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   -- Weekly Market Update for the Week Commencing 9th March 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

Price manipulation is not inherently wrong

Total guesswork regarding China's gold holdings

Revisiting the global boom/bust indicator

US Economic Numbers

The manufacturing sector slowdown

Last week the financial markets were focused on the monthly US employment numbers published on Friday, but our main interest was the set ISM manufacturing numbers published on Monday. The employment numbers are significant to the extent that they have some influence on the Fed, but as economic indicators they aren't useful. This is because they lag the economy by at least a few months and because they are often subject to large future revisions. The ISM manufacturing numbers, on the other hand, are significant because they are reliable indicators of how the economy is currently performing and how it will likely perform in the near future.

Of the ISM Report's components, the most useful is the New Orders Index. Here's a chart showing the performance of this index since the beginning of the 21st Century. There has clearly been a slowdown in the manufacturing sector over the past 4 months, but not enough of a slowdown, yet, to suggest that a recession lies around the next corner.



A warning signal of an imminent recession would be generated by a solid break below 50 in the ISM Manufacturing Report's New Orders Index. The above chart shows that there were a few occasions during 2011-2013 when this index dropped to the low-50s, but that on each of these occasions there was no follow-through to the downside and therefore no recession signal.

The economic slowdown reflected by the recent decline in the New Orders Index is probably related to the retrenchment in the US oil industry stemming from the collapse in the oil price. Considering that the oil industry was responsible for a lot of the 'real' growth in the US economy over the past several years, it's possible that the rapid scaling-down currently taking place in this part of the economy will soon push the entire economy into recessionary territory. Possible, but not likely. Given that the New Orders Index is still above 50, that the monetary backdrop is still supportive and that private domestic investment hasn't yet turned down, we think it's safe to assume that the start of the next US recession lies more than three months into the future. On this matter, that's as far ahead as we need to look.

The employment ramp-up

While the ISM numbers contained the more useful information about economic performance, the employment numbers had by far the bigger effect on the financial markets.

The stronger-than-expected employment report published last Friday had a big effect on the financial markets for two reasons. First, a lot of short-term traders rightly believe that the continuation of strong (250K+) monthly gains in the headline jobs-creation number makes it likely that the Fed will commence a rate-hiking program at its June meeting rather than waiting until later in the year. Second, a lot of short-term traders wrongly believe that moving the Fed Funds rate up from 0.25% to 0.50% or 0.75% will make a difference to the monetary backdrop. It won't make a difference, not just because a 0.50% increase is trivial but also because -- as most recently discussed in last week's Interim Update -- the Fed is now able to boost the Fed Funds rate without reducing bank reserves or money supply, that is, without tightening monetary conditions.

Based on changes in the pricing of Fed Funds futures contracts, we know that in reaction to last Friday's US employment news the market went from expecting one-to-two 0.25% rate hikes to expecting two-to-three 0.25% rate hikes during the second half of this year. Not much of a change, but clearly enough to roil the currency, bond, stock and gold markets.

T-Bond Update

The word "extreme" is mentioned often in today's report. It's the single word that best describes current and recent conditions in some of the most important markets. In particular, at this time the currency market is at an extreme and the stock market is possibly near an extreme, whereas in late-January there were extremes in the T-Bond market, the oil market and, by some measures, the gold market. Below is an update of a weekly chart that we included in our 2015 forecast to illustrate the January extreme in the T-Bond.



As we noted in late-January, the 30-year T-Bond had reached the top of the moving-average (MA) envelope that limited the powerful rallies of 2008 and 2011, and the T-Bond's weekly RSI was at its highest level in more than 10 years. This suggested that the T-Bond had minimal additional upside potential over the ensuing 12 months and that a significant correction was likely. The correction obviously began a short time later and is probably not complete, although we expect that the T-Bond will attract 'flight to safety' buying when the stock market suffers its next meaningful decline. This could lead to the T-Bond making a short-term bottom this month and then rallying back to near its January high as part of a longer-term corrective process.

The Stock Market

Last Friday was the first time in a long time that good economic news was taken negatively by the US stock market due to the effect of the news on interest rates. However, we doubt that stocks and T-Bonds will decline together over the weeks immediately ahead. It's more likely that the T-Bond will soon begin to rebound if it turns out that a significant stock market downturn has just begun.

The only reason we attribute significance to last Friday's pullback in the S&P500 Index (SPX) is that it happened a few weeks after an upside breakout to new highs and invalidated the breakout. Failed breakouts tend to be important.

A short-term and a potentially longer-term bearish signal could now be generated by the following 3-step process:

1. An interim low within the next couple of trading days.

2. A rebound to a lower high (ideally, around 2090).

3. A daily close below the Step 1 low.



Here are two other charts of interest. The first shows that there is now either a triple or a quadruple top (depending on whether or not we count the November top) in place for the NYSE Composite Index (NYA). Note that it would be strange, although not impossible, for a major top in the NYA to be put in place via three or four coincident highs. The second shows that the Bank Index (BKX) moved well above short-term resistance during Friday's trading session before giving up almost all of its gains and ending the day below this resistance.

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

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

Retail Sales
Import and Export Prices
Business Inventories

Friday Mar 13 PPI
Consumer Sentiment

Gold and the Dollar

Gold

Extremes

What we write about the price action often seems to be in the eye of the beholder, in that different people read the same market analysis and come away with completely different impressions. We know that this is the case because of the feedback we receive from our readers.

There is a good example in the gold-related emails we received in the aftermath of Friday's market action. Among several emails was one that criticised us for not foreseeing the severity of the recent gold price decline and for 'moving the bar' on gold's correction. Another email contained a thankyou note for helping to keep the reader out of trouble via our warnings of gold market weakness near the January price top and subsequently. A third email congratulated us on being very accurate with our short-term gold market analysis over the past four months. All of these emails were from long-term TSI supporters who have seen many ups and downs in the markets and the TSI service.

We appreciate all the feedback, but, in truth, it's rare that we make a definitive short-term call about gold or any other market, because we realise that short-term price movements are largely sentiment-driven and unpredictable. The best we can generally do is weigh risk against potential reward. This means that it is rare for us to be either right or wrong about the short-term market action. The reality is that we usually don't have an opinion. However, like everyone else with chart-reading experience we can identify support and resistance levels that have the potential to limit short-term price trends.

The more extreme the price action the more likely it is that we will make an actual "call", thus leaving ourselves open to being either right or wrong. Within the past six months, for example, the crash pattern that completed in the gold-mining sector in early-November of last year enabled us to make the call (which turned out to be correct) that an important bottom was in place and that the bottom would probably be tested within a few weeks prior to the start of a tradable rally. Another "call" was made possible during the second half of January when the non-US$ gold price became so extended to the upside that a substantial correction was a near certainty. However, during the same 6-month period we've been wrong about the currency market. In the currency market's case the price action became extreme enough on more than one occasion to prompt us to make a short-term "call", but the anticipated reaction to the extremity hasn't yet happened. It will happen, but our timing was obviously wrong.

Current Market Situation

The January extreme in the euro-denominated gold price (gold/euro) is illustrated by the following chart. After pulling back to its 200-day MA in December, gold/euro rocketed upward and four weeks later was at the top of a MA envelope that had always limited intermediate-term rallies in the past. At this point there was a high probability that a downward correction lasting at least a few months was about to begin, as we noted at the time.

The historical record suggests an eventual decline to the 200-day MA prior to the start of the next intermediate-term advance. The 200-day MA is rising and we suspect that it will intersect the price 2-4 months from now at somewhere above 1000 euros.



Gold's position at the late-January peak wasn't anywhere near as extreme in US$ terms as it was in terms of the euro and many other currencies. However, with regard to the US$ gold price both the daily RSI(14), a momentum indicator, and the speculative net-long position in COMEX gold futures, a sentiment indicator, were at 2-year highs in late-January. This suggested that a short-term correction was a good bet, but other than $1250 being a high-probability initial target the extent of the correction was unknowable in advance.

Corrections continue until they've done what they need to do. We guessed that gold's correction needed to reduce the speculative net-long position by around 70K contracts, which it had done by the week before last. Also, prior to last week gold's daily RSI had dropped to around 40, which is as low as it will typically get during a routine short-term correction. By the start of last week gold's correction had therefore done what it needed to do to set the stage for a multi-week rally, but this didn't guarantee that a rally was about to begin. The markets aren't that straightforward.

Signs that gold's correction was not yet ready to end appeared last Wednesday, when the HUI broke below its 50-day MA and the HUI/gold ratio dropped to a multi-week low. Hindsight is always 20/20, but in real time these signs didn't say anything more than "the correction will probably extend into the ensuing week".

Friday's plunge in the gold price undoubtedly caused a further significant reduction in the speculative net-long position in the gold futures market. Also, the gold price has just fallen for 5 days in a row and the daily RSI has dropped below 30. This means that the US$ gold price is nearing an 'oversold' extreme, although it isn't quite there yet.

As an aside, an 'oversold' extreme shouldn't be reached during a routine short-term correction. Instead, the market should reverse course well before it reaches an extreme.



In US$ terms the gold market is almost as 'oversold' today as it was 'overbought' at the short-term peak in January. The stage is therefore set for an upward reversal, but the reversal could be preceded by some additional down-days.

Whether it happens as part of the current decline or during the second quarter of this year after an intervening a multi-week rebound, there is a high probability that last year's low will be tested.

Gold Stocks

Like gold, the HUI has fallen for five days in a row and is now nearing an 'oversold' extreme. However, it has only just broken below important lateral support at 180, so we can't confidently predict that there will be an immediate upward reversal. In fact, an immediate upward reversal wouldn't necessarily be bullish beyond the very short-term. Now that support has given way, three or more additional down days in a row would create a much better chance of a sustainable bottom.



Unfortunately, Friday's breach of support suggests that the next multi-week rally will end at a lower high for the year (that is, below 210). The 200-day moving average could be a realistic short-term upside target, but there's no point giving much thought to the magnitude of the next rally until after evidence emerges that the decline has ended.

The Currency Market

By reliable measures the T-Bond, gold in non-US$ terms and oil reached intermediate-term extremes (highs for the T-Bond and non-US$ gold, low for oil) in late-January. By similar measures the Dollar Index also reached an extreme in late-January, but unlike the other markets it didn't reverse course. Instead, it traded sideways for a few weeks and then resumed its steep advance. As a consequence, an intermediate-term extreme has turned into an extreme for the ages.

The following chart illustrates the extreme. Specifically, the top section of the following chart shows that the Dollar Index is in the midst of its largest-ever sustained move above its 200/8 MA envelope (an 8% envelope around the 200-day MA). It went further above the top of this MA envelope in 2008, but in 2008 the move was more quickly reversed. The bottom section of the same chart shows that the Dollar Index's 250-day rate-of-change (ROC) was only higher near its 1985 and 2008 peaks, and was only significantly higher at its 1985 peak.

The chart's overarching message is therefore that the Dollar Index is now at the second or third most 'overbought' level since the advent of the current monetary system. Furthermore, it was only during the final months of the major upside blow-off that ended at the all-time high of Q1-1985 that the Dollar Index was significantly more 'overbought' than it is right now.

Perhaps it will turn out to be important that we are now almost 30 years to the day from the major peak of Q1-1985.



The continuing rapid advance in the Dollar Index has no regard for anything. Even the relative strength in European equities relative to US equities, as indicated on the following chart by the VGK/SPX ratio, has failed to turn the tide, creating the biggest divergence in years between the VGK/SPX ratio and the euro.



The historical record tells us to expect the Dollar Index to suffer a 1-2 month decline of at least 10% after the current blow-off runs out of steam. Be aware, though, that having come this far the blow-off could extend to the 'magical' 100 level before the expected 10%+ decline gets underway.

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 March 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]

  *Almaden Minerals (AAU) advised that all field work and testing related to the Tuligtic project's PFS and environmental permitting will be completed by May of this year, allowing for the completion of the PFS and submittal of environmental permits later in 2015. The company also confirmed that a shareholder vote to enable the spin-out of its exploration and royalty assets into a separate company was still planned for June.

  *Clifton Star (CFO.V) made an announcement last Monday that we view in a positive light. The company announced that it had settled the legal action relating to a C$22.5M loan that should originally have been provided by Osisko more than 2 years ago. Under the terms of the settlement, CFO is receiving C$11M of cash. In return, CFO will release the new owners of Osisko (Agnico Eagle and Yamana) from any further liability associated with the loan and will issue a combined total of 9.6M. With a total post-deal share count of 48M, this means that the Agnico-Yamana combo will end up with 20% of CFO.

This deal will boost CFO's working capital (cash) to C$14M, which equates to about C$0.29/share. The company has no long-term debt, which means that at Friday's closing price of C$0.21 (up about 100% over the week, but obviously from a very low base) it is trading at a substantial discount to its cash in the bank.

Unfortunately, with the option on 90% of the Duparquet gold project having been let go, CFO has no assets of significance apart from its cash. It still holds 10% of Duparquet, but this doesn't have much value at the moment. Therefore, we think that the stock is currently worth no more than its cash in the bank (C$0.29/share).

However, there is still a chance that the efforts of former CEO Harry Miller to replace the current board and renegotiate the Duparquet option will be successful. A lot will now depend on how Agnico-Yamana votes its 20% stake. In other words, CFO could still end up with significant cash and a decent mining asset.

For existing shareholders it could make sense to do some selling if the CFO stock price moves up to near its cash backing (C$0.29) over the weeks immediately ahead and to retain some exposure due to the potential for corporate activity.

  *Lydian International (LYD.TO), a former member of the TSI Stocks List, warrants a mention in today's report due to its price action over the past week. The price action (see chart below) is interesting because it was very much at odds with the performance of the overall sector and was not the result of company-specific news. Why was LYD, an exploration-stage miner with a sub-economic (at the current gold price) gold deposit in Armenia, being accumulated in a down market last week? We don't know. It could be that a corporate deal (takeover or JV) is in the works. It could also be something as simple and fundamentally irrelevant as the stock being mentioned favourably by a widely-followed newsletter-writer, journalist or broker.



  *Premier Gold (PG.TO) reported drilling results from its Rahill-Bonanza (RB) gold project in Ontario, a JV with Goldcorp (PG owns 49% of the project). The results indicated some potential, but weren't anything to write home about. The best intercept was 15.79 g/t Au over 2.13m.

PG also advised that it will be conducting a major exploration program this year at its newly acquired Hasaga gold project in Ontario. The program is expected to include up to 30,000m of drilling.

  *Pilot Gold (PLG.TO) provided an update on the progress of exploration at its Kinsley Mountain gold project (79% PLG, 21% NEV.V) in Nevada. A recent hole drilled between the Western Flank high-grade gold zone and the historic pits in the Kinsley Trend provided the first confirmation that high-grade mineralization is present between the two mineralized zones. The relevant intercept was 6.15 g/t gold over 7.6m.

The 2015 exploration program at Kinsley is currently budgeted at a modest $2M and is planned to involve only 11,000m of drilling, but PLG said that the exploration work will be iterative and that the program will be continually evaluated in light of data from each drill hole. This suggests that the plan could change and the budget could increase depending on drilling results achieved.

Kinsley Mountain continues to have great potential.

  *Pretium Resources (PVG) issued its financial statements for the quarter and year ending 31st December 2014. It also updated the market on its progress.

The financial statements indicated that PVG had C$33M of working capital at the end of last year. Allowing for subsequent spending and a large equity financing, we estimate that the company now has about C$120M of working capital. This is more than enough to get it to the point where it makes a construction decision for the Brucejack gold project.

A decision to proceed with the construction of a mine can't happen until PVG receives the necessary environmental permits. If all goes according to plan, the permits will be issued within the next two months. We expect that this aspect of the project will go according to plan, but permitting will remain a risk until the permits are in hand.

If PVG is going to be taken over by a major or mid-tier mining company it will probably happen after the environmental permits are issued and before the money needed to finance the $747M initial capex is raised. We are not optimistic that a takeover will happen this year, but it's a realistic possibility.

Based on the June-2014 FS for the Brucejack project, PVG offers very good value near its current stock price of US$5.41. However, the price will probably have to fall to US$5.00 or lower for PVG to be among our top five candidates for new buying.

  *True Gold Mining (TGM.V) issued a press release summarising the current state of play at its Karma gold project in Burkina Faso, where construction was suspended in mid-January in response to a violent protest. Here are our main takeaways from the press release:

1) TGM expects to be 10 months from the first gold pour once construction activities fully resume. This means that if construction were to fully resume by the end of April then the first gold pour would be expected to occur next February, which would be about three months behind the original schedule.

2) The financial extent of property damage caused during the protest is estimated to be about $6M, about $2M of which will be covered by insurance. This means that TGM will incur a cost of about $4M to fix the damage.

3) The company implemented a "technical shutdown" to minimise capital expenditures until construction can resume. During this shutdown the company is providing financial assistance to its employees, thus paving the way for operations to be quickly re-started.

4) The Karma project has the support of the federal government.

5) Negotiations with local leaders and other stakeholders are proceeding in a generally positive way, but the date for resuming construction is still not known.

TGM will not be a good candidate for new buying until the issues that led to the work suspension are put to bed and the date for the resumption of construction is known.

    Note regarding new buying of gold stocks

With the HUI having broken below its 50-day MA as recently as last Wednesday and support at 180 as recently as last Friday, it's important not to be aggressive with new buying. An upward reversal could occur within the next couple of trading days, but there could also be significant follow-through to the downside over the days immediately ahead.

Listed below are the stocks that we think are the best candidates for new buying at or near current prices, but note that if there is significant sector-wide follow-through to the downside then better buying opportunities could arise elsewhere. In particular, be on the lookout for opportunities to buy Dalradian Resources (DNA.TO) in the low-C$0.80s, McEwen Mining (MUX) in the low-US$0.90s, Premier Gold (PG.TO) in the C$2.00-$2.20 range and Pretium Resources (PVG) at around US$4.80.

    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$0.97).

2) AKG (last Friday's closing price: US$1.41).

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

4) EVN.AX in the low-A$0.80s (last Friday's closing price: A$0.86).

5) TGD (last Friday's closing price: US$0.79).

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.

Chart Sources

Charts appearing in today's commentary are courtesy of:

http://stockcharts.com/index.html
http://research.stlouisfed.org/



 
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