Why Small Caps Stand to Benefit from Precious Metals Push

• Commentary: The next small cap bull market? What have we been researching over the last couple of years? BRICS launching their own precious metals exchange?
• Quick Takes: SGQ, MTH, GUE
• This week in our Portfolios: KAU, MAN, BPM, CND, TTM
• NOTICE: Are you a TMZ shareholder - click here for an important update.

Can you feel it?

The small end of the market is... feeling good again?

It’s being led by gold and silver price rises that are (finally) driving serious interest into a few smaller gold and silver stocks.

And people are remembering how it feels when small stocks deliver price rises on high volumes.

Second hand sprinkles of positive sentiment are even blessing a few NON-precious metals small cap stocks too.

Now it’s still only a handful of stocks, but it’s noticeable.

Will gold and silver be the driving force behind the next small cap bull market?

Like lithium was back in 2020-2021?

It’s possible, our view is below.

But first we need to do a quick review on how the previous lithium driven small cap bull market happened:

It’s been a long wait since the heady days of that bull market in 2020 and 2021.

Lithium, and the concept of a “global switch to Electric Vehicles”, led the rush into lithium stocks.

Near zero interest rates and government fiscal stimulus during COVID (aka lots of easy money sloshing around the system) got everyone into a punting mood and the party got going.

The excitement spread from lithium to battery metals in general (cobalt, copper, manganese graphite, etc).

Lots of people made money on battery metals stocks and cycled it right back into other small cap stocks.

Everything was going up.

It was starting to get a bit TOO hot towards the end of 2021...

Easy to see in hindsight now of course, not so much at the time.

The Gartner hype cycle is a useful visualisation for investors to try and identify where a particular new idea/technology like electric vehicles may be in the “hype cycle”:

Now we just wait for electric vehicles (dragging along lithium and battery metals stocks with it) to emerge from the “trough of disillusionment” in the cycle.

The good thing about the 2020-2021 battery metals bull run was that many emerging battery metals companies got funded, enough to progress their projects.

Some of these companies with real projects will emerge in the upcoming “slope of enlightenment phase” in the cycle.

From a broader capital markets and supply demand perspective, the battery metals bull run achieved its goal - early stage companies got funded to eventually bring new battery metals supply into the market.

Probably NOT such a success from the point of view of some speculators and investors who jumped in late and took a haircut after the music stopped.

Anyhow, that was the last great small cap market bull run...

So what's next?

Last time, we saw a huge run into a thematic (battery metals) driven by a concept that was easily understood by most people around the world:

“If everyone switches to electric vehicles, we will need a lot more battery metals. Battery metals miners will make money supplying those metals.”

Plausible, it certainly made sense, plus initial EV sales had already started happening...

So punters, retail investors, high net worth investors, fund managers, governments and automakers pushed money into small cap battery metals stocks.

Can gold and silver deliver the next big global bull market for small stocks?

It might be too early to call, but something’s definitely been up this year with gold and silver prices.

(another week gone by and new highs hit yet again - sorry we are sounding like a broken record each week)

Gold and silver are very well known metals as a store of wealth, and have been for thousands of years.

Historically, investors start to add gold and silver as part of their portfolio when they are concerned about inflation, war, high government debt, a financial crisis or global instability.

(sounds a bit like reading the mainstream news these days)

Usually high inflation (erosion in the purchasing power of fiat currency) is enough to get many people thinking about moving some of their portfolio into gold and silver.

How it starts: “maybe I should hold part of my portfolio in precious metals... you know, just in case”.

So, much like the simple story of “the energy transition will drive battery metal demand, which pushes capital into battery metal miners...”

If investors around the world become concerned enough to move just some of their wealth into precious metals, it will drive precious metals demand up and push capital into precious metals miners.

This is not a new thing - gold and silver have had many price runs over the last few thousand years.

So it’s a bit different to the Gartner hype cycle curve for new technologies.

Gold and silver price runs happen every so often in history, it’s just a relatively long time between cycles of a proper precious metals run.

The signals for a precious metals run are:

• Rising, unsustainable government debt
• Governments printing too much money
• Expensive wars
• Inflation rising, eroding the value of currency
• Geopolitical tensions drive investors towards safe haven investments
• Central bank purchasing, particularly from emerging markets

Throughout history, these factors have driven up the price of precious metals - and it looks like it might be happening again.

US government debt is currently the highest it’s ever been, money is being printed to fund wars, inflation is rising and there are simmering conflicts in the Middle East and Europe.

People are reminded of this every day by the news and when they go to the store to buy groceries.

Many in Australia can feel the value of their cash eroding when a $3 coffee now costs $5 (and even $10 if you visit London). Inflation is even worse in other countries like Turkey and Argentina.

This investment thematic in precious metals could spark interest on a near global scale - just like we saw with battery metals from EV’s.

And like battery metals, investment into new precious metals mines has been minimal over the preceding 10 years.

We first started really thinking about precious metals back in 2020.

This was around the time that we first Invested in Thompson Resources (ASX:TMZ) and the infamous “almost silver squeeze” that started (but didn’t get momentum) in February 2021.

(NOTE: Are you a TMZ shareholder? - click here an important update)

The “almost silver squeeze” in Feb 2021 was what encouraged us to purchase our first ever physical silver (shown below) (in a bit of a rush the morning that the “almost silver squeeze” started).

Like anyone who rushes into a new investment, the REAL due diligence started AFTER the purchase (not a good strategy, but often is what happens in practice).

We started by reading a lot about physical silver and gold and what drives supply and demand - this was over 3 years ago now.

During the early stages of the lithium boom, we (and most people) started googling “what metals are in an electric vehicle battery” and “what is the most used battery composition”.

Over the last few years we have learned about gold and silver’s history as a protector of wealth in times of uncertainty and the geopolitics and fiscal factors that can lead to demand spikes for gold and silver.

Again, it all seems reasonable and plausible, and history shows that these precious metals demand spikes have regularly happened over the last few thousand years under certain global conditions.

(just not in our lifetimes...yet).

So in 2021 we decided to regularly add to our physical precious metals stack every couple of months, just in case “it happens again”.

Here are this week’s new additions to the stack:

(Shout out to the Bullion Now shop in Melbourne - not financial advice and no commercial relationship, this is just where we buy our physical metals)

In 2022 we (incorrectly) called the start of a gold price run, it now looks like the thesis was right, but we were a couple of years too early.

We thought the excess money printing by not only the US Government, but lots of governments around the world post COVID-19, would spur a run in the gold price.

(We had far better timing with our call on a silver price run at the start of 2024.)

Our interest in precious metals grew from that first purchase of silver in the bullion shop on “almost silver squeeze” day in February 2021 and since then we have tried to understand the key drivers for precious metals price runs (and started averaging into physical gold and silver as a portion of our Portfolio).

Because inflation affects essentially every working age adult, the market size for the “safety of gold and silver” (as opposed to currency) is, well... every working age adult.

Last weekend we gave a quick overview about what drives gold and silver prices and some examples from history where governments have taken on too much debt (usually to fund expensive wars), currencies are debased and there is a run to the safety of gold and silver.

Links to our commentary here:

• Why is there such growing interest in gold and silver?
• How are precious metals used as a hedge against inflation and currency “debasement”?
• What is the Silver & Gold “Mega Bubble”?

This was just a short primer that covered some key points and a few examples in our own words, but it was just a summary.

To go deeper on the topic, here are some of the books we’ve found most useful over the last couple of years, a short note on the books' key themes and relevance to gold and silver demand.

NOTE: When researching and investing in gold (and especially silver) on the internet, you will probably come across a few “tin foil hat” types and conspiracy theorists with some pretty wild content (think like anti-government, imminent global fiscal collapse, doomsday prepper types). While they can be fun to read occasionally, we try to stick more to the middle ground, lessons from economic history approach to our research.

6 Books we found helpful to understand the drivers behind gold and silver markets

(we do not have a commercial relationship with any of these authors or the book selling platform, we just read and found these books useful.)

1. Principles for Dealing with The Changing World Order by Ray Dalio

(Go to book)

Ray Dalio is an American investor and hedge fund manager, who has served as co-chief investment officer of the world's largest hedge fund, Bridgewater Associates, which he founded.

• Key Themes:
  
  • Economic cycles are driven by the rise and fall of empires, which follow predictable patterns based on debt, productivity, and global influence.
  • Excessive debt and currency devaluation historically precede periods of geopolitical upheaval and economic realignment.
  • The transition from one world order to another is marked by shifts in the balance of global power, often accompanied by social, political, and economic instability.
• Implications for Gold and Silver: Dalio's cyclical framework suggests that as global financial instability increases, gold and silver are likely to become critical safe-haven assets, as they historically retain value when fiat currencies decline.

TLDR: here is a free 40 minute video Ray Dalio made that details the key points of the book.

Ray has clearly made enough money that he doesn’t need the book sales revenue.

2. The Black Swan by Nassim Nicholas Taleb

(go to book)

Nassim Taleb is an essayist, mathematical statistician, former option trader, risk analyst, and aphorist. His work concerns problems of randomness, probability, complexity, and uncertainty.

Also, he hates everything.

• Key Themes:
  
  • Unexpected, high-impact events—termed “Black Swans”—are inherently unpredictable yet shape the course of history and financial markets.
  • Traditional models and financial systems are ill-equipped to account for rare and extreme events, leading to systemic vulnerabilities.
  • Diversification and antifragility, or the ability to benefit from volatility, are essential for mitigating risks in a world prone to sudden disruptions.
• Implications for Gold and Silver: The unpredictable nature of financial crises underscores the necessity of holding gold and silver as a hedge against unforeseen disruptions in global markets.

TLDR: here is a video summary of the key points of the book

Taleb’s other books are a great read too - if you think you are a genius investor, or look up to any famous investors, read his other book “Fooled by Randomness” to ruin your day.

In fact, we recommend reading his whole Incerto series of books.

3. War and Gold by Kwasi Kwarteng

(go to book)

Kwasi Kwarteng is a British politician who served as the Chancellor of the Exchequer under Liz Truss and the Secretary of State for Business, Energy and Industrial Strategy from 2021 to 2022 under Boris Johnson.

This book is very useful to understand the ebbs and flows into precious metals during history, and how it might apply in the near future.

• Key Themes:
  
  • The history of gold is intertwined with warfare, economic stability, and the rise and fall of empires.
  • Gold has historically served as a reliable store of value during periods of geopolitical instability and monetary crises.
  • The movement away from the gold standard in the 20th century has led to increased reliance on fiat currencies, contributing to periodic financial crises.
• Implications for Gold and Silver: Kwarteng’s historical analysis reinforces the notion that gold remains a refuge in times of war and economic uncertainty, suggesting its continued relevance as a protective asset.

TLDR: here is an interview with Kwasi talking about what’s in the book.

4. The Great Silver Bull by Peter Krauth

(go to book)

Peter Krauth has researched, written about, and invested in silver and resources for more than 20 years, using his extensive industry network to uncover outstanding opportunities. As a precious metals expert, he is a frequent guest contributor to webinars and financial websites such as Kitco and Forbes.

This book is silver focused and a fun read (and confirmation bias) for silver bulls like us.

• Key Themes:
  
  • Silver is poised for a significant appreciation due to its dual role as both an industrial commodity and a monetary metal.
  • Economic uncertainty, rising inflation, and increasing demand for silver in technological applications create a favourable environment for its price.
  • Silver's underperformance relative to gold presents a unique investment opportunity, particularly in a climate of currency devaluation and inflationary pressure.
• Implications for Gold and Silver: Krauth’s analysis underscores the potential for silver to outperform gold, especially in scenarios where industrial demand and inflationary concerns converge.

TLDR: This is a pretty niche book so there isn’t a good summary floating around on the internet - but here is an interview with the author talking about the book.

Speaking of silver bulls, we’ve been following a new blog “Catt Calls” - check out their article on $100 silver here.

5. The Bitcoin Standard by Saifedean Ammous

(go to book)

Saifedean is a pioneer in the economies of cryptocurrencies and their potential to change the world for the better. He’s the author of The Bitcoin Standard (2018) (the one we read), introducing the economies of bitcoin and later expanding on the framework in The Fiat Standard (2021). He’s also authored a textbook, Principles of Economics, currently in progress.

We aren’t really into crypto or bitcoin, but the first part of this book provides a really good primer on the concept of currency and money, and the history of how money came into existence.

• Key Themes:
  
  • Bitcoin represents a new form of “digital gold,” characterised by scarcity, decentralised governance, and a limited supply.
  • The evolution of money from commodities like gold to fiat and now to digital currencies reflects changing perceptions of value and trust in financial systems.
  • Bitcoin’s fixed supply offers an antidote to inflationary monetary policies, drawing parallels to gold’s historic role as a store of value.
• Implications for Gold and Silver: Bitcoin’s rise suggests a complementary role for gold and silver, with digital currencies emerging as competitors or allies in the quest to preserve wealth outside of traditional financial systems.

TLDR: The first 10 minutes of this video covers the topics we valued most in this book, being how money works and the history of the gold standard and when it converted to non gold fiat backed currency (after 10 minutes it goes technical into bitcoin, which sounds cool but again bitcoin isn’t really our jam).

6. The End of the World is Just Beginning by Peter Zeihan

(go to book)

Peter Zeihan writes books and produces content about geopolitics and globalism He is the author of The Absent Superpower (2017), Disunited Nations (2020), and The End of the World Is Just the Beginning (2022).

If you have a negative outlook on the future of the world, you’ll love this book. We are generally pretty optimistic about the world, but it's good to be aware of and consider possible worst case scenarios.

• Key Themes:
  
  • Globalisation is in decline, with supply chain disruptions, demographic shifts, and geopolitical fragmentation contributing to a new era of localised economies.
  • Energy independence and food security will become paramount as countries turn inward, redefining global trade patterns.
  • Economic and political instability will increase as countries struggle to adapt to this new world, leading to the resurgence of nationalism and protectionism.
• Implications for Gold and Silver: Zeihan’s analysis points to a future of increased geopolitical risk and localised economic volatility, conditions under which gold and silver traditionally thrive as stores of wealth and hedges against uncertainty.

TLDR: 2 minute book summary video here

Disclaimer, this one is really doom and gloom when it comes to the collapse of modern society.

Takeaways

The key takeaway is that gold and silver act as a strong counterweight to government backed currencies.

It’s happened many times in the past. And it will likely happen again in the future.

In certain global conditions, when people's faith in the government backed currency reduces or erodes, then the price of gold and silver tends to go up.

Throughout history, precious metals have been preferred to currencies in times of global instability, inflation and excessive money printing (in particular to fund global conflicts).

And the price of gold and silver today is a reflection of the reality that we are heading towards this direction.

What happened at the BRICS summit?

Moving on from books we have read, it's back to the news of the week:

All eyes have been on the BRICS summit this week for the gold and silver bulls.

BRICS, is an alliance of countries aimed at challenging the economic and political dominance of the West including Brazil, Russia, India, China, South Africa and UAE.

Over the last 20 years BRICS countries have been steadily increasing its global reserves of gold, with heavy buying the past two years from central banks in Russia, China and India:

(Source)

BRICS see de-dollarization (moving away from the US Dollar as the global reserve currency) as a priority, choosing to settle oil contracts in alternatives like gold and/or non USD currencies.

So far there is one piece of news that has come out of the first week of the summit and that is that BRICS may look to create its own international precious metals exchange:

(Sources)

Any new currency challenge to the USD as the global reserve currency should see further interest in gold, and we think that the all-time highs hit again this week have been spurred by speculation around this BRICS conference.

Quick update on our gold and silver stocks

This week we added Kaiser Reef (ASX:KAU) to our Portfolio.

KAU is a high-grade gold producer and explorer located in Victoria, Australia.

KAU is producing gold right now and is about to mine and explore new depths of its A1 mine that have never been mined before.

We look forward to tracking KAU over the next several years, particularly if gold has the sustained price success that we anticipate.

Read our full Initiation Note here: Our New Investment is Kaiser Reef (ASX: KAU).

We are also bullish on silver.

Our 2024 Small Cap Pick of the Year Sun Silver (ASX:SS1) has the largest primary silver JORC resource on the ASX, 423M ounces of silver equivalent resource in Nevada USA.

Last week we flagged that a run in the silver price could see a big run in the share price for SS1.

Just as we predicted, SS1 hit an all time high last week of $1.16, up as high as 19% off the back of the silver price breaking through the US$34 per ounce barrier.

Just how big could SS1 get if silver were to hit US$40?

Who knows... but hopefully silver will get there.

And of course, past performance is not an indication of future performance.

Our other silver stock Mithril Silver and Gold (ASX:MTH) could also benefit from big moves in the silver price.

MTH has a JORC of 11 million oz silver and 373,000 oz gold in one of the largest silver producing countries in the world, Mexico.

Its goal is to double this resource by next year.

This week, MTH cornerstone investor, the $1BN Jupiter gold and silver fund exercised $3M of options.

Jupiter lodged a change in substantial holding notice on Wednesday announcing they have increased their position in MTH from ~10% to ~17%..

MTH is currently in a trading halt pending a capital raise, and is coming out of halt on Monday.

MTH is taking advantage of the rising price of precious metals to secure more funding for not only this upcoming 4,500m drill program but more drill programs to come.

Another company in our Portfolio that is looking to expand its precious metals JORC resource is

Titan Minerals (ASX:TTM).

TTM has a 3.1 million oz gold and 22 million oz silver JORC resource at its Dynasty project in Ecuador.

...and more drilling is scheduled to start any day now to grow it to potentially 5M ounces of gold.

We covered what we wanted to see from TTM’s upcoming drilling program this week: TTM: 3 million ounces of gold now - resource upgrade mid next year.

In a bull market , drilling, drilling, drilling is the name of the game when it comes to gold exploration companies.

Last month our microcap gold explorer BPM Minerals (ASX:BPM) announced that it had hit high-grade gold at its greenfields exploration project directly next door to $2.2BN Capricorn Metals.

This week BPM announced the results of the final assays from that drilling campaign.

Our quick takeaway was that the results were “good”, but the market was expecting “great”.

Later this year BPM will test the discovery at depth and hopefully find the same style mineralisation as its bigger neighbour Capricorn Metals.

And now that market expectations have been reset down a bit, we hope a big result can get BPM moving again.

Read our full take on the results here: BPM announces new gold intercepts on BOTH sides of discovery hole - time to go deeper.

Finally, if you are a Thompson Resources (ASX:TMZ) shareholder - click here for an important update.

Next week is the quarterly season.

Every 3 months companies need to release a quarterly activities report, where they share management commentary and their financial performance for the quarter.

Quarterlies are not hugely exciting for most of our pre revenue investments (aside from checking how much cash they have left and whether they will need to raise money soon).

BUT for our Investments that are trying to grow revenue, the quarterlies are always an interesting read.

So with October 31st being the deadline to lodge quarterlies for the Jul-Aug-Sept period, We are expecting to see quarterlies AL3, ONE, KAU and WHK next week.

The quarterly is our chance to work out if the announced progress is translating into sales and revenue.

What we wrote about this week 🧬 🦉 🏹

NEW INVESTMENT - Kaiser Reef (ASX:KAU)

This week, we announced our latest Portfolio addition.

And it’s in gold...

This one is a bit different to the majority of the usual early stage gold stocks we have looked at on the ASX over the last year.

Which is why we like it.

Our new Portfolio addition is Kaiser Reef (ASX:KAU).

KAU is a gold producer (& explorer) in Victoria, Australia.

Read: ⛏️ Our New Investment is Kaiser Reef (ASX: KAU)

Mandrake Resources (ASX:MAN)

A large US lithium resource has just been defined.

...just as sentiment for lithium starts to improve.

Mandrake Resources (ASX:MAN) has just released its maiden JORC mineral resource estimate at its lithium project in Utah, USA.

A 3.3Mt Lithium Carbonate Equivalent (LCE) at an average of 86 mg/L lithium.

The resource is more than 2x bigger than MAN’s neighbour $105M Anson Resources.

Read: ⛏️ MAN announces 3.3Mt maiden lithium resource - Lithium brine projects attracting market attention.

BPM Minerals (ASX:BPM)

Our $7.1M capped (with ~$3.85M pro forma cash) gold exploration Investment BPM Minerals (ASX:BPM) announced a new gold discovery only a few weeks ago.

The market reacted strongly - BPM’s share price was up ~215% at its peak post-discovery, hitting a high of 14.5c.

Until Tuesday, the BPM share price had been holding firm above 11c per share - as the market waited on assay results from a few remaining holes from the current campaign that had a chance to be “incredible”...

Those results came out on Tuesday and gold was intercepted in the two new air core drill holes done on BOTH sides of the discovery hole.

Read: ⛏️ BPM announces new gold intercepts on BOTH sides of discovery hole - time to go deeper.

Condor Energy (ASX:CND)

Our 2023 Energy Pick Of The Year Condor Energy (ASX:CND) holds a giant 4,858km^2 of oil & gas acreage offshore in Peru.

We Invested back in 2023 because we expected the CND share price to progressively rise over the next couple of years in the lead up to a “swing for the fence” drill campaign.

(in early stage oil & gas, the share price often rises as a company completes pre-drill work)

Since we first Invested, CND has identified three primary target areas it could drill.

These target areas are from CND’s recent work to reprocess ~1,000km^2 of 3D seismic data.

Which successfully mapped out ~20 different leads.

Read: ⛏️ CND: Serge Hayon joins as MD, lots of targets and plenty of blue sky.

Titan Minerals (ASX:TTM)

So far the gold producers have started running. expect that next will be the ones with existing gold JORC resources.

We think our Investment Titan Minerals (ASX:TTM) will be one of those.

TTM owns 100% of a project in Ecuador with a JORC resource of 3.1M ounces of gold and 22M ounces of silver.

TTM is about to start a 10,000m drilling campaign for resource growth, and is aiming to release a resource upgrade by mid 2025.

Also, the drill rig will be spinning soon on TTM’s copper exploration that has been farmed-in to by Gina Reinheart’s Hancock Prospecting.

Read: ⛏️ TTM: 3 million ounces of gold now

Quick Takes 🗣️

SGQ signs non-binding MoU with SKI HongKong Limited

MTH sampling delivers up to 736 g/t silver, 8.99 g/t gold

GUE completes uranium drill program

Macro News - What we are reading & listening to 📰

Energy:

Sam Altman’s Energy ‘New Deal’ Is Good for OpenAI and AI. What About Americans? (Bloomberg)

• Sam Altman, CEO of OpenAI, is pushing for large-scale investments in energy infrastructure to support AI, proposing several 5-gigawatt power plants to meet the needs of AI companies.
• While OpenAI eyes government-backed support for these efforts, critics stress that local communities should benefit from the AI boom, suggesting that public sectors like education should receive access to computing power in return for incentives.

Iron Ore:

BHP ASX: China stimulus to lift iron ore price to $US130: Deutsche Bank (AFR)

• Deutsche Bank forecasts iron ore prices could reach $130 per tonne in 2025, driven by China’s 6% GDP stimulus.
• Goldman Sachs warns of oversupply from major producers, suggesting this could limit price increases despite short-term rallies.

Lithium:

Lithium shares: Have Australian fund managers got their call wrong for the battery material? (AFR)

• Rio Tinto’s $10B Arcadium Lithium buy has reignited interest but raises concerns about oversupply, affecting hard rock producers.
• New lithium extraction tech could be a game changer, though opinions on its impact are mixed.

Lithium: As EV Batteries Prompt Demand Surge, DLE Technology Could Boost Output (Bloomberg)

• Lithium demand is projected to surge, especially for EV batteries, but supply may face future shortages despite current price drops.
• New extraction technologies like direct lithium extraction (DLE) offer faster and more sustainable methods, though they face technical challenges before widespread implementation.

Uranium:

Nuclear energy stocks hit record highs on surging demand from AI (FT)

• Nuclear energy stocks surged after Amazon and Google secured power deals for small modular reactors, highlighting renewed investor confidence.
• Critics warn of potential delays and regulatory challenges in deploying these untested technologies.

What we are watching:

The Economic Squirrel explains the Silver Squeeze (bit of fun)

Gold to $9,000USD!! The past is over what does it look like next? Rick Rule explains

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Have a great weekend,

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