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   -- Weekly Market Update for the Week Commencing 9th February 2015

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 ended in 2012. In real (gold) terms, bonds commenced a secular BEAR market in 2001 that will continue until 2018-2020. (Last update: 20 January 2014)

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)

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Outlook Summary

Market
Short-Term
(1-3 month)
Intermediate-Term
(6-18 month)
Long-Term
(2-5 Year)
Gold N/A Bullish
(26-Mar-12)
Bullish
US$ (Dollar Index) N/A Bearish
(26-Jan-15)
Neutral
(19-Sep-07)
US Treasury Bonds (TLT) N/A Neutral
(18-Jan-12)
Bearish
Stock Market (DJW) N/A Bearish
(28-Nov-11)
Bearish
Gold Stocks (HUI) N/A Bullish
(23-Jun-10)
Bullish
Oil N/A Bullish
(17-Dec-14)
Bullish
Industrial Metals (GYX) N/A Neutral
(15-Sep-14)
Bullish
(28-Apr-14)

Notes:

1. Our short-term expectations are discussed in the commentaries, but except in special circumstances we won't attempt to assign a "bullish", "bearish" or "neutral" label to these expectations.

2. The date shown below the current outlook is when the most recent outlook change occurred.


3. "Neutral" means that we think risk and reward are roughly in balance with respect to the timeframe in question.

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

Spurred on by the Fed, banks are blowing bubbles again

Money Supply and recession indicators

Just when I thought it couldn't get any worse...

Chris Powell goes off on a tangent

The Stock Market

The US

The Big Picture

The following chart was extracted from the article posted HERE and shows that NYSE margin debt remains below its February-2014 peak. Because major peaks in NYSE margin debt have a track record of occurring prior to major peaks in the S&P500 Index, this is a warning that a major topping process is underway in the US stock market. In fact, it is one of two warnings, the other being the downward reversal in the SPX/T-Bond ratio discussed in previous commentaries over the past few months.



Current Market Situation

The US Bank Index (BKX) has rebounded strongly since re-testing critical support at 66. It ended last week at its 50-day MA, which means that the current price is a likely place for a downward reversal IF we are dealing with a counter-trend rebound within a declining trend.

A weekly BKX close below 66 would be persuasive evidence that a major top was in place.



The senior US stock indices ended last week at short-term resistance. Due to their chart positions they will either reverse lower almost immediately or signal that there is at least one more new multi-year high in store prior to a major top.

However, one sector of the market could suffer a sizable decline over the next few months even if the broad market's bullish trend remains intact. We are referring to the REIT sector, represented on the following chart by Real Estate iShares (IYR). The chart also shows the 20+ Year Treasury Bond Fund (TLT).

IYR tends to perform like a leveraged play on long-term interest rates, with a declining trend in the T-Bond yield generally coinciding with an upward trend in IYR and a rising trend in the T-Bond yield generally coinciding with a downward trend in IYR. That's why the following chart reveals a strong positive correlation between IYR and TLT.

We suspect that the T-Bond yield will be roughly flat over the course of this year, but that with the T-Bond price having hit an 'overbought' extreme in January (refer to the chart in the 26th January Weekly Update for details) there is a good reason to expect a significant downward correction in price and upward correction in yield over the next few months. If this correction occurs it will probably result in a tradable decline in IYR, which appears to be rolling over to the downside from an 'overbought' extreme of its own.

We don't have any specific suggestions, but for some traders it could make sense to average into a bearish IYR speculation over the coming 1-2 weeks. A decline to the low-70s looks feasible.



Europe

Germany's DAX Index, France's CAC40 Index and the EURO STOXX 50 Index have recently broken above last year's highs. Italy's MIB (Milano Italia Borsa, not Men In Black) Index hasn't managed to break above last year's high, but the following chart shows that it has broken out to the upside from an intermediate-term channel.



The recent strength in European equities, not only in nominal currency terms but also relative to US equities, is probably due to acceleration in the rate of euro-zone monetary inflation during the final two months of last year. With additional ECB money-pumping scheduled to begin in March there's a decent chance that this nominal and relative strength will be sustained for at least a few more months.

Japan

After rocketing upward in late-2012 and early-2013 in anticipation of the "Abenomics" pro-inflation program, the Japan iShares ETF (EWJ) has oscillated within a wide rectangle. This long-term pattern is neutral, in that it could be a lengthy sideways consolidation or it could be a lengthy topping process.



Our view is that one of the following two Japan-related outcomes will happen this year (probably during the first half):

1. EWJ breaks above resistance at $12.20 and moves sharply higher

2. The Yen gains 10%-20% against the US$

There's a small chance that both will happen, but there's a good chance that at least one will happen. That's why we like the 'pair trade' that involves owning long-dated FXY (Yen) and EWJ call options.

This week's significant US economic events (The most important events are shown in bold)

Date Description
Monday Feb 09 No important events scheduled
Tuesday Feb 10 No important events scheduled
Wednesday Feb 11 Treasury Budget
Thursday Feb 12

Retail Sales
Business Inventories

Friday Feb 13 Consumer Sentiment
Import and Export Prices

Gold and the Dollar

Gold

The futures market and the gold price

It is sometimes said that the trading of paper gold, such as gold futures, drives the gold price. This is not true. The trading of gold futures will often have a significant effect on price performance, but the effect will be short-lived and fully reversed unless it is supported by what's happening in the underlying physical market.

That futures trading can only have a short-lived effect on price is evidenced by the fact that almost all positions in the gold futures market are short-term, with every buyer of futures today necessarily being a seller tomorrow (not literally "tomorrow", but within the next few months) and every short-seller of futures today necessarily being a buyer tomorrow. It is also evidenced by the fact that the opening of a new futures contract involves both a purchase and a short-sale.

That being said, in the past there has been a long-term relationship between the futures market and the gold price. The relationship is that the trend in futures open interest (OI) moves in the same direction as the price trend. In other words, during a gold bull market the OI will generally trend upward, meaning that the number of contracts purchased and the offsetting number of contracts sold short will tend to make progressively higher highs along with the price. And during a gold bear market the OI will generally trend downward, meaning that the number of contracts purchased and the offsetting number of contracts sold short will tend to make progressively lower highs along with the price. This relationship can be seen by comparing the top and bottom sections of the following chart (the top section shows the gold price and the bottom section shows the COMEX gold futures open interest). By the way, this means that the amount of gold sold short on the COMEX was less in 2014 than it was in 2011.


                                   Chart Source: http://www.sharelynx.com/

The other point that deserves to be made and that can be made with the help of the same chart is that speculators move in synch with the price trend. This is evidenced by the fact that the net speculative position in gold futures (the red bars in the middle section of the chart) was generally short during the 1996-2000 cyclical decline and became increasingly long as the price rose from its 2001 bottom to its 2011 peak.

The tendency for the speculative net-long position in the futures market to rise and fall with the gold price stems largely from the fact that many speculators in the futures market are trend followers. However, we believe that it is also partly due to some speculators making correct assessments of gold's true fundamentals or correctly anticipating changes in gold's true fundamentals.

In any case, the speculative net-long position tends to rise and fall with the price. Since it is mathematically impossible for the speculative net-long position to increase without an offsetting increase in the commercial net-short position (the blue bars in the middle section of the above chart), this means that as the price rises the commercials tend to become increasingly net-short and as the price falls the commercials tend to reduce their collective net-short position. It also means that the commercials will always look wrong while the price is trending upward and look right at price peaks.

The final point we'll make is that the maximum net-long position of large speculators and the maximum total speculative net-long position (the net-long positions of large speculators plus small traders -- the exact opposite of the commercial net-short position) appeared to be limited to around 250K contracts and 300K contracts, respectively, during the cyclical bull market that ended in 2011. We don't know why this was the case, but we expect that, just as OI and total position-size records were broken during the 2005-2011 period, the aforementioned limits will be exceeded during the next bull market.

Current Market Situation

The catalyst for last Friday's sharp decline in the gold price was news that the US economy was doing better than expected, or at least news that was interpreted this way. However, gold's decline on Friday was less about economic news than the extent to which the market had become 'overbought'. In US$ terms the price didn't look stretched to the upside, but speculators had piled into long futures positions over the preceding few weeks. This made the market vulnerable. Also, in non-US$ terms the gold price clearly did look stretched to the upside -- sufficiently so that we were (and still are) expecting a few months of 'corrective' activity.

Gold's recent 'overbought' condition in non-US$ terms is illustrated by the following charts of the euro-denominated gold price and the gold/oil ratio. Note that the large and steep rise in the euro-denominated gold price is why speculators are simultaneously net-long gold futures in a big way and net-short euro futures in a big way (the speculative net-long position in gold futures is at a 2-year high and the speculative net-short position in euro futures is within spitting distance of an all-time high).





As we keep saying, it could easily take a few months to 'correct' these extremes.

In US$ terms the short-term situation is illustrated below. Notice that Friday's decline ended just above the 50-day MA.



The correction in the US$ gold price will probably continue for a minimum of a few more weeks, but that doesn't imply that there will be significant additional price weakness prior to the start of a rally to new highs for the year. As mentioned a week ago, based on past performance it is reasonable to anticipate a correction that is long enough and/or deep enough to reduce the total speculative net-long position in COMEX gold futures by at least 70K contracts. This could potentially be achieved via additional price weakness or a multi-week period of choppy sideways movement.

Brief note on silver

Our most recent comment on silver was in the 19th January Weekly Update, at which time we wrote that silver would probably soon test, but not breach, important resistance at $18.50-$19.00. It subsequently traded as high at $18.50 and then embarked on a correction.

Like gold, silver plunged to its 50-day MA last Friday. It ended the week exactly at this moving average.



Other than not expecting it to exceed resistance at $18.50-$19.00 within the next few weeks, we don't have an opinion on how silver will perform in the near future. It could rebound from the 50-day MA, but it could also continue to work its way down to intermediate-term support at $15.00-$15.50.

Gold Stocks

At that end of last Thursday's trading session the HUI's price pattern was neutral with regard to near-term direction, in that it didn't contain any clues as to whether the price would break above resistance in the low-200s or break below support in the mid-190s. However, in last week's Interim Update we said that regardless of the direction of the coming breakout, a decline to near the 50-day MA (at 179 and rising) was likely prior to the next correction low and was needed to create the next sector-wide buying opportunity.

In response to last Friday's release of positive economic data in the US, the gold price quickly fell 2.6% and the gold-mining indices fell with gold. The HUI closed below its 20-day MA for the first time this year.

As a result of this price action there is now a high probability that the HUI's January peak was the top of the initial rally from last year's crash low, but otherwise nothing has changed. Our expectation continues to be that a decline to the 50-day MA or lateral support at 180 is on the cards and that a decline of that magnitude would set up the next sector-wide (as opposed to stock-specific) buying opportunity. Stock-specific buying opportunities already exist, with EDV.TO being the most obvious.

We plan to add a new gold stock to the TSI List in the near future, but our first choice for the new selection will have to fall in price by around 10% from its current level to create the buying opportunity we want.



The HUI has performed well relative to gold bullion over the past seven weeks and should continue to do so if a new bull market is underway.

The Currency Market

The strong rise in the Dollar Index from a December low of 88 to a January high of 96 was mostly about problems in the euro-zone and declining confidence in the ECB, but last Friday's rise in the Dollar Index was clearly driven by the perception of US economic strength. That's why, for at least one day, gold and the US$ went back to being negatively correlated. In other words, economic data that created the impression that the US economy was doing better than generally thought propelled the US$ upward and gold downward.

However, the market reaction to last Friday's US employment report could aptly be described as subdued, considering that it represented the most bullish employment news in years. The report included greater than expected job creation in January, large upward revisions to the job-growth numbers reported in previous months, and a robust increase in hourly earnings. Even the up-tick in the unemployment rate was a sign of strength in that it was the result of more people entering the workforce. Why, then, did the Dollar Index do no better than rebound to the top of the little downward-sloping channel drawn on the following daily chart?

The answer is that the Dollar Index was near an historic extreme when it peaked in January and is still close to its most 'overbought' level ever. With 9 out of every 10 speculators already bullish on the US$ and bearish on the euro, it is going to be very difficult for the Dollar Index to break above its January high prior to a substantial correction.



The price action hasn't yet confirmed a short-term top in the Dollar Index, so we should allow for the possibility that the January high will be tested and perhaps marginally exceeded before a substantial correction gets underway. Uncertainty regarding the outcome of the new Greek government's debt-related negotiations with its EU partners could get in the way of a euro rally and help the US$ stay near its high for another week or two.

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 ended Friday 6th February 2015:

[Note: AISC = All-In Sustaining Cost, 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]

  *Endeavour Mining (EDV.TO, EVR.AX) announced that it has received the final signed mining permit to develop and operate the Hounde gold project in Burkina Faso. Based on the FS completed in November of 2013, if the Hounde project were developed into a mine it would add about 180K ounces to EDV's annual production.

The FS indicated that the Hounde project would be economically viable, but not robust, at a gold price of $1300/oz. According to EDV, updated details on the economics of the project will be provided in the near future.

  *Energy Fuels (EFR.TO, UUUU) is making preparations to restart uranium production at the Canyon mine in Arizona. Most of the surface development is in place at Canyon. To complete the mine the company plans to extend the existing shaft by 1,200 feet and install two ventilation shafts.

No timeline for the aforementioned work has been provided, but it's unlikely that EFR will need or want additional production until the earlier of 2018 and the time when the spot uranium price makes a solid break above $50/pound.

The current uranium price is around $38/pound and the market is showing signs of strength.

  *Pilot Gold (PLG.TO) reported last October that it had discovered another gold-copper porphyry deposit, called the Columbaz Target, at its TV Tower project in Turkey. This is the 5th deposit and 3rd gold-rich porphyry discovered at the project.

Three holes drilled to follow up on the Columbaz discovery hole encountered significant mineralisation. The grades are low, but the widths are substantial (e.g. 0.36 g/t Au and 0.13% Cu over 499.1 metres) and the mineralisation begins at the surface.

  *Premier Gold (PG.TO) announced very positive news. The news is that PG.TO has done a joint-venture deal with Centerra Gold (CG.TO) concerning the development of PG's Trans-Canada (TC) gold project in Ontario. It is very positive because it a) immediately injects a lot of cash into PG, b) almost certainly means that PG won't have to spend anything on the TC project for at least the next 12 months and perhaps for much longer, c) greatly de-risks the project, and d) is a clear-cut vote of confidence in the economic potential of the TC project.

The specifics of the JV deal are as follows:

1) The JV will be owned 50/50 by PG and CG

2) PG's contribution to the JV will be the TC project

3) In exchange for obtaining its 50% interest in the JV, CG will a) make an up-front payment of C$85M directly to PG, b) pay the next C$185M of development expenses, which is expected to cover a resource re-estimate, a Feasibility Study and part of the initial capex, and c) make an additional payment of between zero and C$30M to PG, with the actual amount determined by the resource re-estimate.

The immediate financial benefit to PG from the deal is therefore between C$177.5M and C$207.5M ($85M plus half of $185M plus a contingent payment of $0-$30M). This is obviously very significant for a company that had an enterprise value of around $300M prior to the announcement of the deal.

That PG was able to do this deal in the current moribund market is a credit to Ewan Downie, its CEO. Downie is clearly one of the savviest business managers in the junior gold-mining sector.

We estimate that PG currently has about $30M of working capital, so as soon as this deal is consummated the company should have about $115M of working capital and no need to spend anything on its flagship project for the foreseeable future. Part of this cash hoard will no doubt be used by PG to add value to its Cove-McCoy gold project in Nevada and its Rahill-Bonanza gold project in Ontario.

  *Ramelius Resources (RMS.AX) estimates that it made a pre-tax profit of A$5.7M during the 6-month period ending 31st December 2014. Full details will be provided in the half-year report due later this month.

The return to profitability is obviously a positive change, but our main concern/interest is the improvement to the balance sheet stemming from free cash-flow. We'll find out what this was when the company publishes its half-year report later this month.

  *Sabina Gold and Silver (SBB.TO) announced that Rob Pease, the company's current CEO, is about to retire and will be replaced by Bruce McLeod. We view this news as neutral. We have not been impressed with Rob Pease and view his departure as a plus, but his replacement has a checkered past. In particular, although Bruce McLeod has a lot of worthwhile experience, he most recently presided over the slide into bankruptcy of copper miner Mercator Minerals.

  *Timmins Gold (TGD) reported drilling results that reveal the potential for a satellite deposit several kilometres to the north of the company's San Francisco gold mine in Mexico, but it is far too early in the exploration process to determine the extent to which this potential can be converted into new production.

    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) AKG (last Friday's closing price: US$1.46).

2) EDV.TO (last Friday's closing price: C$0.59).

3) PG.TO following a pullback to C$2.10-$2.20 (last Friday's closing price: C$2.44).

4) TGD (last Friday's closing price: US$1.01).

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.

    Insider Buying

For insider buying or selling to be noteworthy, it must be substantial. Over the past three weeks there has been noteworthy insider buying in two TSI stocks.

The most significant buying has come from company insiders at Endeavour Mining (EDV.TO, EVR.AX). From 20th January through to 2nd February, EDV insiders purchased around 1.1M shares in the C$0.57-C$0.66 range. EDV insiders therefore clearly believe that the stock offers excellent value near its current price, but what would they know.

There was also significant buying of True Gold Mining (TGM.V) shares by Mark O'Dea, the company's most important "insider". Specifically, from 28th January through to 4th February O'Dea bought 315K shares in the C$0.16-$0.19 range. This represents a meaningful show of support at a time when the company and the stock are under pressure due to a major community-relations issue.

Chart Sources

Charts appearing in today's commentary are courtesy of:

http://stockcharts.com/index.html



 
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