Head of Kaiser Research Online, John Kaiser, delivered his keynote speech at the Toronto Resource Investment Conference on September 13, telling delegates the gold narrative is changing and that hundreds of juniors are about to be culled.

Kaiser started by considering the resource supercycle’s effect on the metals markets over the last ten years, noting the current retrenchment as China and other Asian economies witnessed a fall back in growth.

The economic performance of the US and Europe would become the driving force for the next few years, he said. “But we’re not going to see demand ratchet up because these economies aren’t going to grow at huge rates. There’s also lot of new supply for metal coming on stream over the next few years.”

Kaiser predicted it will take four or five years before demand starts outstripping supply at a noteworthy rate. “This means we’ll have to live with sideways metal prices that won’t go up in a big way except under extreme circumstances.”

Kaiser had analysed merger and acquisition (M&A) activity through the TSX-V over the previous decade. “There was $129-billion-worth of takeover bids that involved juniors,” he said.

“But takeover activity has now subsided . . . Many of the [previous] takeovers were not well thought out and the big producers are now being punished,” he added. “A lot of these projects are now sitting on the shelf waiting for greater clarity in the global economy’s direction.”

Given the dearth of M&A activity, the freeze in financing options and drawdown of available funds, just over 800 companies tracked by Kaiser Research are now on their last legs with less than $200 000 in their treasuries.

“There are another 800 companies that still have money left and have a flagship project at the resource feasibility demonstration stage, or they are generating targets in a bid to come up with new discoveries. This is the group I care about,” he said.

The other, weaker companies need to disappear, Kaiser said. “Many of them are just pretend companies anyway, cluttering the market and confusing investors.”

“And they will disappear; 576 companies tracked have negative working capital, owing $1.6-billion. Of this sum, about $1-billion is accounted for by companies trading below $0.20. No one is going to give any further money to these guys as they owe accountants, lawyers, drillers and all other kinds of service providers,” he added.

“British Columbia and Alberta are going to take the biggest hit when [these companies] are forced to write off those accrued liabilities,” he said.

For healthier companies, extra pressure comes from day traders making algorithmic- based decisions to short any rising movement, Kaiser said.

“It makes it difficult for news releases that are good, but perhaps not spectacular, to push the stock up to price levels that stick. Every news release today gets a little bump followed by a crunch,” he added.

“What these companies need is the ability to rise back into the $0.15 to $0.30 range where they can conduct a financing that doesn’t dilute them to death,” he said.

Of 1 777 companies tracked effective September 10, 58.2% were trading under $0.10 a share.

“And that’s kind of brutal,” Kaiser said. “In 2008, the entire financial sector was cremated and the juniors were considered roadkill. But now we have the NYSE going to record highs and an economy that’s supposedly recovering, yet this sector is priced at a level worse than when the trough of the financial crisis was reached.”

Still, there is some light at the end of the tunnel. “It’s turning around as people start selecting the keepers and the survivors, inching them up,” he said. “We’re going into a market where individual stocks will buck the general trend and do well.”

“Remember it’s all about the difference between the price of the metal and the cost of getting it out of the ground,” he said. “This is one of the reasons why I think there will be shift [in favour] towards discovery-type exploration, with focus centred on projects that have higher-grade deposits.”

Kaiser then considered a changing gold narrative. “This time last year, no one expected Goldman Sachs to predict $1 000/oz gold,” he said.

“But gold has been hammered by the likes of Goldman Sachs because it is believed to be inversely related to the business cycle; the global economy is assumed to be strong when copper is strong while gold is then supposed to be weak,” he explained.

“But in the last decade gold and copper have been twinned. So I’m proposing an alternative narrative for gold. I’m saying that the prospects of increased and real gold prices – the sort that are beneficial to juniors – will happen if we have global prosperity.”

“In addition, the US dollar will no longer be the single reserve currency and it’s not clear what stable multiple reserve currencies there will be. Plus, the US will no longer be able to project unilateral military power around the world. When that time comes, gold will play an important transitional role as we shift into a new world order,” he said.

Another robust support for the yellow metal comes from Asia and other developing regions that move to buy once gold hits a level of around $1 200/oz.

“Gold at $1 000/oz is [too low]; when they got it down to $1 200/oz and everyone started thinking ‘we’re dead’, my screen for gold equities went green,” Kaiser said. “So $1 200/oz is the base where everyone starts buying into gold again. However, you need to be aware that gold will be volatile and that it will be bashed back and forth like a tennis ball.”

“[Overall,] I think the prosperity narrative will be adopted by Wall Street . . . . It’s compatible with the global economy and doesn’t disturb any of their other investments. They can then get into gold equities and make money because the real price of gold will be rising,” he said. “And that’s why this window is really important to stay in.”