Gold and Silver: Blue Sky Breakout Ahead – Miners Have the Leverage

Gold has had a stellar start to 2023 outperforming nearly all major commodities and flirting with the psychologically important $2,000/oz mark – we believe that we’re looking at a clear blue sky breakout moment for gold and silver.

Despite the U.S. Federal Reserve raising interest rates from near 0% to 4.75% in the last year – gold been remained incredibly resilient. Gold has been the best performing physical commodity during this rate tightening period.

The recent banking crisis has lead to the fed increasing their balance sheet by nearly $400 billion over a 2 week period, undoing 60% of the quantitative tightening done in the last year in just two weeks – a bullish backdrop for gold.

Central Banks – The Marginal Gold Buyer

Data form the World Gold Council shows that central banks were the big buyers of gold last year.

They purchased 1,135.7 tonnes in 2022, the highest level in more than 50 years, with a net buying of 862.2 tonnes in 2H22.

This significant level of demand hasn’t got the attention it deserves; much of this buying is coming from central banks outside of the G7 world. An obvious trigger is the unprecedented decision by America on March 2022 to freeze 47% or $300 billion of Russian foreign exchange reserves.

The Silver Price has Lagged Gold

Since the 2007-2008 Great Financial Crisis (GFC) the silver price has materially lagged the gold price. Since the crisis the ever important gold-silver ratio has risen from 32X to 83X – we believe the ratio is significantly stretched and period of silver outperformance relative to gold is on the horizon.

We believe the best way to play the appreciation of gold and silver is through mining stocks. Gold and silver equities as represented by the Philly Gold & Silver Index are the cheapest they have ever been relative to gold bullion. Gold & silver equities have underperformed gold bullion by 80% since 1984, we’ve been in a consolidation phase since 2012 – setting up for a potential strong breakout.

Silver Stock in Focus: Dolly Varden Silver

In our view Dolly Varden (TSX.V:DV) is one of the best silver leveraged names in the sector. Since 2020 the stock is up 343%, outperforming the Global X Silver Miners ETF by 314%

Source: Bloomberg

The company is advancing one of the largest high-grade, undeveloped precious metals assets in BC’s Gold Triangle, the Kitsault Valley Project.

Dolly Varden Asset Map

Source: Dolly Varden Investor Deck

Dolly Varden properties hold a combined silver equivalent resource of 47 million ounces indicated and 90 million ounces inferred equal to 1.2 million gold equivalent ounces indicated and inferred.

Dolly Varden Estimated Total Resource as of YE 2022

Source: Dolly Varden Investor Deck

Dolly Varden trades for half its net asset value of C$1.89/sh and even larger discount to silver mining peers. We believe the best opportunities in a blue-sky gold-silver breakout scenario are companies with significant resources trading at deep discounts.

Silver Miner Comp Sheet as of February 27th

Source: Research Capital Corp Estimates

Dolly Varden drilled over 37km in 2022 and half of the core results are still to be reported. With another 30 km of drilling planned in 2023, we think the company is well positioned to expand its existing polymetallic resource base in the near term.

Dolly Varden Geochemistry

Source: Dolly Varden Investor Deck

Capital 10X gets down to the real money business, actionable financial insights for traders and investors. We analyze company earnings, interview management teams and help teach the fundamentals of financial analysis and options trading. Our mission is to hunt for genuine 10 baggers.


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