Dave Kranzler | Fund Manager Comments on Gold’s Rise & Junior Gold Stock Investment Opportunities

Dave Kranzler of Investment Research Dynamics returns to the program to discuss the recent rise in gold seen this past week and whether it signals a bottom in gold.  Dave also shares his perspective on the junior gold mining sector and where he sees great investment opportunities now.

Dave holds an MBA from the University of Chicago with a concentration in accounting and finance.  Over the years he has worked in various analytic and trading jobs on Wall Street.  For nine years of those years he traded junk bonds for a large bank.  For the past 16 years, Dave has been an avid student of the precious metals markets and steadfast proponent of holding physical gold and silver in one’s portfolio.  Currently, he co-manages a precious metals and mining stock investment fund in Denver.  Dave’s stated goal is to help people understand and analyze what is really going on in our financial system and economy.

0:05 Introduction

1:31 Commentary on gold and the recent COT report

8:22 Was this week’s rise in the gold price a combination of short covering and a flight to safety?

11:41 Is the price action in silver due primarily to industrial demand?

13:54 Commentary on current gold investor sentiment

16:39 Feedback Dave has received over last 6 months from mining stock investors

20:51 Dave comments on the extreme value opportunity in some junior mining stocks

26:53 Commentary regarding EMX Royalty

31:09 Is there a bellwether junior miner that indicates the director the sector is heading?

33:29 Concluding advice

BEGIN TRANSCRIPT:

Bill: Thank you for tuning in ladies and gentleman. I’m Bill Powers, your host with Mining Stock Education, and joining me on the line today is my friend Dave Kranzler of Investment Research Dynamics, and he is also the editor of the Mining Stock Journal. We’re touching base with Dave to get his thoughts on the recent action in gold this week that has many junior mining investors encouraged and to get his overall thoughts on this sector. So Dave, thanks for coming on the program.

Dave: Thanks for having me on again, Bill. It’s my favorite subject to talk about, so hopefully, I won’t drone on too long.

Bill: Well, today, it’s…the markets have closed on Friday as we speak as we’re recording this. Yesterday as you know gold saw a $30 gain, and there’s a lot of hope that’s arising with many of the things that I have seen written and comments online. Would you say that this is the bottom? Is this the beginning of the rally we’ve been waiting for?

Dave: Well, that’s actually a good question. You know, every time I try to pick a bottom I’m always wrong and, you know, I told myself 10 years ago that I was gonna stop doing forecast but I actually in mid to late December I actually thought that that was a bottom and I came out on record especially my Mining Stock Journal pretty adamant that that was a bottom. And, you know, the market ran up really quickly back then. I mean, you know, that the gold bulls including myself, we were just…after the previous four years, four-plus years, we were so ready for the market to turn around. I think everyone just kind of jumped into it. I think the hedge fund algos exacerbated the problem.

So, what we’ve gone through for the last, I don’t know, a little bit more than a year, maybe a year and a half, I think is not an unreasonable consolidation pullback from that, I mean we had just had a quick run-up from the end of December 2015 to like the middle of 2016, you know, I kind of looked at that and I’m like, “Well, I hope this lasts,” but I can see where this could pull back and people are gonna be despondent again, and that’s kind of what’s happened. But I guess, I would say I think that…and again, I’m gonna put a wide range on this just because the market is so volatile and manipulated. You know, I think we have seen the absolute bottom, you know, and that doesn’t necessarily mean that it’s…you know, the gold won’t test sort of the 1180 to 1200 area again, which is what it seems to be doing.

I about, I think it was two-ish years ago, maybe three-ish years ago on my Mining Stock Journal I outlined why I thought that the 1215 to 1220 area was going to be a key area to get through and that was based on, if you look at when the hedge fund started building their enormous net short position in COMEX Gold contracts I kind of eyeballed what I thought was the average cost to that net short position not necessarily their outright short position, but just from the time they went from being net long to flat to when they started going net short COMEX Gold contracts. I kind of figure that their net cost to that net short entry is somewhere in the 1215 to 1220 area. If you look at a chart, you know, gold for, I don’t know, probably for about two and a half months or so, again, I don’t have the chart in front of me so it’s just from memory. Gold would bang its head on kind of the 1215 area and then, you know, it would sell off and go down to, you know, the 1180, 1190, to 1200 area.

And what I said in that issue where I suggested where the key line of resistance is, is that if some event can cause gold to shoot through especially, you know, COMEX…led by COMEX paper gold because that seems to lead the market, I thought if some event would cause it to shoot through that level and if it held there for a few days or, you know, a week or whatever, that we might actually see a massive short-cover rally. Because, you know, the hedge fund, the managed money account on the Commitment of Traders report is primarily hedge funds and most of their trading is dictated by black box computer algos, so if it gets to a point where they’re starting to feel pain on their net short position they’re gonna run to cover it and then they’ll swing back to being net long, right, because their programs are momentum-based.

So, you know, again, I don’t know if we’re gonna hold above that level right now. I mean, what kind of shocked me, I know you wanted to get to the latest Commitment of Traders report. What kind of shocked me was I expected to see the managed money, well, I’ll just call it the hedge fund, I thought that they would have started to cover their net short position, you know, either by adding more long positions or a combination of adding to their long position and, you know, partially liquidating their short position. And actually their net short position increased by over 27,000 contracts and this is through…

Bill: Tuesday, right?

Dave: Tuesday, yes.

Bill: So that’s pre the run-up in gold.

Dave: It’s the day before, it’s by tier, and I’ll get to that in a second. But I mean, I was actually…I almost fell off my chair because I expected to see, you know, the opposite and like when I first looked at it I’m like, “Wait a minute.” I had to rub my eyes, I’m like, “Wow.” So I mean their net short, like…I mean normally, over, you know, the last 15 years or so this type of net short positioning is what we would expect to see from the banks, not the hedge funds. And the banks and primarily the commercials took most of the other side of that trade. So the commercial category of COMEX trader got even net longer.

And I would have thought that, on Wednesday and yesterday, I would have thought that the hedge funds would have covered their…you know, would have bought contracts to cover their short position, but if you look at the numbers through yesterday, and we don’t…the numbers for today won’t be out until Monday, you know, the daily numbers for open interest on the COMEX. But if you look at the numbers through yesterday the open interest through yesterday was…I think it was 18,000 contracts higher than it was when the Commitment of Traders report comes out. And we don’t know for sure but what I think that means and, you know, we’ll get a peek at it a week from now when we see the COT numbers through next Tuesday, what it suggests to me is that the hedge funds were actually shorting contracts yesterday defending their position and Wednesday.

Bill: I was gonna ask you that, do you think that we had, you know, a short cover rally combined with the flight to a safe haven because of the general equity selloff Thursday? Those are the two main drivers.

Dave: I don’t know, you know, I don’t know how it allocate the attribution between flight-to-safety in short covering. I would have thought that the managed money that the hedge funds were in there covering their shorts on Wednesday and Thursday but, you know, the COMEX open interest numbers…because the open interest expanded by so much between Tuesday’s close and yesterday’s close, it means that someone was out there shorting paper. So maybe the hedge funds were covering their shorts and the banks were unloading their longs but they’d also have to…someone had to short more paper, right, because that’s how the open interest expands. If it was just a function that the bank is selling their long position to the hedge funds then the open interest would have shrunk.

So I have to believe that it was the hedge funds out there defending their short position and that’s…I mean, you know, I traded on Wall Street for over nine years in the ’90s, and when you’re a trader and you’re running a big position and the market’s going against you, the first thing you try to do if you still feel a strong conviction for why you have that position on whether it’s long or short is you defend it by, you know, if you’re long you keep buying it, if the market is going lower and people are selling, or if you’re short you short more into it as the market goes higher. So, you know, that’s the mentality that hedge funds have. So I think for now I think they’re defending their position and they may try to push it lower.

So again that, you know, we could see the price of gold ping-pong back down to 1200 but it’s gonna get to be more difficult for them because India is starting to wade back into the market. There were some extreme financial systemic distress over there, their currency was getting clobbered and the financial system was suffering some liquidity issues, and so they were…it made the conditions for gold importing an economic forum but that’s slowly shifted over the last week. And I know based on the numbers that I saw for India for what would be their Friday, it looks like they were back to importing a fair amount of gold last night, and China too.

China is now back in the market and if you just go by the number of deliveries into the Shanghai Gold Exchange that’s a number that’s reported on a daily basis. They stepped up their gold buying this week and these guys buy physical gold that has to be delivered. So, you know, it puts a strong bid under the market and it makes it harder to short the market with COMEX paper so it’s gonna be interesting to see how this unfolds over the next several weeks.

Bill: Today, gold after the run-up yesterday was down about $6.50 an ounce to $12.17 and silver though was up about 2 cents to $14.58 an ounce so it seems like silver might have been going up on industrial demand. Do you have any thoughts on that?

Dave: I mean on a day to day basis it’s impossible to know exactly what’s driving the market. I mean the dollar was up quite a bit today and there was I’m sure after the big run gold had earlier this week I’m sure there was some profit taking in there. I mean the gold-silver ratio has been kind of holding in the low 80s area and that’s what I like to watch to try and judge what’s going on with silver. I mean it’s impossible to know if it’s industrial demand or if it’s the monetary metal attributes of silver. And again, to the extent that gold is manipulated, silver is even more highly manipulated because that’s an easier market to manipulate. It’s a fraction of the size of the gold market and so it makes it easier to push around.

In terms of, you know, what might have driven the price of silver today, yeah, there was probably some correlation effect there. A lot of times what will happen is if the stock market is up a lot, you know, the hedge fund algos automatically buy, you know, assets that are correlated with rising stocks. So, you know, the thinking behind that is, “Oh, the stock market is higher, the economy must be doing okay, so we’ll get a little bit longer. We’ll buy some silver here because maybe that means there’s gonna be some industrial production…you know, some industrial demand,” but, you know, again that’s…I think a lot of that is just the narrative that the media, the financial media likes to draw about there to try and explain day to day what goes on in the market. And to me, that’s silly because, you know, economic trends don’t go up and down with the financial markets.

Bill: One of the things I try to look for after we get a big run-up day like we had on Thursday in gold is what do the juniors do the day after especially if gold pulls back like it did today when it was down 6.50 an ounce. And one company, Gold Resource Corporation, a mid-tier producer, they’re still up 4% today even though gold is down. And that’s a liquid company, it’s trading around 5.74 a share and they had almost 670,000 shares traded, which is not quite double their daily volume but it’s close to that. And to me, that’s just an indicator that Thursday did something psychologically for junior mining gold investors.

Dave: Yeah. I mean and that’s borne out by the sentiment numbers. I get a…it’s a market report that’s put out three times a day by a guy named John Brimelow and we get it because it helps us manage our fund and it also contains a lot of information that isn’t generally available at least for free on the internet or from the media. So that’s where I see my data on the Indian market is in his report. And one of the things that he publishes in there is daily sentiment numbers from Market Vane on gold and silver and the Hulbert Gold Stock Newsletter Index which is published daily. And so, yeah, yesterday it had been running negative for a couple weeks up until early this week and yesterday it actually had a pretty big jump in it. And that reflects…you know, that has a pretty close correlation with retail sentiment in the market and it’s mainly the retail investors that play the juniors, right? So I’m looking at GORO now, they had a nice day today. It was up almost 4%.

Bill: And many of the less liquid juniors were up between 5% and 10% today as I just scrolled through my finance app.

Dave: Yeah, I’m looking at my watch list that I keep for stocks that I feature in my Mining Stock Journal and also through that we have on our fund and I’d say half of the stocks are green, and you’re right, some of them are up 10%, 11%. We had some stocks yesterday that were up over 20%, so I think that partially reflects short covering but, you know, and that’s probably about 20% to 30% of the move that the juniors had yesterday. But it also I think reflects optimism towards the market.

Bill: I’m interested to get your feedback on the feedback you got from your subscribers and the average investor in the Junior Mining sector over the last six months with the pain that many of us endured in our portfolios. What type of feedback did you get over the last six months?

Dave: It’s interesting because…I mean I started the Mining Stock Journal in March of 2016 and I bet close to 25% to 30% of my subscribers are subscribers who signed up in the first six months, which to me was kind of shocking because I thought I’d have a much higher churn rate. And my subscriber base is obviously it’s down from where it peaked in late 2016 but it’s not down nearly as much as I would have thought it would have been given what’s happened to the market over the last 12 to 18 months.

So I think my subscriber base tends to be sort of the harder core, strongly convicted precious metals investors. Now, I get plenty of people who, you know, subscribe for a month and then cancel. And that’s…I don’t have…you know, it’s just the first month is the only minimum time commitment that I have with it. But most people I think kind of just batten down the hatches and there’s…you know, I’ve had some that have been especially in the last few months are looking for ideas for bottom fishing.

So, you know, in the issue that I published last night, you know, I titled it, “Mining stocks have not been cheaper in the last 78 years” and Incrementum had put out a chart, you know, they published that they make it available to anyone. It’s a great booklet of charts and they also make their annual report available to the public for free. But I came across a chart in there that showed the Barron’s Gold Mining Stock Index. The ratio of that index to the price of gold and to the S&P 500, and that index goes back to at least 1950. I had no idea it went back that far. And those two ratios, the Barron’s Gold Mining Stock Index to gold and Barron’s Gold Mining Stock Index to the S&P 500, that ratio has never been lower in the last 50 years.

And so what I suggested was that, you know, if you believe in this sector now is the best time in the last 50 years to invest in mining stocks. And I kind of outlined, you know, I started off by just saying, “Look, you know, the large-cap producing miners, you know, like the Agnico Eagles…” and Barrick and GoldCorp are a different beast altogether. I don’t even really look at those stocks.

Bill: Barrick had a lot of insider buying for the last few months.

Dave: Yeah, but I wouldn’t go near Barrick. It’s gonna underperform the sector. I think Agnico Eagles are a much better player or like a Kirkland Lake, but, you know, I just said, “Look, you know, these stocks have been sold down to levels well below their intrinsic value especially if you assume the price of gold holds at least at 1200.” I mean these companies are making money at 1200…well, Barrick, I don’t think is necessarily but, you know, a lot of the producing companies have really streamlined their operations, they’ve cut their cost, and a lot of them can make money at 1200 gold.

Now that you know they still need to replace their reserves and that’s why Barrick…I’m certain that’s why Barrick merged with Randgold it needed to replace its reserves. Its reserves took a huge hit over the last year. And then I talk about the concept of the juniors where I talk about optionality value. And that is, you know, the junior miners they have either properties with mineralization that they’ve discovered or some of them…you know, or a lot of them have actual defined deposits. You don’t know if they were gonna transform into being a producer. I mean the odds are pretty low but there’s still optionality value there and the market has been sold down so hard that these are basically…the juniors are basically call options with almost no time premium left in them.

You know, there are stocks like U.S. Gold Corp, U.S. Gold is trading below the value of…it’s got a…in addition to its exploration property which could absolutely be a grand slam home run. It’s got a property, it’s a copper-gold property in Wyoming that has a defined deposit on it, and they’re drilling and expanding the size of the deposit, or potentially expanding the size of the deposit. And I know the company has been offered, like, within the last 12 to 18 months, a price for that property that is greater than the current market cap of the stock. So, you know, you’re talking about a junior mining stock here where there’s no option value in it anymore and it’s trading below intrinsic value, and to me that’s absurd and that tells me that the market has gone to such an extreme in terms of valuation that, you know, within reasonable bands of volatility it’s gonna go a lot higher from here, so.

Bill: The main risk on those type of stocks is that their cash position and their burn rate. I met with a lot of pre-revenue late stage developers when I went to the Beaver Creek Conference last month and that was something I was always interested in, and it’s, how much cash do you have? Because if gold doesn’t rise like we desire, you know, you could be diluted out of your portion of the company.

Dave: I agree with that and we saw that issue really, really come to a head in the 2011 to 2015 pull back. I mean, you know, there were periods of time during that four-years when none of these mining stocks could raise money. What’s interesting about that though right now, Bill, is that…and I, of course, all the companies that I deal with and talk to I ask them about this. There’s money that’s available even now to invest in these companies, companies that have reasonable projects and especially companies with reasonable projects that have management with good track records. There’s money there for…they can raise money without a problem right now and a lot of it is starting to come from private equity funds. You know, because this private equity funds are probably…a lot of them are tapped out on technology companies that they can invest in or the values they’ve gotten because the stock bubble have gotten so extreme. They’re looking for other ways to put their money to work. And I’ve had a handful of companies tell me, you know, at all the conferences they get approached by private equity firms looking to invest.

So I agree with you. The ability to raise money is something that you have to evaluate but, you know, I think right now in this current environment as long as you have a good quality asset and you have the potential to prove out a deposit, I don’t think you have problems raising money especially in areas where there’s not a lot of…you know, there’s a lesser degree of political risk like Canada or the United States or, you know, Mexico. One should go beyond those areas then and you start to introduce varying degrees of political risk. West Africa too is an area where there’s a lot of money being raised, and obviously, Randgold that’s where their mines are, West Africa.

So, I mean, to me the key feature of these junior mining stocks is that as these large producers like Barrick and GoldCorp, you know, they need to replace their reserves because they’re depleting them more quickly than they’re finding them. And that’s what’s gonna really increase the optionality value of these juniors. And a lot of the M&A activity that we’ve seen in the last six months has been in the junior sector.

Bill: A lot of that M&A, I don’t get excited about. I know some people do but, you know, if you get a 40% premium when you’re trading at a 52-week low…

Dave: I hate that too. I agree. I absolutely hate that, but, you know what? I mean what it does is that’s, you know, that’s why you have a diversified portfolio of juniors because it increases the optionality value of all the other junior stocks in there, right?

Bill: Mm-hmm.

Dave: And we’ll see at some point. We’ll see at some point. You know, especially assuming the price of gold, you know, shoots back into the, you know, the 1500 to 2000 range. You’ll see crazy prices being paid for some of these juniors. I mean it reminds me of when it was Newmont, bought, it was a Nevada project and imagine it went on to found Pilot Gold. It starts with a F, I always forget the name of it. Anyway, they paid…Newmont paid 2.2 billion for a 4 million ounce defined deposit and that was everything including the inferred.

So we’ll get back to the period of time when we start to see acquisitions at those price levels because these big companies are gonna get desperate for reserves.

Bill: Dave, one company you’ve covered in the past has been EMX Royalty. I’m curious as to your thoughts, they’re about to receive $65 million from the sale of a gold-copper property. Their market cap is right now about $100 million U.S. They have, of course, their prospect generator and they have royalties, what’s your perspective on that company right now?

Dave: You know what? I love EMX Royalty. They’re based here just outside of Denver and I know the management pretty well, and they’re really good guys and they’re really bright guys. And they’re great geologists. I think part of the problem with it, and they’ve got a great portfolio of projects. And I think part of the…you know, with royalties, but a lot of these royalties they’re on projects… Like there’s a massive copper project over in Serbia but I don’t know, it’s probably 10 years away from becoming a mine. So you may have a big fat royalty on it which they do but the market is not gonna give you credit for that until the mine actually starts to produce. I think EMX is undervalued relative to its portfolio of assets. And as an example of that, it was trading at 70 cents before that deal to sell Malmyzh was made public.

And as soon as that deal was made public the stock jumped up to a $1.20. So that gives you an idea of the embedded value of their assets. I think part of the problem with it is for whatever reason, I don’t know, for whatever reason the market doesn’t seem to understand the nature of its assets so it doesn’t give a credit for the value of its royalties until they actually are…you know, the royalty is ready to start converting into a cash pay royalty, and they’ve got a really sweet to grow smelter royalty on a large gold mine that Newmont has in Nevada. And I think they’re undervalued just based on that royalty because the footprint that that royalty sits on, you know, again, Newmont has been expanding the resource on that property and the footprint that their royalty is based on keeps expanding, you know?

So I think if you want a low-risk play that should perform at least in line with the market I think EMX is a good idea. But it’s not gonna be a 10-bagger. Fronteer Gold was the name of that company that Newmont paid 2.2 billion for, around 4 million ounces, and I think it was like in early 2011, so.

Bill: Rick Rule always says that the management that made those stupid transactions were repaid by losing their jobs and gold miners today are much wiser and shrewd. But you foresee if we get into that mania face again that human nature will repeat itself with these majors, huh?

Dave: You know, if the gold price had stayed at 1800 and 1900, you know, the prices paid for those juniors back then, wouldn’t look so stupid, right?

Bill: Mm-hmm.

Dave: I mean it’s easy with hindsight to take a shot at…you know, and again, I’m always criticizing the management of these large companies like Newmont and Barrick and it’s easy to take a shot at them by saying, “Oh, they overpaid.” Well, you know, I’m sure none of the upper management of these companies is expected the gold price to go from 1900 down to 1100, or close to 1000, right? I mean no one expected that but that’s what happened, so, yeah.

You know, at a $1000 gold paying what Newmont paid for Fronteer looks stupid, but if gold goes back to 1900 it’s gonna look really bright, it’s gonna look like a great acquisition. And it’s, you know, a 4 million ounce resource that probably is gonna become a lot larger. I mean there’s not many of those deposits left in the ground to be discovered.

Bill: Are there any junior miners that you follow as like a bellwether indicator of the direction of the junior gold and silver sector?

Dave: You know, that’s a good question, and you know that the juniors…I think the large-cap mining stocks tend to move in a tighter correlation than the juniors do. And with the juniors, a lot of it is company specific. One company that I think is…and that I recommend as, you know, an early stage…when I say early stage, an early cycle like if we’re just starting the next move higher, in the price of gold we’re early cycle. So if you’re looking for companies that will outperform in the early stage cycles one that I think is a good one is Gold Standard Ventures and that one was at a $1.15 in, you know, as recently as mid-June and it’s up to close to a $1.79 today. That’s a pretty nice rate of return.

I actually stuck it in the Mining Stock Journal at a $1.20 back then and I said, “You know what? This thing has got an easy balance up to the $1.70 or $1.80 level.” And we own it in my fund and it’s…I mean, it’s a core hold but we also trade it. You know, we have a core holding and then we put on positions when it sells off and we think the market is gonna bounce, you know, we put on a position and then we sell that…those shares we sell as the stock rallies. And the stock was actually at the beginning of September was at $1.45 so it’s up, what, 35 cents roughly since early September, that’s a 24% return in 6 weeks, 5 weeks, and not too shabby.

So to me I like to use Gold Standard Venture as sort of a harbinger where I think the market is going to go and it always seems to lead the market on the upside and it seems to get hit ahead of downtrends in the market.

Bill: As we conclude, is there any advice you’d like to give our listeners going into this last quarter, tax law selling, or any other things we should be aware of?

Dave: If you’ve got names that you’re sitting on that you think are hopeless and you got a loss in them, don’t be afraid to take the loss. I mean one of the biggest mistakes that investors make at all levels, retail and institutional, is they don’t like to take losses. You always hear them say, “Well, I’ll sell it when I get my money back.” Well, why would you do that if there’s ideas out there that will move much more quickly than the loser you’re sitting on. You know, there’s also opportunity cost. And the government lets you…you know, gives you a slight benefit for taking losses, right?

So, you know, if you’re sitting on positions that are underwater and you think the stocks are dogs and there’s better ideas out there that you’re looking at, sell them, you know, take the tax loss and move the money into stocks that you think will perform better. You know, and I think again, you know, there’s still…the sentiment is still pretty negative toward the sector and I think we saw the blood in the streets over the last few months. And so now it’s really the time to put money to work or if you’re still skeptical at least, you know, just sit tight and be right, and don’t be afraid of the market. But be afraid of the general stock market right now but definitely not the precious metal sector.

Bill: And listeners you can find Dave on the web www.investmentresearchdynamics.com, and Dave any information about the Mining Stock Journal you’d like to share with listeners?

Dave: Sure. You know, I publish it, it’s every two weeks on Thursday. It’s an email based delivery newsletter. You know, I’ve been told many times over the last couple of years that I’m offering it for too low a price but, you know what? I think it’s part of the reason why my subscribers stay with me because I, you know, again, I think I put ideas in here that will outperform the market, I’ve had several ideas, you know, that were 10-baggers between the beginning of 2016 and actually some of them now are…you know, you’re still sitting on 10-baggers from then. SilverCrest Metals is a good example of one. So I’ve had my warts, I’ve had my bruises on some of the names that I’ve picked out, but in general, I’ve had many more winners than I have losers. And that’s what you get to expect in this sector, and I, as part of the subscription service I do put out there, and it’s not direct investment advice but I give suggestions in terms of managing risk and managing your capital, so. And you can find the link to the Mining Stock Journal subscription on my website www.investmentresearchdynamics.com.

Bill: I encourage you to go there and check it out and Dave thanks for chatting today. I appreciate it.

Dave: Thanks for having me, Bill. It’s always a pleasure.