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What are those “A9 Gold Stocks” from Green Zone Fortunes?

By Travis Johnson, Stock Gumshoe, June 30, 2020

Today we’re looking at a teaser pitch for the new Green Zone Fortunes service from Adam O’Dell, who has offered some “cycle trading” newsletters in the past for Dent Research (Cycle 9 Trader and 10X Profits), and has recently launched this Green Zone product as an entry-level service ($49, renews at $79). I haven’t covered any of his pitches before, but it sounds like he’s focused on technical and systematic trading rather than the more typical “stock picking.”

Here’s a little taste of the ad:

“My name is Adam O’Dell.

“I’m what’s called a Chartered Market Technician, or CMT.

“It means I’m like a Navy SEAL at making money in the markets

“Of the 6.3 million people working in financial services in America today… just .1% have qualified as a CMT.

“That’s the top 1% of the top 1%!

“And like a Navy SEAL is exclusively trained to protect our country, I’ve been trained to find profitable investments.”

Anyone else throw up in their mouth a little bit at that statement, or was it just me?

A Chartered Market Technician designation is not exactly easy to get, to be fair, and they’re not terribly common even now (compared to most of the designations financial advisors and other professionals get, it’s fairly new and very chart and trading-focused), but depending on which Level he achieved we’re talking about somebody who has taken several exams and proven proficient in things like risk management, behavioral finance, and popular concepts in technical trading and chart-reading, from Dow Theory to Point & Figure charts… so probably a good educational background for someone who works in the industry, but not exactly Hell Week in SEAL training.

Being a CMT probably does mean that O’Dell passed some ethics exams, so perhaps he’s less inclined than some of his newsletter peers to be misleading in his teaser pitches… let’s continue and see what it is he’s teasing today.

He talks up his “system” of short-term trading, and says that he has recommended 194 trades in eight years, with an average hold period of 70 days, which have generated an average gain of 12% — leading to 78% annualized gains. He claims to have turned $50,000 into $1.8 million with this system… or scratch that, he claims that you could have turned $50,000 into $1.8 million if you followed every one of his trades from 2012 to today.

I assume that means rolling over the profit of each short-term trade into the next trade, so if you do that you’re also dramatically escalating the risk as you go, but the math at least makes sense (I have no idea whether that’s a fair characterization of his track record, or how he calculates his averages and takes account for his losses if he’s betting it all on each trade, but it takes “only” a compound annual growth rate of 67% to turn $50,000 into $1.8 million in seven years).

He claims to have invented a couple “systems” for trading over the years that have done very well, not just the one that generated those results, but he has now apparently moved on to something gold-focused of late… from the ad:

“I have my eyes trained on the gold market right now.

“It’s not that I’m a gold bug.

“In fact, I don’t often recommend precious metals investments.

“It’s as simple as this:

“I want to find the absolute best moneymaking opportunity the markets have to offer at any given point.

“And that’s where A9 Gold Stocks come in.”

I guess the “A9” is just his reference to “rising 9X more than the gold price”… more from O’Dell…

“A9 Gold Stocks could hand you bigger profits than any trade I’ve ever recommended in my entire career.

“They could 9X your gold gains in what I expect to be the greatest gold bull market in history.

“That means for every $1 average investors make in this gold rally… you could be making $9!”

So it sounds like we’re just dealing with “gold miners” in general — gold mining stocks tend to be very levered to the gold price, as you might imagine, since a mine that has operating costs of $1,100 per ounce can see its profits climb 10X when gold goes from $1,200 an ounce to $2,100 an ounce (the gross profit goes from $100 an ounce to $1,000 an ounce). Mining costs are largely fixed (yes, they have inflation — but not based on gold prices, just based on labor and energy costs), so if the value of the shiny stuff they dig up explodes higher, their profits explode higher with them… and usually the stock prices do as well.

And the same goes for “not quite miners” — junior exploration stocks, or companies who have not yet even built a mine, can also see their shares soar dramatically higher… particularly if they’re marginal projects. The deposit that wasn’t quite worth investing in with gold at $1,200 an ounce could suddenly be fending off partners and financing offers if gold is at $2,000 an ounce.

And as a base for these profit assumptions, O’Dell is pitching the idea that gold will go to $10,000 an ounce… which is a number we hear a lot from pundits and gold bugs…

“… along with many of the smartest investors in the world, I’m INCREDIBLY confident gold has finally entered a new long-term bull market…

“And that can only mean one thing:

“Gold is on its way to staggering new highs… up to $10,000/ounce

“Now, to most people, $10,000 gold sounds nuts.

“But each gold bull market of the past ended with new highs far exceeding anything people expected when they started.”

He cites the two dramatic gold bull markets of recent memory as rationale, including the 1970-80 period when gold went from $35 to over $800 (largely fueled by Nixon taking the US formally off the gold standard — so really, as much of a crash in the dollar as it was a surge in gold prices), and the 2000-2011 gold run from $300 to about $1,900. And yes, some gold stocks did extraordinarily well during those runs, he says they “hit gains as high as 4,558%” and that’s probably true, though there were also plenty of gold stocks that performed poorly during those “gold rush” decades.

And Adam O’Dell cites the “Dow-to-Gold” ratio as his main rationale that gold has entered a “long-term bull market” — that’s a popular ratio among goldbugs, and there are a few Agora newsletters who trot it out regularly as a broad market timing tool, going to gold when the ratio is above a certin level, say 20 or 25, and to stocks when it falls below 10 or below 5 or whatever other number makes sense to you. The ratio is just the measure of how many ounces of gold it would take to “buy” the Dow Jones Industrial Average — the Dow right now is at about 25,600, so with gold at $1,780 an ounce the Dow/Gold ratio is about 14 today, down from about 20 late in 2019 but still well above the recent low of about 7 in 2011 and the all-time low of about 1 in the early 1970s.

O’Dell says that…

“The gold bull markets of the 1970s and 2000s reached their peak when the Dow-to-gold ratio hit around five.

“I expect it will be the same this time.”

Whether this indicator will really work as a long-term asset allocation guide in the future, or be as precise as implied, I don’t know — it seems foolish to base your whole strategy on a chart that has had four or five inflection points in 100 years, but if you had followed it you would have at least bought low and sold high for both gold and the Dow in the past 50 years. The ad posits that because the ratio has started to turn, we’ve entered a bull market in gold. There’s a good Dow-to-Gold historical chart at Macrotrends if you’d like to dig into that concept a little more.

And apparently our CMT here says that gold is now in a “huge uptrend” because it’s consistently been making higher highs and higher lows since the low of late 2015, when it last touched $1,000 an ounce. With that trend in place providing some momentum to the “A9” stocks, he says that he then narrows them down by choosing stocks that are more levered than others to the gold price…

“A standard miner can provide some ‘alpha’ … or performance above what you’d get in bullion, coins or a gold ETF.

“But an A9 Gold Stock is different.

“As I said, when the gold price climbs, these rare miners can go WAY up.

“What’s more, they begin outperforming the gold price very early on during a gold bull market.

“And that’s how I identify them…

“Using something I call the G.A.R or ‘Gold Alpha Ratio.'”

He says he’s looking for “A9” gold stocks that show a “G.A.R.” of between four and nine, meaning that they stock rises 4X-9X as much as the price of gold rises. That shouldn’t be particularly difficult, since the average mining stock comes pretty close to that during sharp moves in gold (just since the March bottom, for example, the GDX ETF of major gold mining stocks has given a G.A.R. of about 5, rising 50% to the 10% rise in gold prices).

Those are then narrowed down, we’re told, by choosing stocks with “good fundamentals” — here’s how he puts that:

“A9 Gold Stocks must have solid fundamentals — with great management and huge gold reserves

“Just because I’m a momentum investor doesn’t mean I don’t look at fundamentals, especially in this case.

“It’s no use to buy a stock that outperforms gold but is poorly managed.”

That’s pretty subjective, particularly in an industry that is as populated with bad management and shareholder value destruction as mining, but he says that it means he wants companies with a long history of profitability and a “full pipeline of promising mining projects” for the future. Here are some clues from the ad…

“The first company began trading back in 1987.

“That means they’ve been doing business for 37 years — through multiple gold booms and busts!

“That’s confidence-inspiring continuity for a business in a sector like mining.

“Unsurprisingly, this company is now a top five gold producer in the world with interests around the globe.

“They have 15 mines on five continents — and a double-digit explosion in their gold reserves right at the time when gold is poised to soar.

“The most exciting part is the leverage this company shows to the gold price right now.

“Even though it’s a large established miner, its Gold Alpha Ratio has been as high as 5 during this rally … and could easily accelerate past 9.”

We’ll try hard to avoid taking potshots at the math there, but you can feel free to chortle a little on your own as you check those dates.

Several companies come close to matching those clues… Newcrest (NCMGF) is probably the most interesting near-match, with some huge reserves (particularly in Lihir and Cadia), but they are really on only three continents (Oceania/Australia, and North and South America) and have just half a dozen meaningful mining projects, large though they are. AngloGold Ashanti (AU) is overwhelmingly focused on Africa but does have one Australian project and two in South America to get up to three continents as well. Kinross (KGC, K.TO) also doesn’t quite get up to 15 mines or five continents.

So I expect we’re dealing with the big daddy here, Barrick Gold (GOLD). They did go public on the NYSE in February, 1987, but I guess you can also say they’ve been trading for 37 years because they listed in Canada back in 1983 (so maybe the math mistake in the tease wasn’t a mistake at all). They do operate on five continents, and the share price has recently shown some dramatic leverage to shifting gold prices — though part of that is probably also just the quick March “sell everything” impact. Here’s what the price of GOLD (great ticker) looks like compared to the price of gold over the five years (that’s Barrick in blue, and gold in orange):

GOLD Chart

But lest we get too excited about long-term performance for gold miners, we should also share the history going back a bit further so we can all be clear about how ugly that business can be during a weaker gold market… this is that same chart going back ten years, to just before the last “high” in the gold price in 2011:

GOLD Chart

So that leverage to gold, of course, works both ways — Barrick did surge by 40-50% while gold went up 8-10% out of the March lows, but remember also that gold fell by 20-30% from its highs in 2013, and Barrick’s share price fell by about 70%… and even though gold is much higher now than it was in 2010, Barrick’s share price is still down 50% or so from where it was a decade ago.

Barrick is one of the largest gold miners in the world, and is often described as one of the best, but just the fact that it’s so large helps to push it to be pretty average — if you don’t have a particular fondness for Barrick’s management or projects, you would get very similar results by buying a diversified gold mining ETF like GDX, with a hair less volatility most of the time. This is what that chart looks like if we throw the ETF in as well — this is three years of what has mostly been a steady bull market for gold:

GOLD Chart

GOLD data by YCharts

And this is ten years:

GOLD Chart

So there’s one… I wouldn’t try to talk you out of Barrick, and in fact I have a small options position on that one, but I wouldn’t expect it to wildly outperform the gold mining sector — it’s a strong company with some major projects in Nevada, Australia, South America and elsewhere, but to a large degree, it is the gold mining sector. If gold goes to $10,000 it will perform fantastically well, but so will everything else in the GDX ETF — and there’s not much indication in recent years that Barrick shares will be dramatically more levered to gold than their peers. Gold miners carry substantial political and operational risk even if they’re huge and have a good track record, so there’s something to be said for the diversification of an ETF — if one of Barrick’s mines floods or is confiscated by its local government, for example, that would hurt sentiment for the whole sector but it would probably bring GOLD down more than the GDX.

That said, if you think Barrick is much better than average, by all means, bet on that instead of on the index — it is, at least, arguably the most diversified of the major gold miners when it comes to their operating properties and reserves.

How about number two? Here are our clues…

“And the second A9 Gold Stock is just as exciting.

“Once again, this company has a focus on longevity and sound management.

“They were founded in Canada over 70 years ago.

“From there, they’ve expanded their interests to the U.S. and Argentina — and have a combined proven and probable reserve of 2.1 million ounces….

“… they have also showed an incredible G.A.R. at the beginning of this gold bull market.

“It’s already been as high as 4 during gold’s recent rally!

“That’s why your gains on this one could be worth 2,340% or more.”

2.1 million ounces sounds like a lot, but it doesn’t stand out among the top miners — the biggest gold mining company, Newmont (NEM, NGT.TO) (which bought Goldcorp last year), has about 100 million ounces of gold reserves in its asset base.

If you’re talking about companies that operate primarily in Canada and Argentina, the first one that comes to mind is Yamana (AUY), which has certainly had its troubles and had to delever a couple times but which owns some appealing assets and has good production, but they’ve got closer to eight million ounces of proven and probable gold reserves, and are nowhere near 70 years gold.

I guess you can claim that Rob McEwen’s McEwen Mining (MUX), which started in Canada and expanded through the US and Argentina, has a 70 year history — but that’s only because McEwen is 70 years old, the company has only been around for 20 years or so (McEwen is most well-known for co-founding Goldcorp and helping to build that company, before stepping down as Chair many years ago).

SSR Mining (SSRM) fits pretty well in there too, particularly with the emerging gold strength to complement their historical success in developing silver mines, and they do indeed trace their history (as Silver Standard Resources) back to 1946, and have a pretty concentrated portfolio of operating mines in Canada (Seabee Gold), the US (Marigold) and Argentina (Puna)… though they have a lot more than 2.1 million ounces of gold in proven and probable reserves, too.

Given those limited clues, I’ll settle on SSR Mining (SSRM) as my best guess from the likely candidates — it could be that there’s a better match, but the Thinkolator couldn’t come up with one this time around. They’re a mid-tier producer, likely to produce at least 330,000 ounces of gold this year in the US and Canada, along with tons of silver, lead and silver in Argentina. Their proven and probable gold reserves, almost entirely in Marigold and Seabee, tally up at 4.4 million ounces as of December, though with their substantial silver reserves and resources you could make the number much larger by adding those “gold equivalent” ounces… so it’s certainly not a perfect match, but it’s an interesting company and isn’t as widely followed. And, as you might imagine, it is quite levered to gold — here’s what the SSRM chart looks like (in blue) compared to gold prices (orange) and the gold mining ETF (GDX, in red) over the past three years:

SSRM Chart

So absent a certain answer there, let’s move on to number three…

“… the final company has all the incredible qualities of a A9 Gold Stock…

“Firstly, it’s showing an incredible outperformance versus gold — with a G.A.R. as high as 3.6 already over the last 12 months as gold has been rallying.

“Next, they have a history of sound management.

“They have been digging gold out of the ground since 1957 — which means they’ve worked through multiple gold booms and busts.

“And they’ve declared a cash dividend every year since 1983 — a rare feat for any mining company.

“That can only happen with a tight focus on shareholder value….

“Their proven and probable reserves sit at nearly 20 million ounces.

“Thanks in part to their ownership in the largest operating gold mine in Canada…

“This project is moving 55,000 tons of rock every single day to get at the rich veins of gold that litter this site.”

Thinkolator sez that’s Agnico Eagle (AEM), which owns half of the Canadian Malartic mine in Quebec, the largest operating mine in Canada (Yamana owns the other half, incidentally). Agnico Eagle has indeed declared a cash dividend every year since 1983, and they have a good reputation as being among the most fiscally responsible gold mining companies — and they get a valuation commensurate with that reputation, which has helped considerably over the years. AEM has still performed poorly over the long term, but they’ve far outpaced most of their large peer mining companies… here’s the 10-year chart of total returns for AEM (blue) compared to gold (orange) and the GDX mining ETF (RED):

AEM Total Return Price Chart

But that general steadiness also means that they don’t necessarily get as much leverage from gold rising as the lower-quality operations do — AEM has held up pretty well managing through booms and busts in gold, but that means they tend not to be as desperate for high gold prices to save them… and therefore they don’t get quite the same boost from higher gold prices that a weaker operation will.

It’s a little counterintuitive, but the best-performing mining stock during a wild bull market for gold is likely to be the worst company, with the lowest-grade or highest-cost operations. Agnico Eagle’s partner Yamana is a good example of that, with its mines that investors have seen as lower quality — here’s 10 years of Yamana (red) vs. AEM (blue) and gold (orange)…

AEM Total Return Price Chart

And here’s three years, showing the larger improvement for Yamana when gold prices picked up recently:

AEM Total Return Price Chart

That doesn’t mean Agnico Eagle isn’t a great company, I’d argue that it is — but if gold goes straight to $10,000 from here, it’s not likely to outperform other mining stocks. If gold stays in the $1,500-2,000 range, though, I’d guess that it probably will outperform just by falling less hard during the bad times.

Those are all subjective assessments, of course, and we don’t really know what the trajectory of gold prices will be. I continue to think that gold is an important way to diversify a portfolio, both the metal itself as a hedge against declining currencies over time and gold equities as a way to get some leverage to higher gold prices and probably diversify against a broad market that’s otherwise become very focused on growth and technology.

Personally, I prefer to focus on the mining royalty companies because they tend to avoid the worst impacts of leverage and high operating costs and uncertainties (permitting, delays, etc.) that mines have to deal with, but in the heat of a gold bull market it’s likely that the best gold miners will rise faster than the best gold royalty companies. Royalty companies haven’t led the recent bull market in gold miners, but over time their “higher lows” as they wait out weaker gold markets make them more appealing.

Here’s just a little illustration of that to send you on your way — this compares the four most mature royalty companies Sandstorm Gold (SAND), Royal Gold (RGLD), Wheaton Precious Metals (WPM) and Franco-Nevada (FNV), with Agnico-Eagle (AEM), Yamana (AUY), gold, and the GDX ETF. You can see that over ten years the four royalty companies have generally been at the top of that chart, mostly beating gold, while the miners have been a worse investment than just holding the metal.

AEM Total Return Price Chart

But in the short term it’s sometimes the miners who jump highest and fastest — since the late-March bottom, for example, this is the relative performance of that group, with a few miners doing better than the biggest royalty firms (RGLD and FNV)…

AEM Total Return Price Chart

Frankly, unless you’re really interested in following specific gold mining projects it’s probably not worth obsessing too much over one large cap gold miner versus another — if you don’t like to study the merits of different projects or management teams you can easily just get a basket of the big fellas with the GDX ETF, and if you don’t like dealing with the ugly business of mining at all you can go with one or two royalty companies or a mining financier (like Sprott, for example) that tend to rise with rising gold prices.

It’s your money, though, so you can place your own bets — whether you’re a CMT or a Navy SEAL or just an average joe sitting at his desk like yours truly. If you’ve got any opinions on all of this, or thoughts on some mining stocks you favor for a rising gold environment, well, feel free to toss them on the pile with a comment below. Thanks for reading!

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2 years ago

I subscribe to O’Dell’s Cycle 9 options service as well as Gree