By Dave Forest, editor, International Speculator
Gold has riveted investor attention the last several weeks, blasting through $1,500 per ounce.
That’s the highest gold price we’ve seen in over six years. In fact, bullion has pressed higher than $1,550 in recent weeks.
And that’s lit a fire under gold mining stocks. Since May, the VanEck Vectors Gold Miners ETF (GDX), a basket of gold mining stocks, is up 44%.
With that in mind, I want to go over one of the most time-tested strategies for profits in gold mining stocks.
It’s got half a century of data behind it, with an 80% success rate and average profits of 102%.
I’ll explain it all below… but first, I want to show you why this gold bull market is just getting started… and why it has everything to do with China.
China Will Keep the Gold Demand Brisk
It’s telling that many of gold’s big jumps lately have come during the afternoon in North America… when the Asian markets open. That’s a sign strong buying is coming from investors in that part of the world.
In China, gold is commonly used as a currency hedge. So volatility in the Chinese yuan creates more bullion buying. The currency has certainly been volatile lately – last month, the yuan hit an 11-year low against the dollar.
I expect that’s going to continue. My suspicion is President Trump will end the U.S.-China trade war in the next three months. He’ll “solve” the problem he created to win points heading into election season.
The yuan will jump as investors bet on trade picking up. That will create further volatility in exchange rates. It should keep Chinese gold demand brisk.
At the same time, currency weakness benefits gold miners. Gold prices hit record highs in several currencies the last few weeks, including the Canadian dollar, the Australian dollar, and the South African rand, to name a few.
These countries are all major gold producers. Mines in these nations are now reaping record revenues per ounce, which is great for mining stocks.
In fact, many of our portfolio’s precious metals companies have doubled or better in the last three months. Junior gold exploration stocks are now coming to life. That’s the usual progression in a bull market. One of our holdings in my International Speculator newsletter is up 63% since late June.
But in U.S. dollar terms, the gold price hasn’t even passed its 2011 high of $1,900 yet.
Remember, since that peak, the U.S. government printed another 7 trillion new dollars. With that cash injection rammed down the economy’s throat, I expect a new record coming for U.S. gold prices… which will boost the returns of gold mining stocks.
That’s why I want to tell you about the “Golden Runway” strategy…
The Golden Runway Phenomenon Is Our Ticket to Profits
The Golden Runway phenomenon creates some of the most reliable profits in mining.
My team discovered this phenomenon through detailed research on gold markets.
Like I said before, it has an 80% success rate and average profits of 102%.
The phenomenon takes advantage of the different stages mining stocks go through.
The life of an average mining stock has three parts, like three acts of a play:
Act I – Discovery
Act II – Boring Engineering
Act III – Golden Runway
The first act, which I call the “Discovery” phase, is when a company finds a new mineral deposit. In this Dispatch, I showed you stocks that rocketed 1,000% or more when they drilled into a new deposit of gold, copper, or nickel.
Stocks making a discovery often get bought out for huge sums. A larger company then takes over and builds the mine.
But what if the discovering company decides to build the mine itself?
Such companies enter Act II, the “Boring Engineering” phase.
During this phase, companies are progressing on projects, but they’re not pumping out exciting drill results or increasing the sizes of deposits.
So short-term investors get tired. With no news popping up, they sell the stock in favor of more exciting plays. That selling causes a reliable share price dip (see the middle of the chart above).
But how do we know when this dip is near a bottom? When’s the best time to buy to position for a coming surge upward? How reliable are the profits?
The Key Milestone
You see, every “boring” step the company completes brings it closer to actually mining.
One important milestone for miners is a “construction decision.” This comes after the company has gathered a lot of boring engineering data. Putting all the information together, management decides the mine looks good. It’s likely to make money, so it should be built.
And that’s when my research shows it’s the perfect time to buy – right before Act III, or the “Golden Runway” phase.
Once a construction decision is made, a company goes out to secure financing for the project. Then, it begins actually digging holes, pouring concrete, and installing machinery. The company now moves toward “first pour” – the time when the metal is produced and sold.
During this phase, there’s now a prospect of cash flows, so a whole new group of investors gets interested: pension funds, private equity, even major mining companies. That growing tide of buying causes the share price to start lifting higher.
Buying ahead of this “ramp up” phase thus yields significant profits.
This might sound like common sense. But the shocking thing is just how reliable and repeatable this strategy is.
It works time and time again – yielding double-, even triple-digit gains in relatively short time periods.
And yet, few investors take advantage.
So let’s look at the math on how the Golden Runway can supercharge your mining portfolio if you just buy mining stocks announcing construction decisions…
Average Gains of Over 100%
My team and I looked at every example we could find, covering data in public mining companies going back to 1986.
In total, we found 111 companies that reached a construction decision. We then looked at the share price performance of these stocks between construction decision and first production.
Here’s the breakdown of the 111 stocks:
102 succeeded in building their mines. That’s a 92% success rate.
Four companies were taken over before they finished construction (which yields good profits for shareholders).
Five stocks failed to finish the construction phase due to technical problems or running out of money.
Out of 102 companies that built mines, 82 showed gains in share price between construction decision and first pour, averaging 102% gains.
And 17 of those 82 companies gained over 175%.
So 80% of companies yielded profits for shareholders during the Golden Runway phase.
And those profits were significant.
Here’s another surprising thing our research turned up: It didn’t take long to win these reliable profits.
The average time for peak gains was just 550 days (18 months).
Posting 102% average gains with an 80% success rate in 18 months is rare anywhere in investing.
Plus, this research showed yet another surprising thing…
Golden Runway stocks perform well even in gold bear markets. During times of falling gold prices, our Golden Runway picks still averaged 24% gains.
That’s well above the average for the wider mining sector during these down periods.
But we’re not in a gold bear market… We’re in a bull market.
So we subdivided our research group, and we found that stocks building mines during times of rising gold prices enjoyed 136% average gains.
If gold keeps pushing toward new highs, our Golden Runway picks should be big winners. We currently have five in our International Speculator portfolio, which subscribers can access here. If you’re not a subscriber, you can learn more about a subscription here.
In the meantime, keep an eye out for companies announcing construction decisions for their mines. Once again, that’s the point when my research shows the stock is primed to jump higher.
Editor, International Speculator