The Capital Cycle is once again presenting us with a golden opportunity

Silver broke upwards this morning – to the tune of 3% at the time of writing.

I wonder if it’s because of this.

This was useful, as I was going to write about precious metals anyway.

Specifically though, looking at how bad decisions, a crash in prices, and a crisis in confidence have created the perfect conditions for gold and silver miners today.

Here’s the breakout, which to many bulls will pretty much confirm that the bull market has resumed, and the last couple of months were a ‘pullback’ or ‘shakeout’.

Source: Yahoo Finance

A few weeks back though, some of you might’ve been wondering whether the great gold run of 2020 had burnt itself out.

After all, it had been falling for three months, from the start of August to the end of September.

It fell further than it did in the March panic, no less.

However, regular readers of this letter would, I hope have enjoyed two courses of relief and confidence.

For not only did I write this piece (Patience is a virtue, unless you’re running logistics company ) on August 26, wondering whether the time had come to sell a bit of gold.

But I followed it up on Dec 11, with this piece (A golden opportunity, not to be missed).

Both are written within a wider framework of an enduring belief in a long term bull market for gold and precious metals.

But I am slightly proud of my timing in both cases.

So much so that I have illustrated them on this gold price chart.

Source: Koyfin

Not so fast though, you might tell me.

What are those bars there? What are they telling us?

They’re showing that even my helpfully timed articles only would’ve saved you 7%, if you’d sold and re-bought by the arrows. And gold has come back even more than that since then…

This takes me to a point that’s useful to make at this juncture.

Trading is hard. It’s hard to be right, and it’s hard to time. Gold was probably due a pullback at $2,000+, and this felt like it had bottomed after it dipped below $1,800. But that doesn’t mean trying to trade that was a good idea.

At the very least, it’s probably better to trim or add little bits around the edge of a core position, rather than going all in, and cashing out in bulk. Don’t forget about trading costs either, which would erode yet more of our imaginary 7%.

Anyway, the companies producing gold to sell into market could hardly care whether gold is at 1,800 or 2,000.

Why?

Because their all-in cost of producing an ounce of gold today is about $1,000. And what’s more, they managed to reduce it further in Q3 of this year.

That means that at $1,800, they are producing the best margins in their history – $800 per ounce. The more gold goes up the better, but at $1,800, they are making 40% margins on their product – a fantastic return.

This is based on something called the AISC – the all-in sustaining cost.

And it all goes back to 2012.

The year when lovely Great Britain was just really good at niche sports and not an international embarrassment. The good old days.

Back then, the 12-year bull run in gold ended. With a bang.

Source: Koyfin

When a commodity price falls that sharply, a number of things happen.

And they all relate to the Capital Cycle.

You see, it’s the crash which created many of the most compelling reasons to look at precious metals miners today.

Between 2012 and now, any company that was poorly managed has either struggled and gone bust, or fired its management.

The whole industry has developed a sense of caution and risk-aversion.

While the last bull market saw excitement and ambition, this one has so far been met with patience and discipline.

This means that they are not all rapidly seeking out new deposits and building out mines. Supply is not expanding in line with price, which is what brings commodity bull markets to their ultimate end, as supply outstrips demand growth.

Valuations are also significantly more attractive.

Earnings per share figures rose sharply across the board this year, and in Q3 especially.

Everyone is justifying tech valuations on the basis that they offer growth in a low-growth environment.

While Tesla trades on a PE of 1000x or something, many of the best miners are trading in the low teens for PE, and are generating excellent earnings and cashflow numbers, growing by 50-100% recently.

So what you have is essentially companies which are producing a commodity that’s rising in price.

Supply isn’t going to catch up any time soon, because everyone got their fingers burned after 2012, so is very cautious. Moreover, all the risky management teams got sacked or went bust, leaving only the better management teams who made good decisions and good acquisitions.

They are producing this commodity at low prices, and achieving record margins as a result. Dividends are rising, too…

The commodity, meanwhile, has pretty much the most supportive conditions in its history – record monetary recklessness, and record stock valuations

Throw in very low valuations because investors have their eyes dialled in on big tech, and you have a truly sensational set up for precious metals miners.

All because of a market crash eight years ago.

That’s the capital cycle in action.

It’s like a phoenix rising from the flames, like a forest blossoming after a fire.

Cyclicality drivers everything in the markets, and this is no different.

Sounds like a guaranteed win, right? Well, not so fast.

The main watchword of caution however, is that things can still go wrong. If another big leg down comes in the stock market, many participants (especially the biggest banks) will sell into cash, dollars mainly, before gold. In fact, there seems to already be a bit of this going on today, as markets are tumbling.

That’s what we saw in March too – that in the everything must go sale, even gold takes a hit.

So I wouldn’t make any rash short term predictions – miners could still have a bad month or two.

But zoom out, and accept that risk, and there is a huge amount of potential in picking the best gold miners.

If you want to know which they are…

Click on this link to find out.

All the best,

Kit Winder
Editor, UK Uncensored

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