Big Picture View

Here is a summary of our big picture view of the markets. Note that our short-term views may differ from our big picture view.

In nominal dollar terms, the BULL market in US Treasury Bonds that began in the early 1980s will end by 2013. In real (gold) terms, bonds commenced a secular BEAR market in 2001 that will continue until 2014-2020. (Last update: 23 January 2012)

The stock market, as represented by the S&P500 Index, commenced a secular BEAR market during the first quarter of 2000, where "secular bear market" is defined as a long-term downward trend in valuations (P/E ratios, etc.) and gold-denominated prices. This secular trend will bottom sometime between 2014 and 2020. (Last update: 22 October 2007)

A secular BEAR market in the Dollar began during the final quarter of 2000 and ended in July of 2008. This secular bear market will be followed by a multi-year period of range trading. (Last update: 09 February 2009)

Gold commenced a secular bull market relative to all fiat currencies, the CRB Index, bonds and most stock market indices during 1999-2001. This secular trend will peak sometime between 2014 and 2020. (Last update: 22 October 2007)

Commodities, as represented by the Continuous Commodity Index (CCI), commenced a secular BULL market in 2001 in nominal dollar terms. The first major upward leg in this bull market ended during the first half of 2008, but a long-term peak won't occur until 2014-2020. In real (gold) terms, commodities commenced a secular BEAR market in 2001 that will continue until 2014-2020. (Last update: 09 February 2009)

Copyright Reminder

The commentaries that appear at TSI may not be distributed, in full or in part, without our written permission. In particular, please note that the posting of extracts from TSI commentaries at other web sites or providing links to TSI commentaries at other web sites (for example, at discussion boards) without our written permission is prohibited.

We reserve the right to immediately terminate the subscription of any TSI subscriber who distributes the TSI commentaries without our written permission.

Outlook Summary

Monetary Inflation Update

Late last week the ECB got around to reporting its money-supply data for April, enabling us to update our charts showing the growth rates of euro and G2 (US$ plus euro) True Money Supply (TMS).

The first of the following monthly charts shows that the year-over-year (YOY) rate of growth in euro TMS began to trend upward during the second half of 2011 and that the April-2013 figures extended the advance. The euro-zone's monetary inflation rate is now about 8.5%, which is the highest it has been since July of 2010.

The second chart shows that the YOY rate of growth in G2 TMS has oscillated within a narrow horizontal range at a moderately high level over the past 18 months. It is presently near the top of this range (9.3%).

It's not a fluke that the major stock market declines of 2001-2002 and 2007-2009 happened after the G2 monetary inflation rate fell below 5%. There was a cause-effect relationship at work. This doesn't, however, mean that the equity markets will be immune to substantial weakness until after the rate of money-supply growth drops to a much lower level. What it means is that there is almost no chance of a major deflation scare such as occurred in 2008-2009, or even a medium deflation scare such as occurred in 2001-2002, getting underway over the next 6 months.

While the root cause will be the same, the next global crisis will almost certainly look very different to the last one. Japan's latest monetary experiment is a potential catalyst for the next global crisis. Japan's experiment, which has become known as "Abenomics", could result in such a spectacular and obvious failure of inflation policy that it casts aspersions on the actions of all the globally-important central banks and governments. 

The Stock Market

Japan

As evidenced by the following daily chart of DXJ, an ETF designed to follow the Japanese stock market and to hedge changes in the Yen/US$ exchange rate, Japan's stock market rose at a phenomenal pace for about five months and is now falling even faster than it rose. DXJ is down by 14% from its 22nd May intra-day peak.



One of the most interesting aspects of the recent market action in Japan is the interplay between the stock market and the bond market. In Japan and in most other developed economies over the past 15 years, bond yields have tended to follow the stock market up and down. However, that hasn't been the case in Japan over the past few months. Of particular interest, the catalyst for the recent sharp decline in the Japanese stock market appears to have been rising interest rates. In other words, rather than a sharp stock market decline causing interest rates to fall, which is the way the stock-bond relationship has tended to operate for many years, we now have rising interest rates -- and fear that interest rates will continue to rise -- causing a sharp decline in the stock market.

To summarise, there are signs that Japan is transitioning from rising interest rates being an effect of stock market strength to rising interest rates being a cause of stock market weakness. If this continues then things could get very interesting very quickly, because it will result in "Abenomics" becoming self-defeating sooner than expected.

Brazil

Brazil's stock market was a relative-strength leader last decade, but over the past two years it has been a laggard. As illustrated by the following chart of Brazil iShares (EWZ), in US$ terms the Brazilian stock market is nearing support defined by its lows of the past three years. The situation looks similar when performance is measured in terms of the Brazilian Real.



The two main reasons for the excellent performance of Brazil's stock market from 2003 through to early 2011 were the rising trend in commodity prices and rapid growth in Brazil's money supply. The rapid growth in Brazil's money supply has continued (Brazil TMS has risen by about 16% over the past 12 months), but commodity prices have been immersed in a cyclical decline since early-2011. Also, the rapid money-supply growth has resulted in an obvious "inflation" problem that the central bank has been making a futile attempt to address by hiking official interest rates. The attempt is futile because the central bank is not addressing the cause of the inflation problem (the rapid growth in the money supply), but the hiking of interest rates is another source of downward pressure on the stock market.

The Brazilian stock market is 'oversold' and nearing important support, but at this time we see no good reason to be bullish on either the stock market or the economy of this Latin American nation. Having said that, the "Keynesian stimulus" provided by Brazil's hosting of the 2014 Soccer World Cup could create a semblance of economic strength over the next 12 months while wasting resources and worsening the economy's long-term prospects.

The US

A correction is underway in the US stock market. The senior stock indices haven't yet fallen far from their highs, but there has been meaningful weakness among interest-rate sensitive equities such as Utility stocks and REITs (Real Estate Investment Trusts). As discussed in previous TSI commentaries, the Utility sector reversed downward in April and has now given back almost all of the gains achieved over the past 12 months. As illustrated by the following daily chart, the REIT sector continued its relentless upward trend until about two weeks ago. It has since reversed downward in impressive fashion.



We suspect that the senior US stock indices will make new multi-year highs during the second half of this year, but that the ultimate highs will only be slightly higher than the May-2013 highs.

This week's important US economic events

Gold and the Dollar

Gold

Current Market Situation

Gold's price action over the final two days of last week was slightly bearish, the reason being that gold broke above short-term resistance at $1400 on Thursday only to reverse downward on Friday and fall back to the $1380s. This creates the appearance of a failed upside breakout, and failed upside breakouts are more reliably bearish signals than downside breakouts. However, Friday's bearish price action in the bullion market was counteracted by the resilience of the gold-mining sector.

All in all, it still looks like gold successfully tested its April low during May.



The latest Commitments of Traders (COT) data revealed the smallest speculative net-long position in COMEX gold futures since 2005, when gold was trading at around $400/oz. This suggests that speculators, as a group, haven't been as disinterested in gold as they are right now since the early days of the gold bull market.

The current lack of enthusiasm for gold creates upside potential, but note that speculators will have to start becoming more enthusiastic about gold's prospects for gold's bull market to resume in earnest. To put it another way, it's all well and good for there to be a sentiment platform capable of launching a multi-year rally, but no rally will get far until sentiment begins to improve. Furthermore, sentiment needs to improve within the realm of large speculators. Major upward trends in the gold price are fueled by the buying of large speculators, not by the buying of Chinese housewives.

Sentiment within the speculating community will begin to improve as evidence emerges that, like all its predecessors, the latest round of monetary pump-priming is failing to bring about a sustainable economic recovery and/or is causing an obvious "price inflation" problem. We expect the former (evidence of failure to create self-sustaining strength) to emerge prior to the latter (obvious evidence of a "price inflation" problem).

Supply and demand in the gold market

Notwithstanding the opinions of many gold bulls to the contrary, the law of supply and demand still applies in the gold market. An implication is that it is not possible for the price of physical gold to fall over a certain period unless there is greater urgency to sell physical gold than to buy physical gold over the period in question. This will be the case regardless of what is happening to "paper" gold.

The topical example, of course, is the April plunge in the gold price from the high-$1500s to the low-$1300s. The price of physical gold fell sharply along with the price of "paper" gold, an outcome that would have been impossible if, as many pundits have claimed, the demand for physical gold was soaring relative to the supply of physical gold. Such an outcome could not be made possible by happenings in the "paper" gold market, because physical demand cannot be satisfied by "paper" supply.

This is the most basic of basic economics. It is the economics equivalent of "1 + 1 = 2" in mathematics. When demand rises relative to supply, the price rises to bring the market into balance. The price cannot possibly fall in such a situation.

You can probably make a reasonable argument that the happenings in the "paper" gold market prompted a large wave of selling in the physical market that knocked the price down. You can certainly make a reasonable argument that the large decline in price prompted an increase in demand that quickly brought supply and demand into balance. However, you cannot logically argue that the demand for physical gold was rising relative to supply while the price was falling!

By the way, what would happen if the demand/supply of physical gold rose while the demand/supply of "paper" gold fell? The answer is that the price of physical gold would rise in absolute terms, not just relative to the price of "paper" gold, while the price of "paper" gold fell. This obviously didn't happen at any time over the past two months, but it could happen in the future. It is possible.

We get the impression that a lot of the paper-versus-physical analysis is an attempt to show that the current gold price is either not real or doesn't mesh with the real supply/demand situation. It is effectively an attempt to deny reality and is therefore counter-productive. The truth is that the price is where it is because of the supply/demand situations in both the physical and paper gold markets. The price is real, but that doesn't mean it is right.

Market prices are often wrong. If they weren't, it wouldn't be possible to make large gains by speculating or investing. To put it another way, it's the gap between value and price that creates the best money-making opportunities. This gap can become substantial, mainly because the current market price tends to be determined as much or more by emotion than by the careful weighing of evidence.

Gold Stocks

Current Market Situation

The gold-stock indices ended the week before last in a precarious position, but held support early last week and then showed meaningful strength over the final three days of the week. Even Friday's small decline was a sign of strength in that gold's failure to sustain its break above $1400 could have caused the gold-stock indices to sell off to a much greater extent.

A daily chart of the XAU is displayed below. Resistance at 290-300 for the HUI is equivalent to resistance at 110-113 for the XAU. This resistance must be breached to eliminate most of the remaining doubt that a multi-month bottom is in place.



There are no guarantees, but there's a very high probability that 2013 will turn out to be a year during which the gold-mining sector makes a major bottom. It's possible that the ultimate bottom is already in place, but it's also possible that a new low or a test of the April-May low will happen during October-November. Either way, purchases of high-quality gold-mining stocks made in 2013, especially purchases made when the gold-stock indices are at 'oversold' extremes, are likely to result in huge gains if held for 1-2 years. In the case of the beaten-down junior gold-mining stocks with strong balance sheets and multi-million-ounce projects in secure jurisdictions, "huge" could mean 500%-1000% or even more.

Gold stocks that are breaking out to the upside

In the 27th May Weekly Update we highlighted some gold stocks that had shown relative strength by holding above their April lows during May. Today we are going to highlight some gold stocks that are breaking out to the upside from basing patterns. Not surprisingly, some of the stocks that were showing relative strength by not breaking below their April lows have been among the first stocks to break out to the upside.

Here are the relevant charts:

a) Almaden Minerals (AAU). By achieving consecutive daily closes above its 50-day MA and resistance at US$1.80, our favourite "prospect generator" has done enough to confirm that an important bottom is in place.



b) Kinross Gold (KGC). By achieving consecutive daily closes above its 50-day MA and resistance at US$6.00, KGC has done enough to confirm that an important bottom is in place. As noted last week, the break above US$6.00 creates a short-term chart-based target of $7.50.



c) Midway Gold (MDW). By achieving consecutive daily closes above its 50-day MA and resistance at US$1.03, MDW has done enough to confirm that an important bottom is in place. We have indirect exposure to MDW via AMB.TO, but direct exposure could be appropriate.



d) Pretium Resources (PVG). The break above US$8.00 completed a multi-month bottoming pattern. There is some resistance at US$9.00, but the next resistance of significance lies at US$11.00. PVG's Brucejack project is possibly the best undeveloped gold project in North America.



e) Sulliden Exploration (SUE.TO). Impressively, this exploration-stage gold miner with a project in Peru is now trading above its 200-day MA and near its high for the year, although it is still trading more than 50% below its high of the past two years. The relatively strong performance has undoubtedly been partly due to Agnico Eagle's April-2013 investment in the company.

We successfully traded SUE a few years ago, but currently have no interest. The company is well-financed and its gold project appears to be economically robust, but the valuation is comparatively high.



Currency Market Update

The following daily chart shows that the A$ has continued to fall and is now testing long-term support at 95.



The next chart shows that the Commercial net-long position in A$ futures (the blue bars) just moved above its 2012 high. The 2012 high was a 20-year high, so this means that Commercial traders are now more 'long' the A$ than they have been at any other time over the past 20 years. By extension, this also means that the combination of large speculators and small traders is now more 'short' the A$ than it has been at any other time over the past 20 years.


                                     Chart Source: www.sharelynx.com

The A$ is primed for a rebound that will probably last at least a few weeks, but we wouldn't attempt to play this rebound potential. The reason is that short-term rebounds aside, the A$ is probably in the process of completing a major top that could be followed by a much larger decline than we've seen to date.

The euro continues to hold up relatively well. We expect that it will decline to 120 or lower within the next 12 months, but over the next two months it is more likely to rise than fall.

Support at 127 remains critical and must not be breached if the euro is to maintain its neutral-to-bullish short-term status.

Update on Stock Selections

Notes: 1) To review the complete list of current TSI stock selections, logon at http://www.speculative-investor.com/new/market_logon.asp and then click on "Stock Selections" in the menu. When at the Stock Selections page, click on a stock's symbol to bring-up an archive of our comments on the stock in question. 2) The Small Stock Watch List is located at http://www.speculative-investor.com/new/smallstockwatch.html

Company news/developments for the week ended Friday 31st May 2013:

[Note: FS = Feasibility Study, IRR = Internal Rate of Return, MD&A = Management Discussion and Analysis, M&I = Measured and Indicated, NAV = Net Asset Value, NPV(X%) = Net Present Value using a discount rate of X%, P&P = Proven and Probable, PEA = Preliminary Economic Assessment, PFS = Pre-Feasibility Study]

  *Americas Bullion Royalty Corp. (AMB.TO) is positively affected by last week's receipt by Midway Gold of the Class I Air Quality Operating Permit for its Pan gold project in Nevada. This is because AMB's most valuable asset is its 4% gross production royalty on this project. Pan is scheduled to go into production during the second half of next year.

In other AMB news, metallurgical testing conducted on samples from the company's Brewery Creek gold project in Canada's Yukon achieved gold recoveries of 78% to 83% after most of the test ore was crushed to 9.5mm. This is a satisfactory result.

Brewery Creek could eventually have substantial value, but it is not the reason for our interest in AMB. Our interest is solely due to the gold royalties owned by the company, especially the 4% gross production royalties on Midway Gold's Pan and Gold Rock projects.

  *Dragon Mining (DRA.AX) announced that the submission of the Environmental Impact Assessment Report for its exploration-stage Kuusamo gold project in Finland has been delayed from the second to the third quarter of this year. This isn't significant.

  *Energy Fuels (EFR.TO) announced prior to the start of trading last Friday that it has entered into an agreement with a syndicate of underwriters to raise $5M by issuing new shares at C$0.14. Each new share issued under this agreement will come with half of a 2-year C$0.19 warrant.

We hate to see new shares issued at such a low price, but unlike the case of Sabina Gold and Silver (discussed below) a reasonable argument can be made in favour of EFR's low-priced financing. In EFR's case the reduction in per-share value resulting from issuing low-priced shares could be fully offset by the reduction in risk stemming from the cash infusion.

Considering the price of the equity financing and the overall market environment, EFR's shares held up remarkably well last Friday. The stock closed at C$0.17, down C$0.01 on the day and unchanged over the course of the week.

  *Pretium Resources (PVG) reported the result of the first hole of its 15,000m underground drilling program at the Brucejack project. The result was in accordance with the projections of the resource model, which is what we want. PVG also advised that excavation of the planned 10,000-tonne bulk sample will occur between mid-June and August.

  *Sabina Gold and Silver (SBB.TO) announced a 14M-share equity financing priced at C$1.40/share. Considering that the company had more than $100M of cash in the bank at the end of March and was fully funded for at least the next 12 months and probably the next 18 months, this low-priced financing can aptly be described as unnecessarily value-destructive and a stupid piece of business.

We can see how a poorly-timed and unnecessary financing such as this could make sense from management's perspective, because the financing guarantees that there will be plenty of money to pay salaries over a longer period of time. Unfortunately, the guarantee comes at a significant cost to shareholders.

  *Sandspring Resources (SSP.V) issued its financial statements and MD&A for the March quarter. The financial statements showed that SSP had $5.4M of working capital at 31st March, down from $8.5M at the end of 2012.

SSP has enough money to fund its planned work program over the next several months, but will need to arrange additional financing before year-end. The company has engaged a mining-sector consultant to assist with this process.

Chart Sources

Charts appearing in today's commentary are courtesy of:

http://stockcharts.com/index.html