Gold’s long-term prospects were positive and current market conditions presented an opportunity to buy into discounted junior mining companies with the potential for impressive returns, Sprott Private Wealth senior investment adviser Michael Kosowan told attendees at the Global Chinese Financial Forum recently.
But, given current market conditions, the careful assessment of a company’s strengths and weaknesses was critical for success, he cautioned. This included an in-depth evaluation of management teams and project dynamics.
Kosowan chartered the yellow metal’s fall over the past three years, highlighting its decline from highs of around $1 900/oz in 2011 to its current price of about $1 220/oz.
“There’s been a lot of downward pressure on gold lately, stemming from competing assets like real estate and the broader equity markets, as well the US dollar’s extreme uptrend. In addition, there are regulatory curbs on the extra purchase of gold and there have been weak income gains.
“But the radical monetary policy and the irresponsibility we’ve all witnessed will not end well. [Currently,] the general equity markets are overexuberant, with little differentiation in the bond market between junk and quality,” he explained.
Kosowan said these were indications that we the market was an end game for financial assets, adding that gold had not yet been to the reflation party. “It’s conspicuous through its absence.”
The situation was ripe for contrarians seeking value at discount within the junior resource space, he pointed out, and highlighted the conditions experienced during and just after 1998 to 2000 as indicative of the current potential.
“Gold stocks [from] 1998 to 2000 were low as well, with senior mining companies at that time also experiencing write-downs and bad news. In addition, there was a widespread belief that gold prices would continue to fall, which they did – all the way to $330/oz by April 2001,” Kosowan said.
“But, if the past informs us about the future, then that period also highlights some of the best value plays in exploration – ones that would go on to define the market,” he added.
Kosowan referred to Southwestern Resources as an example, highlighting that the company’s share price climbed from $2 a share to eventually peak at $25 a share. “Now that’s impressive. But the most impressive aspect was Southwestern having $2.50 a share in cash [at the start].” This meant investors had achieved value with a discount, he noted.
“Fast forward to the present and I find myself again talking about immense latent opportunities in the junior gold space,” Kosowan commented, highlighting the ratio of the HUI Gold Index against the gold price.
From 1998 to 2000, the ratio was all the way down and gold stocks were hated,” he said. “There’s been disdain for gold over the past three years and guess where we are today? The ratio is again sitting at an all-time low.
For me, this represents a buy signal,” he explained. “As any contrarian investor will tell you, bargains are usually found among things that are controversial [which]people are pessimistic about and have performed poorly of late.”