It has been quite the year for precious metals. In recent months, the price action has been outstanding. We are talking about new record all time highs for gold and copper.
Silver has had a nice pop, and in the next few days I will be putting out an article on silver’s path towards $50… a target that could be hit before year end. The only metal which has not participated in the metals rally has been palladium.
Analysts say it is falling because of the US Dollar’s strength… but you can see why that doesn’t make too much sense given the action in the other metals. However, palladium bulls have not given up. They are betting on a shortfall if constraints on recycling tighten and car buyers remain wary of Electric Vehicles because of high interest rates.
This article is not about the movements and fundamentals about the metals (but for those interested, you can check out my other articles here on Equity Guru where I do cover fundamentals), but the movement in the junior miners.
Now the junior mining sector is not for everyone. Yes, it attracts money because there are those hoping to make a fortune by hitting a home run playing penny stocks. But we must remember one important thing about these juniors: since they are not making a profit and require raises to stay afloat, these are largely speculative investments.
With the recent move in metals, many investors have been excited about the incoming huge move in junior miners. Newsletter writers have been promising huge percentage gains in the junior metals because they would rally on steroids.
But this hasn’t happened. Creating some confusion for investors and those in the junior mining space. I am not too surprised. I have been following this space since 2015, and I have been hearing about the upcoming boom in junior miners since then. Yes, I have seen interest for sure peak with more people showing up to junior mining conferences on specific years that the metals are rising, but this has not translated to junior mining stocks taking off.
So why is this not happening?
Let’s start off by looking at a few charts to make my point.
Many people like to look at the junior gold miners ETF. Yes, the ETF has seen a nice pop in recent months, and actually could be setting up for a move towards $50 if bulls step in here at the $41 zone. Bulls should be watching for some large green candle to indicate the bulls are stepping in here.
However, we are far off from the all time record highs. These highs came in around 2010. The recent highs on the chart here just show levels from 2020.
This ETF is intended to track the overall performance of small-capitalization companies that are involved primarily in the mining for gold and/or silver.
Fund Highlights
- Small and Early Stage Miners
Portfolio of small gold miners, some of which are in early exploratory stages with upside potential
- High Beta Exposure to Gold Prices (Source: Morningstar.)
Gold miners have historically provided leveraged exposure to gold prices
- Highly Liquid
ETF has historically featured greater average trading volume than any of its underlying junior miners (Source: Bloomberg.)
The Canadian market is the home of junior miners. The Canadian stock market is resource heavy based. If you follow world stock markets, you know that many have been ripping and forming new all time record highs. The TSX briefly took out 2022 highs before rolling over. But I want to focus your attention on a different index.
Most junior miners are listed on the TSX Venture market. Here is how the TSXV long term chart looks like:
Yes, we are green and up year to date. However, given the movement in metals, and how this market is primarily resources, I think many new investors would be surprised that this index is not anywhere close to the highs of 2021.
Quite simply the juniors have not been reacting to $2400 gold, $29.00 silver and $4.65 copper.
The TSX Venture Exchange is not seeing higher highs and higher lows. Since the peak in 2007 at over 3,300, the TSXV has dropped like a stone with anemic rallies in 2016 (after gold bottomed at $1,045) and in 2020. Every rally has failed since 2007, only to hit new lows on ever-declining volume (liquidity).
Nobody is buying this stuff.
Let’s talk about the reasons why.
The Lag Effect
This is the most common answer to why juniors are not outperforming. That this is just the lag effect and the juniors will catch up.
Basically investors are jumping into the big boys and buying quality stocks that have mining activities and are making profits. Think of Agnico Eagle Mines, Barrick Gold, Rio Tinto, BHP, Freeport- McMoRan, TECK etc. The lag effect states that EVENTUALLY after investors see the big boys move, money will trickle down to the juniors because of the bull market.
We have not seen this happen.
BUT I will say that this is indeed what tends to happen. In a resource bull market, money runs to high quality and highly liquid names which dominate the sector in terms of market cap. After these have moved, money moves down the ladder to less liquid and less quality names as speculation fervor takes over. Even when you are betting on a sector bottom, you don’t necessarily bet on a resource reversal by betting on a junior gold miner with a less than $10 million market cap. You tend to play the bottom with large caps.
Okay but this still does not answer the question on why juniors are not moving.
Not Sexy Enough
When it comes to Canadian stocks, there is a bit of a stigma attached to the TSX Venture Exchange. It is the wild west, and Michael Ballanger sums it up nicely:
Shift to the performance of the TSX Venture Exchange — the place where dreams are sold and hearts are broken, the financial industry’s answer to Aqueduct or Hialeah, the place where you dabbled before legalized gambling became a cottage industry for literally every outcome we face in everyday life.
New generation of investors, the young guns, are not running into junior miners. I hate to use the term boomers, but they are the group which has made real money owning mining stocks with the major commodity boom times especially in the 1980s and 1990s. The last major bull market in the precious metals market was 2002-2011, a period just before the Millennial and Gen-X crowd found stocks.
The new generation of Western and Asian investors have avoided the resource sector. I harken back to when Timothy Sykes was here in Vancouver for the Vancouver Resource Investment Conference and talked about how the mining sector had to be made sexy. He talked about all the gray hair in the crowd and if I remember correctly, someone in the audience had to be kicked out.
The truth is the new generation of investors from the millennials to the Gen-X’s are looking at sectors that have a huge growth rate and could be worth eye watering numbers in the future. These tend to be focused more on technology such as crypto and AI.
And let’s face it folks. The tech sector and the crypto space has treated investors much better than the resource space in recent years. Hence it will continue to attract the eyes and money of the young generation. Even a major tech crash would be welcomed as a sign to buy these big names at a cheaper price.
A crash in the resource space wouldn’t be met with the same type of optimism.
BUT THERE IS HOPE
Wall Street Silver actually kicked off something big. It was not just young people trying to make big gains (okay I admit there were some of those) but it sparked an interest in economic history and the system. Many young people were learning about how the system works and why it could be f*cked given the debt levels. It has sparked an interest in gold and silver, primarily on the physical bullion side.
Asia is also waking up to gold and silver. Indian consumers have always been big buyers of precious metals, but I am talking more about the central bank and State side of things. We have seen recent headlines of China’s central bank buying gold, and China Silver Panda coins being a huge hit in Japan as Gold prices against the Japanese Yen soar too high for the average person to buy a full 1oz.
Then of course there are the more mainstream headlines such as Costco selling gold and this being a huge hit, The Big Short’s Dr. Michael Burry betting on Gold, and even the idea of the BRICS issuing some sort of gold backed currency.
Money is running into precious metals, just not in speculative junior miners. But one can argue that in a world with overly priced equities, real estate, and specific sectors, the precious metals and mining space looks cheap in comparison. This in itself could attract more eyes and money as the crazy chase for yield continues. Junior miners would benefit from this if a mania begins.
What would be my message to junior miners to attract younger investors? Simplify things. Yes, continue to talk about how metals will be required for technology and the green energy movements. Show the charts of supply and demand leading to an undersupply of the metals. But please, do not have tons of slides in your presentation using obscure geology terms that do not make sense to most people and quite frankly, bore them. I get that these need to be included given the nature of the junior mining space in finding and developing a discovery, but just don’t overwhelm new investors with tons of numbers and terms. Simplify it on the main presentations, and put the heavy geology stuff in an appendix at the end of the corporate presentations.
With that all said, I do think the junior space is worth watching given the setup in precious metals that is coming when you factor in inflation and debt levels. Also when it comes to supply and demand and the fact the big boys have not spent money exploring to make up for exhausted resources.
Happy Investing.
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