The Golden Plan From Here

Precious metals are the only option for security and value in our world of ultra-low or negative real interest rates, currency market volatility, and impotent central banks.

More and more investors are reaching this conclusion. That’s why gold is already up almost 30% this year – but it is also why I expect to keep inching up all summer and into the fall.

The gold chart supports my contention. It is developing a clear pattern of higher highs and higher lows. And the price is getting very close to conquering its downtrend line from the 2011 high.

It is roughed in on this chart, but the crosspoint is US$1,377 per oz. A bit of a step up from here and a momentous achievement it would be, but I’m betting it happens before the end of summer.

Also significant: if anything were to have pushed gold down, it would have been a strong US jobs report. And that is precisely what we got nine days ago: payrolls in America increased by 287,000 jobs in June, the largest gain since October. Gold did drop on the news…for 5 minutes. It fell from US$1,360 to US$1,335 per oz. in a matter of minutes and then rebounded completely before settling into the US$1,350-per-oz. range for the day.

The takeaway: for gold, flat is the new down. And that is the mark of a true bull market.

The price has moved steeply enough that another consolidation phase is likely, including pullbacks of a few percent. But remember: while reactions to individual news events – a Fed announcement, a stimulus move from the UK, or whatever – will move the gold price on a daily basis, the lack of other options for yield or returns is the real driving force behind gold’s ascent – and that is here to stay for some time.

Because of all this, I am now of the mentality that gold will end the year between US$1,400 and US$1,500 per oz.

The Plan

What will gold’s continued gains mean for equities?

Good question. And a timely one.

The GDX Gold Miners ETF has multiplied 2.5-fold since the start of the year. The GDXJ, the counterpart junior gold miner ETF, has multiplied 3.9-fold. There is no ETF for development-stage gold companies let alone exploration-stage entities, but the multiples would be interesting to see. I would wager that developers are up somewhere in between senior and junior miners while explorers have enjoyed the smallest multiples so far.

But that will change.

Investors moved first into big and medium miners. Nice gains on those buys are enabling some selling, which releases money for new, riskier buys. It’s the classic trickle-down effect. However, I think the nature of who participated in the rally to date will impact the timing of the trickle.

To those of us involved in this sector, it feels like everyone knows about gold, like everyone has put their chips into play. But that just isn’t the case. Many of the returns enjoyed to date have come largely from inside – sector players betting on themselves and each other at the start of a new gold bull.

The thing is, by the time July rolled around industry insiders were exhausted, physically and financially. They need a vacation from investing and need to take some money off the table to have cash available for the fall. I have literally spoken to dozens of guys who are tapped out – they’ve put all their available investing capital to work and are now waiting until the next stage of the game. This lack of capital and need for a break will mean a quieter period at least through July, as people literally go on vacation.

Then they will come back…and free trading dates will start coming fast and furious.

Think back to the start of the year. Financings had been deadly quiet for almost two years, until gold showed some life. It took a bit before people mustered up some confidence the gains would hold – and then everyone went out and raised money.

The biggest and most confident companies, like Franco Nevada, raised right away in February. Developers and explorers had to wait until the market was more confident, which meant some raised in March, or raised a small amount in March, but many did not close until April or May.

Financings have four-month hold periods. Generally, the share price trades highest three months after the financing close date – or one month before the new shares become free trading. The lowest point happens somewhere in the first two weeks after the new shares come free.

These time frames are upon us for the big companies that raised earliest. For the majority of explorers and developers who raised in April and May, shares will come free trading in August and September.

That’s one timing aspect to consider. The other is the big-picture trickle down effect.

Funds increasingly want to get into gold. The bigger the fund, though:

• The more time it takes to prepare for a change in investment rationale, such as a move into gold.
• The harder it is to find places to invest big piles of cash.

A friend used a good analogy for this: imagine these funds like massive ocean-going freighters. For a freighter like that to change course takes time. Once it has faced itself the right direction, it takes more time again to establish some forward momentum.

Funds are figuring out those shifts now and are seeking places to invest. That is the next stage of the bull market, wherein fuel comes not just from engaged retail investors and small, nimble fund managers, but from the mega-money managers driving these freighters.

So what’s the plan?

Look at every stock you own and see when they financed. If a free-trading date is approaching, create a plan.

If you want to add to your position, the time to buy is shortly after the shares come free. If you want to cash in a gain, look to sell approximately a month before the free trading date.

More generally, I think junior gold companies will see slow but sustained gains between now and Labour Day, excepting the ups and downs around free trading dates. Once September hits I think the freighters will be ready to move and industry participants, refreshed from a summer break and with some cash in hand from locking in gains, will be ready to play again.

And things will really heat up. So take advantage of this pause to make a plan.