The day after the U.K.'s surprise decision to leave the European Union, Bullion Vault's customers traded gold and silver worth 30 million pounds sterling: "about two weeks' worth of business in a day," according to the marketplace's head of research Adrian Ash.
Gold prices have jumped about 6% since the June 23 referendum and 26% since the start of 2016. After starting the year at around $1,060 an ounce, Credit Suisse forecasts gold will hit $1,500 an ounce in Q1 2017 and UBS projects that "gold has likely entered the early stages of the next bull run."
A gilded bunker amid economic uncertainty, gold is back in vogue, thanks to the upset Brexit vote, a resulting weak pound, the possibility of additional quantitative easing and the perceived unlikelihood that the Fed boosting interest rates anytime soon. Analysts also project gold could also see some lift later in the year, with India's normal wedding season delayed until October by the Hindu calendar.
SPDR Gold Trust ETF (GLD) recently hit a two-year high. And gold mining stocks, which tend to exaggerate the commodity's gains and losses, as a group have sailed nearly 160% higher since pegging a low in January.
That has placed the Mining-Gold/Silver/Gems group firmly in a No.1 rank among the 197 industries tracked by IBD. Most of the group's biggest gains are coming from thinly traded stocks priced under 10. But the largest miners, including Goldcorp (GG), Barrick Gold (ABX), Newmont Mining (NEM) and AngloGold Ashanti (AU) ended Thursday's session up an average 130% since the start of the year.
Most gold stocks are extended. But Goldcorp on Friday remained below a 20.48 buy point in a cup-with-handle base. Sibanye Gold (SBLG) was in buy range above a 16.73 buy point. And Agnico Eagle (AEM) was lined up to create a three-weeks tight pattern with a 57.16 buy point.
Recovering From A Cycle Fraught With Error
But gold equities have been here before. And they reached much higher highs during the last cycle, in which bullion prices shot up to nearly $1,900-an-ounce in September 2011 before sliding to below $1,200 in 2013.
The aftermath of that price drop "was a really painful time for a lot of these guys because they had to transition from a high-priced gold environment to a low gold price environment very quickly," Morningstar analyst Kristoffer Inton told IBD, adding that some producers were actually losing money mining gold.
Miners have learned a lot since then, say analysts, keeping their pocketbooks tightly monitored and their spending disciplined.
"I don't think anyone would argue the last cycle was fraught with error, and that a lot of the producers have spent some time fixing that strategy and are in much better shape coming out of that period of three years going into this (new) cycle in gold," said Credit Suisse analyst Anita Soni, who now has an outperform on seven of the 13 precious metals stocks that she covers, up from four or five a year ago.
Barrick was once one of the worst performers in the cluster, said Inton, buying "a ton of assets at really high prices," like its $7 billion acquisition of Equinox Minerals five years ago. But a management turnover and paring down of its mine portfolio, among other things, have helped its image.
Now the biggest miner -- it has a market cap of $25.9 billion -- is on route "to meet, if not beat" its target of $2 billion in debt reduction in 2016, wrote Inton last November, after cutting its debt by $3 billion the year before. Goldman Sachs recently added Barrick to its conviction-buy list.
Newmont, another heavyweight, was known for having "a little too much debt" and production pipeline and growth portfolios that weren't as good as its peers, said Soni. But it, too, has undergone a makeover over the last several years, "quietly fixing and addressing all of those things."
"Strategically, they've done all the things that they should do," including divesting assets and paying down debt, she said.
Her top pick is Agnico Eagle, citing its strong exploration and project pipeline.
Both Agnico and Goldcorp have chosen to place mines in areas of with more favorable political jurisdiction, said Morningstar's Inton. Choosing to mine in more geopolitically friendly regions -- Goldcorp core mines are in Canada and Mexico, for instance, and Barrick's major mines are also in the Americas -- comes with less risk but a higher price tag, he said.
Smaller name Eldorado Gold (EGO), on the other hand, did just the opposite, venturing to countries such as Turkey, China and Greece, said Inton. Outside of a few Greek headaches, it's turned out "pretty good" for the company.
As a result of trimmed operations and rising gold prices, earnings forecasts are now soaring cross the group. Five of the 10 largest miners are expected to grow earnings at least 50% this year. On Thursday, Jefferies upgraded Barrick to buy, from hold. The same note lifted Goldcorp's price target to 20, from 17, and lifted Newmont's price target to 42, from 33.
Still, both smaller and larger miners alike face the problem of less exploration and fewer discoveries while the length of mine life declines.
"What's going to face the industry now is the challenge of figuring out where to explore, what to spend money on, and then getting those permitted," said Credit Suisse's Soni. The process of obtaining permits, constructing mines and drilling takes years.
In Search Of Ounces
Some companies are buying their way out of the issue.
Among 2016's merger activity: Goldcorp is acquiring Kaminak Gold, Tahoe Resources (TAHO) agreed to buy Lake Shore Gold and Silver Standard Resources (SSRI) completed its acquisition of Claude Resources -- deals totaling more than $1.5 billion. Experts at Sprotts Asset Management anticipate further acquisition activity as senior miners begin to hit a production wall.
"That goes back to the idea that mine lives in general are getting shorter, and there's been a lack of discovery, so companies need ounces," said Maria Smirnova, a Sprotts portfolio manager with a focus on precious metals.
Just how much more M&A will we see in the near future?
"I think we're just seeing the beginning of it," she said. "We're going to see more deals. . . . We wouldn't be surprised to see (activity) in the 10s (of deals)."
But the worrisome narrative that there is limited discovery -- and therefore less gold to go around -- is frequently fueled by the industry itself, says Inton, who said his gold forecast is "a little bearish."
"Fewer discoveries is always good for the commodity price because it suggests that the price needs to rise to increase development, and that's always what (miners) want, people thinking the price rises," he said. "For them, it's actually a good thing. It gets more costly to mine but the commodity itself goes up."
What will slow down gold's run? BullionVault's Ash checks off a list of headwinds, including soft Indian and Chinese demand, gold producer hedging, and retail selling in the West.
"But I don't know if that's going to matter to price very much, given the kind of risks and the kind of investment sentiment, the sense of crisis that I think is hitting financial markets," he said.
There's "still room for more" in the gold trade, wrote UBS strategist Joni Teves says in her July 5 report, and "despite the very strong inflows into gold ETFs YTD, global holdings are still some distance away from record highs."
Gold mining stock provide a way to double up, or down on the direction gold is headed. Among the fastest moving stocks in the group, First Majestic Silver (AG) had soared more than 400% year-to-date through Thursday. Anglogold Ashanti was up 198%. Royal Gold spiked 120%.
But when sentiment turns, the stocks also fall faster than gold. Gold dropped 19% after peaking near $1900 in September 2011. The gold miners group fell 41% in roughly that time period. Gold fell 33% in six months following a December 2012 peak. At the same time, the gold miners group dropped 55%.
Investors' Intrinsic Doubts
So is it worth investing in gold?
That depends on how you look at the precious metal -- as a legitimate alternative form of currency or as a yellow lump that doesn't produce interest or dividends and has no real value.
In India, China and other parts of the world, hoarding physical bars and gold jewelry is a way to preserve wealth in response to currency devaluation, said Credit Suisse's Soni.
What the West fails to recognize, she said, is that gold "is a flight to safety and alternative currency of choice for 5 billion people on the planet. A billion of us have the luxury of going to a bank and pulling out money whenever we please, but not everybody can do that."
Some investors have a frenemylike relationship with gold. Soni said there are those who buy into the commodity when the global economy teeters, but fundamentally doubt its worth.
What's the broader impact of that school of thought?
"Gold should be a lot more valuable than it is right now, and I think it gets sort of capped because there's . . . a pervading belief that it doesn't really have any intrinsic value itself," she said.
