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Outlook Summary

Update #3, 8th July 2014 (after the close of US trading)

For the next 24 hours we probably won't have access to the internet, so we are now providing a brief market update even though we issued one following Monday's US market action and nothing of great importance happened on Tuesday. It's a case of providing updates when we can. Note that we'll be back to our normal routine on Friday and will publish a full Weekly Market Update on Sunday 13th July.

The stock market pullback of the past two days looks like nothing on the daily SPX chart, but the downward reversal in the RUT/SPX ratio looks significant. Also, the VIX (Volatility Index) is close to warning that a meaningful decline is finally about to happen. The VIX closed at 11.98 on Tuesday 8th July. A daily close above 12.50 would be a reversal signal.

The gold-mining sector rallied on Tuesday, despite a flat gold price and weakness in the broad stock market. This is obviously bullish price action, but the fact that the GDXJ/GDX ratio was flat means that the correction probably hasn't ended. We are working under the assumption that the gold sector's consolidation will continue for another 1-2 weeks. To prove this assumption wrong, the GDXJ/GDX ratio would have to close above its June high.

With regard to stock-specific price action and news, here are some notes:

1. On Tuesday, Premier Gold (PG.TO) broke above the top of a major basing pattern on the back of a positive resource re-estimate for its Hardrock gold project in Ontario. The break above C$3.00 (Tuesday's close was C$3.17) creates an intermediate-term chart-based target of C$4.50, but we think the stock would be a good candidate for PARTIAL profit taking if it moves up to around C$3.50 in the near future.

2. True Gold (TGM.V) has also broken out to the upside, but at C$0.46 it is still closer to a short-term buy than a short-term sell.

3. Dalradian Resources (DNA.TO) was halted on Tuesday and subsequently announced an equity financing at C$0.90/share. The total value of the financing was initially reported to be C$20M, but it was almost immediately increased to $25M due (we assume) to strong demand for the shares. The TSI List has exposure to DNA via the Feb-2015 warrants (TSX: DNA.WT), but the shares will represent a good long-side opportunity for either a short-term or an intermediate-term trade if they drop back (from C$1.02) to near the financing price (C$0.90) when trading resumes on Wednesday.

4. At this time and at current prices, the best candidates for new buying are AAU and EVN.AX. 

Update #2, 7th July 2014 (after the close of US trading)

Recent US economic data have been moderately strong. For example, the monthly employment report (a backward-looking indicator) published last Friday showed a decent quantity of new jobs, and, of greater importance, the ISM manufacturing report (a coincident indicator) published early last week included a significant increase in the New Orders component. However, as is almost always the case, the economic data haven't altered any trends in the financial markets.

Despite the superficial evidence of economic strength, the yields on long-dated US Treasuries remain in short-term consolidations within intermediate-term declines. At the beginning of this year almost everyone thought that T-Bond/T-Note yields would rise over the ensuing several months. They were wrong. Almost everyone still thinks that bond yields will rise over the ensuing several months. They are probably going to be wrong again, largely because of the fact that speculators in general, and small-scale speculators (the proverbial dumb money) in particular, continue to bet heavily on rising interest rates in the face of contrary price action.

Nothing of great significance has happened in the broad stock market, although downward reversals in the Russell2000 Small-Cap Index (RUT) and the RUT/SPX ratio on Monday (7th July) could prove to be important. These reversals from near the March-2014 peak in the case of the RUT and from a long way below the March-2014 peak in the case of the RUT/SPX ratio could turn out to be early warnings that a meaningful decline is finally about to get underway. We'll see.

There is no evidence yet in gold bullion's price action to indicate that a short-term correction/consolidation is imminent, but there is evidence of such a development elsewhere. In particular:

1. The short-term 'overbought' extreme in the silver/gold ratio.

2. The rapid build-up over the past 2 weeks in the speculative net-long position in COMEX gold futures.

3. The performance of the gold-mining sector.

With regard to point 3, the downward reversal in the GDXJ/GDX ratio on 20th June indicates that the gold-mining sector commenced 'corrective' activity at that time (the gold-mining sector of the stock market has been leading the bullion market and the GDXJ/GDX ratio has been leading the gold-mining sector). It's possible that a bottom is already in place for GDXJ/GDX, but the price action on Monday 7th July suggests that the HUI's correction will continue for at least another 1-2 weeks.

One possibility (the one that we favour) involves gold bullion dropping back to a confluence of moving averages at $1285-$1290 while the HUI drops back to around 225 and the GDXJ/GDX ratio holds above its late-June low. Upward trends would then resume.

Update #1, 3rd July 2014 (after the close of US trading)

We are vacationing in a small town called Exmouth on the northern coast of Western Australia. There isn't much to see or do on the land here, but it's an interesting place for scuba diving. Divers can see manta rays, a few different types of shark (we've seen reef sharks, a tiger shark and a shovel-nosed shark to date), sea turtles, dolphins, sea snakes, large garoupa, and countless other sea creatures. At this time of the year there is also a good chance of spotting humpback whales (a couple of days ago a humpback surfaced within a few metres of our boat) and you get the opportunity to swim with whale sharks, the world's largest fish (whale sharks can grow up to 18 metres, but the ones found near Exmouth are generally 4m-10m). In addition, there is a good surf beach here.

Unfortunately, keeping up with what's going on in the world and communicating via email or website updates is proving to be more difficult than expected. We thought that our hotel room would have wifi (because that's what the hotel advertises), but there is actually no internet access anywhere near our hotel. The hotel apparently did have wifi at one time, but it broke down and they've never bothered to get it fixed. A hotel on the other side of Exmouth has wifi in the lobby area, but it is slow and cumbersome to use.

Due to the difficulty of getting a decent internet connection, updates will be via email rather than the TSI web site.

Fortunately, over the past four trading days there were no important changes in the financial markets or the stocks we are following at TSI. At the beginning of this week the US stock market was dangerously extended to the upside, but had not signaled a top. It remains in the same position, having just made a marginal new high. The gold market was consolidating just below resistance at $1320. It broke above this resistance during the first half of the week, but the breakout was a) marginal, b) not sustained through to the end of the US trading week (the US markets are closed on Friday for Independence Day), and c) not confirmed by the mining stocks. The gold-mining sector was consolidating its early-June surge to the upside and continues to do so, and the Dollar Index was essentially in no-man's land, which is where it remains.

Here are a few more details on gold and gold mining:

The gold market has just achieved a "Golden Cross" (the 50-day MA has crossed from below to above the 200-day MA). This makes it more certain that the preceding "Death Cross" marked a short-term bottom (as is often the case and as was expected in this case), but otherwise doesn't provide useful information.

At this time the most useful indicator of the gold market's short-term trend is the performance of the gold-mining sector, and the most useful indicator of the gold-mining sector's short-term trend is the GDXJ/GDX ratio (a measure of how junior gold-mining stocks are performing relative to senior gold-mining stocks). The GDXJ/GDX ratio reversed lower about two weeks ago, ending a 1-2 month period of relative strength in the juniors and signaling that some sort of corrective activity had begun. Although gold made a marginal new multi-month high this week and the HUI has just tested its high of the past two months, the GDXJ/GDX ratio has not yet signaled an end to the corrective activity.

To put it another way, the resumption of the gold market's short-term upward trend will probably be signaled by pronounced relative strength in the juniors, that is, by a clear-cut upward reversal in the GDXJ/GDX ratio, which hasn't happened yet. GDXJ was much stronger than GDX on Thursday 3rd July, but there will have to be some follow-through to the upside next week to indicate that the gold sector's short-term upward trend has resumed.

We think that the HUI will move up to around 300 before the end of September, but it will probably spend at least two more weeks in the 225-250 range.

With regard to individual company news, there isn't much to report. Pretium Resources (PVG) announced some drilling results that show potential for resource expansion but don't materially affect PVG's valuation. Energy Fuels (EFR.TO, UUUU) announced the sale of its Pinon Ridge uranium mill license for $2.7M plus a royalty on future production from the proposed mill. The royalty ($3/tonne of ore fed through the mill plus 1% of the market value of mineral production) could eventually be valuable, but even in the best-case scenario the start of production from a Pinon Ridge mill would be at least 5 years away.

With regard to the price action of individual stocks, a bit more strength in the near future could create some short-term selling opportunities. For example, depending on your position size and objectives, it could be appropriate to sell some Asanko Gold (AKG) shares (current price: US$2.56) if they soon trade up to around US$3.00, even though US$3.25-$3.50 is the chart-based target generated by this week's upside breakout. Also, it would be reasonable to take partial profits on Premier Gold (PG.TO) at C$3.25-C$3.50 (current price: C$2.95). Lastly, Rio Alto (RIO.TO, RIOM) would be a good candidate for partial selling in the C$2.70-$2.90 (US$2.50-$2.70) range. For the RIO position in our own portfolio, the goal is to be completely out by the end of September.