• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer

Fat Tail Daily

Investment Ideas From the Edge of the Bell Curve

  • Menu
    • Commodities
      • Resources and Mining
      • Copper
      • Gold
      • Iron Ore
      • Lithium
      • Silver
      • Graphite
      • Rare Earths
    • Technology
      • AI
      • Bitcoin
      • Cryptocurrency
      • Energy
      • Financial Technology
      • Bio Technology
    • Market Analysis
      • Latest ASX News
      • Dividend Shares
      • ETFs
      • Stocks and Bonds
    • Macro
      • Australian Economy
      • Central Banks
      • World Markets
    • Small Caps
    • More
      • Investment Guides
      • Premium Research
      • Editors
      • About
      • Contact Us
  • Latest
  • Fat Tail Series
  • About Us
Commodities Gold

You Need to Know This Before the Next Gold Stock Rally

Like 0

By Brian Chu, Monday, 29 May 2023

Are you ready for the next rally for gold stocks? I have a feeling that it might be less than a month away. But before you get carried away with randomly buying gold producers, let me share a few insights with you regarding the market and the conditions on the ground. Knowing this will help you increase your chances of success in choosing the right companies and looking at the right indicators to time your trades.

Gold stocks have had a solid run in the last eight months. The ASX Gold Index [ASX:XGD] rallied more than 35% in six weeks from late February to mid-April. If you take it from the time the bear market ended, it’s increased by around 85%.

We’re amid a second correction in recent weeks and the index has given back 13.5%.

How much lower can it go?

I’d be concerned if the index sinks below 6,000 points.

What could cause that to happen?

The first is obvious. If gold retreats to around US$1,800 an ounce and stays there, that might scare investors out of gold producers (which happened this time last year).

Another is if the price of oil suddenly takes off and heads towards US$100 a barrel.

And lastly, changes in legislation to restrict mining activity could also cause a sharp sell-off.

While all of these can occur, I have a feeling that it’s increasingly unlikely now that central banks are halting on rate rises. On top of that, a global push to transform our society via an energy revolution means that mining remains a high priority.

In short, I reckon the bullish case for gold stocks remains intact. So, you might want to take this corrective phase for gold producers as a good time to consider grabbing some.

Recent performance is unimpressive, but the outlook is more positive

Over the past fortnight, I’ve been collating and analysing gold producer company results for the 2023 March quarter.

In today’s article, I’m going to share some thoughts on how these companies performed and my opinion on their future potential.

Let’s start with their operational performance. What I found in the 2023 March quarter was that most producers struggled to increase their gold production.

This is a necessary ingredient to stoke a rally for gold producers. It reflects the amount of growth across the industry.

Here are the key reasons for companies reporting stagnant production:

  1. Weather-related events, which led to mines suspending production or difficulty in accessing or transporting ore.
  2. Planned temporary shutdown of equipment and facilities for repairs and maintenance.
  3. The grade of ore mined or processed is reduced as mines deplete or replaced with low-grade ore that had been stockpiled.
  4. Employee absentees and equipment failure.

That’s the bad news.

Here’s the good news…

Gauge future potential with this neat metric!

Gold producers reported better profit margins this quarter despite a lack of growth in production. Part of this comes from the price of oil remaining at current levels, which has reduced production costs.

For several years, I’ve kept track of the gold-oil ratio to help me track the profit margins in this industry. It helped me to buy producers at a discount before other investors crowded into the market. I’ve written about this before, you can check it out here.

Here’s a figure showing how this ratio has performed since 2021:


Fat Tail Investment Research

Source: Thomson Reuters Refinitiv Datastream

[Click to open in a new window]

The current setup has me quite excited. It’s largely because the gold-oil ratio has been in an upward trend since mid-2022.

This means the gold price has been improving in relation to the oil price.

My analyst found that the ratio therefore correlates with the cash flow of gold producers. They tend to become profitable one or two quarters after the gold-oil ratio starts to trend upward. What we found was that 25 and above is the key ratio level for improved profitability.

That’s why I believe you should be bullish about gold producers since the gold-oil ratio has been above 25 in the past three months.

Now, not all producers will closely follow the relationship that I’ve outlined above. However, my observations over the long term have shown me that it works well.

Should the bullish trend for gold-oil ratio hold, now is a good time to review which gold producers are worth buying.

Selecting the right producer

You may’ve noticed that some producers rallied strongly from last September to mid-April, while others languished.

It wasn’t simply about ‘bigger is better’. For example, junior producers like Alkane Resources [ASX:ALK] and Ora Banda Mining [ASX:OBM] delivered strong returns. Meanwhile, a large producer like Regis Resources [ASX:RRL] is still trading much lower compared to what it was in 2021.

Operational performance such as the amount of production, all-in sustaining costs, amount of cash flows generated, and plant efficiency all play a part.

These are sensitive to economic conditions, weather and forces of nature, mine conditions, equipment reliability, and labour relations.

Some of these affect a region, while others are specific to the company.

Things can turn at the drop of a hat, so it’s unpredictable.

For example, a sudden spell of heavy rain can cause flooding that leads to a company suspending mining activities.

Or a drilling campaign reveals a rich seam of minerals that extends the mine life and suddenly increases the profitability of an ore body.

Individual events are hard to anticipate.

This is where digging into reports and knowing the right questions to ask can help you unearth companies that have a better track record in running a smooth and profitable operation. Additionally, this may help you avoid or minimise the impact of unfavourable outcomes.

Getting the right timing and price

Finally, you might grasp how the economy and financial markets are faring and know which companies are a bargain and which aren’t.

However, the market can stay irrational longer than you can stay solvent.

That’s why some people invest while others speculate.

What’s the difference?

Investing requires patience while speculating is all about timing.

I’m more an investor who prefers to hold a portfolio of gold stocks across the gold price cycle. I use my own valuation metric to help me determine which companies are more attractively valued relative to their future potential.

Others speculate by swooping in and out of companies, using their superior skill in timing the market. They look for price trends and buying momentum to inform their trades.

However, I’ve recently developed an index that helps me improve my timing.

It accounts for more than just the current price and the direction. I’ve managed to incorporate the drivers of value for gold stocks — the price of gold and the potential profitability of gold stocks — by way of the gold-oil ratio.

This index adds to the tool kit that I use to deliver outperforming returns with gold producers.

I’ve used this index to help my subscribers at The Australian Gold Report take some profits in the past month as gold producers started its corrective phase.

Interested in finding out more?

Check out my newsletter service and consider signing up!

God bless,


Brian Chu Signature

Brian Chu,
Editor, Fat Tail Commodities

All advice is general advice and has not taken into account your personal circumstances.

Please seek independent financial advice regarding your own situation, or if in doubt about the suitability of an investment.

Comments

Subscribe
Notify of
guest
guest
0 Comments
Inline Feedbacks
View all comments
Brian Chu

Brian Chu is one of Australia’s foremost independent authorities on gold and gold stocks, with a unique strategy for valuing big producers and highly speculative explorers. He established a private family fund that only invests in ASX-listed gold mining companies, being one of a few such funds in Australia, putting his strategy and research skills to the test under public scrutiny. He currently writes two gold-focused investment advisories.

In his Australian Gold Report, Brian helps you build long-term wealth in physical gold and a select portfolio of hand-picked stocks comprising mainly producers with proven revenue streams and appealing risk-reward profiles. He uses his original valuation metrics and a tried-and-tested investment strategy to help you to deliver sustained outperformance against industry benchmarks.

In his more specialised Gold Stock Pro service, Brian helps readers trade some of the most exciting, speculative gold mining plays on the ASX. He uses his proprietary system — based on the famous Lassonde Curve model, which tracks the life cycle of mining stocks. His aim is to help you navigate the gold and silver cycles, and to capitalise on the bull market for opportunities to deliver outsized gains.

Brian’s Premium Subscriptions

Publication logo
The Australian Gold Report
Publication logo
Gold Stock Pro

Latest Articles

  • A radically innovative industry set to soar
    By Callum Newman

    Pretty soon we’re going to have flying transportation. It could cut car travel demand again. See below for my moonshot idea on this.

  • Debt and declining demographics are a dangerous combination
    By Brian Chu

    Our monetary system plays a big role in causing the demographic decline. How that works is hidden from many. But we can be the remedy by sharing our wisdom with the younger generation.

  • Critical Metal Stocks: Following the Iron Ore Playbook
    By James Cooper

    How does inconceivable capex find its way into new mining projects? Answer: Higher commodity prices. James Cooper compares the iron ore boom from the early 2000s to what may lie ahead for critical minerals.

Primary Sidebar

Latest Articles

  • A radically innovative industry set to soar
  • Debt and declining demographics are a dangerous combination
  • Critical Metal Stocks: Following the Iron Ore Playbook
  • Copper traders: gettin’ jiggy with it
  • Australia ain’t the USA…and that’s great!

Footer

Fat Tail Daily Logo
YouTube
Facebook
x (formally twitter)
LinkedIn

About

Investment ideas from the edge of the bell curve.

Go beyond conventional investing strategies with unique ideas and actionable opportunities. Our expert editors deliver conviction-led insights to guide your financial journey.

Quick Links

Subscribe

About

FAQ

Terms and Conditions

Financial Services Guide

Privacy Policy

Get in Touch

Contact Us

Email: support@fattail.com.au

Phone: 1300 667 481

All advice is general in nature and has not taken into account your personal circumstances. Please seek independent financial advice regarding your own situation, or if in doubt about the suitability of an investment.

The value of any investment and the income derived from it can go down as well as up. Never invest more than you can afford to lose and keep in mind the ultimate risk is that you can lose whatever you’ve invested. While useful for detecting patterns, the past is not a guide to future performance. Some figures contained in our reports are forecasts and may not be a reliable indicator of future results. Any actual or potential gains in these reports may not include taxes, brokerage commissions, or associated fees.

Fat Tail Logo

Fat Tail Daily is brought to you by the team at Fat Tail Investment Research

Copyright © 2025 Fat Tail Daily | ACN: 117 765 009 / ABN: 33 117 765 009 / ASFL: 323 988