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

A spur-of-the-moment trip to Hong Kong

As warned in the email sent to subscribers late last week, today's report is shorter than usual due to our unscheduled trip to Hong Kong to get a first-hand look at the protests (now commonly referred to as the "Umbrella Movement"). The protests are taking place in three parts of HK -- in the streets around the central government offices in Admiralty (near Central on Hong Kong Island), along part of Nathan Road in Mong Kok (a major shopping area on the Kowloon side of HK), and Causeway Bay (a popular shopping/tourist area on Hong Kong Island). We visited the first two locations on Saturday morning and returned to the second location (Mong Kok) on Saturday night. After posting this Weekly Update on Sunday morning (HK time) we'll be heading back to the first protest location (Admiralty) to see if anything is going on. We will post some photos at the TSI Blog within the next couple of days.

Our general impression to date is that this is one of the most peaceful protests ever. Protestors have blocked off some main streets using makeshift barricades and set up camp (there are thousands of tents on the streets in the protest areas), but apart from the numerous signs demanding "civil nomination" for political office and a few people giving speeches to small crowds at night-time, it doesn't even seem like a protest. There was a police presence at Mong Kok (a few dozen uniformed police men and women were standing around the outside of the protest area looking bored), but not at Admiralty.

Overall, it appears to be business as usual in HK. Most people are going about their daily lives as if nothing out of the ordinary is going on and Hong Kong has adjusted to having no vehicular access to the parts of the city occupied by the protestors. However, the situation could turn ugly, as it did for a few days in September, if the government makes another attempt to forcibly remove the protestors.

We suspect that most HK residents do not want to 'rock the boat' for the sake of greater political freedom. After all, it is better to live well and not have the right to vote than have the right to vote but not know where your next meal is coming from.

There are some serious economic problems in HK, but these problems aren't going to be addressed by 'the people' gaining more influence over who occupies the top political offices. The main problem here is the high and rapidly-rising cost of living, which is a ramification of HK being wedged between the inflationary policies of the US and China. Due to the HK dollar's peg to the US dollar, HK's monetary authority essentially follows the US Federal Reserve. Consequently, interest rates are still being held near zero, which is where they have been for several years, and the money supply continues to be inflated at a brisk pace (it is up by 15% over the past 12 months), despite the steep upward trend in prices. At the same time, as a result of the appreciation of the Yuan relative to the US$ and the large price rises in China's major cities, prices in HK still appear reasonable to the mainland Chinese who continue to flood into HK to spend money.

Reversals

Uranium Update

Prior to last week the uranium-mining sector of the stock market had failed to respond in any positive way whatsoever to a 30% rebound in the uranium price. This was a puzzle. Considering last week's market action, the solution to the puzzle might be that uranium-mining stocks have effectively been tied to gold-mining stocks over the past few months by virtue of having many of the same shareholders. That would explain why the uranium sector, having ignored the rally in the uranium price from its June low, suddenly reversed upward in spectacular fashion last Friday, the day after an upward reversal in the gold-mining sector.

The reversal in the uranium-mining sector is obvious on the following weekly chart of the Global X Uranium ETF (URA). Note that all of the week's gain happened on Friday.



The leader to the upside was Cameco Corp. (CCJ), the world's largest publicly-traded uranium producer. The following daily chart shows that CCJ gained 12% on Friday.



Last Friday's moon-shots in URA and CCJ came out of the blue. Prior to Friday we had planned to suggest the gradual accumulation of some long-dated CCJ call options (January-2016 $20 calls) in today's report, thinking that there was no hurry. However, with CCJ having suddenly moved up to just above the top of a well-defined channel and just below intermediate-term lateral resistance, this is not a great time for new buying.

A pullback to around $17.50 would now represent an opportunity to buy the stock or the options.

The Stock Market

At the beginning of last week (in the 3rd November Weekly Update), we wrote:

"Our expectation is that regardless of the intermediate-term outlook, the October low (the low-to-mid 1800s for the SPX) will be tested within the next several weeks. In anticipation of this short-term outcome we purchased an initial position in SSO January-2015 $100 put options on 22nd October and added to the position last Friday. Our current plan is to take profits on these puts if the SPX falls to the mid-1800s during the next 6 weeks or exit at a loss if the SPX makes a new high after this week (we are allowing for some additional strength over the next few days)."

When we wrote the above our expectation was that the SPX would have pulled back to a sufficient extent from whatever new high was made during the first three days of the week to at least suggest the possibility of a short-term reversal. However, the SPX made a marginal new high on Friday and ended the week only two points below this high. This means that there isn't yet the slightest suggestion of a reversal and that the market hasn't yet given us a level at which we should admit defeat on our SSO put options.

Over the days immediately ahead a reversal would be suggested by an SPX daily close below 2000.

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

Gold and the Dollar

Gold

There was a clear-cut upward reversal in the gold market on Friday, with the price first dipping to a new multi-year low of $1130 and then quickly recouping all the losses of the preceding few days. However, the price hasn't yet rebounded by enough to paint the recent breech of the $1180 'triple low' as a false breakdown. As illustrated by the following daily chart, Friday's impressive action took the price back to the breakdown level.

Having acted as support from June-2013 through to October-2014, the area around $1180 is now an important resistance level. Getting above this level (say, $1185) on a daily closing basis would create a near-term target of the 50-day MA.



Gold Stocks

Current Market Situation

When considered alongside Thursday's gain and the preceding 6-day crash, last Friday's rally in the gold-mining sector means that there is a high probability of this sector having just accomplished a trend reversal of at least short-term significance. If so, there should be additional gains over the next few days, with no more than a 1-day 'breather'.

If a major bottom is now, finally, in place for the gold-mining sector, the most likely path over the next few weeks entails an extension of the initial rally (the rally that began last Thursday) and then a decline to test last week's low. Based on the historical record of crash recoveries, reasonable upside targets for the initial rallies in the HUI and GDXJ are 185 and $29, respectively.



Last week's bottom was preceded by and occurred in parallel with widespread capitulation. Furthermore, the capitulation extended beyond the public to institutions and gold-focused newsletters. For example, after making bullish noises most of the way down, last week a popular gold-stock-focused newsletter jettisoned several positions and suggested that its readers do no additional buying of gold stocks until the coast is clear. Time will tell, but it may have inadvertently called the bottom.

The cost of mining gold follows the gold price

In last week's Interim Update we wrote that the fall in production costs just reported by Kinross Gold (KGC) was part of a sector-wide trend that would almost certainly continue over the coming 12 months. This trend is part of a repeating long-term pattern.

The fact is that major trends in the cost of mining gold follow major trends in the gold price with a lag of at least two years. This is partly due to gold-mining managements getting more cost-conscious after it becomes obvious that gold's long-term trend has turned down and more cavalier after it becomes obvious that gold's long-term trend has turned up. However, it is mainly due to changes in the supply of and the demand for the resources used to explore for gold, build gold mines and operate gold mines.

As a consequence of the long-term relationship between the gold price and the cost of mining gold, during at least the first two years of a new major upward trend in the gold market the growth in gold-mining profit margins will match or exceed the increase in the gold price. Despite its long-term dismal record as an investment, that's why the gold-mining sector always performs very well relative to gold bullion during the first 2-3 years of a gold bull market.

The Currency Market

The Dollar Index hasn't clearly signaled a reversal of its short-term trend. To do so it would have to close below 86.8 (the lateral support shown on the daily chart displayed below). That a downward reversal could, however, be in the works was suggested by last Friday's pullback following a rise to a marginal new high for the move combined with Friday's upward reversal in the gold market.



We are neutral with regard to the Dollar Index's 6-12 month prospects, but we suspect that the direction of the next 4-point move will be down. This will be necessary if only to reset the extremely lopsided sentiment in the currency market.

The view that the euro has nowhere to go except lower, and therefore that the Dollar Index has nowhere to go except higher, is now almost unanimous. This is evidenced, in part, by the further rise in the speculative net-short position in euro futures to 237K contracts. The speculative net-short position in the euro has only ever been higher than its current level for a brief period in 2012 -- when the market was consumed by fears that Europe's monetary union was about to collapse.

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 7th November 2014:

[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]

  *Asanko Gold (AKG) announced that the construction of its fully-funded Asanko Gold Mine (Phase 1) is now 12% complete. The mine is scheduled to commence production at the annual rate of 200K ounces/year during the first quarter of 2016.

The next milestone for AKG will be the release of the Definitive Project Plan (DPP) on 13th November. The DPP is expected to confirm that the main aspects of the 2012 FS for Phase 1, which was previously known as the Obotan project, remain valid.

  *Endeavour Mining (EDV.TO, EVR.AX) published its financial results for the September quarter. The company had an AISC of $991/oz during the quarter, which was about $30/oz better than expected. It managed a small bottom-line profit and improved its balance sheet by about $11M.

Operationally, EDV continues to perform as well as could reasonably be expected. However, with its current cost structure it will need a gold price of at least $1300 to generate good returns for shareholders in terms of profits and free cash-flow.

  *Golden Star Resources (GSS) published its financial results for the September quarter. The company announced a profit of $1M for the quarter, but profit figures are sometimes deceptive because they can include accounting adjustments to the valuations of assets and liabilities. We therefore check reported profits/losses against changes in the balance sheet to make sure that the reported profits/losses accurately reflect financial performance.

In the September quarter GSS's balance sheet deteriorated by $8M, so from a practical perspective GSS lost $8M during the latest quarter. This is what would be expected from the quarterly result of a relatively high-cost gold miner that produced less gold than planned during the quarter.

GSS's costs are trending downward (costs were 12% lower in the latest quarter) and should continue to do so. Also, the company has sufficient financial resources to ensure that it is not in short-term danger of going broke. However, its balance sheet will continue to bleed until the gold price moves back to at least $1300/oz.

  *Premier Gold (PG.TO) announced a small (3M-share) equity financing to raise about C$7M. This is a surprising move considering the depressed market and the fact that the company already has about $30M in the bank.

  *Pretium Resources (PVG) published its financial results for the September quarter.

For an exploration/development-stage company such PVG that burns substantial cash every quarter in its efforts to progress its project to the point where it can be sold or put into production, the working capital is the most important number in the quarterly report. The results published last week show that PVG had C$65M of working capital at 30th September. This should be enough to fund the company through to mid-2015 at its current rapid rate of progress.

PVG was hit as hard as the average junior gold-mining stock during the dramatic sell-off that unfolded over the past few months. This shows the indiscriminate nature of the sell-off, considering that PVG owns the best large (10M+ ounces) undeveloped gold deposit in North America -- a deposit that would probably still be economically robust at $1000/oz.

  *UEX Corp. (UEX.TO) reported that it had about C$9M of working capital at 30th September. This is enough to fund the company's uranium exploration work over the coming 12 months.

    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$1.05).

2) DNA.TO (last Friday's closing price: C$0.55).

3) EGD.V (last Friday's closing price: C$1.03).

4) EVN.AX (last Friday's closing price: A$0.55).

5) TGD (last Friday's closing price: US$0.95).

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.

    The Kinross Gold (KGC) trade

In last week's Interim Update we added a short-term KGC trading position to the TSI List at Wednesday's closing price of US$2.00 (the market price at the time). The stock opened at US$2.08 on Thursday and didn't trade lower than $2.07, so for record purposes we'll move the starting price for this trade up to $2.08.

The plan was/is to exit following a rebound to around US$3.00. To be more specific, this position will automatically be exited if KGC trades at US$2.90.

Chart Sources

Charts appearing in today's commentary are courtesy of:

http://stockcharts.com/index.html