Relative to the price of gold, gold and silver miners are at their lowest valuations since 2016. David Erfle of TheJuniorMinerJunky.com explains the macroeconomic forces behind low valuations and what this means for investors.
why are valuations for gold miners and silver miners at really near historic lows? Right now, we're here to discuss this and explore valuations with the expert on gold and silver junior miners, David earthly of the junior miner junkie.com. David. Welcome back. Thanks for having me on, we spoke a few months ago and, uh, you had recommended a few stocks that you like.
We'll talk about those again, this time and revisited your call. But first I'd like to talk about valuations of the space as a whole. If you look at this chart, the ex AAU, which is the Philadelphia golden silvers index. Versus gold it's trading at near 2016 levels, which was the low over the last 30, 30 plus years.
And so I wonder why compared to gold, the silver and gold miners have not have not picked up as much as they probably could have. Yeah, that's a great question. David. It's asked by a lot of people and it's a multifaceted answer. Um, first of all, um, you've got quite a bit of dilution in a lot of these companies which need to raise capital for their operations.
So you have to factor that into it. You've got, um, records, uh, equities prices. Uh, that that continue to go higher. So, um, people view miters and especially juniors as, as higher risk. So they say to themselves, well, um, uh, the stock market continues to go higher. Why should I put my money into these risky, risky stocks?
Um, And also you've got the gold price, which has been consolidating for the past six months. Um, the gold price ran up to over $2,000 in announcing in, in a parabolic fashion. So that is in the process of that move is in the process of consolidate and, uh, that 1800 level on, uh, on, on the, uh, price is a very important level.
It was very strong, uh, resistance back during the. The the, uh, the first leg of this secular bull market that began at the turn of the century, and now it's becoming strong support. So, um, but as you say, the, the, the miners, and especially the juniors are very cheap in relation to the gold price here in lies the opportunity in the sector.
Well, if you take a look at this chart that we're showing now, if you just zero in on the last year, you'll notice that the chart has been sloping up, meaning that the SAU has been climbing faster than goals. Over the last year or so. And we've seen that last year, the miners have outperformed gold. I w the question is obviously, can it continue to outperform gold in a bull market?
Oh, absolutely. And if you, if you go one step further, if you take a look at the GDX J which we know isn't really representative of juniors, but it is representative of, of the mid tiers scattered with some, with some majors. But if you take a look at the, at the GDX J to gold ratio, I think that's made a recent double bottom, um, last week when you started to see the juniors show relative strength.
So the gold price as the gold price was, was going down below 1800 on Thursday, uh, and down $50, the miners pretty much yawned at that move and especially the high-risk juniors. Okay. Now what I'm curious about is whether or not the move in junior miners is proportional to the move in gold. So for example, if you take a look at this chart again, you'll remember that in the last nine years from 2012 to 20.
19, basically gold has been trading pretty much rain bound and flat. And so during that time, the chart has sloped downwards as gold miners continue to lag behind gold. Now the risk here is that as we've seen, since August gold has not gone anywhere, it's sort of just been consolidating downwards flat. So the concern from investors is whether or not gold will follow the gold miners will follow suit.
And just stay flat, if not trend even lower because of the higher beta. What do you think? Well, I really don't think so. Um, uh, the miners are historically cheap, especially in relation to equities are 50% cheaper if you, if you, if you go by, uh, John alaways figures, uh, on Kitco a few weeks ago and, uh, the miners were even cheaper, but, uh, what's even more bullish is the fact that, uh, these juniors they've all been cashed up now.
And that's another, another reason for, for them lagging was the dilution that it costs them to cash up. So a lot of these, a lot of these private placements became free trading recently, and now they've been factored in to the price and the sector. So, um, a lot of these companies that are de-risking high margin projects, With great management teams in top tier jurisdictions are presenting really good value.
So David, you brought up a good point, which is comparing the juniors to the broad equities index. So if you look at the S and P 500 index, for example, the trailing 12 month PE ratio is that, you know, very high levels close to 2007 levels. And so my question is why, why is the gold mining sector so cheap, especially if you consider that last year, there was so much more interest in general.
Generalist investors following the surgeon gold prices. Remember it was relatively easier for monitors to raise capital in 2020. Well, I, I think the answer, a lot of the answer lies in your question and what I touched on before, um, you know, this is a very small sector and people consider it very risky.
Uh, the mining stocks very risky, especially juniors. And, um, if they're gonna, if they're gonna continue to make money in a rising equity market, Um, they figure, um, why should I put my investment into these risks in these risky juniors, these risky gold miners? Um, I think, uh, the, this is a big reason why they remain undervalued and also the fact that, um, you know, a lot of other sectors are.
Kind of stealing Gold's thunder here as Bitcoin is one. Uh, but, um, like I said, you know, this is, this consolidation, prof process has, has lasted long enough. It's it's gone all gone, gone on in time and price, close to historic numbers. So, um, it's, it's a really good idea. If you're a contrarian and to make money in this sector, you have to be a contrarian.
You have to buy when these things are, are, are, are, are really cheap. Like right now and then take some profits on the table when they become expensive. Like they did in August when the gold price got to $2,000 and $89,009 positive this contrarian viewpoint to you. And, uh, I'd like to see your response to this, perhaps it's not, if you just take a look at the x-ray to gold ratio chart again, perhaps it's not the fact that gold and silver miners are undervalued, maybe they're fairly valued.
It's just that gold is too extensive right now. Oh, that's that's, that's a good, that's a good question. But if you take a look at it at the macro, uh, situation going on right now, that's I, I don't believe that at all. I've never seen a more bullish environment for the gold price that we see right now. Um, you know, we've got a fed balance sheet.
It's. That's going over $7 trillion. Now we've got a new president. Biden is, is about to pass this $1.9 trillion stimulus package that looks like all systems are go on it. We've got a federal reserve that continues to, to stimulate the economy with quantitative easing easing. So, um, and we continue to see people losing faith in, in all central bank currencies.
The gold price is, is rising in all currencies. And, um, I, I, that looks set to continue. Yeah. Maybe we'll we need is for the wall street bank group to push up stocks like they did for the, with JME G uh, G GME at AMC. I I'd much rather see gold, especially the silver price go up on its macro fundamentals, as opposed to somebody trying to manipulate the price higher or lower.
Um, so, uh, you know, uh, as far as I'm concerned, it was, it was nice to see that. Fail at, at, at the strong resistance at $30 silver price, because like I said, I'd much rather see it go up on fundamentals nice and slow and steady, uh, because you know, once, once you have a blow off top and this in a, in a commodity and especially silver, um, it's going to ruin that market for quite some time.
I mean, when, when, when the, when the hunt brothers. We're successfully manipulated the silver market back in, in 1979, they ran it up to $150 an ounce in nominal terms. And that pretty much ruined the silver market for over 20 years where successfully ran it up. Why, why, why, why did you stress that they successfully did it?
Do I, are you suggesting this attempt had failed? Yes. Yes. I believe it has. I believe it has. Yeah. Okay. And what was the difference? What was the difference between the 80 and 1980? And now. A big one was the margin requirements. You know, the, the, the rules were, were, were, were, were not in place if the Comax at the time.
And they put the rules in place afterwards. So what happened this past Monday when the silver price was ran up to over $30 on huge volume, right after the Colmex closed, the CME came out and raised margin requirements. 18%. So that, that region that raised up, you had to, you had to put a $16,500 as opposed to $14,000 to, for a silver contract.
Now that's quite a big raise, so that, that knocked the price down. Okay. Okay. Now I, I brought up, um, Uh, wall street bets and, um, and the silver squeeze. Well, first of all, the wall street, best community has denied that they were involved in the shorts, short squeeze, silver. Let's just set the record straight on that.
So they've come out and denied any involvement there, but regardless we have seen silver stocks move up a lot last week. On the squeeze. We don't know who's been pushing it up, but if you look at things like precious metals, um, Kootney silver CEO. I interviewed some of the, a lot of, a lot of these silver stocks are shut up.
And of course they came back down subsequently as silver flatlines. So I do think that if, if there is an attempt to squeeze up the silver market, the miners are the way to play it. Not the bullion market. Absolutely. I couldn't agree more. Unfortunately, I was already properly positioned when this took place, but, um, I did not chase any, any of the stocks we went to did take place because it was obvious to me that it was going to fail because you saw black distribution Campbell's candles on the three days that the silver price started to go up Thursday, Friday, and then Monday.
So, so whoever it was that was able to get the silver price up in the retail sector. Big money came in and knocked it back down. Okay, well, we'll investigate more as to, uh, who was involved and why, but let's go back to valuations and close it off here. I, I, before I joined Kitco I worked as a macro economics research.
And one thing that one of my managers taught me is that valuations are a very, very poor indicator of where prices are going to go. So even though prices are where valuations should I stress are cheap. For the mining sector, it doesn't necessarily mean that prices will reflect upwards. And so I wonder what this means for investors is now a good time to be buying game.
Where should you wait for gold to break up even more? What do you think? I think it all depends on what your view of the gold price is going to be in, in the near term. Um, if, if you believe that the $1,800 level is going to hold like I do, I mean, we've had three consecutive, quarterly closes above 1800.
Dollars. And, um, I think that that gold is, is carving out a strong base there w which once was strong resistance back during the last, uh, during the phase, one of the bull market that I mentioned that ended in 2011. So if you believe that the gold price is carving out a bottom here at any to get 1800, the valuations will catch up, especially once the gold price gets back over $2,000.
Okay. And finally, can you close off by, um, revisiting her calls where the stocks that you talked about last time and, uh, the stocks that you prefer? Oh, sure, sure. Uh, I believe that the three stocks that I mentioned, um, at the end of last year, To your listen to your listeners was, um, I gave you a growth oriented producer, a developer, and an earlier stage exploration company, the growth oriented producer, your, your, your, your viewers are familiar with you inter you interviewed, uh, the CEO, Darren of, uh, America's gold and silver.
I think that's, that's, uh, a very, uh, A good turnaround story for this year. I like turnaround stories because you can get them cheap when they're, when they're turning the company around. Uh, the second one is a developer, a silver developer discovery metals. I think it's one of Eric's Broad's biggest positions.
Uh they've they've got they've I think they've got like 80 million cash right now and, and, uh, they're highly leveraged to the silver price. And, uh, the earlier stage Explorer exploration company gave you was probe metals. Who's who's exploring in one of my favorites. Uh, jurisdictions, which is the, uh, area of the Abitibi in Quebec.
Okay. And, uh, just overall sentiments in the Quebec region, um, is that, is that jurisdiction, uh, seeing high growth right now? Absolutely. I did, uh, my column, um, on, on Kitco, uh, brought that up a few weeks ago. It's it's really starting to heat up. Uh, Eldorado gold took over, uh, Q MX, uh, in Valador um, earlier.
Um, we had, uh, we had, uh, Yamana gold, which I believe you'll be speaking to the CEO here. Uh, Peter Maroney coming up, um, they took over the, uh, Uh, Monarch golds WASA Mac project, which is also in the Abitibi near, near bell door. So, um, that, that area is, is one to watch, I believe, in, in the future, uh, in the, not too distant future because it's really starting to eat up.
All right. Thanks very much for your update, David. I appreciate you coming on today. Thanks very much for having me on again, David, always great to talk to you. Oh, right. Great to speak with you too. And thank you for watching. I'm David Lynn safety from market cap.