long depressed since peaking in 2011, gold stocks poised ...€¦ · long depressed since peaking...

ENR Asset Management Inc. • 1 Westmount Square, Suite 1400 • Westmount, Quebec • H3Z 2P9 Canada

Phone 1-514-989-8027 • Fax 1-514-989-7060 • Toll free 1-877-989-8027 • www.enrassetmanagement.com

June 2018 ENR Advisory Extra Report

Long Depressed since Peaking in 2011, Gold Stocks Poised for Major Break-Out

Mining for Big Profits in 2018 Talk about depressing. Since peaking in 2011, gold mining equities have plunged a cumulative

63%, wiping out tens of billions of dollars in stock-market capitalization. Shareholders have

lost a fortune, dividends were subsequently cancelled or significantly reduced, and projects

the world over were terminated as gold prices tanked. And despite a huge rally in 2016 after

five straight years of declining values, gold stocks have continued to struggle since 2017.

From its all-time high of $1,924 an ounce intraday in early September 2011, gold has crashed

32%. Mining stocks, which are leveraged to the gold price, have crashed twice that level. In

short, it’s the worst bear market for any sector since 2011.

Has the backdrop for gold fundamentally changed recently to finally warrant exposure? After

all, investors have lost their patience with the yellow metal following several false starts since

2013. I think a bottom was indeed placed for the gold mining stocks in late 2015 as measured

by the Philadelphia Gold & Silver Index (XAU Index), a composite of mostly North American

mining companies (see above chart). From its multi-decade low in 2015, the XAU Index has

rallied 116% but is now 26% below its post-crash high set in 2016.

At some point, I think, gold stocks will double, triple or quadruple from these lowly levels. The

boom in Bitcoin until recently and the speculative frenzy in Canadian cannabis stocks and global

technology companies have taken the air out of gold mining; alternatives exist in a late-cycle

economy where speculators are driving asset prices.



2 ENR ADVISORY EXTRA BULLETIN

But bullion prices are set to climb because there’s been a lack of exploration and the global

industry isn’t replacing the reserves it’s been mining. That’s a consensus across most gold

mining circles. The World Gold Council has estimated that world supply may have already

peaked.

Further, the gold mining industry has learned from its mistakes. After expanding production

and aggressively building new mines when gold prices were elevated, many of the leading

miners have cut production, reduced heavy debt loads and some have even reintroduced

shareholder dividends lately. At these levels, the combined global stock-market value of all

publicly-traded gold companies is barely $150 billion dollars – or about 15% of Apple’s

(NASDAQ-AAPL) public stock-market value! So basically, if we liquidated Apple we could buy

the entire gold mining industry more than six times over! Believe me, nobody I know is bullish

on gold stocks today. It’s totally off the investor radar.

Gold-to-XAU Ratio

You can’t have a discussion about gold stocks without elaborating on the important Gold-to-

XAU Ratio. This matrix divides gold mining equities into the gold bullion price; the result depicts

either an overvalued mining sector or one that’s undervalued to gold and vice versa. Over the

long-term, the Gold-to-XAU Ratio has traded between 3 and 6 until an explosive breakout for

the gold price compared to the mining stocks in 2009. And since then, gold has far outpaced the

gold stocks, extending the anomaly between both assets.

Compared to the end of last year, the Gold-to-XAU ratio declined modestly during the quarter.

Indeed, gold shares remain extremely cheap compared to the physical metal after a secular

seven-year bear market.




The Gold-to-XAU chart below depicts the severity of this oversold condition for gold stocks. At

28, the ratio was incredibly bombed-out in late 2015 after five consecutive years of spectacular

declines. Notice the big drop in the ratio in 2016 – hence the big gold mining rally that year (the

higher this trend, the lower the gold mining stock valuations, and vice versa). We’ve been

basically trending sideways since early 2017 with the ratio still heavily depressed at 15.64

versus an historical average of about 6.

Another serious concern is long-term U.S. deficits. This must have an adverse impact on the

value of the dollar eventually.

Household balance-sheets in the United States, Canada, the UK, Australia and other parts of the

world are not in good shape. The elephant in the room, according to Gluskin Sheff’s David

Rosenberg, are subprime auto loans where outstanding debt totals $300 billion dollars. The

delinquency on this debt category is approaching 10% -- the highest it has been since the

economy emerged from recession in 2009/2010. Plus, we’ve got a bubble in student loans and

credit-card collateralized debt. I wouldn’t say this looks like October 2007 all over again, but it

sure doesn’t look pretty, either.

It’s all very late-stage cycle to me and flashing a ‘yellow’ warning light. In my book, it

increasingly looks like we’re already passed peak financial conditions.

On April 17, Joachim Fels of PIMCO published an insightful commentary in The Financial Times:

‘Global economic expansion has entered its 10th year. With bumpy and brittle growth giving way

to a robust and synchronized conjuncture, an ageing cycle has suddenly become much more

cyclical. Late cycle booms typically mark the beginning of the end. As spare capacity erodes and




central banks focus on removing accommodation, risk of accidents in the real economy or in

markets is rising. Investors must prepare for a potentially long period of more volatile and

plateauing asset prices, as if often precedes bear markets…Barring a big geopolitical event or a

trade war, global economic expansion appears to have room to run another year, or maybe two.

But the risk of a recession soon after is high is rising.’

Any way we slice it, the U.S. economy is now in the late innings of a mature expansion –

currently 107 months. And no other asset performs better than gold when a recession strikes,

the dollar plunges and interest rates decline. This is the ‘Perfect Storm’ for gold stocks.

Big Bang for your Buck: B2Gold Corporation

One of the best-performing gold stocks in Canada over the past several years – both on an

absolute and relative basis – is B2Gold Corporation (Toronto-BTO). Based in Vancouver,

B2Gold is among the newest of the senior gold producers in Canada. Since its creation in 2007,

the company has expanded to five operating gold mines and numerous exploration and

development countries, including Nicaragua, the Philippines, Namibia, Mali, Burkina Faso,

Colombia and Finland. The company sports a stock-market capitalization of $2.6 billion dollars.

B2Gold is positioned to continue growing this year. With the planned first full year of

production from the large, low-cost Fekola Mine in southwest Mali, consolidated gold

production is forecast to be between 910,000 and 950,000 ounces, according to management.

This represents an increase in annual consolidated gold production of approximately 300,000

ounces in 2018 versus 2017. B2Gold’s forecast consolidated cash operating costs are expected

to remain low in 2018 (between $505 and $550 per ounce) and all-in sustaining costs are

expected to decrease by approximately 6% versus 2017 (between $780 and $830 per ounce).




The company continues to grow their production and its balance-sheet is strong. B2Gold hits

their production targets quarter after quarter under the strong leadership of CEO Clive T.

Johnson.

What’s remarkable is how B2Gold has grown its production at a time when most of the gold

mining industry has been under pressure since prices peaked almost seven years ago. In 2007,

the company generated 157,885 ounces of gold; through the end of 2016, it’s grown production

to 630,565 ounces – a very impressive figure for an industry engulfed in a bear market. It’s on

course this year to grow production to approximately 950,000 ounces.

In the first quarter, B2Gold recorded gold production of 239,684 ounces – a significant 81%

increase over the same period last year, due mainly to strong production in Mali, the Philippines

and Namibia. It also logged record quarterly gold revenue of CAD$344 million dollars (US$267

million), a dramatic 135% increase over 12 months prior. Consolidated cash operating costs

fell to $481 per ounce in Q1, 15% lower than 12 months earlier. And its cash flows from

operating activities grew to CAD$147 million dollars (US$114 million), an increase of CAD $107

million dollars (US$83 million), representing a 272% increase versus a year earlier. On March

1, B2Gold finished the quarter holding CAD$168 million dollars (US$130 million) in cash.

No bull market lasts forever, and no bear market lasts indefinitely. And no economic recovery

lasts forever, either. Considering the extended duration of this economic cycle (now nine years)

and an ageing bull market for stocks and other risk-based assets, the backdrop is compelling

for gold and B2Gold -- one of the sector’s leading producers with a growing production profile.

From its all-time high in 2016, B2Gold sits 24% off its best level and down 13% from its 52-

week high. In 2018, the stock is down 9.4%.




BUY B2Gold Corporation (Toronto-BTO) at market up to CAD$4.00. Place a 25% stop-loss on

your entry price. Also, please note that I personally own this stock in my Canadian RRSP

retirement plan. It’s also a top holding in the ENR Precious Metals Portfolio for clients.

Italian Flip-Flop Sends Global Tremors

The United States has emerged as one of the top-performing markets in the second quarter

amid a strengthening dollar, positive portfolio inflows and increasing international economic

and political tensions. From currency crises in Argentina and Turkey to political uncertainty in

Italy and its future in the euro-zone, investors have dumped foreign assets en masse since mid-

May in favor of more stable destinations – mostly U.S. stocks and bonds. The big surprise in

financial markets has been the big drop in U.S. Treasury bond yields from a seven-year high of

3.11% just ten days ago to 2.84% this week – a considerable rally. The trigger? Italian politics.

Mounting fears about political instability in Italy and Spain sent tremors through the euro-

zone’s two largest peripheral debt markets on May 29 with investors dumping the sovereign

bonds of both nations and sending European and North American bank stocks sharply lower.

Italian bond yields, already at a generational low, saw the two-year note surge to 2.42% this

week before settling lower at 1.73% this morning. Four weeks ago, the two-year Italian

government bond traded at -0.31%!

In my mind, it seemed ridiculous for Italian bond markets to yield less than many other better-

managed economies like Australia, Norway or Canada. Obviously, the European Central Bank




(ECB) has played a major role backstopping Italian debt markets over the past several years as

part of its massive asset purchases campaign.

The Italians are struggling, as they do on a regular basis, to form a government. The leaders of

the current coalition include so-called “Eurosceptics.” Italy always seems to be in a political

crisis. Governments don’t last very long there, as the ruling party’s coalition tends to splinter

rapidly, requiring yet another election and another effort to form a government by the mostly

incompatible coalitions. This time, after the March 4 election, the latest popular coalition is

dominated by “Eurosceptics,” who believe that Italy’s problems might be solved by leaving the

single currency. As confusion reigned earlier this week, investors sold everything Italian and

quickly, sending bond yields surging and Italian equities tumbling. The anti-establishment Five

Star Movement and the far-right League later retracted comments about exiting the euro-zone.

Unlike the Greek debt crisis in 2010-2012, Italy is a big fish. Her departure from the euro-zone

would trigger a major financial crisis. Italy sports a government debt-to-debt GDP ratio of 132%

-- among the highest in the world. Though Italians are indeed savers, the government has spent

money like there’s no tomorrow – and borrowed to the hilt. Italy harbors €2.3 trillion of debt

($2.7 trillion). Making matters worse, its domestic banking system still faces a bad-loan

problem: Non-performing loans exceed €85 billion ($100 billion) – the most of any EU country

and 11.1% of total loans outstanding. In contrast, France’s bad loans equal 3.1%, Germany’s at

1.9% and the Netherlands 2.2%. Spain, another problem politically for Brussels, holds 4.3% in

outstanding bad loans.

So, what now for European investors, and more importantly, international investors afraid of

possible contagion?




I think Italy will remain in the euro-zone for now. The country has not grown its GDP since

joining the euro-zone in 1999 and probably fudged its books to gain entry. Italy had no business

joining the euro-zone. Like other high-indebted countries prone to bouts of inflation, Italy

should have kept the lira, devalued the currency when necessary and restructured its debts (i.e.

defaulted).

Meanwhile, the ECB is unlikely to terminate its asset purchases this year. The ECB is stuck

remaining accommodative. I think it’s safe to say that the Italian crisis will force the ECB to

postpone any plans for normalizing monetary policy in the near future. After all, it was the

bank’s president, Mario Draghi, who famously declared in a speech in July 2012: ‘Within our

mandate, the ECB is ready to do whatever it takes to preserve the EUR. And believe me, it will

be enough.’ That promise served to put a floor on the euro-zone debt crisis.

We still find good values across Europe. However, investors should avoid Italy, in my opinion,

and other problematic markets, including Spain, Argentina, Turkey etc. It’s hard enough to

make money without the drama of self-inflicted economic and political crises. Turkey, also

subject to historical currency crashes and high inflation, is also suffering from a shock to the

economy under Erdogan. Turkey’s financial markets have plummeted this spring with the lira

crashing 18%, interest rates soaring and stocks tanking.

And Argentina is a mess, yet again. After defaulting on its debt in 2002 and subsequently

breaking the link between the peso and the USD, the economy slid into the abyss for years

before recovering. Interest rates recently topped 40% and the peso has collapsed 34%. I don’t

care how cheap Argentine assets become or Turkish stocks and bonds for that matter: in my

experience, it’s not worth the risk to own these volatile markets. Instead, a low-cost emerging




markets ETF is a sensible option for diversification in this asset class (see VWO or EEM) , not

single-country funds dedicated to markets that are traditionally hostile to foreigners or prone

to repeatedly defaulting on foreign debt obligations.

By the way, the volatility that’s emerged this year across world markets – unlike 2017 – is a

stark reminder of the ageing economic cycle. Stocks have been rising for almost ten years and

by most yardsticks, are ‘fair-value’ at best or outright expensive. The booby-trap for investors

is higher interest rates. Since the United States is the only major economy still tightening

monetary policy since late 2015, we must be mindful that some sort of financial ‘accident’ is

likely to occur. The events in Italy, Turkey, Spain and Argentina are a reminder that rising rates

are a threat to the bull market.

Periods of prolonged easy credit tend to stimulate speculative excesses, especially among

borrowers who have relatively short maturity debts that unexpectedly must be refinanced at

higher rates. History shows that since the late 1960s, rising rates often have triggered a

financial crisis, which turned into a widespread credit crunch and a recession.

Portfolio Update The volatility that erupted in early February isn’t disappearing. The S&P 500 Index has

performed relatively better than the MSCI World Index since April and certainly stronger than

the MSCI Emerging Markets Index. Global major markets are 6% off their late January all-time

highs and the developing markets are off 12.5% their best levels. The S&P 500 Index trades

5.7% below its January 26 all-time high. Small stocks, however, continue to make fresh highs

with the Russell 2000 Index outpacing the broader market since February.




The United States will apply steel and aluminum tariffs on Canada, Mexico and the EU on June

1st. Markets dislike trade wars and increasingly, the world is growing less trade-friendly with

the United States pulling out of global agreements on both climate and trade. In her absence,

only France – a medium global power – is left as the free-market ambassador. Without the

assistance from the United States or several other medium powers at the very least, France

won’t be effective pushing its version of globalism. If that’s true, financial market volatility will

remain a prevalent theme for the remainder of 2018.

Even NAFTA is looking vulnerable as the Trump administration probably slaps tariffs on

Canadian steel and aluminum imports on June 1st. Though not invulnerable, smaller companies

are more domestically focused and are not as adversely impacted by trade wars. This, in part,

explains why investors have lunged after small stocks this year in the United States and to a

lesser extent, abroad.

The ENR Advisory Extra Portfolio made some headway in May with broad gains in U.S.

aerospace and defense, commodities and natural resource equities. Our European exposure,

representing six positions out of a universe of 20 holdings, remains under pressure since late

May amid political wrangling in Italy and Spain. On the plus side, we hold no emerging market

equity exposure but did plug the iShares JP Morgan USD Emerging Markets Bond ETF

(NYSE-EMB) last month following a correction; we’re happy to report a small gain over the past

four weeks in EMB. Buy EMB up to $112.25.

Banks, however, have performed poorly with Commerzbank (Frankfurt-CBK) now trading in

stop-loss territory. We recommend selling Commerzbank. In Zurich, UBS (NYSE-UBS) is also

weak over the past month but remains a BUY based on a new share buyback program, super

low multiples, a rising dividend and the stock now trading at a 52-week low. Buy up to $16.

Vancouver-based B2Gold Corp. (NYSE-BTG) makes its debut in our portfolio this month. This

fast-growing gold miner ranks among the most profitable senior producers in Canada with a

portfolio of top-producing gold properties overseas. Gold is poised to finally break-out this year

and we think it will finish the year closer to $1,400/ounce – a big boon for producers. BUY up

to $3.10.

The iShares U.S. Aerospace & Defense ETF (NYSE-ITA), plugged after a steep sell-off earlier

in May, gained over 5% last month and remains a BUY. The world is becoming increasingly

multi-polar as new actors challenge American foreign policy and an arms race takes center-

stage across most regions, mainly in Asia and the Middle East. BUY ITA up to $208.

In our view, protectionism is bullish for inflation as prices rise for consumers. Wages will

continue to grow and are just below 3% currently. The iShares S&P GSCI Commodity-Indexed




Trust (NYSE-GSG) has gained 7.5% since our first plug, mainly on the heals of crude oil. Oil is

now correcting but should bottom-out ahead of seasonal demand strength. BUY GSG up to $18.

It’s still a great time to boost portfolio hedges as we progress into summer seasonality for

stocks, typically a bad period for investors until Thanksgiving. ETF hedges help to reduce

portfolio risk and unlike options contracts, don’t expire worthless.

One of my favorites is the Currency Shares Japanese Yen Trust (NYSE-FXY). No other

currency since 1998 produces more alpha amid global market jitters than the yen. BUY up to

$90.

The dollar has been ‘on fire’ since bottoming in the first quarter, up 6.3% based on the U.S.

Dollar Index. The USD Index holds a disproportionate weighting in the EUR at 56.7%; the single

currency has declined sharply since last winter as political troubles and slowing growth force

investors to reassess the euro-zone economic landscape this year.

A strong dollar hurts the returns of foreign securities when converted back into USDs. Until the

USD starts to weaken again, focus on our Best Buys and avoid buying risky emerging market

stocks and most other foreign securities, unless recommended.

What’s Included in this Service

As part of the ENR Advisory Extra package, you’re entitled to the following services. We highly

recommend our clients take advantage of these services to better implement your long-term

investment goals and risk objectives:




• Quarterly portfolio/account review

• Portfolio planning and future projections

• Automatic portfolio rebalancing

• Tax-loss harvesting advice

Please call our office in Montreal and make an appointment with Eric. Telephone (Toll-Free) 1

877 989 8027 or email Ms. Melissa Silva at [email protected]

------------------------------------------------------------------------------------------------------------------------

Eric N Roseman Montréal, Canada May 31, 2018

mailto:[email protected]




ENR Advisory Extra Portfolio, as of May 30, 2018 (Intraday)

Security Listed Symbol Entry Price

Date Current Yield

Current Price

Gain/ Loss

Advice

B2Gold NYSE BTG $2.73 May 30/18

0.00% $2.73 NEW BUY

iShares U.S. Aerospace and Defense ETF

NYSE ITA $189.60 May 4/18 0.95% $199.88 5.42% BUY

iShares J.P. Morgan USD Emerging Markets Bond ETF

NYSE EMB $108.48 May 4/18 4.52% $109.28 0.74% BUY

UBS Group AG NYSE UBS $17.68 Apr 2/18 4.27% $15.33 -9.62% BUY

iShares S&P GSCI Commodity Trust

NYSE GSG $16.40 Mar 5/18 0.00% $17.63 7.50% BUY

iShares TIPS NYSE TIP $112.18 Mar 5/18 2.24% $112.50 0.99% BUY

Vanguard Materials

NYSE VAW $134.12 Mar 5/18 1.62% $133.46 -0.22% BUY

Ranger Equity Bear NYSE HDGE $10.00 Nov 2/16 0.00% $8.07 -19.30% BUY

CurrencyShares Japanese Yen ETF

NYSE FXY $88.45 Sep 6/16 0.00% $87.92 -0.60% BUY

Berkshire Hathaway Class B

NYSE BRKB $125.79 Feb 9/16 0.00% $191.66 52.37% BUY

Gold Bullion Unlisted N/A $1,077.30 Jan 4/16 0.00% $1,302.34 20.89% BUY

Commerzbank AG Frankfurt CBK € 11.13 Jul 31/17 0.00% € 8.95 -20.50% SELL

Sanofi SA NYSE SNY $44.67 Jan 30/18 4.92% $38.25 -10.21% HOLD

J.M. Smucker Co. NYSE SJM $105.73 Sep 6/17 2.87% $107.95 4.31% HOLD

CurrencyShares Swiss Franc ETF

NYSE FXF $93.03 Jan 3/17 0.00% $95.00 2.12% HOLD

Pfizer Inc. NYSE PFE $32.79 Jan 3/17 3.70% $36.16 15.28% HOLD

Macquarie Global Infrastructure Total Return Fund

NYSE MGU $19.81 Jan 3/17 6.62% $22.36 21.96% HOLD

Dassault Aviation Paris AM € 1,091.60 Jan 3/17 0.93% € 1,640.00 68.62% HOLD

Unilever ADR NYSE UL $42.11 Nov 2/16 3.47% $55.43 36.55% HOLD

iShares Currency Hedged MSCI Japan

NYSE HEWJ $24.65 Sep 6/16 1.22% $32.41 33.39% HOLD

Rheinmetall AG Frankfurt RHM € 62.82 Aug 1/16 1.58% € 107.85 83.48% HOLD

Risk Disclaimer: The financial information provided in this Bulletin is accurate at the time of publication to the best of ENR’s

knowledge. Recipients are advised that the financial data provided is subject to constant change. Recipients are also made aware

that investments in single stocks and bonds are a high-risk pursuit that could result in a high or even total loss of invested capital.

Investments in foreign currencies and securities should also be considered a high-risk venture, as the currency might drop in value compared to the US dollar and political, or country-specific factors, might endanger the liquidity and/or value of the security.

Investing in securities has definite tax consequences, some of which may be dependent on a security’s type, its country of issue or

the form of its income streams. ENR does not provide legal or tax advice nor accepts any such liability. Clients should always consult

a professional regarding specific legal or tax matters.

long depressed since peaking in 2011, gold stocks poised ...€¦ · long depressed since peaking...

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