-- Weekly Market Update for 6th May 2019

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.

The BULL market in US Treasury Bonds that began in the early 1980s ended in mid-2016, but there will be many years of topping action in bond prices and bottoming action in bond yields before major new trends get underway. A major decline in government bond prices will unfold during the 2020s. (Last update: 11 September 2017)

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.), gold-denominated prices and inflation-adjusted prices. This secular trend will bottom in 2020 or later. (Last update: 11 September 2017)

A cyclical BEAR market in the US Dollar began in 2016-2017. (Last update: 11 September 2017)

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 in 2020 or later. (Last update: 11 September 2017)

Commodities, as represented by the CRB Index, 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 2020 or later. (Last update: 11 September 2017)

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True Fundamentals Summary [Notes: 1) The date shown next to the current True Fundamentals Model (TFM) signal is when the most recent change occurred. 2) Charts of the Gold and Equity TFMs are included in the "Charts and Indicators" section of the TSI web site]

Last week's posts at the TSI Blog

Gold, Commodities, and Bob Moriarty's New Book

Summary of current thinking/positioning

1) The Dollar Index (DX) held its upside breakout last week, but the price action kept alive the possibility of a bearish signal in the form of a failed breakout.

2) Gold, silver and the associated mining indices should begin to rebound very soon. The coming rebounds probably will be counter-trend reactions rather than new multi-month upward trends, although a downward reversal in the DX could lead to tradable strength in the gold sector.

3) The US stock market and many other stock markets are now very stretched to the upside on a short-term basis. This should mean that multi-week pullbacks begin soon, but the intermediate-term rallies probably aren't over.

4) There's a good chance that a large T-Bond decline will commence before mid-year, possibly following a test of the March high.

5) We are holding a cash reserve of 30%-35%.

Global Monetary Inflation Update

Here is our monthly update on what's happening on the monetary inflation front in a few different regions/countries.

The G2 (US plus euro-zone) monetary inflation rate dropped to a 10-year low in March-2019 and has now spent 19 months below the boom-bust threshold of 6%. Refer to the following chart for details.

The low rate of G2 monetary inflation stems from the very low rate of money-supply growth in the US. During March the year-over-year (YOY) rate of growth in euro supply was 7.6%, which although well down from a 2014 peak of 14% is still quite high. The rate of growth in US$ supply, however, was only 1.8%.

The slow (by modern standards) rate of G2 money-supply growth boosts the risk that a global recession will begin in 2019, but, as noted in the past, the monetary inflation rate is a long-term indicator that leads economic and financial-market conditions by amounts of time that can vary substantially from one cycle to the next. When attempting to predict the start time of the next recession we therefore rely on other leading indicators, three of which were discussed in last week's Interim Update.



Australia's monetary inflation rate has picked up a little over the past few months, but the country remains on the verge of monetary deflation.

The very slow money-supply growth has had an effect on Australia's property market, in that over the past 12 months residential property prices have fallen by an average of 6.9% on a nationwide basis and 10.9% in Sydney (the largest and most expensive city in Australia). Refer to the article posted HERE for more detail.

Actually, the decline to near zero in Australia's monetary inflation rate is both a cause and an effect of the slight (to date) deflation of the property investment bubble. Commercial banks have been making it more difficult for house buyers to obtain credit, leading to a pullback in prices and a slowdown in the pace at which new money is created.



In January-2019 the year-over-year (YOY) growth rate of China's M1 money supply dropped to its lowest level since 1989. There was an insignificant up-tick in February, but the recent attempts by China's government to promote credit expansion started to 'bear fruit' in March. Refer to the following chart for details.

We wonder if this is too little too late to kick-start a new surge in the demand for industrial commodities.



Hong Kong hasn't escaped the general monetary-inflation slowdown. As illustrated below, the YOY rate of growth in HK's M2 money supply has languished near a 10-year low in the 1%-4% range over the past several months.

Remarkably, HK's low monetary inflation rate is yet to have a pronounced effect on the world's most expensive real estate. Property prices dropped in HK during August-December of last year, but they rose in January and the majority view is that a rise to new highs is in store.

Due to the monetary backdrop, we think there's a high risk of a double-digit decline in HK property prices over the next 12 months.



Almost everyone knows that the Bank of Japan (BOJ) has pumped a huge amount of money into the Japanese economy, so the lack of "price inflation" in Japan is something of a quandary. Analysts have let their imaginations run wild in an attempt to explain this strange set of circumstances, and the situation in Japan has even been cited as proof that increasing the money supply doesn't cause prices to rise. However, anyone who didn't blindly assume that the BOJ's actions were leading to rapid money-supply growth and instead took the trouble to check what was actually happening to Japan's money supply would quickly realise that explaining Japan's lack of "price inflation" requires no stretch of the imagination. The fact is that Japan's monetary inflation rate over the past 25 years has been consistent with an "inflation" rate of approximately zero.

The persistently low rate of monetary inflation in Japan is illustrated by the following chart. The chart shows that the YOY rate of increase in Japan's M2 money supply averaged about 2% over the past 27 years and about 2.5% over the past 10 years. It is currently about 2.4%. Assuming productivity growth of 2%-3%, these money-supply figures are consistent with a flat general price level.



Note that QE in Japan is different from QE in the US. When the Fed implements QE it boosts the supply of bank reserves and the supply of money on a one-for-one basis (bank reserves aren't counted in the money supply), but the BOJ's QE adds far more to bank reserves than to the money supply. Note also that the Fed's QE created a lot less "price inflation" than many people were expecting for the reasons outlined HERE.

The Japanese economy has benefited from the persistently slow rate of monetary inflation and the resulting stability of the currency, but at the same time it has been hurt by the massive diversion of resources to the government. The net result is an economy that isn't exactly vibrant, but also isn't that bad.

To summarise the above information, the pace at which new money is being created around the world remains unusually slow.

Commodities

The Platinum Group Metals (PGMs)

In the 8th April Weekly Update we noted that platinum had finally begun to demonstrate the outperformance justified by its extremely low price relative to other precious metals. We also noted that the US$ platinum price was a little stretched to the upside on a short-term basis and could soon commence a correction, but that significant additional gains were likely prior to the next multi-month top.

The price topped at $920 during the next trading day and then commenced a correction. The correction may have ended at $847 last week.

Ideally (from a bull's perspective) the price will remain above the 20-week MA (the black line on the following chart) on a weekly closing basis over the next few months.

We think that platinum is a buy in the mid-$800s.



Turning to another of the PGMs, it is fair to say that the palladium market was well and truly into bubble territory in March-2019. This is evidenced by the near doubling of the palladium price over the preceding 7 months and palladium's extremely rich valuation relative to almost all other commodities.

It's possible that the sharp decline in the palladium price from its March-2019 high marked the bursting of the bubble, but as mentioned in the 1st April Weekly Update it's more likely that the decline is the start of a multi-month correction. This is based on a comparison with the palladium rally of 1997-2000 and the fact that the end of the first parabolic move in a cyclical advance generally doesn't mark the end of the cycle.

If we are dealing with a multi-month correction rather than the start of a bubble collapse then the palladium price should not give a weekly close below its 50-week MA (the blue line on the following chart).



Oil remains in correction mode

The knee-jerk reaction to the news that the US government was removing waivers on sanctions against buyers of Iranian two weeks ago pushed the oil price above resistance at $64-$65 and created at least a multi-week top. The price has since pulled back to moving-average support at around $61.

The test of the 50-day and 200-day MAs could lead to a price bounce, but we doubt that the correction is over.



The Oil Services ETF (OIH) has dropped a lot further (in percentage terms) than the oil price over the past two weeks. Although its correction probably isn't over, it has almost reached the 'buy zone'.

We think that OIH would be a good candidate for new buying at $15.50-$16.00.



The Stock Market

The NASDAQ100 Index (NDX) has risen for 8 weeks in a row and on 18 of the past 19 weeks, which means that it is immersed in one of the most relentless rallies in its history. The following weekly chart shows that it has just achieved consecutive weekly closes above last year's high, so we can be certain that this is not a bear-market rally. It is an extension of the cyclical bull market that commenced in 2009.



The S&P500 Index (SPX) has just achieved its first weekly close above last year's high, but the new high is too marginal to be viewed as a breakout. It is a test of the 2018 high. However, the NYSE Advance-Decline Line (ADL), which is shown in the bottom section of the following daily chart, broke into all-time-high territory almost three months ago and continues to trend upward.



Prior to last Friday there was a minor bearish divergence/non-confirmation in the form of the Russell2000's inability to close above its February-2019 high, but that divergence was eliminated on Friday. The RUT closed at a new high for the year on Friday, although it remains well below last year's high.



The relative weakness in the banking sector could be viewed as a bearish divergence, but we suspect that the Bank Index (BKX) is in the process of becoming relatively strong. That is, we suspect that the up-turn in the BKX/SPX ratio from its March low (refer to the bottom section of the following chart) has staying power. This is linked to our expectation that long-term interest rates will rise over the next 6-12 months and to bank stocks being attractively valued, on average, relative to the broad market. Consequently, although it is not a trade we plan to do we like the idea of simultaneously going long KBE (the Bank ETF) and short SPY.

This is a topic we plan to revisit within the next couple of weeks.



Due to the small additional gains made by most US stock indices last week, the market's position today is similar to what it was a week ago. Therefore, although the market has shown more near-term resilience than expected, the following paragraphs from last week's commentary still apply:

"The US stock market is very 'overbought' on a short-term basis and moderately 'overbought' on an intermediate-term basis. Considering the SPX's position relative to major resistance this probably means that a correction will begin within the next few days, perhaps following a spike by this index to a new all-time high. Supporting this conclusion are the recent downward reversals in the oil price and China's stock market.

The coming multi-week decline could be steep, but due to the performance of the NYSE Advance-Decline Line it is more likely to be a correction within an on-going intermediate-term upward trend than the start of a new intermediate-term downward trend."

Two events could have an influence on how the US stock market trades over the next few weeks. The first and lesser important of these events is Uber's IPO, which is scheduled to happen late this week. The IPO a few weeks ago of Lyft, Uber's main ride-sharing competitor in the US, was a flop, with the shares now trading about 15% below the IPO price. We suspect that Uber will perform better post-IPO, but in any case the event could mark a short-term turning point for the overall market.

The more important event is the potential US-China trade deal. There's a good chance that a deal will be signed by presidents Xi and Trump in June, simply because both men want it to happen.

Anticipation of an end to the "trade war" was not the main driver of the rally from the December-2018 low. The main drivers were the Fed's aboutface and the extent to which the market was stretched to the downside at the time of the 26th December upward reversal. However, optimism that the government-imposed restrictions on international trade (and hence on economic growth) would soon be eliminated or reduced has been a significant part of the bullish narrative.

We think that the big event will be the announcement of a specific date for a Xi-Trump meeting rather than the actual signing of a document confirming the details of a trade agreement, because once a meeting is scheduled it will be known that a deal has been done.

If the announcement of a Xi-Trump meeting happens with the SPX near an all-time high then the knee-jerk reaction to the news could establish a top that holds for a few months.

This week's significant US economic events [Notes: 1) The most important events (to the markets) are shown in bold. 2) A list of global economic events can be found HERE]

Gold and the Dollar

Gold

Despite the market volatility around Wednesday's Fed announcement, last week was a non-event in the gold market. The US$ gold price broke below lateral support at $1280 in the aftermath of the Fed news, but held above the preceding week's low and then recovered to end the week at around $1280.

The sentiment and fundamental backdrops were essentially unchanged. Sentiment is supportive, but not in a big way, and the fundamental situation is neutral.

A daily close above $1300 would indicate that a rally capable of testing the February high was underway.



Silver

The US$ silver price ended last week almost exactly where it began the week -- at its 200-day MA. However, the intra-week price action was interesting. There was a break to a new low for the year on Thursday that could have led to downward acceleration, but on Friday the market reversed direction and recouped the losses of the preceding two days.

We doubt that a multi-month rally is about to begin, but there's a decent chance of a rebound to resistance in the $15.60s. A daily close above $15.00 would warn that such a rebound was underway.



Gold Stocks

A week ago we suspected that the Gold Miners ETF (GDX) had made a multi-week low and that a small rebound to resistance near $22.00 probably would occur prior to the resumption of the short-term downward trend. However, the downward trend resumed immediately and by the close of trading on Thursday 2nd May GDX was below its 200-day MA and at a new low for the year. The gold-mining sector bounced on Friday, but not by anywhere near enough to indicate a trend reversal.

As a result of last week's price action we can add a weekly GDX close below the $21 demarcation level to the list of intermediate-term bearish signals generated by the gold-mining sector over the past month.



The gold stock indices and ETFs are more 'oversold' now than they were a week ago, but the short-term risk/reward is not materially different. Again there is a decent chance for a rebound, but again the rebound -- assuming it happens -- probably won't get very far before the downward trend resumes. Our guess is that if a rebound in GDX has already started or gets underway within the next couple of days it will be capped by resistance at $21.50. This implies near-term upside potential of about 5%.

In one respect the situation is a little more conducive to going long for a trade now than it was a week ago, because Thursday's new low followed by Friday's bounce suggests a logical place for a nearby protective stop. Specifically, anyone going long for a trade could manage risk by placing a stop slightly below last week's low. However, this is not a trade that interests us.

The short-term 'oversold' condition that suggests the potential for a rebound should be weighed against the intermediate-term indicators that turned bearish over the past few weeks. Two of these indicators are illustrated by the following charts. The charts show the recent plunges in the HUI/gold ratio and GDX's Advance-Decline Line (a measure of gold-sector breadth).

As mentioned in last week's Interim Update, a sustained break in the Dollar Index below 97 could spur a more substantial rebound in the gold-mining sector than currently appears likely.

The Currency Market

The COT data indicate that speculators, as a group, are betting aggressively on an extension of the US dollar's upward trend against most other major currencies, with the biggest bets being on further weakness in the Swiss franc (SF), the Australian dollar and the Yen. No market ever reversed course simply because speculative sentiment became lopsided, but this means that there will be plenty of fuel to support a downward move in the US$ if the trend reverses for some other reason.

Last week the DX pulled back to support at 97.0-97.2. It briefly traded below support on Wednesday in anticipation of a further 'dovish' tilt by the Fed and then rebounded in the aftermath of the Fed's latest words of wisdom. This price action was slightly positive as it implied that the preceding week's upside breakout had been successfully tested, but Friday's price action was slightly negative. On Friday the DX reversed downward despite a strong Employment Report.

Friday's downward reversal left the DX precariously poised near support at the end of the week. Consequently, the potential for a failed upside breakout still exists.



The Swiss franc (SF) has begun to recover from the 'oversold' extreme reached during the week before last. As mentioned a week ago, the most likely path from here is a rebound to the 50-day MA (the blue line on the following chart) and then a decline that tests or undercuts the April low. This would set the stage for a longer and stronger rebound.



Updates 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 ending Friday 3rd May 2019:

[Note: AISC = All-In Sustaining Cost, EBITDA = Earnings Before Interest, Tax, Depreciation and Amortisation (a measure of cash flow), EV = Enterprise Value or Electric Vehicle, FS = Feasibility Study, FY = Financial Year, IRR = Internal Rate of Return, ISR = In-Situ Recovery, JV = Joint Venture, 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%, NSR = Net Smelter Return or Net Smelter Royalty, P&P = Proven and Probable, PEA = Preliminary Economic Assessment, PFS = Pre-Feasibility Study]

  *Alkane Resources (ALK.AX) published its quarterly report for the March-2019 quarter (the third quarter of FY2019). The report revealed another above-plan performance from the Tomingley Gold Operation (TGO), with production of 10.7K ounces at an AISC of A$956/oz. The on-going better-than-expected performance of the TGO has prompted another increase in FY2019 gold production guidance. Originally it was 30K-35K ounces, then three months ago it was boosted to 35K-40K ounces, and now it is 42K-47K ounces. The company produced 37.4K ounces during the first three quarters of FY2019, so the expected production during the final quarter is 5K-10K ounces.

The Tomingley open pit is depleted and the current production is solely from the processing of stockpiles. That's why the amount of gold produced has been trending downward. However, plans are in place to extend the life of the operation by developing an underground mine and exploring for additional resources. Initial production from the underground mine is on track to begin during the December-2019 quarter and recent drilling results suggest the potential to establish a new pit within a few kilometres of the existing plant.

The company's efforts to arrange financing and offtake agreements for the Dubbo specialty metals project have continued, but no tangible progress was reported.

ALK has a strong balance sheet, with no debt and cash, bullion plus listed investments of A$78.8M. This constitutes a quarter-over-quarter decline of A$1.7M.

  *Clean TeQ (CLQ.AX, CLQ.TO) published its quarterly report for the March-2019 quarter. The report stated that the company had cash of A$100M at the end of the latest quarter, which amounts to a reduction of about A$17M over the course of the quarter and A$52M over the past three quarters. This means that CLQ continues to spend rapidly as it ploughs ahead with the front end engineering and design (FEED) for the Sunrise nickel-cobalt project in New South Wales, Australia.

The FEED is being done by Metallurgical Corporation of China Ltd (MCC) and is scheduled to be complete in Q3-2019. It is envisaged that an output of the FEED will be a fixed price procurement and construction contract for MCC.

From our perspective, the key to CLQ's long-term risk/reward is how the US$1.5B estimated pre-production capex is financed. This will determine whether the more appropriate course of action is to 'cut and run' or average down.

Ideally, financing will involve a project-level investor along similar lines to the deal that was done by Kidman Resources (KDR.AX) to fund the development of its Mt Holland lithium project. We were therefore pleased to read the following in CLQ's latest report:

"Clean TeQ is actively engaging with a number of project financiers and potential offtake/joint venture partners in order to secure an equity financing package for the project. The drive for end-users to secure high-quality, long-term supply of nickel and cobalt sulphates remains strong."

  *Golden Arrow Resources (GRG.V) published its financial report for the quarter and year ending 31st December 2018. The report shows working capital of roughly zero, down by C$2.7M since the end of the September quarter. It also shows the addition of C$11.2M of long-term debt due to a US$8M draw-down on the US$10M credit facility provided to GRG by SSR, its JV partner. This effectively means that GRG spent about C$14M during the December-2018 quarter.

The large quarterly cash drain was due to GRG's share of the costs of Puna Operations Inc. (POI), the JV that is owned 25% by GRG and 75% by SSR Mining. The JV owns the Pirquitas-Chinchillas silver-lead-zinc project in Argentina, which was in the process of being ramped up during the December-2018 quarter.

The Pirquitas-Chinchillas project is now producing metal at near its design rate, so GRG should now be cash-flow positive or close to it. Furthermore, GRG raised C$4.7M via an equity financing during the March-2019 quarter, so the next quarterly report should contain a stronger balance sheet.

GRG is a leveraged play on silver and should perform extremely well once the market embarks on a major rally.

  *Cobalt 27 Capital (KBLT.V) published its financial results for the quarter and year ending 31st December 2018.

At 31st December the company had no long-term debt, US$46M of working capital (down from US$50M at the end of the preceding quarter) and US$200M of undrawn credit. This means that it had US$246M of available financing.

The latest balance sheet doesn't include the purchase of Highland Pacific (HIG.AX), the owner of 8.56% of the Ramu nickel-cobalt mine in Papua New Guinea. The purchase should be completed by mid-May at a cost of about US$70M, an amount that can be comfortably funded using KBLT's existing financial resources.

The HIG purchase will give KBLT part ownership of a profitable mining operation and could enable the company to start paying dividends.

  *Mineral Resources (MIN.AX), a Western Australia based company that produces lithium and iron-ore and that provides pit-to-port mining services, published its quarterly report for the March-2019 quarter (the third quarter of FY2019).

The highlight of the quarter was a 41% increase in the amount of iron-ore shipped by the company. This was done to take advantage of the relatively high iron-ore price.

Also worth mentioning is that submissions were lodged during the quarter with the relevant regulatory authorities in Australia and China in relation to MIN's sale of a 50% interest in the Wodgina Lithium Project to Albemarle Corporation (NYSE: ALB), the world's largest lithium producer, for US$1.15B in cash. The sale is expected to be completed before the end of the 2019 calendar year.

As noted in previous TSI commentaries, the deal with ALB values Wodgina at A$17 per MIN share. This implies that just one of MIN's assets is worth more than the company's current market cap.

Separately, MIN upwardly revised its FY2019 EBITDA guidance from the A$280M-$320M estimate provided last November to A$360M-$390M. The reason for the improved guidance wasn't mentioned in MIN's press release, but we assume it has a lot to do with the higher iron-ore price and production.

  *Premier Gold (PG.TO) reported the discovery of high-grade gold mineralization in the first hole drilled at the McCoy-Cove project's Antenna target. The drilling was funded by Barrick Gold (GOLD) as part of an earn-in obligation (GOLD can earn 60% of the project by spending US$22.5M on exploration).

The discovery hole contained a 118.9m intercept grading 4.12 g/t gold. Furthermore, the drill hole was lost at a depth of 725.4m in mineralisation grading 5.59 g/t Au. Barrick liked this result enough to exercise its option to become the operator of the joint venture.

This is obviously very good news.

Separately, PG reported March-quarter gold production from its Mercedes mine (Mexico) of 17.6K ounces. According to the company, this is in line with its plan. Annual production guidance of 75K-85K ounces of gold has been maintained.

List of candidates for new buying

From within the ranks of TSI stock selections the best candidates for new buying at this time, listed in alphabetical order, are:

1) AAU (last Friday's closing price: US$0.51)

2) KBLT.V (last Friday's closing price: C$4.17)

3) PG.TO (last Friday's closing price: C$1.60)

4) SBB.TO (last Friday's closing price: C$1.02)

5) TK.V (last Friday's closing price: C$0.33)

The above list is limited to five stocks. It sometimes will contain less than five, but it never will contain more than five regardless of how many stocks are attractively priced for new buying.

Chart Sources

Charts appearing in today's commentary are courtesy of:

https://stockcharts.com/
https://www.barchart.com/