John Kaiser of Kaiser Research shares his thoughts on where gold is headed this year, and mentions small-cap stocks that have caught his eye.
Will the resource space be hit with the “PDAC curse” this year? According to John Kaiser of Kaiser Research, the answer is no.
Speaking to the Investing News Network (INN) at PDAC, Kaiser explained that this year there hasn’t been the typical build up of excitement leading into the convention.
“This year [the PDAC curse] won’t happen because the resource companies have barely budged … they’re flatlining, continuing the trend from the rest of last year,” he said. “[There will be] no PDAC curse simply because we didn’t have anything [that] counts as a January effect to build up the excitement.”
Kaiser also builds on comments he made during a January interview with INN, sharing more of his thoughts on China and where the gold price could be headed in 2018.
In closing, he provides an update on three stocks he believes are set to have a make-or-break year, and comments on a couple of new investing ideas he has. “In terms of new ideas, one of my bottom fish, Namibia Rare Earths (TSXV:NRE), resumed trading after a three-month halt,” he said.
Watch the interview above for more insight from Kaiser or read the transcript below. You can also click here to view our full PDAC 2018 playlist on YouTube.
INN: We’re here at PDAC, and it’s the first day of the show. There’s something you talked about this morning called the PDAC curse. What is that, and do you think we will see it this year?
JK: The PDAC curse is the tendency of the junior resource companies to lose their momentum after a strong opening to the year — the so-called January effect, shortly after the March convention in Toronto. It’s usually the peak of enthusiasm, but then everybody knows sell in May and go away, and they say, “well, we’re all so smart. We’re going to do it right now.” And we see it fade away.
There have been a few exceptions. 2003 was an exception when the market got that the China supercycle was kicking in; 2006, when the majors finally figured it out and stopped forward selling their production. Then again in 2009, when the market was surprised by copper prices and everything [was] rebounding sharply. And then again in 2016, at the end of a five-year brutal bear market where we had a surprising — from the end of January right through until mid-August — a rally. Last year we had a bit of a rally, but it faded. This year if you look at the Venture Exchange … volume and traded value looks like, “oh wow, we’re into a very big, enthusiastic market, and the PDAC curse has to happen.”
But this year it won’t happen because the resource companies have barely budged. They’re subdued trading. They’re flatlining, continuing the trend from the rest of last year. We will certainly see it in the cannabis and blockchain market, even though they don’t have a PDAC conference that gets them all excited. It’s very similar to March 2000, when that bubble peaked. I think that bubble is peaking now.
The big question is in the second half of this year is this economy still trending upwards — the global economy — or has it been turned into a trainwreck as a result of political developments. So no PDAC curse simply because we didn’t have anything [that] counts as a January effect to build up the excitement for PDAC.
INN: That makes sense. Back in January, we had quite a wide-ranging interview. You had some interesting thoughts to share about the US, which under Trump is pulling back into itself. I think just last week we saw a little bit more of that, with those aluminum and steel tariffs. Is it good to see large countries like the US try to decrease their dependence on China, or does that create more problems than it solves?
JK: Well, there are two questions. One, can the trade imbalance between countries like China and the US be stabilized, be balanced? I think the process for reshoring is already naturally underway. China is becoming a dictatorship. There’s no secrecy anymore, and the companies there realize that [the] cheap advantage of being there is disappearing — environmental controls are starting to be enforced, so you can’t use China sartorially anymore. So moving back to the US is a natural thing, but you don’t want to do this en masse with everything.
The global economy has supply chains that are interwoven everywhere. This simplistic idea [of] slapping tariffs on all these things in which America imports more than it exports has the potential for a severe ripple effect, and this is hanging as a cloud. I was a little bit more enthusiastic in January about the outlook for the second half because I said, “okay, if we get an infrastructure of boom going and the economy continues to trend upwards, the resource sector is going to blossom because it’s the last sector.” Since then, we’ve had volatility return into the general markets with the VIX-related mini correction and in the bigger markets. We have interest rates now clearly on the rise. And the infrastructure proposal that Trump has put forward doesn’t really have any funding legs to it, so I’m not sure that’s going anywhere. So introducing this destabilizing, protectionist policy makes me very worried about the economy in general, and the prospects for these juniors coming to life are dim, which might explain why the mood is a bit subdued here at the conference.
INN: So as the US is pulling in on itself we’re seeing China emerge as a competing superpower. We’ve seen the issues that can happen when China is a dominant source of one commodity, for example, rare earths. Should investors be concerned about the rise of China?
JK: With China’s much larger population base, it is inevitable that its economy will keep growing relative to that of the US with its 350 million people. Now, China wants to protect its backyard. It doesn’t want to be pushed around by others, it wants to take the lead in technology. It doesn’t want to be the country that steals everybody else’s IP and duplicates it without compensation. It wants to become a leader. We don’t really need to be afraid of that.
But one of the problems with this bellicose attitude that the American president has adopted is that it could result in hostilities between this global trading fund. China is a significant producer of a lot of metals. Zinc is one of them, 40 percent, and then there’s others such as antimony and tungsten, where it dominates 85 percent. And in rare earths it’s still up there at 95 percent. So getting into a trade war with China is a way of disrupting these critical metals supply chains, similar to what we saw in 2010, 2011, when we had rare earth prices go up 10 to 20 times, to insane levels, partly as a result of a skirmish between Japan and China over the Senkaku Islands, but also partly because the Chinese overplayed their hand to show how important they were with the rare earths.
INN: I’m going to take you back to gold. In January, you gave a price prediction for this year of $1,600 to $2,000, which is one of the more bullish predictions that I think I’ve heard. I’m curious to hear how high you think gold could go in the very long term — what’s the potential there?
JK: If you compare today’s price to, say, 1980 when it was $400, the inflation-adjusted equivalent is $1,225. Today it’s about a hundred bucks higher. That’s an 8-percent real price increase. The inflation is starting to creep back, but interest rates are coming higher. If we do have these destabilizing protectionist policies to destabilize the economy, that will take care of inflation. We will see job losses and all that kind of stuff. So that argument for gold is not very good.
We do see the deficit as increasing. Every Republican president has always increased the total deficit by an amount bigger than any predecessor. Obama holds the record right now, and there’s no way that Trump is going to allow Obama to hold this record. Of course, it doesn’t matter now that the Republicans control it all because deficits are only an issue when the Democrats are making all the decisions. So if in the midterm elections we see the Democrats take back the House and/or the Senate, then we’re going to see the drumbeat about the old gold-bug narrative come back in. But that’s no good for the juniors, because a higher gold price because of inflation or the US dollar tanking — it doesn’t make a lousy deposit any better.
What does make a deposit better is a higher real price. I have something called a prosperity model, where I say that when you have these big, long-term historical structural changes, such as, say, the US declining from its top superpower position relative to an ascending superpower such as China, then you get anxiety entering the system … insecurity. This happened in 1980, when gold ran to $800 — America was losing it. They couldn’t deal with Tehran. They didn’t have inflation under control. At that point, all the gold that existed, aboveground stock that was spread amongst people who had accumulated it, was 26 percent of global GDP. In 2000, when America had completely won the Cold War that was down to 4 percent. Now, it’s about 10 percent. If we continue to see the global economy decline, we will see America’s relative position decline, and with Trump accelerating the lie that America is no longer great, it’s going to happen even faster. So a real price increase in gold is natural — especially when dumb stuff like these protectionist policies are put into reality, and we start seeing this destabilization.
So if we take 26 percent of global GDP today, that translates into a $3,300 gold price, which is what people like Pierre Lassonde and Rob McEwen toss around, except they do it in the old gold-bug terms. But if you do it in this, “man, this world is getting very uncertain. One needs to park some of their wealth in gold,” then you can see a rise of gold like that without the accompanying narrative that’s harmful for the juniors. We are in the space where this could happen. Exactly when and how high gold [could go], I have no idea. But I just think it’s naturally in that direction: higher real prices. And that will benefit both the optionality plays and the explorers.
INN: Final question. I’m going to move on to talk about stocks. In January, you gave us three that you said [are having] their make-it-or-break-it year — that was InZinc Mining (TSXV:IZN), Nevada Exploration (TSXV:NGE) and Scandium International Mining (TSX:SCY). If you have any updates on those I’d love to hear them. If not, your thoughts on prospect generators.
JK: Nevada Exploration is looking to raise money to drill the targets that they have; until they have raised money to drill, that story doesn’t advance. InZinc is getting set up to drill. They have a four-month hold ending in April for that $0.10 financing, so the market has to digest that, and then we need to see some good results. But even failing that, West Desert as it exists is already in the money. Hopefully we get an institutional audience coming in. If we get the discovery, we have another Hermosa Taylor-type story — that’ll be very exciting.
Scandium International has started to release a series of letters of intent. One of them is quite important, it’s with Granges. It’s a Stockholm-based producer of heat exchangers, it has 30 percent of the world’s heat exchanger market. They’re looking at an aluminum-scandium alloy for the little plates that are inside these heat exchangers — potentially a very big market. They’ll probably have a whole bunch more of these over the next while, and hopefully that’ll get the stock trending up to where they can do the really important milestone, which is a financing.
In terms of new ideas, one of my bottom fish, Namibia Rare Earths, resumed trading after a three-month halt when they acquired a portfolio of properties from a private Namibian company which is operating mines and processing facilities. One of them is Kunene, which is the western half of another project called Opuwu that an Australian company, Celsius Resources (ASX:CLA), acquired from the same group a year earlier. This is a cobalt-copper system that has 0.1 to 0.15 percent cobalt and half percent copper. It was originally explored by First Quantum Minerals (LSE:FQM), which was looking for 2 percent-plus copper belt style. They spent $2 million, didn’t find it, walked, then the group looked and said, “this cobalt’s quite interesting.”
So cobalt’s the big metal. You know, the Congo has enough to supply the rest of the world for almost eternity, and for the total, 100 percent, of electric-power vehicles, but there’s all this instability. So there’s interest in nickel-cobalt laterite deposits in Australia and in Africa, but this is a different style itself. It’s a sulfidic shale-hosted system. It probably doesn’t have the metallurgical complexities that these others have. If we get a good resource estimate from Celsius in the next month, this is going to really help Namibia Rare Earths. And of course, they still have the Lofdal project, which is one of the few heavy rare earths-enriched rare earths deposits that could be put into production.
One final thing, I’d like to mention that two of my picks have been Peregrine Diamonds (TSX:PGD) and Tsodilo Resources (TSXV:TSD). Peregrine keeps improving its results, its stock seems to have been stuck. Tsodilo is processing a bulk sample at BK16, a somewhat smaller version of the Karowe pipe of Lucara Diamond (TSX:LUC). But the really big thing that’s got me excited is last week Eira Thomas decided to come out of semi-retirement and take on the CEO role at Lucara. That’s pretty exciting, because she is completely immersed in the Arctic, was part of the whole Diavik exploration process, has had several diamond companies along the way, but she’s also very well interfaced with the financial sector, knows how all this is done.
What’s really hurt the diamond juniors over the past 20 years is no western aggregator ever really emerged. I mean, De Beers does its own thing, Rio Tinto (ASX:RIO,LSE:RIO,NYSE:RIO) never really acquired anybody. In fact, they got rid of their position in Ashton and that became part of Stornoway. But now we have a company — Karowe’s now going into underground mining, so their best asset is depleting. They still have a good valuation, a good reputation. They could end up acquiring Tsodilo if BK16 delivers something similar. But also projects like Chidliak and Peregrine — if it’s too small for the Friedlands, this is something that could be absorbed by Lucara and pushed forward.
So I’m excited that finally there’s a company there that — what Dominion Diamond could have done but never did — somebody like Eira, who I would call the diamond queen, is in charge. I’m excited. I think the diamond sector is going to get going again. And besides, that blockchain stuff that they’re talking about, fingerprinting diamonds with the laser scans and all that, getting natural diamonds into this ledger so that you can track it and prove it, and then you can have the synthetic ones in there too, and you can get price divergence so that the natural diamond industry can stay alive as a true collectible. I think that’s also a very positive development to overcome this funk about how synthetic diamonds are going to destroy natural diamonds.
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Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.