Opportunities In The Gold Exploration Sector

TM editors' note: This article discusses a penny stock and/or microcap. Such stocks are easily manipulated; do your own careful due diligence.

An Unloved Sector

We rarely discuss individual stocks in these pages, but we make an exception now and then when we spot exceptional opportunities. This time the reason is actually more mundane: the vast majority of gold exploration stocks failed to benefit from the rally in precious metals prices last year. As a result many of them came under even greater pressure in the tax loss selling season at the end of the year. We made a list of such stocks late last year – a download link to the PDF document is provided below this post. Here is an example of such a stock:

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ATAC (ATADF), one of many exploration stocks that came under selling pressure in last year’s tax loss selling period.

 ATAC (ATADF) is actually a fairly solid company as exploration companies go – it has a large land package in the Yukon territory, a PEA-supported high grade resource, a second fairly large high grade resource (which unfortunately consists of hard-to-treat refractory ore, which puts grade into perspective) and numerous scout drill holes suggest there is potential for more discoveries.

And yet, the stock has been in a downtrend for several years. As the weekly chart shows, it traded above 70 cents both in 2016 and 2017. If one goes even further back, it traded actually as high as $4.40 in late 2011 when gold peaked. Naturally the share count has increased since then, but on the other hand, the drill programs that were funded by share issuance have been reasonably successful.

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ATAC, weekly – in 2016 and 2017 the stock briefly traded above 70 cents.

If this were the case with just one exploration stock, we would suspect that there is a problem at the company we don’t know about. However, the vast majority of small exploration stocks has fared extraordinarily poorly in recent years. Only a handful of stocks with exceptional news flow have managed to deliver a half-way decent performance in line with the rally in gold.

A Long List of Caveats

Right now may actually not be the best time to make our list available, since net speculative positioning in gold futures is quite stretched (and has been for a while). We believe that positioning extremes in gold futures have shifted upward, as this has happened in numerous other futures markets as well in recent years (most notably in crude oil, where the extreme in net speculative length has grown from around 120,000 contracts to 850,000 contracts over the past decade).

Still, as a percentage of open interest the net speculative long position in gold futures is clearly at the upper end of its long term range, although it remains below its highs of 2016 and 2019. It is therefore possible that it will expand further, but there is undoubtedly a limit to this process:

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Disclosure: None.

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