Episode Details

I was on a panel with veteran geologist Brent Cook earlier in the week and something he said rather struck me.

“It’s shaping up to be a brutal summer for mining companies.”Brent Cook

Looking at the chart below, it’s hard to disagree.

The Gold Miners Bullish Percent Index has fallen to zero.

Not 5 or 10, but zero. That’s lower in the in the crash of 2008 and during the Covid panic. It has only ever reached this level during the darkest days of the great gold bear market of 2011-16, and even then only twice.

This chart measures the percentage of gold mining stocks that are on Point & Figure buy signals. If every stock is on a buy signal, the reading is 100. If none are, the reading is zero.

A reading of zero does not mean prices cannot fall further, only that not a single stock in the index is in a technical uptrend.

Readings like this only occur at moments of extreme pessimism. But what makes today’s reading so unusual is the backdrop.

In 2008, everything was crashing. In 2013 and 2015, gold itself was in a vicious bear market. During the Covid panic everything was crashing. Today, gold’s above $4,000; silver’s above $60.

The fundamentals for higher prices - central bank buying, irretrievable government spending and, in the case of silver, industrial demand - remain. Yet the mining shares are in the swanny.

And these are monthly charts. Such extremes take time to develop. Daily and weekly indicators can hit zero fairly easily. Monthly indicators rarely do.

This is an extraordinary breadth washout. Why is it happening?

Inflation (in the true meaning of the word)

When gold and silver went bananas late last year and early this, mining companies took advantage of the frenzy, as they always do, to raise capital. Bucket loads were raised.

Typically in Canada there is a four-month hold after a capital raise. It means that capital raised in January, for example, only came free trading last month and capital raised in February is only coming free trading now.

Somebody has to buy all that paper, and, if they don’t, prices fall until somebody does buy it.

Add that to the broader decline in the underlying metals prices, especially gold and silver, and you can see why junior mining is having such a rough time of it, and why Brent thinks things are going to get brutal.

Too much paper.

Not enough people to buy it.

The sector simply needs time to digest all that paper. Another leg higher in gold and silver would increase buying, but for now money is flowing in the opposite direction.

Such extremes can prove excellent buying opportunities - though if you bought the 2013 dip you had a wait on your hands - but we have all this paper to get through.

Many miners are terrible businesses, years from any cashflow. Costs, especially energy, have risen. Dilution is relentless.

The bear case is that mining stocks are warning us that gold and silver are headed lower.

On the other hand, the economics of mining have changed with gold and silver this high. Producers should make a lot of money. They will need to replenish lost ounces. The value of deposits has changed. Previously uneconomic mines start to look viable. The value of genuine new discoveries is immense.

The bull case is that miners are pricing a disaster that doesn’t come. Gold and silver stabilise, the financing overhang eventually clears and the sector re-rates sharply higher. We are near capitulation.

With a BPI reading of zero, one thing is certain: the sector is not over-owned.

Given that June typically sees the low for the year in gold and silver, I favour the bull case. But the summer is always weak. We might have a while to wait if my ongoing thesis that gold and silver range trade for a year proves true.

This is not 2011-16.

It’s a mid-cycle correction.

The question is not so much