May 21,2021

Gold continues gain on inflation pickup

Gold continues a major comeback as inflation starts to pick up

The gold price rose 0.8% this week to US$1,838/oz, continuing a three-month upswing, on concerns that inflation may be starting to spike much more than was previously expected, especially given the surprise surge in the US CPI in April.

Looking at market targets for gold, silver and base metals juniors

This week we look at the share price performance and the upside to consensus target prices for the main gold, silver and base metals juniors on the TSXV to determine which segments of the market and stocks may be relatively over or undervalued.

Producers and juniors see a strong rise

Both the gold producers and juniors rose substantially this week, with the GDX up 7.0% and GDXJ up 9.2%, and most of the Canadian juniors rose as the market seems to be pricing in expectations that gold will go considerably higher from current levels.

Producers and juniors see a strong rise

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1) Gold back above the 2020-2021 average

Gold was up 0.8% this week to US$1,838/oz, its highest level since January 2021, and has jumped convincingly above the average of US$1,1775/oz from 2020-2021, and seems to be coming out of a lull that lasted from around January 2021 to April 2021. The early months of this year had seen gold under pressure because of a broader market idea that the economic rebound was a healthy one, naturally seeing some pickup in inflation, which was a good thing, with yields rising in response to this, and yieldless gold could be sold off to chase yields in the bond markets. In contrast, we had argued that this recovery was not really healthy, and almost completely jacked up by a historically massive monetary stimulus which could drive extreme inflation and would certainly drive up gold eventually (Please see our May 14, 2021 weekly for more on these competing theses).

Looks like we have been proved correct, with inflation spiking and starting to spook investors, with stock markets suddenly under pressure as fears that earlier-thanexpected rate hikes by the Fed could smash equity valuations. The question now is what will the Fed do if inflation gets out of control; will they really slash interest rates and crash the market? This seems a bit doubtful to us, and we may see an interesting game of 'chicken' between the Fed and inflation, with the Fed holding on until the last minute to hike. At which level of inflation will they intervene? The April print for US CPI was already at 4.15%, so do they start hinting at earlier-than-expected interest rate cuts when inflation is over 5%, or wait till 8%, or even 10%? We believe that any of these scenarios give gold quite a lot of room to run, and even if rates are eventually hiked, we could still see gold benefit in a flight to safety. Overall, these are dangerous times for the economy, stock market and the Fed, but likely good times for gold.

1) Gold back above the 2020-2021 average

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Zooming in from the bigger picture to the past two weeks, we see some interesting developments, especially the way that gold has held up while other assets that were seeing major strength over most of 2021 have suddenly declined. Global equity markets saw a major decline from May 10 to May 13, one of the worst so far this year (Figure 5), and the two major cryptocurrencies, Bitcoin and Ethereum, both collapsed, losing around 30% of their value in just a week. Gold, in clear contrast, has gained over this period. These cryptocurrencies especially, which, like gold, are a monetary substitute, had likely been gaining some of the inflows that would have gone to gold in previous cycles, and we may see such funds move back to gold.

2) TSXV Juniors: Gold, silver and base metals

This week we check in on the YTD performance of the major TSXV-listed Canadian junior gold, silver and base metals miners, and the upside to their consensus target prices, to gauge which of the juniors look the most attractive currently. For the gold miners, while the clear standout price performance is New Found Gold, with the second largest market cap of the group (Figure 7), up 122% YTD on a continued series of outstanding drilling results from its Queensway project (Figure 8), although it is the only stock of the group where there is downside to the share price target (Figure 9). However, as there is only a single analyst estimate making up this 'consensus' target, and often targets are not updated by analysts for months, the recent strong drill results may not yet be incorporated.

2) TSXV Juniors: Gold, silver and base metals

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Another larger gainer has been Victoria Gold, which reached commercial production last year, and had come in under expectations for output in H2/20, but had a strong Q1/21, leading to a rebound in the share price, which is now up 41% YTD. This has brought it close to its target price however, with just 11% upside. Orezone has also had a strong year, up 30%, as it continues development of the Bombore project, with financing secured and mill construction proceeding, and the market still sees 40.6% upside. The rest of the gold juniors have seen a relatively weak performance this year because of the relatively weak gold price, but this has meant that there is considerable up to target prices for most of the group, as gold analysts are likely forecasting a stronger average gold price than the market had been baking in so far this year. If the major run in the gold price continues, we could see these companies move closer towards these targets.

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Like much of the gold space, the TSXV-listed Canadian silver juniors (Figure 10) have had a weak 2021 so far, especially given the ramp up in share prices on the strange case of alleged speculation in the silver market in late January and early February 2021 (see our February 2, 2021 report, Silver Suppression?!). Only Discovery Metals is just eking out a gain for the year, up 3.1%. Interestingly, although silver has very wide industrial uses compared to gold, which has its value really mainly driven by monetary factors, it has not seen the type of surge that the industrial base metals have this year. The market is still expecting good things for most of these companies, however, with target prices for Kootenay, GR Silver and Bear Creek all above 100% with moderate downside only for New Pacific. We note that there are no consensus target estimates for Discovery, Aurcana, Silver One, or Dolly Varden.

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The TSXV-listed Canadian junior base metals stocks (Figure 13) have been quite strong YTD overall compared to the gold or silver companies. The standouts are the copper junior Filo, surging 362% and the zinc junior Foran, spiking 220% (Figure 14). Canada Nickel has also had a strong year, up 76%, and copper company Sandfire Resources is up 34%. The strong performance of Foran has brought it above its share price target, with -20% downside currently, while Canada Nickel has 36% upside, Filo, 23%, and Sandfire just 7% upside, to their consensus targets (Figure 15). The rest of the group still have substantial upside to their targets given their relatively underperformance this year. MacArthur Minerals has the largest upside, as it continues to advance a major iron-ore project towards development (see our April 16, 2021 Weekly for more on MacArthur Minerals).

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Producers all up, and Canadian juniors mostly rise

All of the gold producers were up this week as the market seems to be starting to price in substantial upside for the gold price for possibly the first time so far in 2021 (Figure 16). News flows included Centerra entering arbitration against the Kyrgyz Republic and Iamgold providing an operational update. (Figure 18). The Canadian juniors also mainly rose (Figure 17). For the Canadian juniors operating mainly domestically, Victoria reported Q1/21 results, Pure Gold provided an operational update, New Found Gold reported stock option grants and GT Gold's acquisition by Newmont was completed (Figure 19). For the Canadian juniors operating mainly internationally, K92 reported Q1/21 results, Rupert Resources announced a bought deal private placement and Novo completed the exercise of its option to earn a 50% interest in the Malmsbury project (Figure 20)

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Disclaimer: This report is for informational use only and should not be used an alternative to the financial and legal advice of a qualified professional in business planning and investment. We do not represent that forecasts in this report will lead to a specific outcome or result, and are not liable in the event of any business action taken in whole or in part as a result of the contents of this report.