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Exploration companies to outperform in 2021 as inflation supercharges gold and silver - Crescat Capital

Kitco News

Kitco News has launched its 2021 Outlook, which offers the most comprehensive coverage of precious metals markets in the new year. Trillions of dollars were pumped into financial markets in 2020 and that won't come without consequences. Economists expect that investors will be Bracing For Inflation in 2021.

(Kitco News) - 2020 has been an unprecedented year for the precious metals market. In August, gold prices pushed to a record high above $2,000 an ounce.

Although the precious metal sector is attracting new investor attention, the mining sector continues to underperform. The mining sector's value is well below what it was during the last bull market in gold and silver.

However, some market analysts think this trend this will change and investors won't be able to ignore the value being generated in 2021.

With that in mind, we decided to reach out to some mining experts and ask them how they would invest $10,000 in the mining sector and what themes they see playing out in 2021.

Part I: Looking at gold miners to hedge against rampant inflation in 2021 - David Erfle

Expert: Tavi Costa

Claim to Fame: partner and portfolio manager at Crescat Capital

How would you invest $10,000 in the mining sector?

If I had an extra $10,000 to invest, I would diversify into 5-7 different precious metals junior exploration companies with well geographically positioned properties that have strong likelihood of finding high grade and economically viable gold and silver deposits and are also led by highly knowledgeable and geologically capable people.

 What three companies do you like the most in 2021 and why?

  • Eskay Mining: An exceptional tier 1 jurisdiction opportunity in British Colombia, in the heart of the Golden Triangle. This junior explorer has a large 52,600 hectare land package which is located south of the legendary Eskay Creek mine which delivered the highest grade gold ever mined in North America. We believe we have very strong potential of finding multiple high grade precious metal VMS deposits on this property and perhaps becoming Eskay Creek #2.

  • Eloro Resources: A massive silver-polymetallic system in the very unexplored south-central part of Bolivia. Their Iska Iska project, not too far from the famous San Cristobal mine, is a precious metal-rich epithermal system with a base metal-rich disseminated porphyry system. We believe the breccia pipes they are drilling could host between 100s of millions and up to 1 billion tons at 3-5 ounces of silver equivalent per ton.

  • New Found Gold: Another junior exploration company with a 151,030 hectares property in Newfoundland, Canada. Their Queensway project looks to be a high-grade to bonanza-grade Epizonal gold system, Fosterville style, with the potential of becoming one of the most exciting gold discoveries of the last several decades. The company has already hit some exceptional intercepts and is on its way to completing a 100,000 meter drill program.

What investments would you avoid next year?

US utilities. I believe we are entering a period of higher inflationary forces driven mostly by a supply shock in commodities. As fixed income proxies, these stocks should suffer from such environment. To put it simply, utilities are the epitome of defensive traps. These companies are true capital destroyers, bleeding free cash flow for decades, historically levered, and at near record valuations. 

What do you think are going to be the big themes next year: M&A activity, earnings, exploration, record gold prices?

Given our strong views of how early we are in the precious metals cycle, we believe it’s time to focus on the exploration segment of this industry. With monetary dilution at an extreme, governments running massive fiscal deficits, unsustainable debt imbalances globally, and a suppressed interest rate environment, we think this creates a supercharged environment for precious metals. Meanwhile, there has been zero gold discoveries above two million ounces in the last three years because the whole industry underinvested in exploration for the last eight years. As investors feel the urge to seek capital protection, this is soon to be one of the largest supply/demand mismatches we have ever seen in the gold market.

What are your final comments on what you think 2021 is going to look like for investors.

Next year will likely mark the comeback of higher inflationary forces. While central banks are hamstrung to continue expanding the global monetary base to drive interest rates lower, we believe commodities are on the verge of a major supply shock. Aside from technological impacts, money velocity and demographics, depressed commodity prices are one of the key reasons why consumer prices haven’t gone higher. This could severely change the macro landscape by creating an inflationary environment while many risky financial assets like stocks and bonds are at record valuations. Note that the Bloomberg commodities index and the US 30-year inflation expectation are now re-testing a 12-year resistance line. If we see a breakout, this could be very significant for financial markets. In our view, given the level of monetary and fiscal imprudence worldwide, the case for owning hard assets and selling short historically overvalued assets has never been greater. Buying precious metals and selling high flying stocks, even short selling if you have the risk tolerance, is one way to be prudently positioned for the next year in our view.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.