Gold Prices Bounce off Support to Reverse Downward Trend; Is The Market Turning?

By
TradersDNA

Gold prices have pulled back from their highs seen during the peak of the pandemic-driven market sell-off, but are now attempting to snap the sell-off and downtrend. With risks escalating, gold, mining companies, and gold ETFs are seeing increased attention from investors.

The drop in gold prices has rebounded off the technical support and could bring a broad recovery for spot prices and gold companies. Small-cap stocks, often seen as riskier investments, have also sold off alongside gold but may see a simultaneous resurgence. Most small-cap gold stocks have sold off quite a bit, however, some resilient and high-quality mining companies have maintained and added to their gains.

Collective Mining (TSXV:CNL), a Canadian junior mining company, has seen a nearly 7% increase in its share price in 2022, while other companies have seen large portions of their market cap erased during the sell-off. The company can credit multiple achievements for the positive performance, including a recent announcement that it had expanded the Olympus discovery holes at its Guayabales project in Colombia. The expansion includes high-grade vein systems and assays including 221 g/t gold, and 812 g/t silver.

Those results expanded on the recently announced discovery holes at Olympus of 302 metres at 1.11 g/t gold equivalent and 216.7 metres at 1.08 g/t gold equivalent. Collective has three diamond drill rigs turning at the Guayabales property.

Long-term rallies typically begin after a broad sell-off like the market is experiencing right now. Indexes border on bear markets, and risky assets see fewer capital inflows for a short period. However, this rarely lasts long.

The value proposition for gold and related companies is evident, with the potential for more upside in light of market conditions.

Companies exploring new high-grade deposits are in a great position right now thanks to another set of factors. Gold deposits worldwide are getting harder to find, and those that are discovered tend to be lower grade. The low-grade ore requires more processing to produce an ounce of gold, which raises costs for exploration. As a result, large mining companies are attempting to lower their exploration costs and timelines through M&A.

Instead of spending years and millions of dollars exploring for a new deposit, miners can buy out companies that have already made a discovery. This is an efficient way to bring new ounces into production and drive growth.

Explorers need to complete several processes to create the value that large mining companies are looking for. The first is identifying a high-grade deposit. The second is proving up the resource with enough drilling to make it economic. The last step is building the infrastructure necessary to get the mine into production, which can take years.

Many companies do not bother with the project development once the discovery and mineral resource have been made. They prefer to sell the project at that point and move on to the next one. This is where the market comes in

With large companies looking to buy projects, explorers need to make sure they are well-funded so they can take advantage of the opportunity when it comes. Being fully financed, explorers have the advantage of being able to hold out for a higher price or a better offer in what can often be a multi-billion dollar deal.

In the current market conditions, Collective Mining looks like an attractive option for investors. The company has made significant discoveries, is trading at a relatively low valuation to its potential value, and has maintained its share price performance during one of the most difficult moments for small-cap stocks in recent history. Short-term gold prices have not established a new trend yet, but if the rebound off the technical support holds, the uptrend could pull everything in the industry along with it.

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