of 50,000 bopd.

American Sands Energy is an early-stage company in Utah looking to become one of the first companies to mine oil sands in the U.S. As an early-stage, small market cap company, readers should do proper due diligence, (including a review of the company’s corporate presentation and its SEC filings), and consult with an investment advisor. Further information can also be found at the company’s website.

Mr. Gibbs, thank you for your time. Can we start with a brief overview of American Sands Energy?

American Sands Energy Corp. [Ticker: AMSE] is a pre-production oil company with oil sand resources located near Sunnyside, Utah. We are committed to the safe, clean and profitable extraction of oil from oil sands deposits in North America using a proprietary technology. We have leased oil sand deposits in Utah containing approximately 150 million barrels of recoverable bitumen. We employ an environmentally friendly, solvent extraction process that produces no tailings ponds, as our process uses no water. We expect to be in commercial production by the summer of 2016.

Can you talk about the efforts of Amoco and Chevron on your property in the 1980′s & 1990′s?

Yes. A compelling aspect of our company is that Chevron and Amoco probably spent $30-$40 million (on drilling alone) on our property in the 1980′s – 1990′s. These companies drilled a total of 189 holes and did considerable engineering work. In fact, Amoco delivered a full-blown mining plan for both a 25,000 and 50,000 barrels of oil per day, “bopd” mining operation. We have access to all this information and a great deal of this historical data was incorporated into the mining permit application we submitted about six weeks ago.

How is your licensed technology / process different from oil sands operations in Canada?

That’s a great question. There’s a key difference between oil sands deposits in Canada and the oil sands deposits we are targeting. Canada’s oil sands are called, “water wet,” because they are saturated with water. In Utah, the oil sands are referred to as “oil wet” and are “wet” with hydrocarbons, not water. The deposits are in fact very dry and, for a frame of reference, resemble oil impregnated sandstone. Our process, for which we have an exclusive license in Utah, uses a proprietary solvent solution that liberates the bitumen from the sands.

If there’s a single takeaway from this interview, it’s that our process does NOT use or produce water, and therefore we will not be creating any tailings ponds. Let me repeat that, no tailings ponds. Without the need to handle and remediate vast quantities of water, we believe our projects will be economically superior and more environmentally friendly than other oil sands operations. For example, the energy costs we incur could be as much as 60% lower than mining operations in Canada which require expensive steam generation facilities. And, our capital required to begin operations is significantly lower without the need to plan for, design permit and build wastewater tailing ponds.

You currently have access to a contingent resource of 150 million barrels of oil. Can you grow the resource?

Yes we can. We have taken the appropriate steps to lock down a sufficiently large resource (150 million contingent barrels) to get us well underway. However, our leases are only a portion of the total Sunnyside deposit which consists of a large, contiguous resource of about 1.1 billion barrels. Of those incremental barrels at Sunnyside, approximately 475 million barrels are in private hands. We are in contact with these holders about acquiring or leasing their property and believe that, when we’re ready, obtaining access will not be a problem.

How much of the future value of the company could come from activities outside of Utah?

We target only the, “oil wet” oil sands deposits, of which Utah is a major source within the U.S. We are looking at opportunities to acquire assets outside of Utah and in fact outside of the U.S. We believe that there are dozens of deposits highly amenable to our licensed extraction technology. For now, the overwhelming majority of our time and capital is devoted to Utah. As our Sunnyside project continues to be de-risked, we see the value [to AMSE] of these other opportunities as growing stronger. In most cases, few if any viable alternative solutions exist for these oil sands deposits, so the opportunity is not running away from us.

American Sands Energy recently submitted a Notice of Intention to Commence Large Mining Operations, essentially a Mining Permit application. Please explain the process by which this application will be reviewed by the State of Utah.

On March 6th we submitted our Notice to Commence Large Mining Operations application, a culmination of years of hard work by us and drawing extensively upon the considerable efforts of Amoco and Chevron in the 1980′s & 1990′s. We are very lucky to be working with very talented people, both in-house and through third parties, that helped us in this all-encompassing process. The main agency we are dealing with, the State of Utah’s Division of Oil, Gas & Mining, “DOGM,” is highly organized and professional. We will continue to have periodic conversations with DOGM as they deem appropriate. We will provide them with any additional information they require and answer any questions they may have.

To what extent is the Bureau of Land Management (BLM) and/or other Federal agencies involved in the permitting process?

Another good question, thank you. No matter how many times we tell our story, investors continue to assume that we face difficult and time consuming interactions with the BLM and other Federal entities. This simply is not the case. From a permitting perspective, virtually everything we need to begin operations is accounted for in the mining permit application that we submitted on March 6th. While we expect routine back and forth conversations with the State of Utah’s Division of Oil, Gas & Mining, “DOGM,” our plan is to have all permits and approvals in place within 9-12 months and to commence mining 6-9 months after that.

Some pundits have voiced concern regarding how American Sands Energy will get its bitumen to market. Is this a potential problem?

We don’t think this will be a problem. Our site is located about 150 miles from Salt Lake City, which has close to 200,000 bopd of refining capacity. In the past, as much as 40% of Salt Lake’s feedstock came from the Canadian oil sands, with which our bitumen is very comparable. Initially we expect to truck 5,000 bopd, approximately 30 trucks a day, to the Salt Lake City refineries. We are just 7 miles from rail, which would expand our options to include refineries in California, Texas, Louisiana and even the East Coast if the economics made sense.

Since underground mining of oil sands is not done in Canada, how feasible is that approach in Utah?

We believe our approach to mining is very feasible. Our confidence in this comes from the work done by us and a number of third-party mine engineering firms. Multiple highly qualified firms contributed to a number of comprehensive studies and designs that were included in our mining permit application. Underground mining of coal deposits has been going on for decades in Utah, creating an ample supply of local, contract miners. We don’t feel as if we are pushing any limits in this respect.

Your Chief Operating Officer was quoted as saying that first commercial oil might be achieved, “in the summer of 2016.” What events could delay that time frame?

Delays in getting permitted and difficulty raising capital are the two main risks. We’ve already discussed the permitting process and how long we think it might take. Even if we run into delays on permitting, we can still move forward on a dual track with some of the initial mine development work (before breaking ground). We remain comfortable with our summer of 2016 estimate for first commercial oil.

Upon the closing of your Series A preferred deal, how many months is American Sands Energy funded for?

It really depends on how aggressively we move on the project. If for any reason we need to slow our timetable, we think that we are funded for up to 24 months. Investors know that we have an important capital raise ahead of us; if permits come in as expected, in 9-12 months we could be looking to raise the capital required to commence operations.

Approximately how much capital will be required to get the proposed 5,000 bopd plant, and associated mining operations, up and running?

$75 million would fully fund us through production and sales of first oil. If necessary, we could move forward with less. The amount we raise is highly dependent on market conditions. If capital markets are agreeable, we could also look to raise more than $75 million, giving us the ability to acquire or lease contiguous property and pursue oil sands extraction opportunities in other jurisdictions.

Might you be able to raise a portion of that capital from non-equity sources?

Yes, it’s certainly possible that we will be able to get a portion of our capital needs from non-equity sources. But again, that will only be determined by market conditions 9-12 months from now. While we would like to raise both debt and equity, we are assuming that it will be all equity. One simple example of non-dilutive capital that may be available to us is equipment financing. We have had preliminary talks with a few suppliers. That alternative might be tied to the final issuance of permits and/or an equity raise.

Thank you again for your time and thoughtful answers. In summing up, what key points should my readers leave with?

It was my pleasure. Thank you for your interest in American Sands Energy. I think we covered a lot of ground today. To sum up I simply reiterate that we have an extraordinary opportunity to be among the first oil sands companies in the U.S. Our licensed technology does not use water and therefore avoids the huge financial, environmental and political concerns surrounding tailings ponds. Our resource of 150 million contingent barrels is significant and can be expanded by an additional 475 million barrels when the time is right. We hope to be in production at a run-rate of 5,000 bopd in 2016. While AMSE is a early-stage investment opportunity, we believe that the upside in our company’s valuation could be substantial if we achieve our targets in coming years.

The American GDX Gold Miners ETF is slowly becoming the de-facto standard for measuring gold-stock performance.

The American GDX Gold Miners ETF is slowly becoming the de-facto standard for measuring gold-stock performance. Nearing its eighth birthday, GDX has even usurped the venerable HUI gold-stock index as this sector’s metric of choice in many circles. While GDX has advantages and disadvantages compared to the traditional HUI, it is an excellent gold-stock benchmark. But it still falls far short of individual stock picking.

Gold-stock speculation and investment isn’t easy. Like any sector, it takes a great deal of experience and expertise to understand what the miners and explorers are doing and separate the wheat from the chaff. In some ways, analyzing gold stocks is even harder. As the consummate contrarian sector, gold stocks get very little coverage in the mainstream financial press. So the best of breed aren’t widely known.

This relative information vacuum leaves gold stocks somewhere between a challenge and a minefield for individual investors. Without the time or resources to spend years intensely studying this obscure little sector, it’s virtually impossible to pick the winners. This gap left by Wall Street’s total disinterest has been filled for decades by financial newsletters. Rare contrarians like us do the heavy lifting and sell our results.

Back in early 2006 as the exchange-traded-fund boom was just ramping up, gold stocks were actually flying. The flagship NYSE Arca Gold BUGS (Basket of Unhedged Gold Stocks) Index, better known by its symbol HUI, had rocketed 98.4% higher in just over 8 months! Excitement in gold stocks was as great as it’s been in their entire secular bull, a perfect environment for Van Eck Global to launch its GDX ETF.

While ETFs are common and ubiquitous today, GDX was revolutionary at its birth. It gave individual and institutional investors and speculators an easy and efficient way to get instant diversified exposure to the world’s best gold-mining stocks. The fund’s custodians did all the hard ongoing research work, aided by market capitalizations which always separate the winners and losers. GDX proved a success.

With decades of experience studying and trading gold and silver stocks, we were never super-interested in GDX at Zeal. Diversification is important, but a smaller handpicked portfolio of the best elite stocks will always outperform a larger diversified one. So we stuck to our old game of ferreting out the best gold and silver stocks to buy individually. But we kept close watch on GDX, over 6 years ago I wrote my first essay on it.

Now on those rare days when gold stocks are discussed on CNBC, the HUI is never mentioned. In this new ETF-dominated world, the dominant ETFs have replaced minor sector indexes as the leading benchmarks of choice. So to mainstreamers not steeped in gold-stock trading experience, GDX is the gold-stock sector. So we’re long overdue for revisiting its construction, components, and performance.

GDX tracks its own modified market-capitalization-weighted index, the NYSE Arca Gold Miners Index. Market-cap weighting is without a doubt the best way to construct an index. Over time in free markets companies are stratified by their market caps, which reflect their past successes, current execution, and future potential. The winners are bid up to higher market caps, while the losers are sold down to lower ones.

GDX currently has 39 component companies, the largest 7/8ths of which are listed in this table. Their market capitalizations and relative market-cap weights within this population are shown, along with each company’s weighting in GDX and the gold-standard HUI. GDX is quite interesting, both similar to and different from the HUI. Its custodians have done a great job in creating a fine gold-stock benchmark.

GDX’s best attribute after ease of trading and instant diversified gold-stock exposure is the smart way that its components are weighted. GDX’s weightings are virtually identical to their relative market caps among each other. This avoids the common ETF pitfall of custodians subverting the results of free-market bidding to impose their own biases on their portfolios. The best companies win the largest market caps.

This weighting methodology is better than the HUI’s. With only 18 component stocks compared to GDX’s 39, market-cap weighting is a lot harder. So the HUI’s custodians essentially assign the top two companies a weighting near 15% each, the third around 10%, and then split the remaining 60% among the remaining components roughly equally. This gives the smaller companies an outsized index impact.

That would be fine if they were the best of the smaller gold miners, but unfortunately they aren’t. Some of the highly-weighted smaller-market-cap components of the HUI have had big problems ranging from production issues to poor management to geopolitical challenges, and their performance has suffered. If a better subset of the smaller gold miners shown above was picked, the HUI’s performance would improve.

Another neat attribute of GDX is it doesn’t just hold American-traded stocks like the HUI. GDX offers exposure to gold and silver miners that trade in Australia, Canada, Hong Kong, and the UK. This overseas contingent isn’t huge, at 11 of the 39 component stocks but less than 1/8th of all GDX stocks’ total market capitalization. But it’s still a nice bonus to get international exposure unavailable in US markets.

As all experienced gold-stock traders know, the American stock markets are no longer the venue of choice for emerging and growing explorers and miners. Unfortunately crushing regulations here in the US have made the cost of doing business far too high for smaller companies, so many choose to list elsewhere instead. Canada is now the dominant world leader, so it’s important to be able to trade on its exchanges.

GDX certainly has drawbacks too, the chief one being its annual 0.52% management fee. Every year a half percent of GDX is siphoned off to pay its custodians for their services. This is reasonable, as they deserve to be compensated for their hard work like everyone else. My main concern is this ongoing yearly cut making GDX less desirable as a long-term gold-stock tracker like the HUI, which has no fees.

Major gold-stock moves play out over secular time spans. Across nearly 11 years leading up to September 2011, the HUI rocketed an astounding 1664% higher! Vast fortunes were won in gold stocks. Analyzing the ebbs and flows of this epic bull run to determine optimum buying and selling timing required digging deeply into past data. Is GDX comparable over multi-year spans like this with fees constantly coming out?

Another drawback of GDX is the fact it has so many component companies. Over-diversification is a certain risk to long-term performance, and 39 components is a huge portfolio. Over decades of trading and studying the markets, I’ve found that an optimal portfolio size is 10 to 20 companies. Academics have verified this real-world experience of many traders, that after 20 the benefits of diversification rapidly diminish.

An ideal portfolio is a single company, the one that is going to have the best performance over your holding period! But since we mere mortals can’t see the future, we can’t know which one stock is going to fly far beyond the rest. So we diversify, spreading our bets to have a greater chance of catching that one with the best gains. This also reduces company-specific risk, which is very serious in gold mining.

Unfortunately gold deposits and mines are inexorably locked in specific places. So miners are at the mercy of their host governments. Unlike most producers that can move factories to other countries if one country burdens them too much or hikes tax rates too high, gold miners don’t have that option. Owning 10 to 20 elite gold and silver miners reduces the overall impact if one falls sharply on some geopolitical problem.

At Zeal we run two portfolios, one around 10 stocks in our monthly newsletter and one around 20 in our weekly newsletter. And with 664 realized trades over 13 years or so, the vast majority of which are gold and silver stocks, the tyranny of the bell curve couldn’t be more apparent. No matter how much we research, our portfolios always seem to have bell-curve distributions of returns. This is true of all professionals.

Every expertly-handpicked portfolio has a big winner or two on the right side of the bell curve, a big loser or two on the left side, and the bunch in the middle with varying degrees of average performances. And these tails don’t seem to grow much as your portfolio size grows. So getting over 20 companies reduces performance since it dilutes the right-side winners’ massive gains with a larger pool of average gains in the middle.

The GDX and HUI both share another serious problem endemic to the small gold-mining sector, an overemphasis on the major miners. This week, GDX’s 39 component companies had a total market cap of just $154b. This is vanishingly small in the context of the broader stock markets. At the end of March, 21 companies in the S&P 500 had individual market caps greater than the total of all of GDX’s components!

One of the reasons gold stocks can soar so fast when they start to regain favor is the tiny size of this sector. They are less than 0.9% the size of the S&P 500. But within these GDX components, the top 5 alone account for a whopping 46% of all components’ total market cap. So just like the HUI, GDX’s price action is dominated by a handful of major gold and silver miners with stock prices that have stagnated.

So a bet on both GDX and the HUI is largely a bet on the major gold miners. While these are certainly the largest and safest in this sector, I don’t think they are best of breed. Their weak share prices reflect their great challenges in recent years of profitably running and sustaining large multi-mine operations. All the gold-stock price gains haven’t been in the majors, but in the smaller growing gold and silver miners.

The smaller miners have a huge price-appreciation advantage with their smaller market caps. GDX’s top 5 and 10 components have average market caps of $14.1b and $10.4b. It takes a lot of capital flowing in to move such large stocks higher, big market caps have far more price inertia. But everything below the top 10 has an average market cap of $1.7b. It is vastly easier for a $2b company to triple or quadruple than a $20b one.

So if you built your own portfolio by just lopping off GDX’s top 5 or 10 holdings and buying the rest, it would far outperform GDX. But why not go even farther? Why not just pick the 10 or 20 smaller and mid-tier gold and silver miners out of GDX with the best fundamentals and best prospects? This elite subset of the gold-mining sector should easily double the headline gains, and probably achieve even more.

That’s what we do at Zeal. We’ve spent decades endlessly researching the universe of gold and silver miners and explorers to uncover the best of breed. And then we build high-performing portfolios of these, attempting to buy low when gold is out of favor. If you have the capital, there’s no sense being stuck with owning every major stock in a sector when you can instead handpick the highly-likely winners.

Back to using GDX as a benchmark, how does it hold up compared to the gold-standard HUI? This next chart compares the two over the last 7+ years. Despite their considerable differences, their performance is functionally identical! These two lines are totally interchangeable, no one could tell the difference. Why? Because both the ETF and the index are utterly dominated by the performances of the same major miners.

GDX’s international exposure, its over-diversified portfolio size, and its management fee would seem to be enough to differentiate its performance from the venerable HUI’s. But there is virtually no difference. During gold’s major uplegs and corrections of the past 7 years or so, GDX’s price action and performance has been virtually indistinguishable from the HUI’s. So for all intents and purposes, GDX is the HUI.

This is not only true visually, but mathematically. Over the entire span of this chart since the dawn of 2007, the GDX and HUI have had a stellar correlation r-square of 98.5%! This is astoundingly high for an r-square, just off the charts. It means 98.5% of the daily price action in GDX is statistically explainable by the HUI’s, or vice versa. And within the last great upleg and correction, this relationship was even stronger.

When gold stocks more than quadrupled out of late 2008’s exceedingly irrational and fundamentally-absurd stock-panic low, the GDX and HUI r-square climbed to 99.4%. And in the subsequent correction that cascaded into a brutal cyclical bear in last year’s extreme gold-selling anomaly, this number shot up to an unheard of 99.9%! This almost bothers me, as GDX’s major differences should lead to different performance.

But they haven’t, because the major gold and silver miners dominate both the ETF and the index. This has all kinds of implications for investors and speculators. On the macro level, GDX is obviously as good a benchmark as the HUI despite its management fees. After living and breathing the HUI for 14 years it will be hard for me to switch and think in GDX terms instead, but that’s the way the world is heading.

GDX’s excellent tracking of gold-stock performance will also make it the destination of choice for mainstream capital looking for gold-stock exposure. This is a double-edged sword. On the good front, traders putting differential buying pressure on GDX threaten to sever its tracking of its underlying gold-stock index. So those capital flows must be directly equalized into the underlying gold stocks themselves.

Thus GDX’s custodians absorb excess demand by issuing new shares. The resulting cash they raise is then shunted back into the gold stocks, lifting the entire sector. But the bad part of this is GDX will deploy new capital based on its weightings, determined by its components’ market caps. So all these gold stocks will get a boost from GDX buying instead of the half-or-so subset that are most deserving of capital inflows.

So if all gold-stock investment happened through GDX alone, the performance of the gold stocks would be totally homogenized. Thankfully that is not the case, with the vast majority of gold-stock buying done outside of GDX. How can we know that? GDX’s market cap is only around $8.1b, just 5% of the total market cap of its component gold stocks. So experienced stock pickers will still shine in the gold-stock realm.

And that’s what we are at Zeal. We only want to own the elite best-of-breed gold and silver stocks with the best fundamentals, best projects, and best management. So we research these sectors year-round. We recently finished our latest project looking for the world’s best growing mid-tier gold miners. We published a fascinating 32-page report detailing our dozen favorites with the best fundamental prospects.

Interestingly 9 of those are included in GDX, with average market caps of $2.8b. There is no doubt this elite subset will far outperform the broader GDX dominated by the majors. You can easily build your own custom portfolio of best-of-breed growing mid-tier gold miners that will trounce the broader gold-stock metrics.

The bottom line is the GDX gold-stock ETF has grown into a fine sector benchmark. It has far more, and many better, companies than the flagship HUI gold-stock index. And despite its reasonable annual management fee, its performance has nearly exactly mirrored the HUI’s. Investors and speculators who just want basic diversified gold-stock exposure are well served by GDX, it tracks gold stocks perfectly.

But unfortunately the gold-stock sector is dominated by a few major miners, and their performance will always fall short of the smaller miners growing beneath them. So investors and speculators willing to build a smaller still-diversified portfolio of elite best-of-breed gold and silver stocks will enjoy far greater gains than GDX can ever provide. That is a heck of a lot more appealing than settling for mere sector performance!

Adam Hamilton of Zeal LLZ, Guest Contributor to MiningFeeds.com

The Fed minutes were dovish and this helped push Gold above $1,310 to $1,320.

The Fed minutes were dovish and this helped push Gold above $1310 to $1320. However, the miners, which usually lead the metals did little to confirm the rise. In fact, the miners have been relatively weak in recent days and had a bearish reversal on Thursday. Their rebound from an oversold condition has petered out. Another point is Gold, during this rebound has made no progress against foreign currencies. It’s starting to show some strength against the equity market but it needs to show strength against all currencies and not function only as the inverse of the US Dollar. Be on alert as the short-term trend for precious metals (especially the miners) could resume to the downside.

Looking further out, forthcoming weakness shouldn’t last that long in the big picture. The miners have been basing for quite a while and started to gain traction in Q1. The next low at worst could be a double bottom or otherwise would mark the first higher low in this bottoming process. In the chart below we plot GDX (large caps), GDXJ (juniors), SIL (silver stocks) and GLDX (explorers). We note how much each would have to decline to test its December low.

Click here for reference chart.

Our gold stock bear analogs chart, which helped us call the June 2013 low and anticipate the December 2013 low, makes a strong argument that the final low (on a weekly basis) occurred in December. The low is circled but we kept the plot going for further comparison. Compared to the present, there are only two bears that lasted longer and at present both were down less than 50%. Note that at the December low when gold stocks were down 64%, the three bears which lasted longer were off no more than 50%.

Click here for reference chart.

The 1996-1999 bear which ended at this time down 69% is an interesting case. It did reach lower levels in 2000 before the current secular bull started. However, after the 1999 low gold stocks exploded led by the GDM index (forerunner to GDX) which surged 75% in a few months. Then the stocks consolidated for many months before popping again. During this brief 14-month respite the GDM gained 90%, the XAU 83% and the HUI 68%. After the bottom in 1999, GDM and XAU broke to new lows two years and two months later. The HUI, which was more attached to the epic junior bubble of the mid 1990s, reached new lows one year and nine months later.

Considering this history, even the most bearish person would have to admit that the market needs to consolidate for a while (as in way more than a year) to have any chance to reach new sustained lows. Gold stocks enjoyed a huge short covering rally shortly after the 1999 low. Yet even after the short covering ended the preceding bear market low wasn’t breached for roughly two years!

Why is this bottom taking so long? A few weeks ago we posited that it could be because of the extended topping process in 2011-2012. Perhaps that unusual topping process is giving way to an unusual bottoming process. In any event, the best plan is to wait patiently for the next oversold condition or in case we are wrong, wait for the next breakout. I don’t expect a breakout anytime soon. The indices look weak and TheDailyGold Top 15 Index (15 of our favorite companies) also appears to have downside potential in the coming days and weeks. Nevertheless, I am actively researching companies as well as watching their price action. The coming months could be your last best chance to accumulate the companies poised to benefit from the coming revival in precious metals.

Article written by Guest Contributor to MiningFeeds.com, Jordan Roy-Byrne of The Daily Gold.

Recent weeks were not bad for those gold investors’ hearts filled with golden hopes.

Recent weeks were not bad for those gold investors’ hearts filled with golden hopes. The price of gold depends on many factors, but past patterns can give us important hints and suggest which of them are to be carefully studied and properly comprehended. If history were to teach us anything about gold’s past market values it would most primarily be the following: watch out for the feds! Wise observation of government policies is the main driving force for what is happening in the gold market (surely along with supply factors in the longer run). As we discussed a month ago, this is the main reason for the observed correlation between the gold price and the interest rates. Not because interest rates per se are always casually linked to the gold price. But because interest rates are a reflection of current government policies.

This time we are going back to the possible interest rate hike subject, so passionately and almost obsessively discussed in the media. Last time, since the major change of the Fed chairman, we have heard that interest rate hikes are far, far beyond the horizon. Despite this, most of us apparently believe that interest rates will sooner or later have to be raised to the pre-stimulus range. It is unclear and remains a big mystery when this is likely to happen. Lately more has been said by the Fed (Janet Yellen) about this mystery of raising interest rates at the moment. We will get back to this in few paragraphs, but let us will debate the initial point. Despite what many observers claim, it simply may not be the case that the Federal Reserve should raise the interest rates. Actually the United States may still stay and bathe in a slumpy recession-type of environment for years to come. And the interest rates may stay as low as they are right now without any hikes visible on the horizon.

How may one support this thesis? Isn’t it obvious that rates have to go up sooner rather than later? They may, but we refuse to simply take this for granted and echo that those hikes are coming closer and closer. Let us have a look at the case of Japan starting from the nineties, certainly a very good parallel of the United States right now. After a huge credit bubble that burst during the beginning of the 1990s, the real estate market collapsed along with the stock market. Debt stayed at record levels, and additionally, public debt also reached its highest peak in all of history. In these conditions the Bank of Japan started lowering the interest rate to absurdly low levels, of less than one percent. In the real terms the rates became virtually negative. This may have been understood as a temporary tool in order to support failing businesses. The raises of the interest rate were to happen one day. In the end it was not a temporary tool at all. It became permanent. Rates in Japan stayed low for a very significant period of time. They are still below one percent and have been staying at this level since 1995. 19 years and not much has changed. Japan is still in a way involved in the fight with the recession that started twenty years ago. The tools triggered back then are still in place today.

The same can happen with the United States.

Increases of the interest rates are not necessarily on the horizon. They can stay low for a very, very long time. Notice that they already stayed low for a relatively long time. Ben Bernanke set the interest rate close to the zero boundary at the end of 2008. They are staying at this level for a sixth consecutive year. Despite the fact that as soon as we reached a zero interest rate policy, experts started to debate when the time of reversal should come. Some of the optimists believed that it might happen within a few months. After a few quarters the story tends to come back like a boomerang. And as soon as it is about to hit, it disappears again.

Click here for reference chart.

It is really hard to remind oneself that for at least one year, no recognizable expert has shown up and tried to scare us about upcoming interest rate hikes. Although we do not believe that the USA will necessarily repeat Japan’s case, we refuse at the same time to take for granted that hikes are coming.

In our opinion investors shouldn’t take Federal Open Market Committee statements that seriously, because they can quickly change. Do not treat stated goals as binding, because usually something else is at stake other than what is stated in their goal.

What does it indicate to us about the currents of the gold market and government’s influence on it? Overall government spending, especially via the central banking system, is generally not decreasing and the Fed is making sure that banks can go on with pooling more funds into the broken financial system. Since this is about to be continued, it’s likely to have a continued positive impact on the price of gold and gold market in general. Of course, not necessarily right away, but we are very likely to see gold higher in the coming years.

Matt Machaj, PhD of Sunshine Profits, Guest Contributor to MiningFeeds.com

Disclaimer

All essays, research and information found above represent analyses and opinions of Matt Machaj, PhD and Sunshine Profits’ associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

We are now psychologically conditioned for pain and punishment in the gold markets and to beware of the next downward plunge.

Next month marks the 3-year anniversary of the bear market in silver that started in May 2011. Later this summer we will hit the 3-year anniversaries of the bear markets in gold and gold stocks. We are now psychologically conditioned for pain and punishment in the gold markets and to beware of the next downward plunge.

In reality though gold has been in a basing phase. It’s not going down anymore, it’s going sideways where the downward plunges are muted and the upward rallies are still fake bear market rallies. What’s interesting about this base is that it started right at the height of bearishness in the gold market. That two day massacre in gold back in April 2013 when gold plunged below $1400 actually started the left hand side of the base. So right when everyone was panicking about gold, in reality it was starting to form a major bottom!

Just a couple months later after trying and failing to get back above $1400, gold made the low point in the base in June of 2013 around $1200. Gold then tried once again to get back above $1400, but then failed and retested the bottom of the base in December 2013. So a well established base formed in gold between $1200 and $1400 as you can see in the chart below.

Once gold held support again in December 2013 it rallied back to $1400 just last month, but then failed again and was turned back down to where it is today. So gold has been basing now for about a year between $1200 and $1400. Notice though in the previous chart the 30-week moving average has flattened out, and gold has now traded back above the 30-week moving average. Stan Weinstein, author of one of the best books ever on trend trading called “Secrets for Profiting in Bull and Bear Markets”, would call this a Stage 1 base.

Gold stocks have done essentially the same thing as gold. They started forming the left hand side of a base in April 2013, then traded mostly sideways for the rest of the year. Some of the gold stocks went on to make lower lows during the rest of 2013 but most of the damage had been done by the April-June time frame.

Taking a look a the GDXJ Junior Gold Miners ETF notice how the 30-week moving average has flattened out just like it has in gold. After going back and reading what Weinstein said about Stage 1 bases recently I noticed this quote which might relate to what we are seeing in the gold stocks today:

“But often volume will start to expand late in Stage 1, even though prices remain little changed. This is an indication that dumping of the stock by disgruntled owners is no longer driving down the price. The buyers who are moving in to take the stock off their hands are not demanding any significant price concession. This is a favorable indication.”

Notice the tremendous increase in volume in GDXJ since the start of 2014. As Stan says this is an indication that buyers and sellers have reached equilibrium. So after a year long base in gold and gold stocks, what were are looking for next is the breakout into a Stage 2 advance.

The ideal buy point, according to Weinstein, is when gold would breakout above the resistance of its base and above the 30-week moving average on above average volume. This would indicate buyers have taken back control of the gold market and a new bull market in gold is going to begin. Weinstein notes that there is often a retest of the breakout point during which a second chance opportunity arises to do low-risk buying.

Checkout what the solar stocks did from April 2012 to April 2013. They had a similar basing period to the current gold market. The solar ETF TAN based for about a year then broke out of the base on an increase in volume in May 2013. Then TAN retested the base towards the end of June 2013, and from there broke back into the Stage 2 advance that is still ongoing today. This is a great example of Stage Analysis in action.

So the bottom line is gold is in a basing phase, and this has been going on for about a year since April 2013. According to Stage Analysis the ideal buy point would be the breakout above $1400 on an increase in volume, or on a retest of $1400 after a breakout occurs.

Justin Smyth of Next Big Trade, Guest Contributor to MiningFeeds.com. Connect with him on Twitter: @nextbigtrade

Gold stocks have lapsed back to despised status after late March’s sharp selloff.

Gold stocks have lapsed back to despised status after late March’s sharp selloff. Thanks to their strong 2014 rally before that, traders were slightly warming to this abandoned sector. But despite the rekindled extreme bearishness, gold stocks remain the greatest bargain in all the stock markets. Their prices are still absurdly undervalued relative to gold which drives their profits, fantastic buys for brave contrarians.

The precious-metals miners and explorers are just reviled these days, the laughingstock of the stock markets. And this is understandable given their disastrous performance last year. While the benchmark S&P 500 stock index soared 29.6% in 2013, the flagship HUI gold-stock index plummeted 55.5%! That has to be one of the biggest sector performance gaps in history, a total nightmare for this small sector.

But it wasn’t always thus, prudent contrarians won great fortunes in gold stocks before 2013’s extreme outlying gold anomaly slaughtered them. In the 11-year secular span between late 2000 and late 2011, gold stocks as measured by the HUI skyrocketed 1664% higher! During that timeframe the S&P 500 actually slumped 14% lower. It’s hard to dismiss gold stocks’ potential if you participated in their massive bull.

And that life-changing secular bull was stealthily born in conditions much like today’s. The stock markets were near record highs, trading at dangerously-high valuations, and euphoric investors assumed they were in a riskless new era where stocks would rise forevermore. And gold stocks were overwhelmingly ignored or loathed, an anachronistic relic. The lack of interest forced their prices to brutally-deep lows.

The whole games of speculation and investing are about buying low then selling high. And what better time to buy low than when a sector is despised? Stock prices are a popularity contest driven by sentiment, so the less popular a sector is the cheaper its stock prices. And fundamentally gold stocks are almost as cheap today as they’ve ever been. They may be the only cheap sector left in these lofty stock markets!

Any company’s long-term stock price is ultimately driven by its underlying profitability. And profits in gold mining aren’t complicated. A miner extracts gold from an ore deposit at a cost which is largely fixed when the mine is developed. And then it sells this gold at market prices. For any given mine, the higher the gold price the greater the profits. Gold prices drive gold-miner profitability, and thus gold-miner stock prices.

So gold-stock levels have always been highly correlated with the gold price. Gold is the dominant driver of this sector’s fundamental earnings. And today’s gold-stock prices are truly fundamentally absurd compared to today’s prevailing gold prices. Gold stocks have almost never been cheaper relative to the driver of their profits. The hyper-bearish psychology spawned by 2013’s carnage has led to this extreme pricing anomaly.

This is easiest to understand by looking at the ratio of gold-stock prices to gold itself. Over the past decade or so, the HUI/Gold Ratio has been the most popular way to frame this comparison. The daily close in the flagship HUI gold-stock index is divided by gold’s daily close, and charted over time. The result shows the extreme undervaluation of gold stocks today, why they are such a screaming contrarian buy.

The HUI/Gold Ratio is rendered in blue, and in late March’s sharp gold-stock pullback it slumped as low as 0.168x. This number is meaningless without context, but in this post-stock-panic chart you can see that such HGR levels are very low. This isn’t far above the absolute low seen in early December, when the HGR hit 0.157x. That was its lowest since the earliest months of gold stocks’ bull 12.9 years earlier!

At today’s price levels, gold stocks have almost never been cheaper relative to gold which drives their profits! Realize that last year’s gold plunge that obliterated gold stocks was an extreme anomaly created by the Fed’s stock-market levitation sucking capital out of the flagship GLD gold ETF. Its outflows alone accounted for 84% of gold demand’s total global drop, driving gold’s worst year in a third of a century.

There was nothing at all normal about the gold markets last year, much like in 2008’s once-in-a-century stock panic. So the last normal span that we can use as a baseline is the post-panic years of 2009 to 2012. And during that time, the HGR averaged 0.346x. So by that conservative standard, recent weeks’ gold-stock prices were less than half normal levels! It’s like a 50%-off sale in gold stocks, epic bargains.

Even if gold did absolutely nothing, languished in the high $1200s forever, the HUI would have to soar nearly 106% from its recent pullback low merely to hit pre-2013 post-stock-panic norms relative to gold. What other sector is so cheap that it still needs to more than double just to hit fair-value benchmarks? There aren’t any. The extreme bargains present in gold and silver stocks today are truly extraordinary.

But man, it’s so darned hard to buy low. When a sector has fallen a long ways and been weak for a long time, everyone assumes it is doomed. The low prices spawn bearish psychology that feeds on itself. This pessimistic sentiment trumps or taints the sector’s fundamental outlook, leading to a universal belief that it is destined to spiral lower indefinitely. So most traders won’t touch it with a ten-foot pole.

Enter the contrarians, the pioneers who fight the crowd rather than succumb to groupthink. We have spent our trading lifetimes diligently studying market history, so we know all markets are forever cyclical. Extreme greed or fear and their resulting anomalously high or low stock prices never last, sentiment always mean reverts and then overshoots to the opposite extreme. So the more hated a sector, the more we want to buy.

As this chart shows, the HGR has been falling on balance since early 2011. That means the gold stocks have been underperforming gold, rallying less when it rises and falling more when it retreats. This is because gold stocks have drifted more and more out of favor. But popularity can’t decline forever, at some point there is no one left to hate and abandon these miners. And that bottoming process is underway.

Despite the hyper-bearish psychology universally plaguing the entire precious-metals realm since last spring, thanks to gold’s worst quarter in 93 years (Q2’13), the HGR has stabilized! For nearly a year now, the HGR has generally bounced along 0.17x at worst. Other than the brief foray under these levels in late December after the Fed’s surprise QE3 taper hit gold, gold stocks haven’t lost any more ground.

This nearly-year-long sideways grind in the HGR has carried it from its downtrend’s lower support to its upper resistance. Another couple months of gold-stock outperformance like we saw in January and February will break the HGR out of this downtrend for the first time! As hard as it is to believe, the gold stocks’ return to favor has already begun. And it will only strengthen, as nothing begets buying like buying.

Before gold stocks’ sharp recent pullback, which occurred near a time of normal seasonal weakness, they were one of if not the best-performing sector in all the stock markets. Between late December and mid-March, the HUI soared 35.9% higher in a span where gold only gained 15.0% and the S&P 500 was essentially flat at +1.3%. The sentiment and popularity shift in gold stocks away from hated has already begun.

If a major HGR reversal is indeed underway as all signs point to, we are transitioning from a period of gross gold-stock underperformance of gold back to outperformance. And with the HGR still so incredibly low, gold stocks have a long way to run before their prices normalize relative to gold. This is very exciting for contrarian investors, as we shouldn’t have to wait long to be rewarded for fighting the herd and buying low.

And the potential wins are far greater than merely a doubling in the coming year or two for several reasons. The gold price itself is heading higher as well, the best smaller gold and silver miners will see gains that far outpace the baseline HUI’s, and regaining the 0.346x pre-panic HGR is actually quite conservative. The confluence of all this together is what makes gold stocks such an epic contrarian buy.

Gold plunged last year due to heavy gold-ETF selling and the resulting heavy gold-futures selling. As the stock markets levitated thanks to the Fed’s money printing and jawboning, the interest in prudent portfolio diversification with alternative investments vanished. So capital fled gold to chase general stocks, crushing the metal. Yet these extreme outflows have already started to reverse, leading gold to mean revert.

This young year has already seen the early vanguard of the reversal of stock-capital flows back into gold ETFs. GLD just saw its first consecutive monthly holdings builds since late 2012, a very bullish omen. And futures traders have been aggressively buying gold as well, even on the critical long side. With so much capital migrating back into gold, its price has to rise. And that certainly affects HGR HUI-target levels.

At $1300 gold, the post-panic-average HGR of 0.346x implies a HUI around 450. That is a 99% gain from this week’s pullback levels. But at $1500 gold, this same HGR kicks the HUI target up near 519 or 130% higher. And at $1700 gold, it jumps near 588 or 160% higher. So the bigger 2014’s necessary and inevitable mean reversion higher in gold, the higher the gold-price targets get merely to return to normalcy.

And we are only talking HUI gains here, an index made up of the largest gold and silver miners. We’ve always traded and recommended smaller miners with far-superior fundamentals to the majors. These companies are far more profitable on a price-to-earnings basis, are growing their production and therefore future earnings far faster, and have much lower market capitalizations than the HUI’s majors.

Thus these elite smaller miners will far outperform the HUI as gold stocks recover, amplifying the gains for the brave contrarians willing to buy low when few others will. We’ve spent over a decade at Zeal endlessly studying the entire universe of gold and silver miners to uncover these elites with the best fundamental prospects. There aren’t many people in the world who understand gold stocks better than we do.

And finally, that 0.346x post-panic-average HGR target is actually quite conservative. Before 2008’s extraordinary stock panic, gold stocks traded at much higher levels relative to gold than we’ve seen in the post-panic era so far. This next chart, one of my favorites, extends this HGR comparison back to 2003. That really hammers home the point of just how incredibly dirt-cheap the gold stocks are these days.

Before that crazy once-in-a-lifetime stock-panic fear maelstrom sucked in gold and gold stocks, the HGR averaged 0.511x for a long secular 5-year span! This trading range was fairly tight too, oscillating between 0.46x support when gold stocks were out of favor relative to gold to 0.56x resistance when they were in favor. I still believe there is a great chance gold stocks will outperform enough to return to this pre-panic HGR.

Gold stocks have not just been falling out of favor relative to gold since early 2011, but since early 2006. That was actually the last time gold stocks won any semblance of popularity, and it was exceedingly profitable. When any fundamentally-sound sector falls out of favor on balance for 8 years running, there simply has to be a massive mean reversion afterwards. And these tend to overshoot in the opposite direction.

We have a great example of such an event in silver. For years after the stock panic, the similar Silver/Gold Ratio traded far below its pre-panic norms. Back in early 2009 I was ridiculed for predicting an overshooting mean reversion of silver prices relative to gold. Yet it happened, as the markets are forever cyclical. Don’t like market conditions today? Then wait a few months. Silver soared as it returned to favor.

By early 2011, the SGR had surged to its best levels of this secular bull as silver regained popularity with traders. And before silver was crushed by last year’s extreme gold anomaly, silver still remained near pre-panic levels relative to gold after that huge sentiment shift. There is no reason at all that gold stocks can’t do the same. This is a small sector that doesn’t need great capital inflows to catapult dramatically higher.

With sentiment so dismal these days, it is hard to even imagine what gold-stock prices would look like at that pre-panic-average 0.511x HGR. So I rendered a line back up in the first chart in yellow that shows where the HUI would have been trading in this post-panic era at a 0.511x HGR. Even today with gold still quite depressed, this implies a HUI fair value near 659! That is nearly a triple from today’s anomalous levels.

And a HUI triple is not far-fetched at all. During 2008’s stock panic, the HGR plummeted to 0.207x at worst. Gold stocks were absolutely loathed and left for dead, just like recent months. But out of that very peak despair, this sector started surging. The HUI would more than quadruple over the next several years. And recent months’ extreme HGR lows were way worse than late 2008’s, implying even more upside.

There was such extreme bearishness in gold stocks just a few months ago that the HUI actually fell to a 5.1-year low, levels last seen briefly in the dark heart of the stock panic. Such extreme undervaluations weren’t sustainable then and they aren’t now. If your goal is to buy low then sell high, would you rather buy euphoric general stocks near lofty 5-year highs or loathed gold stocks near dismal 5-year lows?

It’s true major gold-stock valuations don’t look good today, as they all suffered big non-cash writedowns from last year’s anomalous gold selloff. It will take a year for these to roll off the books and stop masking ongoing profitability. But if you get below the majors to look at smaller and mid-tier gold miners, they are actually very profitable right now. We have recently bought many elite miners with single-digit P/E ratios!

In fact we just recommended one in our brand-new monthly newsletter trading at an astounding 4.7x earnings! And its profits are still rising rapidly. This elite gold miner expects to grow its production by 11% this year to 230k ounces annually. And as the gold price itself recovers, its profitability for each ounce mined will leverage gold’s gains. Investors ought to be beating down the doors for deals like this.

The bottom line is the hated gold stocks remain an extraordinary contrarian buying opportunity today. They’ve almost never been cheaper relative to gold, which drives their profits and hence ultimately stock prices. After the last episode of similar extreme undervaluation during the stock panic, the leading gold-stock index more than quadrupled over the subsequent years. Mean reversions always follow extremes.

So another epic mean reversion higher in gold stocks is all but certain in the coming years. This sector that has fallen out of favor for so long will gradually return to favor, as markets are forever cyclical. This will largely be driven by gold’s own mean-reversion recovery upleg out of last year’s extreme lows, which will lead to gold-stock buying. As gold stocks start outperforming, capital will flock to chase their big gains.

Adam Hamilton, CPA of Zeal LLZ, Guest Contributor to MiningFeeds.com

Today gold is back above $1,300. Is this the start of a run to and past $1,400?

It’s been a while since we looked at Gold in a vacuum. We’ve focused on the gold stocks as they have led the sector. We covered Silver last week. Gold is more interesting because in its current state it’s more difficult to draw a strong conclusion. One could look at the evidence and go either way. Today Gold is back above $1300. Is this the start of a run to and past $1400? I don’t know. My gut says more range bound activity is ahead.

First lets take a look at the Gold bear analog chart. This includes the major bears of the past 35 years, excluding a super long (1987-1993) bear that was very mild in its price decline. The Gold bear analog isn’t quite as black and white as the previous analogs shown for Silver and the gold stocks. One could look at this chart and surmise that the bear has longer to go while others could say it has gone far enough and deep enough already.

Click here for reference chart.

At the June 2013 and December 2013 lows, Gold was very close to plunging to that final low as it did in 1982 and particularly in 1976 and 1985. The fact that it didn’t happen and the fact that this bear has dragged on renders it less likely that we get a final plunge. The longer a bear market is, the less severe it tends to be in price and the less likely it terminates with a final plunge. For example, the 1996-1999 bear declined only 3% in its last 11 weeks. In other words, if this bear is to make a new low and break $1200 on a weekly basis, I doubt it plunges from there as much as people would think. There aren’t as many players left in this market as there were a year ago, two years ago and three years ago.

Aside from the typical Gold in US$ chart it’s always important to consider Gold in the context of various currencies and the equity market. In the chart below we plot Gold against a foreign currency basket and against the S&P 500. The first plot shows that Gold hasn’t made a double bottom but is still in a series of lower lows and lower highs. The positive is Gold is has rallied up to trendline resistance several times already. I think Gold will be in position to break the trendline by the end of summer. If that happens, the bear market is over.

Click here for reference chart.

Meanwhile, Gold has obviously struggled against the S&P 500. We all are aware of the negative correlation between the two markets which started just after Gold peaked in August 2011. If Gold is to begin a new bull market in earnest then it really needs to reverse itself against the S&P 500. The ratio has clear resistance at 0.75 which is important resistance dating back to July 2013. The ratio has traded below 0.75 for the past five months, a period in which many stocks rebounded strongly. If the ratio can move back above 0.75 it would make a very strong case for Gold’s bottom being in place.

We just don’t have enough evidence to know at this point. I continue to maintain that the mining stocks (and definitely the juniors) have bottomed. GDXJ and SILJ would have to decline 24% to test their daily lows. GLDX would have to decline 27%. The mining stocks led the move down and have led this fledgling recovery. I think they continue to lead. However, it appears that they won’t sustain a rebound and push much higher until after the metals have bottomed.

My conclusion on Gold is if it breaks to a new low then a final bottom is imminent. If it breaks above $1400 and the resistance in the aforementioned charts, then it has bottomed. Yet, Gold and the mining stocks could continue to be range bound for several months and deny us an immediate answer. At worst it would bring us much closer to the end and the start of a new bull market. Rick Rule, who was very prescient during the recent downturn recently stated that he thinks we are seeing a saucer type bottom and that 12 to 18 months from now we will be in a rip roaring bull market. Consider that it takes an uptrend to develop to create the momentum that leads to the rip roaring part. I believe we have no more than several months left to accumulate the best stocks which are positioned to benefit from the coming resumption of the secular bull market.

Article written by Guest Contributor to MiningFeeds.com, Jordan Roy-Byrne of The Daily Gold.

In 2014, B2Gold is targeting gold production of 410k ounces from three different mines, which would be record output for this new mid-tier.

In 2014 B2Gold is targeting gold production of 410k ounces from three different mines. This would be record output for this new mid-tier, a whopping 159% increase in volume over just a couple years ago. And with its fourth mine on schedule to pour its first gold in Q4, B2Gold is looking at an annual production rate of 550k+ ounces by this time next year.

B2Gold’s methodical progression to the mid-tier-producer ranks isn’t all that surprising considering the pedigree of its management team. This is the same team after all that skillfully groomed Bema Gold into an industry icon. Veteran gold-stock investors have fond memories of Bema, a company that made them a lot of money up to 2007 when it was acquired by Kinross Gold for $3.2b. And many of these same investors believe B2Gold is building a similar legacy right before their eyes.

B2Gold has used a combination of acquisitions and organic development to expand its portfolio. CEO Clive Johnson, who was Bema Gold’s founding president back in 1988, had his new company hit the ground running after the Kinross deal. Though Johnson and team certainly could have sat on a nice warm beach counting the money they made selling their old company, they didn’t. They recognized that the gold bull market was just heating up, and sought to emulate their Bema Gold success.

B2Gold’s first move was to acquire two producing assets in Nicaragua of all places. Now this small Central American country is not somewhere that typically comes to mind when it comes to mining gold. But it is actually a great place to operate both geologically and geopolitically. And over the years B2Gold’s expert team has greatly enhanced operations to where it is now one of Nicaragua’s largest employers, taxpayers, and exporters.

B2Gold’s largest operating mine came over by way of its January 2013 acquisition of CGA Mining. The Masbate mine is located in a safe jurisdiction of the Philippines, and contains a huge cache of resources that will have it producing for decades. 2014 will be Masbate’s first full year of production under B2Gold’s ownership. And it is this operation that ultimately promoted B2Gold out of the junior ranks.

Achieving mid-tier multi-mine status over a period of only about six years is certainly impressive. But Clive Johnson and team are hardly sitting on their laurels as they target additional growth. As mentioned, B2Gold has a fourth mine in the works via its Otjikoto development project located in Namibia.

Interestingly Namibia is usually only part of the mining conversation when you’re talking diamonds and uranium. When it comes to African gold mining, it’s typically South Africa or some of the burgeoning upper West African countries getting all the attention. With only a single commercial-scale gold mine, Namibia is hardly considered a precious-metals powerhouse.

Gold deposits don’t care about borders though. And B2Gold is the proud owner of one in the desert region of north-central Namibia that is on track to double this country’s gold-mine count. B2Gold broke ground on this $244m development project in early 2013, and its Otjikoto mine is expected to pour its first gold in Q4 2014.

Otjikoto will be an excellent low-cost long-life gold-mining operation. According to the original plan, it will see annual production of 141k ounces over the first 5 years of an initial 12-year mine life. This output is expected to come in at cash costs of only $524 per ounce. And this will serve to drive down B2Gold’s overall mining costs, with operating and all-in sustaining costs projected at midpoints of $681 and $1075 respectively in 2014.

Otjikoto is also expected to deliver above and beyond the original mining plan via a low-cost expansion that will increase output by 20%+ by 2016. And this is supported by a resource base that keeps on growing as B2Gold continues to punch holes into this wide-open deposit. The latest discovery just northeast of the planned pit was found to contain 700k+ ounces that grade more than double the reserves that were used in the feasibility study.

In Otjikoto B2Gold is demonstrating its ability to organically develop a gold mine from the ground up. It acquired this project as an advanced exploration play in 2011, it successfully completed a feasibility study, and its mine build is currently on schedule and on budget. This soon-to-be vertically-integrated operation is set to be one of B2Gold’s most profitable.

With a fourth mine producing gold B2Gold forecasts total output of 555k ounces in 2015. And then when you throw in Otjikoto’s anticipated 20% bump in production along with a potential 10% expansion at its Philippines mine, B2Gold expects annual volume to exceed 600k ounces by 2017.

Though B2Gold’s growth trajectory has been quite spectacular, not surprisingly it is already looking towards its Otjikoto encore. It is of course always within the realm of possibility that B2Gold will purchase its next operating mine. But it is currently looking internally for mine #5, within its strong pipeline of advanced-stage projects.

The highest-potential candidate is the Kiaka project located in super-hot Burkina Faso. Kiaka is the newest addition to B2Gold’s pipeline, via its December 2013 acquisition of Volta Resources. And with total resources of 4.8m ounces, it contains one of the largest undeveloped gold deposits in West Africa.

This project came with a positive prefeasibility study that drew up a 10-year mining plan with annual production of 340k ounces. A large mine naturally comes with a large price tag though. And I suspect it’ll require gold prices higher than where they are today before B2Gold considers pulling the trigger on spending the $600m+ estimated to build the mine according to the PFS.

B2Gold is however performing its own feasibility study that will look at a staggered operation, focusing on a smaller higher-grade starter pit. The intent here would be to lower the capex and opex, projected at $671/ounce over the life of the mine. And if the study comes back positive, we may indeed see Kiaka’s development move forward sooner rather than later.

Overall with an unhedged rapidly growing production profile with costs that are in the lower half of industry average, B2Gold has everything going for it fundamentally. It is indeed looking like Bema Gold Part 2! [Hmm, is it possible that B2Gold’s name is a clever play on this?] And investors who realize this ought to be greatly rewarded as gold powers higher in the years to come.

Gold is obviously the primary driver of any gold-mining stock. And in the chart below we see how B2Gold has performed with its underlying metal since 2011. Visually BTG of course tracks very closely with gold. And this is backed-up mathematically with a high correlation R-square of 79% over this stretch. 79% of BTG’s daily price action is directly explainable by gold’s own.

Like most gold stocks, BTG performed very well concurrent with gold as the metal soared to its 2011 all-time high. But what I want to focus on is how BTG has performed subsequent to this high, over a period where gold consolidated and then fell hard in 2013’s anomalous plunge.

The last few years have no doubt been rough for the precious-metals sector, which has been a shell shock for folks who’ve enjoyed a decade-long run that took all its assets from the lower left to the upper right. And the mining stocks have taken the biggest beating, which is not too surprising given their tendencies to amplify the performances of their underlying metals.

To demonstrate this amplification, or leverage, consider how the gold stocks performed when gold was down 37% from its 2011 high to 2013 low. The popular GDX Gold Miners ETF, which is comprised of the stocks of the world’s best-of-the-best gold miners, took it on the chin with a 69% loss from its 2011 high to 2013 low. And things were even worse for the smaller miners, with the GDXJ Junior Gold Miners ETF down a breathtaking 81% from peak to trough. These dismal losses make BTG’s high-to-low drop of 58% not look all that bad!

B2Gold’s muted loss compared to the sector actually shows relative strength. And as you can see in this chart, BTG really flexes its muscles on the upside. Any time gold mustered a meaningful rally, BTG blasted higher.

The first two pops came off gold lows in late 2011 and mid-2012. Following the initial and healthy correction off its all-time high, gold consolidated in a high band with $1550 as strong support. And investors piled into BTG both times it bounced off this support. In each occurrence gold rallied 15%, while BTG soared higher by 66% and 59% respectively. These spectacular gains represented outstanding positive leverage to the metal, to the tune of 4.4x and 3.9x!

This $1550 support ended up catastrophically failing in early 2013. And gold continued to fall without much relief for another three months to its June low, with BTG naturally following suit. But when investors finally got a whiff of a relief rally, they again piled into this mid-tier’s stock. Gold jumped a solid 18%, with BTG popping 84% higher for 4.7x positive leverage.

Rather frustratingly gold ended up giving back all its gains to achieve a secondary multi-year low in December. And as would be expected, BTG sold off as well. This low ended up being the springboard for the latest rally. And BTG has again greatly impressed with a 69% gain to gold’s 16% (4.3x leverage).

Overall as you can see BTG offers investors awesome positive leverage when gold moves higher. Over the last four uplegs this stock has delivered an average of 4.3x positive leverage to the metal. And this destroys what its peers have done, with GDX and GDXJ leveraging an average of 1.9x and 2.8x respectively over these same four gold uplegs.

B2Gold really is in the sweet spot of gold-mining stocks. It is diversified enough to hedge operational risk. Its assets have longevity (18m+ ounces of resources in all categories). Its low-cost unhedged production allows for strong future cash flow. It has a strong balance sheet relative to its peers. It has a great track record. It has a strong growth pipeline. And its market capitalization is small enough to where it won’t take much capital inflow to send its stock way higher.

If gold forges a path higher, as we expect it to, there’s no reason to believe that B2Gold won’t continue to outperform the sector. And for the reasons above and many more, this company ranks as one of our favorites in our brand-new hot-off-the-presses research report.

This latest report focuses on mid-tier gold producers. We closely examined the universe of stocks that list in the US and Canada, and chose our favorite dozen to fundamentally profile. On an annual basis these miners produce from just under 200k ounces on the low end, to just over 1.0m ounces on the high end, while averaging 490k ounces. This group has great diversification, with mines in 19 different countries on 6 different continents. And in general they produce their gold at cash costs in the lower half of industry average.

Like B2Gold these companies also have great growth prospects. Some are pursuing brownfield expansion, some are advancing large exploration projects, and some are actively constructing their next mines. To get more detail on B2Gold and the other 11 elite high-potential mid-tiers, buy your report today! These are the stocks that should lead this sector higher as gold continues to run!

The bottom line is B2Gold is a new mid-tier gold producer that has its sights set on continued growth. It operates three excellent mines, and is developing a fourth that is poised to greatly enhance its production profile. B2Gold’s management team has put together a strong portfolio of projects. And their track record ought to give investors confidence in their ability to execute.

Investors have indeed latched onto this company. And this is apparent in the performance of B2Gold’s stock in response to its underlying metal. BTG has greatly outperformed gold and the other stocks in its sector. And it ought to continue to do so going forward.

Scott Wright of Zeal LLZ, Guest Contributor to MiningFeeds.com

Alex Molyneux, Chairman of Azarga Resources.

The following interview between me, (Peter Epstein), and Alex Molyneux was conducted over the past week over phone and email. Alex Molyneux’s Azarga Resources is proposing to merge with TSX main board listed Powertech Uranium [PWE.TO]. This merger would create a globally diversified, pure-play uranium platform from which to grow. Alex strongly believes that anyone bullish on Uranium needs to take a closer look at Powertech. Disclosure: Peter Epstein owns shares of Powertech Uranium.

Clearly, Azarga Resources is bullish on Uranium, having accumulated a 34% stake in Black Range Minerals, 15% in Anatolia Energy, 45% of Powertech Uranium and a 60% stake in the Centennial project in Colorado. Why are you so bullish?

Investing in uranium right now is a once in a decade wealth creation opportunity. We have not seen such a clear, ‘no- brainer’ since the gold sector in 2002 / 2003. Currently, there’s a very unnatural demand / supply dynamic caused by the Fukushima incident, but once the adjustment is done the industry will revert to an orderly market. In my view that’s a uranium price trading range of US$60-120/lb, double to triple where it is now. There seems no way around this, consider:

  • The world requires a 50% increase in mined supply by the end of the decade, yet 50% of current supply isn’t even cash flow positive at current levels. In my view, and many industry experts agree, any real growth in supply will require a price around US$80/lb.
  • Uranium demand is actually low risk, it’s generally being led by State sponsored build programs of nuclear power so it’s more likely to happen regardless of industrial production and GDP figures.
  • All 4 BRIC countries are increasing the % of electricity they generate from nuclear
  • Whilst Japan and Germany have stepped back from nuclear power, the U.S., UK and France are building new reactors and Japan is close to swinging back in. More importantly so many new countries are joining the nuclear club… Pakistan, UAE, Saudi Arabia, Turkey and Poland to name a few. Global new build plans are at a record high.

So, we know the uranium price is at least a double off this eight-year low and we could see junior and medium-sized uranium companies increase five or ten fold when that happens. We see no other minerals with this magnitude of upside at the moment… that’s why Azarga is here!

Explain the rationale for the proposed Azarga Resources / Powertech Uranium merger. Azarga already owns 45% of Powertech, why do you think that the combined company would be better off?

Azarga has been attracting the attention of a number of institutional investors. However, many of them need to invest through a liquid public listing according to their investment mandate. By merging the whole asset base into Powertech Uranium [PWE.TO] / [PWURF], a TSX main board listed company that we already control, we offer those institutions an opportunity to get on board. The upside for stakeholders is critical mass and a globally diversified uranium portfolio. We offer a reasonable, ‘one stop shop’ for institutions wanting to play uranium’s upside.

How would a combined Azarga/Powertech fund Dewey Burdock through first production?

Azarga is fully funded through Q1 2016 and we have good support from our strategic investors who funded Azarga privately and consistently added more funding to us. With equity from our partners at the appropriate time and project-level financing, I believe that Dewey Burdock is very doable.

Compared to In-Situ Recovery projects owned by Uranerz, UR-Energy and Uranium Energy Corp, Powertech’s Dewey Burdock project gets little respect. Why do you think that is?

Dewey Burdock has had two main issues:

First, its in a vehicle that fell off the radar, ignored by brokers and with no promotion. It’s hard for Dewey Burdock to get fairly valued if its not even in the dialogue.

Second, its in South Dakota, where less is known about permitting compared to Wyoming, so there’s a perception that we have significant permitting risk.

As Powertech and Azarga come together, we plan to reintroduce the company to new and existing investors, so that they can make valid comparisons to global uranium companies like Toro Energy and Peninsula as well as U.S. ISR peers Uranium Energy Corp, Uranerz and UR-Energy, not to mention conventional uranium miner Energy Fuels Inc. These companies have market caps ranging from C$110 million to C$220 million. Powertech’s market cap (before the proposed merger with Azarga) stands at just C$ 12 million. I’m not suggesting that Powertech should trade at a C$100 million valuation overnight, but as the company’s assets advance towards production, most notably Dewey Burdock, this massive valuation gap should shrink.

Regarding significant permitting risk in South Dakota, we think it’s a misconception. All the State hearings have been held and the State basically came back saying they would conclude their finding when the NRC is locked in, i.e., basically a conditional approval. Once we get final approval from the NRC, we will have the Environmental Impact Study finalized and the draft license issued. The Atomic Licensing Safety Board will meet to issue that license (again, per the finalized work of NRC) and then the State will issue the permits. We think we will be fully permitted by year-end.

What about the Centennial project in Colorado, owned 60% / 40% by Azarga Resources / Powertech?

Centennial is interesting, also ignored by the market as Powertech used its limited resources to focus almost exclusively on Dewey Burdock. However, Azarga retained SRK, a highly regarded independent technical / engineering firm, to revive that project late last year. SRK is working on a number of scenarios but we expect to reveal a new Feasibility Study and permitting plan for that project… it may be that the new study makes good use of Black Range’s Ablation technology.

Assuming that the merger is successful, what other Uranium assets might the new entity consider?

Firstly, we just want to see a reasonable valuation after the merger closes, only … Its only after that would M&A be considered. In that instance though, there is certainly more that we can do in the U.S. Africa is also of interest, in particular Niger, which in my view has by far the best assets for African uranium.

I noticed Azarga increased its holdings of Anatolia Energy to 15.1%. In looking at Anatolia’s website, that company’s main project boasts an IRR of greater than 100%. What can you tell us about that project?

That project is another interesting ISR project. It requires less than $50m of upfront cap-ex and is projected to have cash costs of just $22/lb, truly world class. Like Dewey Burdock in South Dakota, the project is being ignored because its in Turkey. It seems there’s one valuation for Wyoming assets and every other compelling ISR project is cheap. This won’t last, our projects will get mined. Anatolia got its mining license late last year. I see no good reason why Dewey Burdock and this Turkish project for its project should be so radically undervalued compared to the Wyoming plays.

Can you tell us about Black Range Minerals?

Black Range has the Hansen / Taylor Ranch deposit, 90.9 million lbs in Colorado with a published study for a mine plan that would do 2 million lbs per year at a cash cost of about US$30/lb and upfront capital of around US$80m. That’s fairly compelling compared to some of the U.S. ISR projects. So, that in itself is quite interesting and there’s a technology angle that’s very interesting as well. Black Range is sitting on a hidden asset in the form of a potentially game-changing uranium mining technology.

You mentioned a hidden asset at Black Range Minerals, a JV with a Uranium mining technology company?

Yes, Black Range has (with Azarga’s support) been funding a technology called Ablation. Black Range owns 50% of it in JV with the inventors. Put simply, Ablation is a technology that can significantly reduce costs at sandstone-hosted uranium deposits that are not amenable to ISR mining. It’s a physical pre-concentration technology that happens at the mine.

How does it work? The sandstone-hosted uranium ore goes into water to form a slurry. The slurry is streamed through opposing jets, causing the sand particles to collide. The uranium mineralization, which is a petina on on the outside of the grains, shatters and fragments into small particles that can be separated. The result is that we generally recover 90% of the uranium, with a 90% mass reduction. Therefore, just 10% of the mass (with 90% of the uranium) gets transported to the mill. This technology can, in many cases, reduce cash costs at amenable deposits by 20%-25%, making them comparable to ISR. The Ablation technology is finalizing commercialization. We have a five tonne-per-hour unit in Casper, Wyoming that has been processing ore. We also have an African uranium company, Goviex Uranium using it in their revised operations flow sheet. An Ablation unit is planned to be tested by Goviex in an upcoming pilot plant.

Most investors know that Kazakhstan is by far the largest producer of uranium, but are unfamiliar with the uranium picture in the Kyrgyz Republic… Please explain what Azarga has there.

Kyrgyzstan is just an extension of Kazakhstan, that ‘neighborhood’ is big for Uranium. China has a mine in Xinjiang right near Kazakhstan and we are right between that mine and the main Kazakh production base. We have the largest uranium deposit in Kyrgyzstan. It’s a known deposit that Soviet geologists discovered and drilled in 1950s-1970s. They estimated a 47m lb resource. We have been drilling it for the last two years and are correlating the Soviet data well. We will have an NI 43-101 resource this year. Its hugely strategic because it could be another good source of supply for China. Roughly 50% of China’s uranium is imported from Kazakhstan. Our material could be exported across the land border with China the same way as Kazakhstan’s.

I understand that Azarga also controls a significant deposit of heavy Rare Earth Elements. At what stage of development are the REE’s?

Well this is a bit of, ‘blue-sky’ for us. On our Kyrgyzstan licenses we saw some anomalies on the western side. Soviets had made hand written notes in the uranium drilling logs noting observations of unusual colors etc. We thought, you know, that could be rare earths! In 2013, we popped three holes in that area and did some trenching. We certainly hit something exciting, some samples of 15% total rare earths oxides, that can be considered among some of the highest grade observations in the world. But again, it’s early days because the data we have isn’t enough for a JORC or NI 43-101 resource yet. We will drill the deposit more in 2014 and hope to reveal a new heavy rare earths discovery.

Thank you Alex for your time. You gave us a lot to think about. Any parting thoughts for readers?

Yes, and thank you Peter, it’s a pleasure to speak with you as always. I agree that we covered a lot of ground here. I guess I just want to reiterate that a combined Powertech & Azarga will give investors a very great way to play the coming doubling or more of the uranium spot price. Smart investors can buy a company like Cameco (CCJ) to get exposed to the ongoing nuclear renaissance, but companies like Powertech, soon to be Azarga Uranium Corp, offer far more upside. Near-term catalysts include the de-risking of Powertech’s Dewey Burdock project in South Dakota. As investors come to realize how Dewey Burdock compares to its U.S. ISR peers, a re-rating of Powertech’s stock should follow.

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