Is the current price of gold presenting an opportunity within the junior mining space? In August 2020, the price of gold reached an all-time high of ~US$2,067 per ounce. Since then, the precious metal has been on a bit of a tilt but began to rebound around March of this year.
Gold Spot Price 5-year Chart (USD per ounce)
A peek at the junior miner index shows the trajectory of junior gold stocks over the last five years.
VanEck Vectors Junior Gold Miners ETF (GDXJ) 5-year Chart
Now, with gold prices gradually picking up again, investors must be wondering when gold stocks will begin to follow suit. In an interview with Kitco NEWS, John Feneck, founder of Feneck Consulting, sounded off on the buying opportunities that currently exist in the gold mining industry. He believes that there is a real disconnect between the low stock prices of junior mining companies and the current price of gold. According to Feneck,
“We’re seeing very good valuations, we’re seeing low net debt-to-EBITDA, we’re seeing good free cash flow, a lot of positive things. It’s just not reflected in prices yet.”
A Protection Against Momentum Money
Relative to high returns from equities in the last few months, gold has failed to perform well. So, when asked why investors should be interested in gold right now, John Feneck had a simple answer: a hedge against momentum money.
“How are you creating any type of protection in your portfolio when you’re fully exposed to technology and hydrogen and all these things that are super-hot right now?”
He goes on to say that,
“…it’s portfolio insurance if wealthy people need to insure their portfolios, and they do that through ownership in something like gold or silver”
The Market Opportunity in Junior Gold Stocks
The Fed’s perceived hawkish position at the Federal Open Market Committee meeting on June 16, 2021 was a cause for concern for junior miners. However, John Feneck argues that the Fed has since shifted towards a more dovish stance.
Feneck then pins the lack of growth within the gold mining industry on seasonality trends.
“We’re just not seeing follow-through in terms of buying because it’s the summer doldrums and volumes are quite low.”
While portfolio trimming of the gold sector is encouraged, Feneck warns against completely abandoning the space. Using the demonstrated disconnects as a market opportunity in junior gold, investors can dollar cost average or get in at a reasonable price. Most investors on the TSX Venture and CSE know that the summer can often provide attractive entry points as liquidity dries up.
