-- Weekly Market Update for the Week Commencing 7th November 2016

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 early-2015, but there will be many years of topping action in bond prices and bottoming action in bond yields before major new trends get underway. (Last update: 29 June 2015)

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 2018 and 2020. (Last update: 29 June 2015)

A secular BEAR market in the US 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 2018 and 2020. (Last update: 29 June 2015)

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 2018-2020. (Last update: 29 June 2015)

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Outlook Summary

4. Long-term views are determined almost completely by fundamentals and intermediate-term views are determined by a combination of fundamentals, sentiment and technicals.

Last week's posts at the TSI Blog

Interesting aspects of the current financial situation

How should the real interest rate be measured?

Summary of current thinking/positioning

1) Thinking that short-term bottoms are in place for gold and the associated mining indices, but expecting that the overall corrections will extend into Q1-2017 and that multi-week rebounds from the October-2016 lows will be followed by tests of the lows.

2) Expecting that 2017-2018 will be a very bullish period for commodities, but acknowledging that the early-2016 lows could be tested prior to the start of the aforementioned bullish period. Gradually building up long-term exposure to non-gold commodities and simultaneously hedging against short-term weakness via EEM (emerging market) and USO (oil) put options. Will probably take profits on hedges this week.

3) Thinking that the US stock market has additional downside in store and positioned for such an outcome via QID call options, but expecting a 1-2 week rebound to begin this week (perhaps following a downward spike).

4) Thinking that the currency market is close to a critical decision point. It could go either way, with the Dollar Index breaking below support and signaling an intermediate-term top or holding above support and resuming its intermediate-term advance.

5) Maintaining a large cash reserve in recognition of the downside risk in almost all equities (current cash percentage is around 45%), but looking for opportunities to reduce cash and add to gold plus commodity exposure.

Commodities

Supply-demand versus price

Commodity supply-demand fundamentals must always be considered in relation to the market price. The reason is that it makes no sense to be bullish or bearish based on an assessment of the fundamentals if the fundamentals have been fully discounted by the current market price. And how can we tell if the fundamentals have been fully discounted by the current price? We can't tell for certain, but if the price is at a relative extreme and it seems that 'everyone' is aware of the bullish or bearish supply-demand story then it's a good bet that the market has already discounted the story.

A good example is provided by the oil market during January-February of this year. We wrote at the time that although the supply-demand fundamentals were bearish and showed no sign of improving, the oil price was probably close to an intermediate-term bottom. Our reasons were that the oil price was trading near a multi-decade low in inflation-adjusted terms and that the mainstream press was inundated with articles harping on oil's bearish supply-demand situation. This meant that something close to a worst-case scenario for the oil market was baked into the current price, which, in turn, meant that the risk/reward was bullish.

Copper could be near a short-term price top

In the 24th October Weekly Update we wrote that the copper price had fallen to support (near US$2.09) and that a 1-2 week rebound would be a normal occurrence even if lower prices were likely prior to a sustained upturn. A rebound has happened.

The rebound has been a little stronger than anticipated and has enabled the copper price to break above the top of the triangular pattern that limited its movements over the past 10 months. This could be warning that a substantial rally is has begun, but over the years we have seen countless breaks above resistance that were not followed by significant additional gains. Furthermore, there is important lateral resistance only a few cents above the current price and the Commitments of Traders (COT) situation is warning of a short-term price top.



The COT warning won't matter if a bull market has begun, because bear-market sentiment benchmarks don't work during bull markets. However, it will be prudent to heed such warnings until the bull-market scenario is confirmed.

Platinum is rebounding

In the 24th October Weekly Update we wrote that platinum is the precious metal with the best intermediate-term risk/reward, that the platinum price was near multi-decade lows in real (inflation-adjusted) terms and relative to gold, and that we had begun to purchase physical platinum for our own accounts. The platinum price was US$932/oz at the time.

Having included a long-term chart in the 24th October report to show platinum's extreme cheapness in gold terms, today we are including a long-term chart showing platinum's extreme cheapness in inflation-adjusted (IA) terms. The following chart shows that the IA platinum price* is near its lowest level since the late-1970s.



We also wrote in the 24th October report that the January-2016 low near $825 could be tested -- most likely early next year following a multi-week rebound -- prior to the start of a major rally.

The platinum price has since rebounded to the low-$1000s, where it is encountering resistance in the form of the 50-day and 200-day MAs. The rebound is probably not over, although a pullback to as low as $960 would be normal.



The upshot is that nothing has changed since our last platinum update. Platinum is very cheap and, as anticipated, is rebounding from an 'oversold' extreme, but the rebound doesn't eliminate the possibility of the January-2016 low being tested prior to the start of a major rally.

    *We have our own method of 'inflation-adjusting' that was first explained back in 2010.

The oil price is experiencing a predictable decline

Not surprisingly, the divergence between the oil price and the currency market (the C$, mainly) is in the process of being eliminated via a decline in the oil price.

The oil market's decline is probably not close to being complete, but with the price having just fallen for 6 days in a row and on 10 of the past 12 trading days to near support defined by the 200-day MA it's a good bet that a 'pause for breath' will soon occur. Our guess is that the oil price will make a multi-week bottom this week and then rebound/consolidate for 2-3 weeks before resuming its downward trend.



The uranium price has collapsed

Our most recent comments on uranium were in the 21st September Weekly Update. Under the heading "Why uranium investments could stay radioactive" we mentioned the secondary source of supply (the under-feeding by uranium processors to generate more fuel from less ore) that had counteracted the removal of supply resulting from the termination of the "Megatons to Megawatts program". We went on to write:

"We are interested in maintaining some exposure to uranium mining on the basis that the bearish fundamentals are well known and fully reflected in the current price, but 2-3 years ago we gave up trying to predict the timing of the eventual/inevitable uranium price reversal. The reversal could happen this year, but it could also still be years away."

At that time the uranium price was around $25/pound.

As illustrated by the following chart, the price has since plunged to the $18-$19 range. This is a 12-year low. It is therefore fair to say that the bearish fundamentals were not fully reflected in the current price when the price was in the mid-$20s.



The price plunge of the past several weeks was possibly a final capitulation, but even if this is the case the risk for the companies involved in uranium mining is that there will be a multi-year period of basing prior to a sustained price rally. In fact, until/unless proved otherwise this should be considered the most likely outcome. We are therefore not interested in adding to our uranium exposure in response to the current price weakness, but we continue to maintain some exposure and to watch for signs of a 'change in the tide'.

The T-Bond is headed much lower, but not in the short-term

The T-Bond's downward reversal from the top of its long-term price channel (refer to the following monthly chart) points to significant additional weakness over the coming 12 months. Even if the secular bull market in government bonds is not over, the historical record suggests that a decline to either the 84-month MA (the blue line on the following chart) or the channel bottom lies in store.

Rising inflation expectations will be the most likely fundamental driver of the intermediate-term downward trend.



At the same time, there are reasons to suspect that the T-Bond will have an upward bias over the coming 1-2 months. One is that the market recently became short-term 'oversold' in both momentum and sentiment terms. Of particular significance, the COT situation (a sentiment indicator) is now the most constructive it has been since December of last year. Another is that the T-Bond is likely to get a short-term boost from nervousness associated with US politics (regardless of who wins the big election) and stock-market weakness.

The Stock Market

The US

The Election Effect

The polls point to a Clinton victory in the US Presidential election on Tuesday 8th November, but the outcome is far from a foregone conclusion. The election will therefore roil the financial markets in general and the US stock market in particular over the next few days.

In a case of "better the devil you know", a Clinton victory would almost certainly prompt a stock-market rebound. We think that the gains would evaporate within a few days and that the US stock indices would break below their early-November lows before the end of the month, but for bearish speculators there is a risk that the rebound would turn out to be more sustainable than we expect.

A Trump victory would almost certainly prompt a sharp stock-market decline and create an excellent opportunity to take profits on short-term bearish speculations.

Another consideration is the risk that the election result will be contested. Both sides in the acrimonious battle for the Presidency have already set the scene for claims of fraud/rigging if the vote doesn't go their way. This could cause nervousness to extend well beyond Tuesday-Wednesday of this week even if Clinton wins.

Current Market Situation

The S&P500 Index (SPX) finally breached support at 2120 last Tuesday. It then followed through to the downside over the remainder of the week.



Our short-term target continues to be the "Brexit" sell-off low in the 1990s. However, we must guard against being complacent in our short-term bearishness. Actually, it is never a good idea to be complacently bullish or bearish, because there is never just one plausible outcome.

Over the past couple of weeks the stock market has mostly done what it needed to do to validate our short-term bearish expectations, but at the same time there are some reasons to be wary. Here they are:

1) The SPX has just declined for 9 days in a row. A daily losing streak of this length is very unusual and has led to the market becoming sufficiently 'oversold' to enable a sizable bounce. The extent to which the SPX is short-term 'oversold' is evidenced by the fact that apart from during the drama of August-2015, at no time over the past four years has the SPX's daily RSI(14) been lower than it is right now.

2) On Friday the SPX reached its 200-day MA at 2083. Short-term declines often bottom at or just below this MA.

3) The SPX has weakened significantly, but the Dow Transportation Average (TRAN) has been holding up extremely well. In fact, while the SPX was validating our short-term bearish outlook by breaking below support, TRAN was consolidating in bullish fashion just below resistance. This is potentially important because TRAN has been the leading stock index to both the downside and the upside over the past 2 years.



The stock indices are likely to trade in a wide range over the next few days as traders first anticipate and then react to the outcome of the Presidential election. Significant weakness should be viewed as an opportunity to take profits on bearish positions.

Hong Kong

Hong Kong's stock market rates a mention in today's report due to a development that occurred after the close of trading last Friday. We are referring to the Hong Kong government's decision, effective immediately, to increase the stamp duty on all residential property purchases to 15%. The stamp duty applicable to property purchases had previously been a sliding scale of 1.5% to 8.5%.

This measure is being taken in an effort to 'cool' the world's hottest real estate market. It is another in a very long line of examples of one problem caused by government or central-bank intervention providing the justification for additional intervention. In this case, the root of the problem is the HK government's determination to maintain the nonsensical HK$ peg to the US$, which requires the importing of destructive US monetary policy.

The news could cause a big sell-off in Hong Kong's Hang Seng Index (HSI) on Monday. Important support lies at 21500, or about 5% below Friday's closing price.



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

Last week we listed five reasons that the US$ gold price had probably made a short-term bottom at $1243 on 7th October and was on its way to resistance in the low-$1300s. We also wrote that we didn't expect the gold price to do much more on the upside over the remainder of the year than test this resistance.

As illustrated below, the expected test of resistance has since occurred.



Under normal circumstances the best we would be expecting from gold in the near future would be a spike up to the $1320s, but these aren't normal circumstances. This is because the 8th November US presidential election constitutes a giant wildcard.

A Trump victory, an indecisive result from the initial vote count, a contested result or evidence of fraud could lead to a much larger spike in the gold price than would otherwise be possible. For example, the 24th June "Brexit" surprise prompted a $100/oz single-day surge in the gold price. A decisive Clinton victory, however, would likely result in a sharp pullback in the gold price, although it probably wouldn't push the gold price below its 7th October low. After all, when gold was bottoming in the $1240s in early-October almost everyone was convinced that Clinton was going to win.

Thanks to the political situation in the US, the gold market is likely to be volatile in an unpredictable way over the next few days.

Gold Stocks

The gold-mining sector was very strong relative to gold bullion in the two weeks following the 7th October bottom and then gold bullion made a catch-up move. This is all perfectly normal. The fact is that the HUI and gold bullion have essentially arrived at the same place, with one then the other showing relative strength. The place they have both arrived at is resistance defined by the early-September low.

That the HUI hasn't yet been able to close above resistance at 220, despite having traded above it on three of the past four days, keeps alive the possibility that there will be a test of the early-October low prior to the start of a more substantial rebound. However, it's more likely that a short-term bottom is in place for the HUI and that a rally to as high as 250 is unfolding.



Here is an update of our chart comparing the HUI's performance from its January-2016 bottom with the performance of the Barrons Gold Mining Index (BGMI) from its 1982 bottom. The price action following the 1982 bottom continues to be the closest historical match to the price action following the January-2016 bottom.

As advised in the past, we'll continue to track this comparison as long as it continues to work.



The 1982-1983 model predicts a December high for the gold-mining sector.

The Currency Market

A week ago, we wrote:

"Regardless of whether a top was put in place at 99 last week or will be put in place at around 100 in the near future, a multi-week top should soon be in place for the Dollar Index. The big question is: Will this top a) be nothing more than a pit-stop on the road to significantly higher levels over the months ahead, or b) mark the end of the intermediate-term rally that began at the May-2016 low?

If the answer is "a" then the downside in the Dollar Index over the next few weeks will probably be limited by support near 97.5, but if the answer is "b" then a decline to the low-90s is about to begin.

We suspect that the answer is "a", because this answer is the best fit with our assessment of the fundamental backdrop. However, our opinion on the matter is not strong."

As a result of last week's price action we can now be sure that a multi-week top was put in place when the Dollar Index rose to 99 during the week before last. Furthermore, the breach of support at 97.5 increases the probability that the recent top will turn out to be the intermediate-term variety.



Despite last week's breach of support, at this stage we aren't drawing any conclusions about whether or not the Dollar Index's recent top was the intermediate-term variety. The reason is that the extraordinary goings-on (the Wikileaks revelations and the FBI investigations) in the lead-up to the 8th November Presidential election are causing significant temporary distortions in the markets. Where the Dollar Index closes at the END of this week could, however, be informative.

Last-ditch support for the Dollar Index's intermediate-term upward trend lies at 96. If the Dollar Index achieves a weekly close below 96 it will be a clear sign that the late-October top was the intermediate-term variety.

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 4th November 2016:

[Note: AISC = All-In Sustaining Cost, FS = Feasibility Study, FY = Financial Year, IRR = Internal Rate of Return, ISR = In-Situ Recovery, 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]

  *Almaden Minerals (AAU) reported results from on-going metallurgical testing associated with the PFS for its Tuligtic gold-silver project in Mexico. The results reported last week indicate 90% recovery for both gold and silver, which is both very good and consistent with the project's PEA.

The company advised that it expects the PFS to be completed early next year.

  *Blackham Resources (BLK.AX) published its quarterly report for the September quarter.

In the introductory BLK write-up included in the preceding Weekly Update we estimated that BLK probably had about A$30M of cash and A$30M of debt for a net-debt position of approximately zero. We weren't far out. The quarterly report showed cash of A$33M and debt of $36M for a net-debt position of A$3M.

The company will probably be cash-flow negative this quarter as it ramps up to commercial production at its Matilda gold project, but we expect that it will be cash-flow positive from the first quarter of next year.

  *Endeavour Mining (EDV.TO) reported very good financial performance for the September quarter. By comparing its balance sheet at 30th September with its balance sheet at 30th June we find that there was a US$106M improvement over the 3-month period.

The one black mark is that the company is not properly accounting for the streaming deal associated with the Karma project obtained via the acquisition of True Gold Mining during the second quarter of this year. This streaming deal constitutes an obligation to sell 20K ounces of gold per year at an 80% discount to the spot gold price. We estimate that it is a roughly US$100M liability at the current gold price, but this liability is nowhere to be found in the "Liabilities" section of the balance sheet.

We view EDV as fully valued at the current gold price, but it offers much better value than most other 500K-1000K oz/year gold producers.

We expect that it will trade in line with the gold-mining ETFs.

  *Energy Fuels (EFR.TO, UUUU) announced that it has entered into a contract to process "alternative feed materials" on behalf of a third party. Alternative feed materials are materials other than conventional ores that contain recoverable quantities of uranium.

The company didn't provide any information regarding the financial effect of this contract.

Also, EFR issued its quarterly report for the September quarter. Although the report shows that the company's balance sheet remains in good shape, the cost of keeping the balance sheet in good shape has been high. Specifically, working capital over the course of this year has fallen by only US$4M (from $35M to $31M), which is superficially a good result considering the lousy uranium market. However, over the course of the year to date the company has issued US$23M of new equity. This means that the company's operations consumed about $27M of cash during the first three quarters of the year.

EFR will continue to leak cash for the foreseeable future and will not be a good candidate for new buying until there is evidence of a turnaround in the uranium price.

  *Timmins Gold (TGD) published its quarterly reports for the September-2016 quarter.

Due to the good production result reported last month, the company was able to add US$8M of cash to its balance sheet during the September quarter. Its balance sheet has now improved by US$36M during this year to date, with working capital rising from a US$14M deficit at the end of last year to a US$22M surplus at the end of September.

Does this mean that TGD is 'out of the woods'?

Yes, it does, as long as the gold price doesn't tank.

As noted in the 29th August Weekly Update, TGD's financial situation and value are highly levered to the gold price. For example, we estimate fair value to be US$0.85/share at $1300/oz and only US$0.39/share at $1200/oz.

TGD is one of the few gold producers listed in North America that is under-valued based on the current gold price.

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 near US$1.10 (last Friday's closing price: US$1.39)

2) BLK.AX (last Friday's closing price: A$0.69)

3) PG.TO (last Friday's closing price: C$3.00)

4) PRQ.TO (last Friday's closing price: C$1.85)

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

Did Oz Minerals (OZL.AX) get away from us?

In the 3rd October Weekly Update we introduced OZL, a mid-tier, low-cost Australian copper producer with a strong balance sheet. The stock was trading in the low-A$6 area at the time.

We wrote that OZL's valuation was low enough to justify buying, but that the price chart suggested an optimum buying price in the low-A$5 area. Our plan was therefore to add OZL to the TSI List if it dropped to A$5.00-A$5.20, although we mentioned that for our own account an initial position had already been established.

The stock subsequently declined to around A$5.70, but then began to strengthen. On Friday it closed at A$7.02, which is a marginal new high for the year.

So, as far as the TSI Stocks List is concerned have we missed the boat on this one?

Possibly. We will not be surprised if OZL breaks decisively to new highs for the year within the coming few weeks, because the valuation is still attractive. However, given our lack of enthusiasm for copper's short-term prospects we won't add OZL to the TSI Stocks List at a time when both it and the copper price are short-term 'overbought' near resistance.



One of the challenges we face with the TSI Stocks List is that stocks are either 100% in or 100% out of the List, meaning that there is no scaling into and out of positions. By scaling into and out of positions an investor obviates any requirement to be accurate with short-term timing, especially when making the initial purchase or sale. For example, we will usually make our initial purchase of a stock, which will generally be at least 25% but not more than 50% of the planned full position, once we become comfortable with the value on offer, almost regardless of what we think is going to happen to the stock price in the short-term.

In OZL's case we bought 50% of a full position and introduced the stock to the TSI readership after we became comfortable with the value on offer, while thinking that we would probably get an opportunity to a) reduce our average cost and b) add the stock to the TSI List at a price at which the value was even better. There is still a realistic chance of the stock price dropping all the way back to the low-A$5 area in response to significant stock-market and commodity-market weakness over the months ahead, but the probability of being able to buy in this range is lower now than it was a month ago.

Chart Sources

Charts appearing in today's commentary are courtesy of:

http://stockcharts.com/index.html
http://www.barchart.com/
http://bigcharts.marketwatch.com/