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January 25, 2018 | Burnt Fingers Hand You Big Bargains

Sean Brodrick

Sean is the natural resource analyst for Weiss Group. You can read his thoughts on gold, oil, cannabis, uranium and other natural resources at EdelsonInstitute.com

Have you ever tried to teach a kid to cook? They’re eager, but man, they make mistakes. They usually burn themselves once. Then the problem is getting them anywhere near the stove again.

Well, there are a bunch of burnt fingers in the gold mining industry right now. And their discomfort is handing you some incredible opportunities. Bargains galore!

Here’s what I mean. The world’s biggest gold producers have cut way back on mining deals. Why? Because the deals they did in the past went wrong in a big way. In fact, past deals led to $85 billion worth of write-downs at major gold producers.

Now, they just don’t want to take the risk.

This chart from Bloomberg illustrates what I mean.

In the heyday of the last gold boom, 2011, companies spent a record $38.7 billion on deals, according to Bloomberg data.

To be sure, they were buying at the wrong time.

Gold hit a high of $1,921.17 an ounce in 2011. By the end of 2016, gold had dropped as low as $1,127. Plenty of those pricey projects didn’t work at much lower prices.

No wonder gold dealmaking dropped to less than $15 billion in 2016. That was the bottom of the bear market. The price of gold started zig-zagging higher.

But despite the rise in gold, the big miners didn’t start making more deals. With all their burnt fingers, the big gold miners let the dollar amount of deals drop to $8.9 billion in 2017.

This is one of several factors weighing on the prices of gold miners, developers and explorers. If few are buying, then speculative money sees no reason to take positions.

Result: Though gold has rallied, it is down 27% from its bull market peak. And miners are off a whopping 66% from their bull market highs.

When the big gold companies start buying again, this valuation gap will be filled. Maybe hard and fast!

Why am I so sure the big dogs will start biting? Because they’ve been so focused on cost-cutting that they haven’t been doing exploration on their own, either. They have massive gaps in their pipelines of future production. And those pipelines need to be filled.

So, when will this rebound happen? Here’s some insight from VanEck. That’s the fund family that runs the VanEck Vectors Gold Miners ETF (NYSE: GDX) and VanEck Vectors Junior Gold Miners ETF (NYSE: GDXJ).

VanEck says gold prices would need to climb back to $1,400 — a level not seen since 2013 — to convince investors it’s time to rebuild the production pipeline.

Well, considering that gold is in a new bull market, we could easily see the metal hit $1,400 this year.

And that means investors who pick up small companies at bargain-basement prices soon, will beat the starting gun. They’ll be cooking with gas, while others wake up to the dinner bell and are left scrambling for ingredients.

I’ve been telling my subscribers about some small companies I find very interesting. And I just returned from Vancouver, where I spoke at the Metals Investor Forum. There, I met with and talked to several small companies with enormous potential.

My goal is to have a quiver full of red-hot rocket stocks, ready for action.

You should start making plans, too. The leading stocks of the GDXJ are a good place to start. Do your due diligence before you buy anything.

All the best,
Sean Brodrick

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January 25th, 2018

Posted In: The Edelson Institute

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