CEO.CA Weekly Wrap

A look at some of the week’s best chats and charts on CEO.CA, a community and platform for Canada’s venture stock markets.

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The big story of the last week is clear. In Wednesday evening futures trading gold broke out to its highest levels in nearly six years and the Index Channel caught the excitement of market participants in real time:

This was a breakout that was nearly six years in the making and the excitement was palpable:

@Excelsior stated it nicely, with spot gold above $1380 the breakout was for real. The question now became “could gold hold breakout levels for a weekly close?”

After spending much of Thursday’s U.S. trading session within a relatively tight range, gold began to break higher as Asian markets began to open on the other side of the world:

It didn’t take long for August gold futures to bust through the $1400 round number psychological barrier and make a new high for this move at $1415.40.

Once again the Index Channel was all over the price action in real time:

The thrust from $1397 to $1415 occurred in a matter of minutes and had the distinct flavor of buy stops being triggered just above the $1400 level. Perhaps the most impressive aspect of gold’s performance last week was the fact that even after a $70 (~5%) move in a few days, it remained within 1% of its highs as markets came to close on Friday afternoon.

Gold’s official weekly closing price of $1400.10 gave technicians what they wanted to see in terms of a weekly close above the neckline of the multi-year head & shoulder bottom pattern. I’m not going to redraw the chart because it’s been posted so many times that i’m sure everyone is very familiar with it. We also have some chartists projecting the current gold move to well above the precious high of $1923:

While last week’s gold excitement was certainly riveting there were some members who had other priorities:

Enjoy summer in British Columbia @EvenPrime!! The markets will still be here when you get back ;).

With all of this sudden hooplah and excitement around gold I figured it was a good time to lay out some tips and lessons from markets past for those who might be fortunate enough to be on the verge of experiencing their first gold bull market:

  • I can’t recall the gold sector shifting from skepticism to extreme optimism in such a short period of time - don’t be surprised if things get trickier over the next few weeks.
  • Don’t let short term market gyrations cause you to lose sight of the bigger picture. If this is a real gold bull market $1,500 or even $1,600 will be reached relatively early in the cycle and $2,000+ during the excitement and euphoria stages of the rally is well within the realm of reason.
  • Be clear on your time frames. Are you buying a gold stock for a 1-2 year investment hold or are you buying it for a quick trade? Don’t confuse time frames and I always recommend that people who both trade and invest to have separate accounts in order to clearly distinguish between trading positions and investment positions.
  • While it’s true that at some point during the bull market even the biggest piece of crap stocks will begin to rally hard, I don’t advise moving far down the quality spectrum out of greed. This usually ends badly and it’s easy to get caught in a low quality stock and allow a short term trade to turn into a long term bag-holding “investment”.
  • Fear and greed are the two strongest emotions that cost investors’ money. During a strong bull market cycle these emotions of fear and greed become stronger than ever and ultimately end up costing undisciplined market participants a lot of money. Check in with yourself regularly and ask yourself if you’re making decisions out of fear or greed. If you have been then simply stop it and refocus on the bigger picture while creating healthy habits that help you avoid succumbing to the pernicious emotions of fear and greed.
  • Bull markets experience sharp corrections every few months - these corrections help to create a “wall of worry” that the bull market climbs. Buying near a rising 50-day or 200-day simple moving average is one of the tried and true methods of trading a bull market uptrend. Keep it simple stupid.
  • Bull markets bring out all the charlatans, promoters, and “get rich quick” bullshit artists. Avoid all of this stuff like the plague and curate your sources of information and trade/investment ideas. Your thoughts are valuable, your time is valuable, treat them as such.

Gold is up about 10% since the end of May and the GDX is up about 23% over the same time frame - so where are we in the overall gold market cycle? Is this too big of a move in such a short period of time?

These questions prompted me to label the monthly chart of gold with phases of market emotions:

Gold (Monthly - 20 Year)

To put the current situation into perspective the last time gold was in the ‘optimism’ phase was probably in 2008/2009 when the price was around $900. Within less than three years gold would go on to more than double as it scaled the market phases of ‘excitement’, ‘thrill’, and finally ‘euphoria’. If i’m correct that gold is only in the optimism phase it would mean that this bull run has at least another two years left and Mr. Brandt’s $2,637 price target might actually be too conservative.

One of the most innate tendencies of human beings is to project the recent past forward into the future. This tendency is especially strong in financial markets where markets tend to follow patterns, that is until they rapidly change character and catch the herd wrong-footed. I have been surprised by the number of alleged gold bulls who have remained skeptical of the recent move, many have continued to expect gold to fail near the $1350-$1378 multi-year resistance yet again. I also believe that this persistent skepticism even among the gold-faithful helps to explain Thursday and Friday’s tremendous strength - many market participants who had missed the gold move up to this point decided they simply couldn’t take it anymore and had to get in.

I have dubbed the gold sector rally since the end of May the ‘golden swan”:

To put it simply, in the short term this move in gold and gold miners is white hot which means it’s vulnerable to some short term profit taking and mean reversion. However, in the longer term big picture this is the most bullish setup i’ve seen in my entire life.

So how does one make money from this fledgling gold bull market?

Scanning and Twitter this weekend it seems there are many different opinions on ways to profit if gold continues moving higher over the coming months. While there should be increasing fund flows into the precious metals sector over the coming weeks/months, I don’t think an investor can just buy any old gold stock and do well. There will be winners and losers, and while there will probably be a lot more winners than losers, there will be losers nonetheless.

With that being said some of the biggest percentage gains are likely to be generated by gold explorers/developers with projects with all-in sustaining costs (AISC) above US$1,000 that look much more attractive at a US$1,400 or US$1,500 gold price as opposed to a US$1,200 or US$1,300 gold price.  With gold prices rising and project economics suddenly becoming more compelling project construction financing is likely to become more available and cheaper.

A gold developer that I have owned since the end of last year, Eastmain Resources (TSX:ER), is one of these developers whose project economics look much different at US$1,400 per ounce gold vs. the US$1,250 gold price they used in a 2018 PEA for their flagship Eau Claire Project in the James Bay Region of Quebec. The 2018 PEA for Eau Claire showed a 27% after-tax internal rate of return (IRR) using US$1,250 gold price and $.77 CAD/USD exchange rate assumptions. Assuming the exchange rate stays about the same at a US$1,400 gold price the after-tax IRR jumps to nearly 40%. This is a significant improvement in project economics and one that makes Eau Claire a compelling asset for Eastmain to advance to the feasibility study level.

Without even mentioning Eastmain’s other projects (Eastmain Mine and Eleonore South JV), Eastmain is currently being valued at about 10% of the project NPV (C$350 million, NPV(5)) for Eau Claire using today’s gold price and USD/CAD exchange rate. This means that Eastmain shares are extremely undervalued and the market began to catch on to this undervaluation on Thursday and Friday as ER shares jumped from $.115 to Friday’s high at $.175 before settling at $.16 to finish the week:

ER.TO (Daily)

For ER to simply get back in line with its peer group average in terms of enterprise value/ounce of gold (measured, indicated, & inferred) its share price needs to rise to ~$.24 per share. Moreover, one could argue that Eastmain should command a premium valuation considering its jurisdiction and the location of its project in a prolific mining region of Quebec (ranked #4 in the world by the Fraser Institute). It’s also worth noting that Eau Claire boasts a blended average head grade of nearly 5 grams/tonne gold with 95% gold recoveries.

Eastmain has spent much of the last eight months drilling its new Percival discovery which is 14 kilometers from Eau Claire (within trucking distance to the main Eau Claire deposit) on the same property (Clearwater).

The initial discovery holes were extremely promising (Hole ER18-822 1.46 g/t gold over 78 meters, and hole ER18-823 2.35 g/t gold over 87 meters), however, thus far Eastmain hasn’t managed to follow up on its early success at Percival.

In Eastmain’s most recent news release on Percival drilling Eastmain noted that it has identified three main east-west trending zones of mineralization which encompass 650 meters of east-west strike length with a north-south width of 250 meters. The mineralization appears to converge as the mineralization continues east and I expect Eastmain to conduct a follow-up drill program at Percival in July or August. The point of this next phase of drilling will be primarily to continue stepping out and following the mineralization to the east.

I own Eastmain shares and it was one of my Stock Picking Contest picks at the beginning of the year.

To wrap up this week’s Weekly Wrap i’d like to point out some of the biggest movers and best looking charts from last week:

GGI.V (Daily - 1 Year)

Say what you want about Garibaldi, the stock has basically doubled in a month. $1.40 is an important long term support/resistance level and GGI managed to close above it for the first time since last October. I was reviewing some of my technical chart blog posts from last year and came across this post on Garibaldi from last September (“This Golden Triangle Explorer Is Primed For A Big Move”).

It turned out that Garibaldi was ready for a big move, as it fell more than 70% from the day I published that post. Since falling to a low of $.69 in May GGI has hammered out a broad based multi-month bottom and I see short term support near $1.20 with the potential for a move up to fill in the open gap at $2.29 before the end of the year.

RNX.TO (Daily - 1 Year)

RNX is a stock that I highlighted in the Weekly Wrap two weeks ago after it had delivered an NR stating that they had discovered nearly 1,000 ounces of coarse gold about 25 meters below the Father’s Day Vein Discovery. Last week RNX clearly benefited from a combination of the gold rally and the GDXJ rebalancing. After rallying ~55% RNX has almost reached my short term price target of $.75. This is a chart to keep on your radar and probably a stock that should be accumulated on pullbacks.

WHN.V (Daily - 1 Year)

It’s no secret that I’m bullish on Westhaven (I own a large position and Westhaven is an Energy & Gold sponsor company).  I have followed the company closely since first highlighting the Westhaven story when its shares were trading around $.14 in April of 2018.  Westhaven has come a long way in 14 months, however, it feels like Westhaven is embarking upon the next chapter of the Shovelnose story while investors are still not fully appreciating the discovery opportunities that might be just around the corner. 

The WHN chart has been building up energy for the last couple of months and a rally above $.73 would probably see the gap up at $.81 quickly filled, followed by a test of much bigger resistance up between $.90 and $1.00. Westhaven has commenced its summer drill program at Shovelnose and the drills will likely keep turning through the end of August. Next week i’m expecting an update from the company on its recently completed mapping and prospecting program at Shovelnose. Speaking with the company last week they were happy with what they were seeing including hydrothermal breccia outcrop and gold and arsenic anomalies coincident with mag lows outside of the South Zone. 

"If I had to pick my favorite for the next 12-24 months it would probably have to be gold....I think if it goes to $1400 it goes to $1700..." ~ Paul Tudor Jones (6/12/2019)

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Disclosure: Author is long shares of Eastmain Resources (TSX:ER) and Westhaven Ventures (TSX-V:WHN) at the time of publishing and may buy or sell at any time without notice. 


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