There is much confusion on the path for DEG here. Perhaps it is because people are looking at the short term and not seeing the mid term and long term for the positives and the negatives that are coming. Let's have a look at the positives first before I steel you to endure some negatives in order to benefit from the positives.
There is no doubt in my mind that DEG has been pumped and dumped. Most of us here have benefited from the pump as we were not the targets of the dump. Listed and unlisted investment trusts focusing on the gold sector - specifically the GDXJ - and any commodities funds that include the GDXJ as an element of their portfolio were the targets of the pump and dump. Those of us who bought in at the 30 cent or less price point have actually benefited from it. But De Grey does have a history of being pumped and dumped. It happened with the Withnell deposit being discovered back in late 2003, not long after the "Brown Bottom" in gold and the price of gold began to climb to a point that the market deemed the rise in the price of gold to be sustainable so great euphoria was possible. Alas, the Withnell deposit wasn't as good as it looked and development did not proceed to a full blown mine.
The size of the ore body at Hemi is a different story. It is very large, it appears, at this stage, to be very consistent and it is shallow enough to be a sustainable open cut mine. On top of that, the other ore bodies that have been identified previously at Withnell etc can be mined and the ore trucked to the processing plant that will process the ore at Hemi. The development of a discovery into a mine goes through stages. There is the euphoric stage of the discovery, followed by at best a consolidation in the share price and, at worst, a significant pullback in the share price. Someone else who is wiser than me came up with this chart to illustrate the path from discovery to mine in terms of the share price. We are now in the "orphan" phase and we await the development of the mine.
Those who are traders got out near the peak of the first phase and they are looking for opportunities elsewhere. Some people can sniff out a play anywhere and good on them. They came into DEG and left with a tidy profit. It was nice to have made their acquaintance. They may well come back for phase 2 of the Lassonde Curve but in all probability many if not most of them will be fully invested elsewhere when the second rally happens. This is going to be a long term money making operation that will be coming on line in the early stages of a great rotation out of many sectors in the stock market and a great rotation into commodities. Because the shares are so tightly held De Grey has a strong chance of actually becoming a tier one producer. In part, the rotation into commodities will be driven by shortages. The coming solar minimum is going to cause lower crop yields because of shorter growing seasons affecting marginal cropping areas more than premium cropping areas. But as we all know, price is set at the margin and if one place will pay more for something then that place will get more of it. The other side of the rise in commodity prices will be an aversion to debt.
Those of you who hate the short sellers will enjoy the spectacle of seeing the short sellers going broke. These people have made the most massive bet in recent times against the US 30 year Treasury Bond. These people have borrowed these bonds and sold them short. They are short over 2 million contracts, each valued at a nominal $100,000.
They expect that there will be a revulsion to the US dollar and the bonds will crash. Nothing short of a civil war in the US could cause this to happen. You will have to weight this in accordingly but most of us will think that this prospect is "remote". If there is no civil war in the US then these people are about to get their heads handed to them on a plate. Who buys the US 30 year Treasury Bond? It is foreign governments trying to get some duration into their Forex reserves, the commercial banks who trade them as contracts and the US Fed who is acquiring US$5 billion of these bonds each and every month from the commercial banks. The supply of available bonds is diminishing and these people do not see it. The shorts lost some money in 2018 and now they have doubled down to recoup their losses. Either the shorts know something that we don't of they are going to go broke. Contracts have an expiry date and at some point the shorts have to buy back the shares and return them at the price on the day. What the above chart does not show is the duration of all of those contracts. The maturity wall for these contracts is proprietary knowledge and worth a lot of money because when the maturity wall is steepest is when this blows up.
What happens if the shorts go broke? The US Dollar strengthens chronically causing financial chaos globally. Initially all assets will go down in terms of the US Dollar, including gold. The Australian dollar will also go down against the US Dollar so any decline in gold will not be equivalent. The price of gold will always be higher in terms of the A$ than the US$. This will put a cushion under the share price of gold miners and explorers with a strong exposure to gold (or anything else that is traded in US Dollars - in other words hard commodities). The other businesses listed on the ASX that derive their income in Australian Dollars will not fare so well. Because margin debt is also at extreme levels any move down in the markets will be amplified by margins being called and assets being sold down. As gold is the most liquid asset there is it will find a ready market in a panic and will be sold first in the hope that realised cash will be sufficient to pay out the margin. Some will have enough and others will not. The selling will continue until the supply of gold in weak hands is exhausted. From that point on the price of gold goes up in terms of the US Dollar while the US Fed tries to stop the US Dollar going up in terms of all other currencies.
With luck, DEG will be able to finish their drilling program while the economic chaos works it's way through the process of price discovery as debts go bad, mostly because of the flow on effects of the Covid 19 on global business (which has been massive). The key figure will be just how many ounces of gold will be in the maiden resource estimate to be released in the "mid year" by the company. Have you noticed that recent reports by DEG have been reporting the ore values in the terms of grams of gold per cubic meter? Given that there is likely to be more than 5 tonnes of ore per cubic meter (rock - which is less dense than sulphide mineralised ore - averages 5 grams to the cubic centimeter or 5 tonnes to the cubic meter) I am expecting the maiden resource estimate to be in excess of 10 million ounces - and that the estimate will still be very conservative. This is because the ore body seems to contain hundreds of thousands cubic meters of varying grades of grams per cubic meter. In other words, this is a world class discovery. That said, the price could well whipsaw about in any chaotic markets disrupted by a financial crisis and the gaps could be closed. The gap between 90 cents to 93 cents a share is already in range but the breakaway gap in the 50 cents to 54 cents a share range could also be closed before the share price of De Grey rallies back to all time highs. Am I worried? Not a bit. This is just a part of the ducks all lining up in a row.
So, what happens if there is a civil war in the US of A? It will all depend upon whether it is over quickly or if it is protracted and, Heaven forbid, results in the nation splitting up. As the US Dollar is the global reserve currency it will throw international markets into confusion and chaos. Nobody will be sure what the US Dollar will be worth. If the civil war is short and one side emerges victorious quickly the US Dollar will resume it's place as the global reserve currency as there will no longer be any doubt about the governance of the nation. If a civil war is protracted then the price of gold will soar. The shorts will get paid out in US Dollars that are worth less than they had hoped and the shorts will be devastated.
As always, there is much more to say about these things but the future is a rabbit hole and only so much can be anticipated until it is much closer and the probabilities are collapsing. I will post more from the macro perspective when there is more to see.
May you all have a happy and prosperous new year.
DEG Price at posting:
99.5¢ Sentiment: Hold Disclosure: Held
(20min delay)