The Gold Bull Market Barometer

Let’s talk about gold. Specifically, Aussie dollar gold and Aussie gold producers.

While the heat has come out of the sector over the past month or so, gold priced in Aussie dollars remains firm. It’s currently trading around $1,810 an ounce, which is not too far off it’s all time high.

As you can see in the chart below, gold priced in Aussie dollars (which I’ll refer to as AUD gold from now on) peaked in February. It’s since been correcting lower, but only by a modest amount.

Gold / Australian Dollar - XAUAUD (FX) - 1 Day Line Chart USD 30-04-19

Source: Optuma

[Click to open in a new window]

AUD gold recently traded down to around $1,770, but thanks to sharp weakness in the Aussie dollar against the greenback, it’s recently bounced back above $1,800 an ounce. My guess is that the correction could continue for a little while yet. But the upward trend remains firmly intact.

If you’re working a decent sized deposit with attractive grades, you’re making very good money with gold at these prices.

Free Report: ‘The Top Three Gold Stocks on the ASX’

Gold mining is a tough business

But gold mining is a tough business. Being profitable isn’t enough. The market is always looking for growth. Established miners who are producing 100,000 ounces or more of gold each year have to find ways to replace that production and more. If they don’t, mine life declines and the market attributes a lower value to companies with a shorter mine life.

The obvious way to replace reserves and resources is to continue exploration drilling while mining. But when the cycle heats up, companies often look to add to reserves via acquisition.

Conditions in the Aussie gold market have been strong for years. The players that invested well at the bottom of the cycle, like Northern Star Resources Ltd [ASX:SAR], Evolution Mining Ltd [ASX:EVN] and Saracen Mineral Holdings Ltd [ASX:SAR], to name a few, are now cashed up and in a strong financial position.

There is only so much money you can pump into exploration each year, so the obvious answer to keep growth going is to buy already existing ounces via acquisition.

Yesterday, emerging gold producer Bellevue Gold Ltd [ASX:BGL] went into a trading halt following media speculation about its potential as a takeover target. It confirmed via an ASX announcement that it had appointed a broker to ‘deal with any interest expressed by third parties in relation to Bellevue or the Company’s Bellevue Gold Project.’

BGL is one of the best performing gold stocks on the ASX. It’s up nearly 180% over the past year. That’s thanks to some spectacular high-grade drill results that have resulted in an inferred resource of more than 1.5 million ounces at a whopping 11.8 grams per tonne of gold.

The mine enjoyed historical production of 800,000 at 15 grams per tonne from 1986 to 1997. Bellevue (formerly Draig Resources) started drilling in 2017 and quickly discovered new resources adjacent to the old workings.

Now, it is one of Australia’s highest grade gold resources. And the company is shopping the asset around.

Why would you want to sell such a high grade mine, with considerable exploration potential, when the AUD gold price is around $1,800 an ounce?

The bull market is still young

Does the board believe we’re near the top of the market? Maybe. But I doubt that is the motivation. The Managing Director, Steve Parsons, is former head of Gryphon Minerals. This was an ASX listed, West African gold explorer that built up a large, undeveloped resource during the last boom.

But during the bust phase, the market didn’t attribute much value to ounces in the ground. The share price peaked around $2. Parsons sold Gryphon to Canadian miner Teranga Gold in 2016, for 16 cents. I remember the deal because subscribers to my newsletter, Crisis & Opportunity, made roughly 100% on the stock in a few months.

Do you think that experience weighs on Parsons?

Maybe he’s hesitant to get caught twice and wants to sell ‘at the top’. Or at least, by continuing to drill and increase the resource, while at the same time letting others know that the very profitable ounces in the ground are available at a price, he is giving himself a monetisation option while gold prices are high.

But the cycle rarely works out the same way twice.

One of the features of the Aussie gold bull market so far has been the rational behaviour of the miners. They all tightened their belts in the 2012­­­–2015 downturn. What has emerged is a sector very disciplined on costs and acquisitions. That is not working in Bellevue’s favour.

But as AUD gold prices remain attractive, and strong cashflows continue to strengthen balance sheets, it’s doubtful whether this discipline will remain.

A feature of bull markets is that they eventually lull management into making stupid decisions. They ‘make sense’ in the short term, but longer term they destroy value.

My guess is that the bull market is still young, precisely because you’re not seeing any stupid decisions made by the gold miners. But as pressure mounts to maintain share price growth, miners will be forced to ‘buy ounces’ and pay more than they should to do so.

Given this view, Bellevue is worth keeping an eye on. If it doesn’t get a bite, you’ll know that existing producers are holding their nerve, and that the bull market in gold has still go a long way to go.

Regards

Greg Canavan,
Editor, The Rum Rebellion

PS: Three Aussie gold Stocks to watch in 2019. Find out more here.


Greg Canavan approaches the investment world with an ‘ignorance is bliss’ philosophy. In a world where all the information is just a click away at all times, Greg believes we ingest too much of it. As a result, we forget how to think for ourselves, and let other people’s thoughts cloud our own.

Or worse, we only seek out the voices who are confirming our biases and narrowminded views of the truth. Either situation is not ideal. With regards to investing, this makes us follow the masses rather than our own gut instincts.

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