-- Weekly Market Update for 15th July 2019

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 mid-2016, but there will be many years of topping action in bond prices and bottoming action in bond yields before major new trends get underway. A major decline in government bond prices will unfold during the 2020s. (Last update: 11 September 2017)

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.), gold-denominated prices and inflation-adjusted prices. This secular trend will bottom in 2020 or later. (Last update: 11 September 2017)

A cyclical BEAR market in the US Dollar began in 2016-2017. (Last update: 11 September 2017)

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 in 2020 or later. (Last update: 11 September 2017)

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 2020 or later. (Last update: 11 September 2017)

Copyright Reminder

The commentaries that appear at TSI may not be distributed, in full or in part, without our written permission. In particular, please note that the posting of extracts from TSI commentaries at other web sites or providing links to TSI commentaries at other web sites (for example, at discussion boards) without our written permission is prohibited.

We reserve the right to immediately terminate the subscription of any TSI subscriber who distributes the TSI commentaries without our written permission.

True Fundamentals Summary [Notes: 1) The date shown next to the current True Fundamentals Model (TFM) signal is when the most recent change occurred. 2) Charts of the Gold and Equity TFMs are included in the "Charts and Indicators" section of the TSI web site]

Last week's posts at the TSI Blog

Gold and Inflation Expectations

Summary of current thinking/positioning

1) The Dollar Index (DX) has commenced a downward trend, but it could be a few months before the new trend becomes consistent. In the meantime the price action could be choppy, possibly involving a test of the June high near 98.

2) The US$ gold price has broken out to the upside on a monthly basis. Significant additional gains are likely within the next three months -- after the current correction has run its course. The US$ silver price stands a good chance of making a catch-up move over the months ahead.

3) The gold-mining indices/ETFs became extremely 'overbought' late last month and have since been in correction mode. The correction may or may not be over, but either way there probably will be additional gains within the coming two months.

4) The SPX probably will commence a sizable multi-week decline soon.

5) An upside blow-off has set the stage for a large T-Bond decline. The decline probably began on Friday 5th July, although it could be September-October before the market starts trending downward with conviction.

6) Oil's correction is probably over, although there is still a risk that stock market weakness during July-August will push the oil price to a new multi-month low.

7) We are holding a cash reserve of 25%-30%.

A reversal in the Treasury market

We now have evidence that a top of at least short-term importance is in place for the prices of long-dated US Treasury securities. The evidence is last Thursday's break by the 20+ Year Treasury ETF (TLT) below the bottom of the price channel that formed over the preceding 6 weeks.



We think that TLT will trade a lot lower before year-end in response to expectations for higher "inflation" and a rapid increase in government debt supply, but other than expecting the early-July high to remain the high for the year we don't have a firm opinion regarding performance over the next two months. One realistic short-term possibility is a topping process involving a multi-week low before the end of this month followed by a rebound to a lower high over the ensuing few weeks.

Commodities

Vanadium extends its downward trend

Our most recent comment on vanadium was in the 17th June Weekly Update, at which time the price had just bounced following a major decline. We wrote:

"Our guess is that the industrial demand for vanadium will increase over the next six months due to the rebuilding of stockpiles that were drawn down over the past six months and new Chinese rebar standards coming into full effect. This should result in an upward bias in the price, but not the sort of spectacular rally that occurred in 2018."

Our vanadium outlook is unchanged. However, the following chart shows that the vanadium pentoxide price in Europe made a new 18-month low last week, so the anticipated upward bias hasn't commenced yet.



The Palladium bubble is intact

From the 1st April Weekly Update:

"As ridiculously expensive as palladium appears to be relative to other metals, most notably platinum, the decline from the mid-March peak is more likely to be the start of a multi-month correction than the start of a bubble collapse."

And from the 6th May Weekly Update:

"It's possible that the sharp decline in the palladium price from its March-2019 high marked the bursting of the bubble, but as mentioned in the 1st April Weekly Update it's more likely that the decline is the start of a multi-month correction. This is based on a comparison with the palladium rally of 1997-2000 and the fact that the end of the first parabolic move in a cyclical advance generally doesn't mark the end of the cycle.

If we are dealing with a multi-month correction rather than the start of a bubble collapse then the palladium price should not give a weekly close below its 50-week MA (the blue line on the following chart)."

Our view that the sharp decline in the palladium price from its March-2019 peak was probably the start of a multi-month correction rather than the start of a bubble collapse was correct, because over the past week the metal traded at a new all-time high.

Palladium is in a bubble, but the bubble is not yet fully inflated.



Despite the potential for another parabolic rally in the palladium price over the months ahead, we are not the slightest bit interested in buying palladium at its current stratospheric valuation. However, we would buy platinum in anticipation of at least a partial catch-up move. Platinum has a vastly superior risk/reward.

Platinum is still relatively weak

The platinum price remains near an all-time low in gold terms and not far from a 10-year low in US$ terms. We suspect that in US$ terms it is 'coiling' in preparation for a large advance, although the chart pattern (see below) leaves open the possibility that last year's low will be tested prior to the start of such an advance.

A weekly close above US$920 would confirm that the expected large advance had begun.



More evidence of a correction low in the oil price

Last week the oil market added to the evidence that its correction ended during the first half of last month. It did so by closing above its early-July high, a short-term trend-line drawn from the April peak and its 50-day and 200-day MAs.

The big test for oil will occur during the US stock market's next meaningful decline, because there is still a strong positive correlation between the oil price and the SPX.



The Stock Market

Current US Market Situation

Last week the S&P500 Index (SPX), the NASDAQ100 Index (NDX) and the Dow Industrials Index (Dow) all broke into new all-time high territory on a weekly closing basis. Refer to the following weekly charts for the details. Also, the new highs were confirmed by the NYSE Advance-Decline Line (ADL). This is evidence that the bull market is intact, but it doesn't provide any information about the market's likely path over the coming 1-2 months.

As well as breaching previous highs, last week's closes in the SPX and the Dow were above big round numbers: 3,000 for the SPX and 27,000 for the Dow. Also, the NDX ended the week within spitting distance of a big round number of its own (8,000).

Getting to these big round numbers generates headlines in the press, but otherwise doesn't mean much for investors. Also, as is the case with the upside breakouts it doesn't provide any information about the market's likely path over the coming 1-2 months.

Based on sentiment and cycles, we continue to expect a significant multi-week decline. However, for risk management purposes we would exit short-term bearish speculations if the SPX were to make a new high after this week.

The monetary inflation headwind

The year-over-year rate of growth in US True Money Supply (TMS) made a new cycle low in June-2019 and is not far from its 20-year low. The relevant monthly chart is displayed below.

This means that the money-supply situation constitutes a steadily increasing headwind. Note, though, that the cyclical equity bull market of 2003-2007 didn't die until about 12 months after the TMS growth rate plumbed a similar level in September-2006. This simply means that the monetary inflation rate is not a good short-term or intermediate-term stock-market timing indicator.



Time to bet against Tesla?

In the 10th June Weekly Update we wrote that almost regardless of what happens to the US stock market, Tesla (TSLA) probably is on the road to extinction. We thought that TSLA would be a good candidate for a bearish speculation if the stock price were to rebound to around $240 (it was trading at $204 at the time).

The following chart shows that TSLA has since rebounded to the $240s and that the rebound is a test of the May-2019 downside breakout. If you are interested in betting against this over-priced, cash-consuming, debt-laden company, now would be a reasonable time to do so.

Note that betting against TSLA is not a trade that we will be doing in the near future, but only because right now we are involved in more than enough different speculations.



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

No confirmation of a gold bull, yet

There are times when the US$ gold price and the US stock market (as represented by the SPX) trend upward together. When this happens it is indicative of US$ weakness (relative to real assets, not necessarily other fiat currencies). In such situations it is not reasonable to assert that both gold and the SPX are in bull markets, because logically these assets are different to the point of almost being diametric opposites. To determine which asset (gold or the stock market) is in a bull market we must look at their relative performances. The one that is in a bull market will be in a major upward trend relative to the other.

The gold/SPX ratio tells us how gold is performing relative to the SPX. When gold is in a bull market this ratio will be in a major upward trend and when the SPX is in a bull market this ratio will be in a major downward trend. Furthermore, the historical record informs us that this ratio's 200-week moving average can be used to confirm, in a timely fashion, the transitions between gold bull and equity bull. In particular, when the gold/SPX ratio moves from below to above its 200-week MA it confirms that gold is in a bull market and by extension that the SPX is in a bear market.

As things stand today the gold/SPX ratio is in limbo. The ratio made a new 10-year low in August-2018, so prior to then gold was in a bear market. It's possible that a new gold bull market got underway at that time, but the ratio remains below its 200-week MA so a gold-bear to gold-bull transition has not been signaled...yet.



Current Market Situation

In last week's Interim Update we wrote that according to the latest COT data, the total speculative net-long position in Comex gold futures had risen to near its highest level of the past 9 years. This implied that speculative enthusiasm for gold now represented a significant risk, even with the supportive fundamental backdrop.

The new COT report that was issued at the end of last week contained another reason to be concerned about sentiment in the gold market. The concern is that the net-long position of the "NonReportable" traders (the proverbial dumb money) has just risen to near a 6-year high. Refer to the middle section of the following weekly chart for more detail.



As explained in last week's Interim Update:

"No upward trend ever ended simply because speculators became too bullish, but when speculative enthusiasm becomes extreme it means that the downside risk is much higher than otherwise would be the case. To put it another way, a high level of speculative optimism won't CAUSE an upward trend to end, but after the upward trend ends it will magnify the subsequent decline.

Despite the stretched sentiment situation, it will be reasonable to assume that the upward trend is intact as long as the fundamental backdrop remains supportive and the gold price remains above $1350 on a weekly closing basis."

Currently, the fundamental backdrop (as indicated by our Gold True Fundamentals Model) clearly is exerting upward pressure and critical support at $1350 is not under threat. However, there continues to be a realistic chance that the bottom of the $1350-$1380 support range will be tested before the current correction comes to an end.

Gold has been in correction mode since 25th June when it spiked up to $1442.90, and made its correction low to date on 1st July when it traded at $1384.70. Over the past fortnight the price oscillated within the 25th June to 1st July range. A daily close below $1390 would warn that a test of support at $1350 was coming, whereas a daily close above $1430 would warn that a surge to around $1500 was underway.

Regardless of whether gold breaks out to the upside or the downside from its trading range of the past three weeks, there's a good chance that the gold price will trade in the $1500s before year-end.



Silver

Silver's performance continues to be lacklustre. In dollar terms (see chart below) silver is in the middle of its year-to-date range and in gold terms silver is languishing near a multi-decade low.



There are never any guarantees in the financial markets, but if gold remains in an upward trend then there's a high probability of silver eventually making a huge catch-up move. It must move up to the low-$20s just to catch up with where gold is today, and if gold were to extend its upward trend to the $1500s, which it may well do within the next few months, then silver would stand a decent chance of rising to the mid-$20s to bring itself back into line with its sister metal.

In anticipation of the catch-up move we have been accumulating SLV (iShares Silver Trust) call options. The TSI Stocks List contains the SLV January-2021 $18 call option, which is a relatively low-risk (as far as these things go) way to obtain leveraged exposure to a potential large silver rally. It is relatively low risk because it simply requires a large silver rally anytime between now and the end of NEXT year. Our own account contains multiple SLV call option positions with exercise prices in the $15-$18 range and expiry dates of October-2019, January-2020 and January-2021.

The main risk with leveraged silver positions is a gold breakout failure that obviates the need for silver to make a catch-up move.

Here is a weekly chart of SLV. Note that an SLV share presently trades about $1 below the per-ounce silver price.



Gold Stocks

Revisiting the 1980s comparison

Prior to mid-June of this year we were monitoring the gold-mining sector against a model based on the sector's price action during 1982-1987. This model pointed to a major low in early 2020 followed by a very strong rally lasting more than a year. However, in the 17th June Weekly Update we introduced an alternative model for the gold-mining sector that also was based on the sector's price action during the 1980s. This model involved lining up the 1984 top in the XAU with the 2016 top in the HUI.

Here is the description and the associated chart for the alternative 1980s comparison included in our 17th June report:

"If we line up the charts as stated above, the HUI's price action of the past 12 months looks very similar to the XAU's price action between early-1986 and early-1987. To be more specific, the HUI's multi-month plunge into its September-2018 low and subsequent recovery has a lot in common with the XAU's multi-month plunge into its July-1986 bottom and subsequent recovery. If this comparison is relevant then there could be some consolidation over the next few weeks, but three months from now the HUI will be a LOT higher than it is today."



We then summed up the situation as follows:

"...comparisons with the 1980s price action suggest two different, but equally interesting, possibilities. One is that the start of a powerful rally is still 6-8 months away. The other is that a powerful rally is underway, with the best part of the rally likely to happen over the next three months."

Within a week of writing the above the odds shifted in favour of the alternative 1980s model, prompting us to write the following in our 24th June report:

"The more short-term bullish of the two 1980s models discussed a week ago is now the more relevant."

During the subsequent three weeks the price action continued to track the alternative 1980s model quite closely. To show what we mean, here is an updated version of the chart displayed above:



A literal interpretation of the above chart's message is that the HUI will rocket upward to a short-term peak in early-September with only minor pullbacks/consolidations along the way, after which there will be a sizable 2-3 month correction and then a final 3-month surge to a major high in early 2020. A less rigid interpretation is that the gold-mining sector will have a strong upward bias for another 5-7 months.

The recent price action

Last week the HUI broke above its 25th June high, but it was the only important gold-mining index or ETF to do so. The others (GDX, for example) successfully tested their June highs. Also, the HUI's breakout wasn't confirmed by the bullion market.

Here are daily charts of the HUI and GDX.

The 1980s comparison discussed above suggests that the HUI's breakout will prove to be sustainable, in which case it will be confirmed by related prices this week. However, it isn't reasonable to blindly assume that over the next several weeks the gold-mining sector will mimic the near-vertical ascent of March-April 1987. It possibly will, but additional corrective action of sufficient magnitude or duration to push the daily RSI(14) down to around 50 is required to create a new short-term buying opportunity for the popular mining ETFs.

Unlike the gold-mining sector, the silver market is not remotely close to being 'overbought'. Consequently, for new buying at this time we prefer silver bullion to the mining ETFs.

The Currency Market

Last Tuesday the Dollar Index (DX) tested lateral resistance at 97.2 and managed to close above its 50-day MA for the first time since early-June. It then dropped over the remainder of the week. The catalyst for the pullback was the non-subtle hint of easier US monetary policy in testimony delivered by the Fed Chairman on Wednesday.

The Wednesday-Friday pullback took the DX from lateral resistance at 97.2 to moving-average support at 96.4.



It's possible that the DX's rebound from its June low ended last Tuesday, but an extension of the rebound is also a realistic possibility. Either way, we are anticipating significant weakness in the DX over the next several months.

Future US$ weakness has been signaled by the gold market and by the recent performances of the Swiss Franc, the Yen and the Canadian dollar. Also, future US weakness meshes with how we see the fundamental backdrop developing over the months ahead, although we hasten to point out that the true fundamentals are US$-neutral at this time.

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 12th July 2019:

[Note: AISC = All-In Sustaining Cost, EBITDA = Earnings Before Interest, Tax, Depreciation and Amortisation (a measure of cash flow), EV = Enterprise Value or Electric Vehicle, FS = Feasibility Study, FY = Financial Year, IRR = Internal Rate of Return, ISR = In-Situ Recovery, JV = Joint Venture, 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%, NSR = Net Smelter Return or Net Smelter Royalty, P&P = Proven and Probable, PEA = Preliminary Economic Assessment, PFS = Pre-Feasibility Study]

  *Alkane Resources (ALK.AX) published its quarterly report for the June-2019 quarter (the final quarter of FY2019). After another above-plan quarterly performance from the Tomingley Gold Operation (TGO), gold production for the full financial year was 49K ounces. This was at the top of the upwardly-revised guidance range and about 60% above the original guidance. In other words, the TGO performed very well in FY2019.

Production guidance for FY2020 (the financial year ending 30th June 2020) is 27K-32K ounces of gold at an AISC of A$1300-$1450. Note: The current A$ gold price is around $2000/oz.

The Tomingley open pit is depleted and the current production is solely from the processing of stockpiles. That's why the amount of gold produced has been trending downward. However, the life of the operation has been extended by the construction of an underground mine that is scheduled to go into production during the March quarter of 2020. Also, exploration results indicate the potential to establish a new pit within a few kilometres of the existing plant.

With regard to the Dubbo specialty metals project, which is where the bulk of ALK's value and upside potential lies, the company's efforts to arrange financing and offtake agreements are on-going.

ALK has a strong balance sheet, with no debt and cash, bullion plus listed investments of about A$81M. This figure is roughly the same as it was 6 months ago.

  *Alliance Mineral Assets (A40.AX) reported June-quarter lithium concentrate production from its Bald Hill mine that was roughly the same as the March quarter, enabling the company to achieve a production result for the first half of CY2019 that was close to the top of its guidance range. Specifically, during the first half of this calendar year A40 produced 78,937wmt (wet metric tonnes) of 6.0% Li2O-equivalent versus guidance of 65,000-80,000 wmt. This constitutes a solid production performance, although production costs won't be known until the end of this month and the complete financial picture won't be known until the annual financial report is published in September.

Production for the next 6 months is expected to be similar to production over the past 6 months.

We are comfortable with the way A40 is performing on the ground, but like all lithium producers the company is struggling against market headwinds in the form of a downward trending lithium price. There's a high probability that it eventually will be taken over by either Galaxy Resources (GXY.AX) or Mineral Resources (MIN.AX), two companies that have lithium mines in the same part of Western Australia as A40's Bald Hill project, but hopefully the takeover will happen during a more bullish period for lithium miners.

  *eCobalt Solutions (ECS.V) will hold a shareholders meeting on 19th July to vote on the proposed merger with Jervois Mining (JRV.AX, JRV.V). If the merger is approved then each ECS share will be exchanged for 1.65 JRV shares. Based on JRV's current price of A$0.20 on the ASX and the current A$/C$ exchange rate, the merger values ECS at around C$0.30/share.

We added ECS to the TSI List as an intermediate-term trading position primarily due to the stock's discount to the implied value of the JRV merger proposal. Also, our view is that combining the two companies is in the best interest of both ECS and JRV, so we think that shareholders should vote in favour of the merger.

First Cobalt (FCC.V), the holder of a 6% stake in ECS, has been sending out letters advising ECS shareholders to vote against the merger. FCC obtained its ECS stake via a share swap with a third party AFTER the proposed ECS-JRV merger was announced, for reasons that aren't clear to us.

Note that FCC does not have significant financial resources (the company had minimal working capital at 31st March and probably has negative working capital right now) and therefore is not in a position to make a positive contribution to ECS. JRV, on the other hand, has about A$20M of working capital and is positioned to advance projects in Australia and Africa in addition to the Idaho-based project currently owned by ECS.

  *Cobalt 27 Capital (KBLT.V) is subject to a takeover bid from Pala Investments, its largest shareholder. In the 19th June Interim Update we wrote that the bid was not even remotely close to full value.

In June-2018 KBLT purchased from Vale, at a cost of US$300M, a "stream" that entitles it to cobalt production from the Voisey's Bay (VB) nickel mine in Canada beginning on 1st January 2021. The stream entitles KBLT to 32.6% of the cobalt production from VB until 23.8M pounds have been delivered and 16.3% thereafter. The timing of this purchase was inopportune to put it mildly, as the cobalt price has subsequently crashed from US$35/pound to only US$12/pound. However, by selling now the senior managers of KBLT would be compounding their error. Having bought near a major high they would be selling near what very likely will turn out to be a major low. Furthermore, since production linked to the VB project doesn't commence until 2021, the current price of cobalt is not relevant. What really matters is what the cobalt price will be from 2021 onwards. By then it could well be where it was in early 2018 or even higher.

All of which raises the question: Why is KBLT's management supporting the Pala takeover bid? After all, the company has a strong balance sheet and therefore is not under financial pressure to dump high quality assets at fire-sale prices.

A possible answer to the above question was mentioned in the detailed and scathing response to the proposed takeover provided by Anson Funds, a large KBLT shareholder. The full response, with which we are in total agreement, can be read HERE.

Anson notes that if the takeover is successful then KBLT's existing managers will receive change of control payments and will manage the spin-out company to be called "Nickel 28". In other words, they will receive financial bonuses and will continue to draw their salaries.

Fortunately, minority shareholders will have an opportunity to vote against this nonsensical takeover, and thus prevent it from happening, at a future shareholders meeting.

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 in the low-US$0.60s (last Friday's closing price: US$0.65)

2) CGT.TO (last Friday's closing price: C$0.18)

3) ECS.V (last Friday's closing price: C$0.21)

4) PEY.TO (last Friday's closing price: C$4.01)

5) PG.TO near C$2.00 (last Friday's closing price: C$2.06)

The above list is limited to five stocks. It sometimes will contain less than five, but it never will 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:

https://stockcharts.com/
http://www.goldchartsrus.com/
https://www.vanadiumprice.com/