1. At about 4:00am yesterday, gold suffered a dramatic sell-off in just a few seconds. More than 15,000 contracts quickly changed hands on the COMEX.

2. This caught most investors by surprise. That’s because they don’t follow the physical market meticulously.

3.   The supply and demand of physical gold is what drives price discovery in the paper market. The leverage involved on the COMEX, SGE (Shanghai), and the LBMA (London) allows the paper market to significantly magnify the action taking place in the physical market.

4.   The gold price trends are generally determined by the physical market, and magnified by the paper market.  It’s that simple.

5.   Janet Yellen has stated, “I don’t think anybody understands gold.”  I disagree.  I’ll suggest that anybody who ignores the physical market will find that most of what happens in the paper market feels like an electric shock.  It’s not a shock.  It’s a magnification.

6.   To view the latest key physical gold market news, please click here now.  When the major banks stop importing gold into India, even if it’s for just a few days (as it is in this case), a “price vacuum” can occur on the COMEX and/or the LBMA, and do so in just a few seconds.

7.   That’s what happened yesterday, and the good news is that gold importers may already be close to getting the clarity they seek on the GST tax. 

8.   Please click here now.  Double-click to enlarge.  Gold has a “perky” feeling to it right now, even though the summer typically sees sideways to lower price action!

9.   I don’t see anything negative on this daily gold chart, and my 14,7,7 Stochastics oscillator is at a point where $50 – $100 rallies tend to begin.

10.        There’s also a nice positive wedge formation in play.  I’m an aggressive buyer in all current price weakness, with a focus on gold stocks.

11.        On that note, please click here now. Double-click to enlarge this nice GDX chart.

12.        Many gold stocks surged higher yesterday, even with gold falling by about $20 an ounce.  Are these stocks anticipating a reversal in the multi-decade money velocity bear cycle?

13.        I think so, and that’s why my focus for most new market positions in the precious metal asset class is: gold stocks.

14.        GDX is trading in a large consolidation pattern, and it has been doing so since February.  That’s when physical market demand for the Chinese New Year festival reached a peak.

15.        There’s nothing strange or “out of place” with the current GDX price action.  Gold stocks don’t need a reversal in US money velocity to outperform gold bullion on rallies, but they do need it to stage overall outperformance that is “here to stay”.

16.        Please click here now.  Silver demand is beginning to rise, and the commercial traders appear to be keenly aware of this fact.

17.        Please click here now.  Double-click to enlarge this COT report table.

18.        This report shows the liquidity flows in the COMEX silver market through last Tuesday.  These flows are positive.  In my professional opinion, the commercial players added even more long positions during yesterday’s 4:00am price drop.

19.        Please click here now.  Double-click to enlarge this daily silver chart.

20.        Silver is now in a key buying area.  Silver bugs need to ignore the past and focus on the positive demand in China and the solid COT report.

21.        I view the entire $17 – $16 price area as a key one for accumulators.  Silver bugs can buy every ten cents dip in this zone, and do so with a smile.

22.        Once the Indian GST rollout is completed, I expect Indian dealers to join their Chinese brethren with strong demand.

23.        That’s likely what the commercial traders are anticipating, and taking buy-side action now to ensure they are poised to profit from the coming rally.

24.        The physical market for gold is a very powerful financial force.  When that price action is magnified by leveraged players in the paper market, it can affect price discovery in many other major markets.  A well-known coffee company says, “Respect the bean”.  That may be good advice, but I think it’s vastly more important for gold and silver bugs to “Respect the bar”!  

On June 12th Metalla Royalty & Streaming (CSE: MTA) (OTCQB: EXCFF) (FRANKFURT: X9CP) announced that it has entered into a transformational agreement to acquire a portfolio of 3 Royalties and 1 Streaming assets from Coeur Mining (NYSE: CDE).  The purchase price is US$ 13 M, consisting of common shares in Metalla that will be 19.9% of pro-forma capital structure. As per terms of the agreement, assuming a C$0.60 deemed conversion price, the remainder of the US$ 13 M purchase price would be a ~US$ 6.6 M unsecured convertible bond with a 5.0% coupon.

This low-coupon convertible note funding mechanism is highly attractive.  Since Metalla will be generating meaningful cash flow, management will not need to raise equity capital in the market.  The note will automatically convert based on the share price at the time of the next material portfolio transaction.  As can be seen in the chart above, the higher the deemed conversion price, the lower the pro-forma # of shares.   

Game-Changing Transaction, Template for Future Deals

This is a game-changer and it highlights management’s capabilities in this niche sector.  Upon closing, Metalla will be robustly cash flow positive, a remarkable achievement at this stage of the Company’s short life.  In 2018-2019, cash flow of roughly C$ 6 M/yr. is a reasonable expectation, bridging the gap until other promising royalties / streams start throwing off cash.  On a pro-forma market cap (@C$0.60/share), the Company is trading at about 8x Enterprise Value (“EV”) to Cash Flow (“CF”) ratio.  Several peers, including precious metal royalty / streaming (“R/S”) Majors Franco Nevada (~25x) and Royal Gold (~20x) are trading at or above 20x trailing 12-month CF.  

Metalla has delivered a tremendous transaction that puts the Company on the radar (on both sides of the table) of precious metal companies of all shapes and sizes.  The US$ 13 M acquisition is fairly complex, highlighting the skill set of Brett Heath and his expert business development / structuring teammates.  Conducting business with C$2 billion, top-10 silver producer Coeur Mining opens the doors to others seeking sophisticated win-win transactions to monetize non-core assets and gain partial ownership of Metalla’s high-growth R/S platform.  Equity participation in Metalla offers miners the diversification benefits of the Company’s entire portfolio.  And, shares of Metalla held in lieu of divested non-core assets have tangible value that is more readily appreciated by investors. 

The Endeavor Silver Stream

Metalla estimates that the Endeavor Silver Stream (“ESS”) will generate cash flow of C$ 2.5-3.0 M for the balance of 2017 and C$5.0 – 5.5 M (at an average price of US$17/oz. Ag) in 2018.  Based on the Endeavor mine plan delivering 987,500 oz, of Silver (“Ag”) over the next 24 months, quarterly cash flow of ~C$1.35 M is expected through mid-2019.  Metalla will have the right to buy 100% of Ag production for many years from the Endeavor underground zinc-lead-silver mine in New South Wales, Australia.  However, the current mine life is 24 months.  

Management believes that mine life could be extended.  If it is extended each quarter would generate roughly C$1.35 M in cash flow (at US$17/oz. Ag) on top of C$11-$12 M expected in the stipulated 24-month period. As evidenced by this quote from the website of Cobar Operations Pty Ltd, the operator of the Endeavor mine, there’s optimism that mine life could be extended beyond 2019,

“Extraction of some 30 M tonnes has occurred, with remaining reserves expected to support production out to 2019.  The company is actively exploring with the intent of operating the site well beyond 2019, taking advantage of significant infrastructure including plant & machinery with nameplate capacity > 1 Mt/yr.….. capable of supporting significantly higher production rates.” 

The ESS consists of five contiguous mining leases totaling 4,096 hectares.  Incremental production from new discoveries in this area would bolster cash flow to Metalla, (there’s over 12 M ounces Ag potentially deliverable before capping out under the terms of the streaming agreement).

Royalty on Pan American Joaquin Project

One of the 3 Royalties acquired is a 2% NSR payable by Pan American Silver on minerals mined from select concessions of the Joaquin project in Santa Cruz Province, Argentina, 145 km from Pan American’s Manantial Espejo silver-gold mine.  Pan American purchased Joaquin from Coeur for US$25 M.  The project contains an estimated resource of 65.2 M Measured & Indicated ounces Ag @128.9 g/t.  Two percent of 65.2 M = 1.3 M ounces Ag attributable to Metalla.  About 2/3’s of resource is understood to be near-surface, amenable to a simple open-pit operation.  

Management estimates a 10-year mine life could generate about C$30 M in (gross, un-discounted) cash flow to the Company.  Operations at Joaquin could commence as soon as 2h 2018, but to be conservative I assume 2020 will be the first full year of mining.  A NPV(8%) on C$3 M of annual CF from 2020 to 2030 would be > C$20 M.  

I mentioned that leading precious metal R/S companies are trading at or above a 20x EV/CF multiple.  Another common industry metric is EV/Net Asset Value (“NAV”), sometimes referred to as Price “(P”)/NAV.  Well established peers trade at 1.5x to 2.5x P/NAV.  {See Chart above from Maverix Metals’ corporate presentation}. The Joaquin NSR valuation alone at a 1.5x multiple would be worth C$30 M.  

Hoyle Pond [Goldcorp] Extension Properties

Aside from the Coeur deal, the Company’s 2% NSR on the Hoyle Pond extension properties in Timmins, Ontario potential company-maker.  Goldcorp is likely to move onto the extension properties in the near future, but the Royalty does not kick in until a cumulative 500k ounces of Gold (“Au”) has been produced.  Management is waiting for additional data from Goldcorp regarding planned exploration / development activities on the properties subject to the NSR. 

My guestimate is that the Royalty could go cash pay in 2021 or 2022.  To be clear, that’s my opinion only, not necessarily that of management.  The current run-rate of 160k ounces Au/yr., if maintained, would equate to 3,200 attributable ounces of gold per year, representing considerable cash flow, perhaps on the order of C$4 – 5 M/yr. discounted back at a 10% discount factor, (no matter if it’s 4, 5 or 6 years away), an estimated NPV would be in the tens of millions (CAD$).  Without much pencil work, I feel comfortable in saying that Metalla’s company-wide P/NAV is well under 1.0x. 

Building a High-Growth Investment Platform

Subject to closing the deal this summer, management has pulled off a blockbuster acquisition of a valuable portfolio of assets.  US$ 13 M would have been too large a check to write, so management funded it in an innovative way; roughly half & half unsecured convertible note and newly issued shares in the Company.  Coeur is poised to become a 19.9% shareholder of a much larger and diversified Metalla Royalty enterprise.  Moving forward, management is committed to closing at least one, and possibly two, more acquisitions by year-end. 

Near-term cash flowing assets will continue to be the focus for the next few deals.  If more deal(s) come to fruition, annual cash flow from 2018 on could grow to about C$8 M.  Management’s stated goal is to reinvest 50% of free cash flow and pay 50% in dividends.  I don’t expect to see dividends this year, but based on potential cash flow, a C$0.01 quarterly dividend commencing sometime next year seems possible (my opinion only). 

Conclusion

Metalla Royalty & Streaming(CSE: MTA) (OTCQB: EXCFF) (FRANKFURT: X9CP) has made remarkable progress in a short period of time.  Upon closing the Coeur transaction, the Company will already compare favorably to peers on both an EV/CF and P/NAV basis.  Even more impressive, Metalla’s pipeline of deals and its small relative size means it will probably be the highest growth precious metals R/S company in North America.  The Company is still small and largely unknown, but that’s changing.  It’s a question of when, not if, Metalla will begin to be valued in line with peers, I think that time is fast approaching. 

Disclosures:  The content of this article is for illustrative and informational purposes only.  Readers fully understand and agree that nothing contained herein, written by Peter Epstein of Epstein Research, [ER] including but not limited to, commentary, opinions, views, assumptions, reported facts, estimates, calculations, etc. is to be considered implicit or explicit, investment advice. Further, nothing contained herein is a recommendation or solicitation to buy or sell any security.  Mr. Epstein and [ER] are not responsible for investment actions taken by the reader.  Mr. Epstein and [ER] have never been, and are not currently, a registered or licensed financial advisor or broker/dealer, investment advisor, stockbroker, trader, money manager, compliance or legal officer, and they do not perform market making activities. Mr. Epstein and [ER] are not directly employed by any company, group, organization, party or person. Shares of Metalla Royalty are highly speculative, not suitable for all investors. Readers understand and agree that investments in small cap stocks can result in a 100% loss of invested funds. It is assumed and agreed upon by readers that they consult with their own licensed or registered financial advisors before making investment decisions.

At the time this article was posted, Peter Epstein owned shares in Metalla Royalty and the Company was an advertiser on [ER].  By virtue of ownership of the Company’s shares and it being an advertiser on [ER], Peter Epstein could be viewed as biased in his views on the Company.  Readers understand and agree that they must conduct their own research, above and beyond reading this article. While the author believes he’s diligent in screening out companies that are unattractive investment opportunities, he cannot guarantee that his efforts will (or have been) successful. Mr. Epstein & [ER] are not responsible for any perceived, or actual, errors including, but not limited to, commentary, opinions, views, assumptions, reported facts & financial calculations, or for the completeness of this article. Mr. Epstein & [ER] are not expected or required to subsequently follow or cover events & news, or write about any particular company or topic. Mr. Epstein and [ER] are not experts in any company, industry sector or investment topic.

To a degree, the mining business has always mimicked the process from which it profits and has remained deferential to its two noble truths: pressure and time. Change doesn’t happen overnight, profit rarely comes without pain. But the payoff is inevitably worth it and its value invariably lasts. But more and more we are seeing the mining sector adopt the impatience and short-termism that is commonplace in major financial centres, and this is particularly the case in London. An on-going row at Petropavlovsk, the London-listed mining company, is fast-becoming a case study for the vulnerability of small-cap companies to foreign influence and with it we are seeing the changing nature of the mining sector.

Outside observers to the Petropavlovsk case are bemused at the failure of London’s established institutions and regulators to recognise the methods that foreign interests will employ to gain an advantage. London, post-Brexit vote, is an increasingly popular hunting ground for foreign interest groups: some taking advantage of the weak pound, others taking advantage of the weaker institutions. The commitment of arbiters like the City Takeover Panel – many of whom are employees of the companies whom they purport to scrutinise – and the proxy shareholders advisory firms to the ‘old way’ of doing things, particularly their blindness to the shrewd aggression of foreign players, will ultimately leave them all with egg on their face. If the AGM goes as predicted this week and the current board is ousted, the Petropavlovsk case may well prove to be the latest in a litany of failures at the hands of London’s regulators, and here’s why.

Renova ascendant

If they oust the Board, it is all but confirmed now that Renova, Petropavlovsk’s largest shareholder, will use the company as a vessel for dumping its wider mining assets. Given Renova’s history of stealth takeovers, it’s long been suspected that they were up to their old tricks this time too. But I’ve heard from friends that at cocktail parties across Moscow, Renova’s billionaire owner, Viktor Vekselberg, is hardly being coy about his long-held intentions to infiltrate and seek-control of Petropavlovsk. Quoting sources inside Renova, the Russian press has reported that the motivation is Petropavlovsk’s London listing. Either Vekselberg is seeking to create a mining conglomerate into which it can dump its suspicious assets (such as Kamchatka Gold, as reported in Russian press), or create a vessel into which he can merge Roman Abramovich’s Highland Gold assets. Certainly the proposed appointment of Bruce Buck, of law firm Skadden, Arps, Slate, Meagher & Flom, to the Petropavlovsk board would suggest this is the case. Not only is Mr Buck one of the most bullish M&A lawyers in town, he’s also Chairman of Chelsea Football Club owned by, you guessed it, Roman Abramovich.

Takeover Makeover

Back to our present day example: Petropavlovsk, where there are enough irregularities to keep tongues wagging for years. After a couple of months’ research into the allegation that Renova is part of an undeclared concert party with M&G and Sothic, last week the Takeover Panel found no cause for further investigation. In short: ‘nothing to see here!’

The Panel announced that the rebel shareholders’ resolutions were not “board control-seeking” and, as the parties couldn’t be proven to be acting together, no mandatory Offer was required. The conspiracy theories around the reasoning for this conclusion will only be fanned by the fact that the Deputy Chairman of the Takeover Panel, Philip Remnant, happens to be the Chairman of M&G. Nor will it help that Alan Porter, Group General Counsel and Company Secretary of Prudential/M&G, is also on the Panel. Never mind that one of the Panel’s Case Officers is on secondment to the Panel from Skadden, the very law firm of one of the proposed new Directors, Bruce Buck. All speculation of course, but it does look a bit odd.

Toothless bodies with wagging tails

Of course, there has long been criticism of the ‘toothless’ nature of London’s regulatory bodies.

Think of what happened with Kraft’s takeover of Cadbury’s chocolate last year. Immediately after buying out shareholders with the promise of jobs preservation and future growth, Kraft promptly closed a key factory at the cost of 400 jobs. Kraft barely got a proverbial ‘slap on the wrist’ by UK regulators.

I remember back in 2015 when the watchdog reprimanded Credit Suisse and two major law firms over the way the trio handled the 2010 creation of Bumi, a London-listed Indonesian coal miner. The trio had wholly violated UK takeover rules by not informing the regulator about links between two Indonesian coal miners that had in effect taken majority control of Vallar, the previous incarnation of Bumi. Their punishment?  A whole four years after their glaring breach of the City Code, the Panel admonished them with a mere “statement of public criticism”. Ouch.

If the City Takeover Panel’s aim is to keep UK markets honest, its censorship measures sorely need updating.

Something F-ISS-HY going on?

And it’s not just the Takeover Panel that could fall victim to some suspicions over questionable impartiality.

Compounding frustrations among retail shareholders last week was the bizarre flip flopping of one of London’s leading proxy advisory firms, an institution responsible for making recommendations in the best interests of ordinary shareholders ahead of AGMs. To great media attention last week, proxy firm ISS announced that it was backing the current Petropavlovsk board and rejecting the resolutions of M&G, Sothic and Renova. But within 24 hours had performed a dramatic u-turn to reject the current board and back the very resolutions it had freshly endorsed. Of course, it would be churlish to suggest that ISS was in any way influenced by the complaints of its clients… Especially churlish to point out that M&G just so happens to be one of ISS’s largest clients in London…

So, there are more than enough questions already circulating about the effectiveness of the regulation of London’s market and a question-mark over impartiality hardly helps. There is already a worrying vulnerability of British businesses to foreign takeovers, and our seeming inability to protect and regulate against hostile moves could leave UK regulators, perhaps even the London Stock Exchange, the laughing stock of European markets.

Watch this space on any havoc wreaked at Petropavlovsk following the distructive board changes which UK regulators, yet again, failed to censor. Any irregularities that do emerge about the shift in power may well teach the London Stock Exchange a thing or two about pressure and time: they’re going to be under a lot of pressure and fast running out of time to fix it!

1. After the US markets close today, Morgan Stanley will announce whether Chinese stocks get the green light for inclusion in their emerging market index.

2. Please click here now. This announcement has the potential to create substantial international liquidity flows into Chinese stocks.

3.   That can have a very positive effect on the price of gold.  Here’s why:  Gold plays a huge role in Chinese culture.  When the citizens are happy or in the mood to celebrate, they buy gold.

4.   For most of 2017, the Chinese stock market has left the US market in the dust, and today’s announcement could add even more zest to the rally.

5.   Please click here now. Double-click to enlarge this FXI chart (a Chinese stock market ETF).

6.   It’s clear that even without inclusion in the Morgan Stanley indexes, the Chinese stock market is roaring higher.  Note the bullish island reversal pattern that is in play now.

7.   The Chinese gold market (especially the market for investment grade bars of gold) is recovering in step with the new bull cycle in Chinese stocks.

8.   Please click here now.  Double-click to enlarge this daily gold chart.  I realize that gold market investors are a bit disappointed that gold hasn’t surged above $1300 in 2017, but good things come to those with patience.

9.   Note the position of my 14,7,7 Stochastics oscillator at the bottom of the chart.  Gold tends to rally when it reaches the 10 area (it’s near that now).  When it reaches the 90 area (as it did a few weeks ago), gold tends to soften.

10.        It’s not rocket science; from a technical perspective, gold tends to “breathe”, much like a person does.

11.        Most of the major trends in the gold market tend to be related to the ebb and flow of Chindian demand.  Commercial traders operating on the LBMA and the COMEX use leverage to essentially magnify the price action.

12.        Most of gold’s price rally in 2017 was caused by Chinese New Year demand.  That waned in February.  The general trend has been sideways since then, which is normal for this market.

13.        The rallies to $1300 in March and May were related to India’s Akha Teej festival demand, and the Indian government’s decision to levy a modest GST rate for gold.

14.        I’ve been adamant for years that gold is a much bigger market than most investors realize, and it’s so big that Chindian demand can affect Western bond and currency markets.  It can be argued somewhat persuasively that the Fed doesn’t move the gold price.  The gold price action moves the Fed.

15.        Since February, gold has been consolidating quite majestically.  Gold bugs should act now to jettison any petty fears they have about future price action.

16.        Please click here now. Double-click to enlarge.  Note the numerous blockchain currencies I’ve highlighted, and their fabulous gains over just the past 24 hours.

17.        I cover blockchain in detail at my https://gublockchain.com website, and I view it as the newest sub-sector of the precious metals asset class.

18.        That’s because most of the blockchain currencies were designed around the nature of gold and the difficulties involved in mining it.  In a nutshell, blockchain currencies are electronically mined.  Most of the founders of this market have a philosophy that is very anti-establishment, anti-government, and pro-gold.

19.        Blockchain has been warmly embraced by precious metal investors in the East, who are generally younger than the “old guard” gold bugs of the West. Fresh approaches like blockchain are a welcome addition to the fight against fiat currency systems promoted by governments.

20.        Many older gold bugs in the West are also getting in on the blockchain action, and that’s good news.  Please click here now. Litecoin surged about 80% higher in 72 hours over the week-end, while gold and stock markets were closed.

21.        I view litecoin as the “silver bullion of the blockchain world”, and bitcoin is like gold.  The bottom line may be that blockchain is not just the newest kid on the precious metals investment block…it’s also the hottest.

22.        Please click here now. Double-click to enlarge this superb GDX chart.  Investor fear about gold stocks is unfounded, and I’m a “power-buyer” of GDX on every ten cents decline in the current price area.

23.        The triangular consolidation is perfectly normal for this time of year.  Note the excellent position of my Stochastics oscillator at the bottom of the chart.

24.        GDX is probably just days or hours away from the next rally.  My strongest recommendation to global gold stock enthusiasts is to jettison bad memories of the past and get serious about participating in the upcoming upside fun for gold stocks.  To participate in the rallies of tomorrow, investors need to be buyers today!

1. The next US central bank interest rate announcement is scheduled for tomorrow afternoon. Gold and related assets are now in “pause mode” against most fiat currencies.

2. Gold has a rough general tendency to decline ahead of a rate hike, and then rally strongly after a hike is announced.

3. That has happened in textbook fashion with the first three rate hikes in the current hiking cycle.

4. There’s no guarantee that it happens again this time, but if it does gold should take out the weekly chart downtrend line that has the attention of institutional technical analysts.

5.   Please click here now. Double-click to enlarge this fabulous monthly gold chart.

6.   Note the buy signal flashing on the Stochastics oscillator at the top of the chart.  It’s happening in the 50 area, which indicates strong momentum. 

7.   Also, the TRIX indicator at the bottom of the chart is about to cross over the zero line.  This is extremely positive technical action.

8.   Technical breakouts that are produced by fundamentally important events are significant.

9.   The bottom line is that a breakout on the monthly gold chart that occurs in the days following tomorrow’s Fed announcement could be a gamechanger for gold market investors.

10.        Please click here now. Double-click to enlarge this weekly chart of the US dollar versus the Canadian dollar.

11.        The dollar already looks like a train wreck against both the Japanese Yen and the Indian rupee.  Now it’s poised to go off the rails against the Canadian dollar.  I’ve set an initial target zone in the $1.25 area.

12.        Please click here now. Double-click to enlarge this oil chart.

13.        Oil is by far the largest component of the major commodity indexes.  A rally in the Canadian dollar tends to coincide with a rally in those indexes.

14.        That’s inflationary, and more good news for gold.

15.        Please click here now.  Good news for gold is happening around the world, and when it’s coming from India, commercial traders tend to buy long positions in size on the COMEX.

16.        After years of gold-negative policy announcements, India’s government has begun to make announcements that are cheered by the gargantuan gold jewellery industry.

17.        Millions of industry workers have been sidelined by the barbaric legislation of the government in recent years.  I’m predicting that most of them will be back at work within twelve months.

18.        India’s gold jewellery market will be in expansion mode very quickly, which means the COMEX gold price will be in upside expansion mode even more quickly!

19.        Please click here now.  Double-click to enlarge this gold chart. Active traders can take action on the buy-side right now to capitalize on a potential rate hike rally following tomorrow’s Fed announcement.  Long term investors can place buy orders in the $1220 price zone.

20.        My personal focus for fresh precious metals sector buying is GDX, the gold stocks ETF. 

21.        Please click here now.  Double-click to enlarge this GDX versus gold chart.

22.        There’s not much point in buying a high-risk asset class like gold stocks if they are not poised to outperform the underlying low-risk asset class of gold bullion.  The good news is that gold stocks are technically poised to do so right now.

23.        Most of the gold stock pipeline news flow is now positive.  More rate hikes are needed to reverse the multi-decade bear cycle in US money velocity, and Fed-focused economists have assigned roughly a 95% chance of a rate hike tomorrow.

24.        GDX has been drifting sideways to lower against gold bullion since February.  I’m a very aggressive buyer on any price weakness between now andtomorrow’s Fed announcement.  There’s no guarantee that the Fed’s fourth rate hike will be followed by a fourth glorious gold sector rally against global fiat, but I will suggest that all investors should be poised to profit, if it happens!

The gold miners’ stocks remain deeply out of favor, largely shunned by traders. Since this sector just spent the better part of a year grinding sideways, such bearish sentiment isn’t surprising. But with a giant technical formation nearing a major inflection point, things look to be coming to a head in gold-stock land. A big breakout is nearing, and gold stocks’ deep undervaluation relative to gold argues it will be to the upside.

Every investor’s portfolio should always include a core position in gold bullion.  As a rare asset that tends to move counter to stock markets, gold acts like insurance.  It rallies strongly when stocks and bonds are falling in serious corrections or bear markets, mitigating overall portfolio losses.  Gold certainly has risks of its own, but they pale in comparison to the additional layers of risk heaped on by gold-mining stocks.

Gold miners face major financing, operational, geological, and geopolitical risks that gold doesn’t.  Even when gold is thriving on strong investment demand, individual gold miners’ stocks greatly underperform if their mines suffer troubles.  Thus gold-mining stocks must offer ultimate returns well beyond gold’s own, to compensate investors for bearing these miners’ big additional risks stacked on top of gold’s own risks.

Miners’ gains do amplify gold’s underlying gains during gold bulls, as evidenced in the flagship HUI gold-stock index.  Gold stocks’ last secular bull ran for 10.8 years between November 2000 to September 2011.  During that span the HUI skyrocketed 1664.4% higher, driven by gold’s own parallel 602.9% bull market!  That made for 2.8x upside leverage for gold stocks relative to gold, right in line with historical ranges.

The major gold stocks that dominate the HUI and the leading GDX VanEck Vectors Gold Miners ETF will generally enjoy 2x to 3x upside leverage to gold in bull markets.  With the big gold stocks tending to see ultimate gains doubling or tripling gold’s, investors are often willing to shoulder their additional risks.  And among the smaller mid-tier and junior gold miners, their collective upside leverage to gold runs even greater!

The reason investors are so down on gold stocks today is their year-to-date leverage to gold has been horrendous.  Despite the Trumphoria-fueled record-high stock markets, gold has still surged 11.9% since 2017 dawned.  Incidentally that has handily bested the S&P 500’s 8.7% YTD gain.  But despite gold shining, the gold stocks as measured by the HUI were only up 11.1% YTD as of the middle of this week.

And that was even after Tuesday’s surge, where the HUI blasted 6.1% higher on gold challenging $1300 again!  The gold miners’ stocks, despite their big additional risks, are actually lagging gold so far this year with terrible leverage of 0.9x.  That’s why bearishness on this sector is so extreme today.  Truly the risky gold stocks aren’t worth owning if they fail to generate much-greater gains than gold.  Upside leverage is critical.

While this year-to-date snapshot is pretty damning, it’s a myopic perspective.  Like everything else in the markets, gold stocks’ leverage to gold flows and ebbs in cycles.  We are likely at trough leverage now, as it’s hard to imagine this sector’s psychology becoming much worse.  After exceptional underperformance relative to gold, the gold stocks’ gains tend to surge and outperform to gradually restore that 2x to 3x average.

Given the sometimes-extreme cyclicality of gold stocks’ upside leverage to gold, they were actually due for a period of underperformance.  In January 2016, a new gold-stock bull was born out of fundamentally-absurd 13.5-year secular lows in HUI terms.  Over the next 6.5 months, the gold stocks soared 182.2% higher on a new and small 25.2% gold bull.  That was extreme 7.2x upside leverage, far too great to be sustainable.

I warned about gold stocks’ excessive early-bull gains last July, that a mid-bull correction was necessary and inevitable to rebalance sentiment.  Due to a series of anomalous events slamming gold itself in the second half of last year, that healthy gold-stock correction grew far more extreme than anyone expected.  But after such huge outsized gains relative to gold in 2016’s first half, a leverage mean reversion is righteous.

So the gold stocks have far-underperformed gold for the better part of a year now, fully bleeding off the excessive greed their early-2016 outperformance fueled.  And now the relative-performance pendulum is once again set to swing back the other way.  This chart looks at the major gold miners’ technicals since early 2016 as represented by the HUI.  A major triangle consolidation chart pattern is nearing the end of the line.

That overdue gold-stock correction last summer was fast and furious in August, with the HUI plunging a blistering 22.0% in less than a month!  That was totally normal.  The gold stocks then spent September consolidating and bottoming, typical staging for their next upleg.  But then out of the blue they got walloped by an extreme event.  Gold futures suffered a mass stopping as key gold support near $1300 failed to hold.

Gold’s resulting extreme 3.3% down day in early October sucked in the gold stocks, which saw their own stop-loss-triggered cascading selling.  The HUI plummeted 10.1% in a single trading day, spawning incredibly-bearish psychology!  But that September consolidation before the early-October plunge would start forming the upper resistance line of the giant triangle consolidation pattern finally nearing maturity today.

After that extreme anomaly, the gold stocks soon started grinding higher again along the HUI’s key 200-day moving average.  200dmas are usually the strongest support lines in ongoing bull markets.  Then unbelievably gold suffered another extreme anomaly.  After Trump’s surprise election win, stock investors started jettisoning gold-ETF shares like crazy on the sharp Trumphoria stock-market rally.  Gold plunged again.

And naturally the HUI followed, as gold miners’ profits and hence ultimately stock prices are leveraged to underlying moves in gold prices.  After that the gold stocks started consolidating again in November, until they were hit by a mind-boggling third anomalous event after just suffering two in two months.  The gold stocks dropped with gold in mid-December on 2017 Fed-rate-hike projections being more hawkish than expected.

That rare gold-futures mass stopping, the never-before-witnessed Trumphoria stock-market surge that was contrary to all pre-election expectations if Trump actually won, and the hawkish Fed ballooned that healthy gold-stock correction to a freakishly-large 42.5% in 4.4 months!  But as soon as those extreme gold-selling anomalies stopped materializing, gold stocks were quick to bottom decisively in December.

They briefly consolidated low, starting to form the lower support line of that triangle consolidation chart pattern of such great interest today.  After being beaten to such super-low levels relative to prevailing gold prices, the HUI took off like a rocket in a major new upleg.  By early February, the gold stocks had surged 35.5% in just 7 weeks on a mere 10.0% gold rally.  That was strong 3.6x upside leverage to gold!

But that initial upleg surge stopped cold at the HUI’s 200dma.  When bull markets suffer unusually-large corrections thanks to anomalous events, technically-oriented traders’ perceptions can shift from seeing 200dmas as strong bull-market support to major overhead resistance.  Bulls aren’t believed to be back on track until decisive re-breakouts above 200dmas occur.  That actually happened with gold itself in mid-April!

So the HUI was repelled at its 200dma in mid-February, solidifying the upper resistance line of this triangle consolidation chart pattern.  Then gold stocks retreated from mid-February to mid-March, as Fed-rate-hike fears flared again among gold-futures speculators.  These guys dominate short-term gold price action, and are irrationally scared of Fed-rate-hike cycles even though gold has thrived during them historically.

On the very day the Fed indeed hiked again as expected in mid-March, gold and therefore gold stocks surged dramatically.  The FOMC members controlling monetary policy didn’t up their collective forecast for three total rate hikes in 2017, which was considered dovish.  So the HUI soared 7.8% higher in the afternoon after that third rate hike of the Fed’s newest cycle.  That solidified this triangle’s support line.

Gold rallied strongly from there into mid-April, breaking decisively back above its 200dma again on rising geopolitical fears.  That was after Trump lobbed cruise missiles into Syria, sent a carrier battle group to North Korea, and struck Afghanistan with the biggest conventional bomb ever used in combat all within a single week!  But gold-stock sentiment remained damaged, and the HUI again failed to overcome its 200dma.

Gold and especially gold stocks faded again into early May, with new record highs in US stock markets retarding gold investment demand.  Then a big stock-market down day rekindled gold’s uptrend, but the beaten-down gold stocks only edged feebly higher really lagging their dominant fundamental driver.  That recent action further reinforced this symmetrical-triangle consolidation pattern that’s crystal-clear in this chart.

Since September now, the gold stocks as measured by the HUI have seen lower highs and later higher lows.  Their upper resistance line is pushing lower right along the HUI’s 200dma.  Just this week, that big 6.1% HUI surge on Tuesday blasted it right back to its 200dma again for the third time in five months.  Meanwhile the HUI’s lower support line keeps rising, compressing this 9-month-old triangle consolidation pattern.

As you can see in this chart, this symmetrical-triangle formation has nearly closed.  In a matter of weeks, the gold stocks’ resistance and support lines will converge.  That will force gold stocks into an imminent technical breakout one way or the other.  This drifting sector has reached a major inflection point.  And the resulting move could be big, as symmetrical-triangle breakouts often fuel big momentum buying or selling.

While a breakdown is possible, the odds favor a major upside breakout soon for gold stocks.  In my line of work, I hear from plenty of fund managers.  They understand the gold miners’ underlying fundamentals are strong, as evidenced by the recently-reported first-quarter results of the GDX components.  They also know gold stocks are unloved and undervalued relative to gold, with big upside potential when sentiment shifts.

But since fund managers have to report their performance on a quarterly basis, many are wary of shifting capital back into gold stocks early.  They don’t want to be stuck reporting owning the very-unpopular gold stocks at quarter-ends before this sector starts moving again.  So multiple fund managers have told me they are waiting for a decisive 200dma breakout of the HUI or GDX.  That’s their green light to start buying.

That will yield hard technical confirmation that gold stocks remain in bull-market mode.  And since this giant symmetrical triangle’s upper resistance is paralleling the HUI’s 200dma, a 200dma breakout will also be an upside consolidation breakout.  Concurrent upside breakouts of multiple major resistance lines should unleash serious buying momentum.  A decisive breakout is 1%+ above any resistance line.

Interestingly these festering fears that a gold-stock bull might not be in force anymore are kind of silly.  As of the middle of this week, the HUI was still up 101.1% bull-to-date since January 2016 compared to an 18.5% gold gain over the same span.  And gold stocks are only down 28.7% from their bull-to-date peak seen in early August.  That’s not much in a sector as volatile as this considering all the late-2016 anomalies!

The greatest argument for gold stocks’ imminent upside breakout from their long symmetrical-triangle consolidation is actually fundamental, not technical.  The gold miners’ stocks remain greatly undervalued relative to prevailing gold prices.  In Q1’17, the major gold miners included in that leading GDX ETF reported average all-in sustaining costs of just $878 per ounce.  That’s $409 below today’s gold price!

The gold miners are very profitable today, yet their stocks are priced as if they not only can’t earn any money now but probably never will!  That’s a ridiculous anomaly driven by excessively-bearish sentiment, and such extremes never last for long.  A great proxy for the strong fundamental relationship of gold-mining profits and therefore gold-stock prices to gold levels is found in the venerable HUI/Gold Ratio, or HGR.

It simply divides the daily HUI close by the daily gold close, so the resulting ratio can be charted over time.  As I discussed in depth in an essay on gold-stock-bull upside targets in mid-April, the average HGR in the last normal market years between 2009 to 2012 was 0.346x.  The gold stocks need to at least mean revert back up to those levels to return to some semblance of fundamental normalcy relative to gold.

This last chart looks at the HGR since early 2016, this new gold-stock bull market’s entire lifespan.  It is rendered in blue along with key moving averages.  The actual HUI gold-stock index level is shown in red.  But a second hypothetical HUI is included in yellow, showing where gold stocks should be trading at that post-panic-normal-year HGR average of 0.346x.  That’s more than double where this sector is drifting now!

If the gold stocks were popular and loved today, trading at historically-high levels relative to gold, I would be very bearish on this symmetrical triangle failing to the downside.  But the exact opposite is true!  This week the HUI/Gold Ratio was trading at only 0.157x.  That’s still super-low historically, not too far above the all-time low of 0.093x last seen in January 2016 when this strong new gold-stock bull was stealthily born.

And even when gold stocks peaked in their young bull’s first upleg in early August, they remained way under normal levels relative to gold by all historical standards.  The HGR only hit 0.209x at best, still far below that 2009-to-2012 normal-year average of 0.346x.  Realize that for their entire young bull market, gold stocks have yet to trade anywhere near even normal price levels let alone high ones warranting caution.

Interestingly the HGR itself is in a similar giant technical pattern to the gold stocks, a descending triangle.  Since early last November, the HGR has found strong support just under 0.15x.  Like the gold stocks, the HGR is getting squeezed into an ever-tighter trading range.  So an HGR breakout is also imminent.  And like gold stocks, the odds favor that being to the upside.  These extreme-low HGR levels are very rare historically.

If the gold stocks would simply mean revert back up to their 0.346x average HGR, the HUI would trade at over 445 at this week’s gold prices!  That’s a whopping 120% higher than today’s levels.  When a sector is radically undervalued fundamentally relative to the driver of its profits, upside potential is vastly greater than downside risk.  Gold stocks’ mean-reversion upside from here is huge, arguing for a major upside breakout.

With gold stocks so darned cheap relative to gold, the odds heavily favor the nearing inflection point of this symmetrical triangle turning sharply north.  And interestingly, a potential big buying catalyst for both gold and gold stocks is coming next week.  The FOMC is meeting to make a monetary-policy decision which is widely expected to result in the fourth rate hike of this cycle.  And future rates will be forecast.

Despite gold-futures speculators’ paranoia of Fed rate hikes, both gold and gold stocks surged sharply after each of the three previous rate hikes in this cycle.  Why should the fourth prove any different?  It’s also quite likely the FOMC members’ collective view on more rate hikes in 2017 proves either stable or more dovish than expected.  After Q1’s very-weak GDP and May’s huge US jobs miss, the Fed can’t be hawkish.

The Fed only forecasts future rates at every other FOMC meeting, or once a quarter, in the so-called dot plot.  That showed three total rate hikes in 2017 in mid-March, when the US economic data looked much stronger.  Traders had expected that to be lifted to four, but it wasn’t.  That’s why gold and gold stocks surged sharply that very afternoon.  If that rate-hike forecast stays at three next week, gold should rally again.

But between the sharp deterioration of US economic data in the past quarter, along with the Fed’s desire to soon start shrinking its grotesque balance sheet ballooned by years of QE, the FOMC may very well lower its 2017 rate-hike outlook.  It doesn’t even have to fall to two, signaling this year’s rate hikes are likely over.  If the collective forecast even sheds a quarter point, gold-futures speculators should flood into gold.

Remember mid-March’s less-hawkish-than-expected dot plot drove gold 1.9% higher the afternoon it was published.  That resulted in a major 7.8% HUI surge that very day, along with nearly a month of follow-on rallying after that!  If gold and therefore gold stocks catch a bid on next week’s FOMC decision, this sector’s symmetrical triangle will conclude with an upside breakout that could unleash big buying momentum.

With gold stocks nearing such a major technical inflection highly likely to be resolved to the upside, you need to be closely following this sector.  It wouldn’t surprise me one bit to see the HUI’s ultimate 2017 gains approach or even exceed its big 64% surge last year.  The earlier you get informed and deploy in great gold stocks cheap, the greater your gains will be.  Buy low before most others, as fortune favors the bold!

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The bottom line is a major technical inflection point nears in gold stocks.  A giant symmetrical-triangle consolidation pattern formed over the past 9 months has nearly fully converged, which will soon force a major breakout.  Odds are it will prove to be to the upside given this sector’s strong fundamentals and severe undervaluation relative to gold.  The major gold miners are very profitable at today’s gold prices.

The most-visible near-term breakout catalyst is next week’s FOMC meeting.  Gold and gold stocks have rallied sharply after each of the past three Fed rate hikes.  So if gold-futures speculators see anything the Fed releases as less hawkish than expected next week, they will pile back into gold which will once again catapult gold stocks higher.  And given all the weak economic data lately, it’s hard to imagine a hawkish Fed.

In mining, it’s always a nice surprise when predictions come true. We’ve all been in situations where we have to scrabble around for explanations when anticipated or projected yield doesn’t quite match up when the dust has settled. Projections being more-or-less-correct is a satisfaction I have thankfully enjoyed plenty of times in my mining career, but it’s a new experience when it comes to market analysis!

Last month, I wrote an article for MiningFeeds that suggested that Renova Group, the diversified business conglomerate run by bullish billionaire businessman Viktor Vekselberg, was gearing up for a run at the London Stock Exchange. This week, an article in Russia’s leading financial newspaper, Kommersant, confirms this is precisely what’s going on.

The article, written by the Moscow-based financial newspaper, leans on a source close to Renova to report that the company intends to take control of London-listed gold mining company Petropavlovsk at the forthcoming AGM. To recap: last month, Renova submitted its intention to vote against the reappointment of much of Petropavlovsk’s current board, apparently motivated by concerns around ‘corporate governance’. Petropavlovsk hit back, calling the move a takeover ‘by stealth’ and vowed to fight for the protection of smaller shareholders.

This week, the Russian newspaper reveals that Renova’s motivations may be less altruistic in nature. Kommersant reports that Renova intends to take control of the Petropavlovsk board to create a new, major gold-mining conglomerate (that would be Russia’s second largest gold player) by consolidating several Russian gold assets of varying quality into Petropavlovsk.

Provided the City of London Takeover Panel is satisfied with Renova’s approach to this deal, it certainly looks like a pretty strong move for the Russians. But, there’s one part of the report that still doesn’t make sense to me: Kamchatka. Kamchatka is a remote, volcanic region in Eastern Russia that has long been considered by optimistic mining consultants like me to be a sleeping giant for platinum, copper, nickel and gold. No one has managed to crack it yet, but plenty have tried.

Within its massive and diversified portfolio, Renova currently owns a company called Zoloto Kamchatki, another goldminer with development and production assets in Kamchatka. Last year, Petropavlovsk seriously and publicly considered the possible acquisition of Renova’s Kamchatka Gold assets along with Amur Zoloto, another gold mine in the very far east of Russia. Press releases were issued, exploration updates released, but the deal never happened.

We haven’t heard much about Kamchatka Gold since the deal fell apart, but oddly it rears its head once again in this latest news from Kommersant. Renova’s source now claims the Kamchatka Gold asset could push the value of Petropavlovsk to $500m. That’s nearly twice the estimated market cap of Petropavlovsk’s entire business. So why wasn’t this disclosed before? And why Renova’s sudden change of heart in moving away from a core development focus to which they were so committed just 6 months ago?

1. Gold tends to become a rather dull market as the summer approaches. Will this year be different?

2. The summer doldrums are caused by seasonal softness in Eastern jewellery demand, but the next major Fed rate hike announcement and commentary is just two weeks away.

3. This Fed meeting appears to be a win-win setup for gold.  The bottom line is this:

4. A decision not to raise rates based on the terrible action of the Fed’s PCE (inflation indicator) could blast gold right through the $1300 resistance area.

5. On the other hand, the first three rate hikes have all been followed by substantial gold price rallies. 

6.  The US debt ceiling (I call it a floor) mess is simmering and a rate hike could upset the US stock market apple cart.

7. That could create a huge surge out of US risk markets and into the perceived safe havens of the yen and bonds, and into the real safe havens of gold and silver bullion.

8. India’s GST rate announcement is another imminent factor.  That announcement could create very violent price action and do it very quickly.

9. Please click here now. Double-click to enlarge.  Dollar bugs may be on the verge of getting squashed if the implications of this H&S top formation play out in textbook fashion.

10. Technically, the dollar is clearly a weekly chart train wreck.  Is gold a mirror image of the dollar versus the yen?

11. To view the current technical situation for gold, please click here now.  Double-click to enlarge this daily gold chart.

12. When key events like the Indian GST rate announcement and a Fed rate decision are imminent, it’s critical for gold investors to prepare their buy and sell orders and get them into the market before the announcements occur.

13. Gold is currently trading above the $1260 support zone.  Gold is likely to swoon until the jobs report is released on Friday morning at about 8:30AM.

14.  Buy orders for gold and associated assets need to be placed right now.  It’s too late to place them after the report is released because retail investors don’t have the sophisticated trade software used by powerful institutional players.

15. Ahead of the jobs report, I’m an eager buyer in the $1260 – $1245 price zone, with a big focus on GDX and individual gold stocks.

16. Please click here now.  Double-click to enlarge.  The T-bond has a quasi flag pattern on it, which is quite positive news for gold.

17. I predicted several years ago that Janet Yellen would end QE and begin a rate hiking cycle, and that she would have initial success in her goal of raising short term rates while long term rates remained steady.

18. Clearly, she gets an A on her rate hike report card in that regard, at least for now.  Fed rate hikes are producing an ideal environment for gold market enthusiasts, because they are enticing banks to move money out of the Fed and into the fractional reserve banking system.

19. The rate hikes are happening at a modest pace and that keeps equity market players happy.

20. Please click here now. Double-click to enlarge this GDX chart.  I’m a very aggressive GDX buyer in the $23 – $18 price zone, with orders in the market to buy every ten cent decline in the price.  There’s nothing to fear ahead of the jobs report, Fed announcement, and GST decision except fear itself!

21. GDX and associated gold stocks have a very solid feel right now, and I’m getting emails from investors who are new to the gold community.  They feel the time is right to fade their US stock market holdings, and accumulate quality gold stocks.  That’s a very wise move.

22. Please click here now.  Double-click to enlarge.  I’m a huge blockchain assets enthusiast, and I cover them on my junior site at www.gracelandjuniors.com. “Ether Coin” (Ethereum) is the latest addition to my roster of blockchain currency investments.

23. Blockchain items are arguably the newest members of the precious metal sector “family of assets”, because of the many fundamental similarities they share with precious metals.  Incredibly, Ether is up almost 100% from where I bought it on Saturday.  While my long term target is $2000, given the huge rally in just days, I have to be a partial seller now.

24. Old timers in the gold community may want to take a closer look at blockchain technology.  My suggestion is not to view it as a gold market competitor. Blockchain currencies are not a replacement for gold.  They are simply the newest members of the ultimate asset family!