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

Economics Myths 12, 13 and 14

In the 17th February Weekly Update we presented a list of eleven economics myths. We subsequently posted this discussion as a free article, although in the free article we added a twelfth myth. Prompted by some stuff we've recently read, we are now adding two more myths to our list. Below are Myth #12 (for TSI subscribers who didn't read the free article) and the two new additions to our list of economics myths.

Myth #12: Inflation is not a problem unless the CPI is rising quickly

The conventional wisdom that "inflation" is not a major concern unless the CPI is rising quickly is not only wrong, it is also dangerous. It is wrong because monetary inflation affects different prices in different ways at different times, but the resultant price distortions always end up causing economic problems. It is dangerous because it leads people to believe that there are no serious adverse consequences of central-bank money printing during periods when the prices included in the CPI are not among the prices that are being driven skyward by money printing.

Myth #13: Interest rates are the price of money

People who comment on economics and the financial markets often say that the interest rate is the price of money. For example, John Mauldin's 9th March article titled "The Problem With Keynesianism" has multiple references to interest rates being the price of money. This is wrong.

The price of money is what money can buy. For example, if an apple is sold for $1, then the price of a unit of money (one dollar) in that transaction is one apple. To put it another way, the price of money is the purchasing power of money. It rises and falls in response to changes in the supply of and the demand for money and changes in the supply of and the demand for the things for which money is traded.

The interest rate, on the other hand, can be correctly viewed as either the price of credit or the price of time. In the case where there is no risk of default and no risk of purchasing-power loss due to inflation, the interest rate will be determined by the perceived benefit of getting money immediately versus getting it at some future time.

In summary, although changes in one can affect the other, the interest rate and the price of money are very different things.

Myth #14: Policymakers should try to boost employment and real wages

The conventional wisdom that policies should be put in place to boost employment and real wages confuses cause and effect. Just as rising consumption is an effect, not a cause, of economic growth (refer to Myth #11 in our Economics Myths article), rising employment and real wages are effects of economic growth. For example, the rebound in the US economy from its 2009 trough hasn't been unusually weak due to the unusually slow recovery in employment, there has, instead, been an unusually slow recovery in employment because there has not been a strong recovery in the economy.

Consequently, the best way to get rising employment and real wages is to remove the obstacles to economic progress. The government and the central bank are by far the biggest obstacles, so minimising the government and eliminating the central bank would be effective. 

Ukraine

Uranium Update

Although the market for uranium (the commodity) has flat-lined near multi-year lows since the third quarter of last year, there has been considerable strength over the past few months in uranium mining equities. This strength in the equities enabled URA, the Global X Uranium ETF, to signal a major upward trend reversal by breaking decisively above its 50-week MA.



Obvious confirmations of trend reversals often don't constitute buy signals. That's especially the case when the confirmation immediately follows a sharp rise in price. The buy signal -- if there is such a thing -- is created by the pullback to support that tends to get underway shortly after the obvious confirmation.

In URA's case there was one week of additional upside following the obvious confirmation of a trend reversal. A correction then began. The correction will potentially take URA down to its 50-week moving average, which acted as resistance during 2012-2013 and should now act as support. We would consequently view a pullback to the mid-$16s as an opportunity for new buying.

The Stock Market

We read that last week's decline in the S&P500 Index (SPX) was its biggest in 7 weeks, but that's not saying very much because there were no significant weekly declines over the preceding 7 weeks. The SPX was down about 2% last week, which means that it is now about 2% below its all-time high.

While the US stock market continues to shake-off all threats to its upward trend, the upward trends in some other important stock markets have taken meaningful hits. Our first example is Germany's stock market. As illustrated by the following daily chart, Germany's DAX Composite tested its intermediate-term channel bottom and lateral support defined by its lows of the past 5 months last Friday. It is short-term 'oversold' and has held support for now, but all it would take to confirm an intermediate-term trend reversal is a weekly close below last Friday's intra-day low.



Our second example is Japan's stock market. As illustrated by the following daily chart, Japan's Nikkei225 Index broke out to the downside in January and appears to have just resumed its decline after rising for a few weeks in a successful test of its breakout.

The Nikkei has support at 14,000 and then at 12,500.



In response to current events, here is a daily chart showing the performance of the Market Vectors Russia ETF (RSX). RSX has broken below major support, but, interestingly, gained 3.6% last Friday despite the Ukraine-related uncertainty. This rebound was probably a reaction to the ETF being very stretched to the downside on a short-term basis.

At some point this year we will probably become interested in buying RSX, but right now we are viewing it solely as an indicator of the seriousness of the Ukraine conflict.

This week's important US economic events

Gold and the Dollar

Gold

That the gold market is short-term 'overbought' is obvious from a glance at the following daily chart. No technical indicators are required. This simply means that now is not a good time for new buying.



Although gold is sufficiently stretched to the upside on a short-term basis for sensible gold bulls to temper their enthusiasm, it seems that almost every week there is a new piece of evidence confirming December's major upward trend reversal. Last week's addition to the pile of evidence was the clear break by the euro-denominated gold price (gold/euro) above its 200-day MA. This further differentiates the current rally from the counter-trend rebounds that happened in 2013.



The biggest immediate threat to gold's short-term upward trend is the Ukraine situation. The reason is covered in the following excerpts from the "Gold and Military Conflict" discussion in the 5th March Interim Update:

"...there is often an increase in the speculative demand for gold in reaction to international military conflict or the rising risk of international military conflict, causing the gold price to quickly gain some ground. However, the price gains made on the back of such developments are never sustained.

Buying gold in response to rising tensions between militarily-significant governments is more akin to superstition than reasoned analysis. The fact is that military action is only bullish for the US$ gold price to the extent that the action results in either meaningful "inflation" or meaningful economic weakness in the US and/or Europe, but even in these cases the initial rally will be retraced."

And:

"It is possible...that the [Ukraine] conflict will escalate and the gold price will surge in response. Just bear in mind that any price-surge in response to news of this nature would likely be retraced in full."

Based on the historical record we can be confident that gold will fully retrace any price gains made on the back of Ukraine fears. The problem is that there will be no way of knowing how much of gold's rally is due to these fears, because at the same time as gold is being artificially/temporarily boosted by military-conflict superstition it is also being boosted by genuine fundamental influences such as evidence of economic weakness. At this stage our best guess is that the rise to around $1350 was underpinned by genuine fundamental drivers, whereas the additional gains have been mostly due to the goings-on in the Ukraine. In other words, we guess that there is presently no more than $30 of military-conflict-related premium in the gold price. This is not enough to be worried about, but if events in and around Ukraine conspire to push gold up to the $1420s this week then the stage would be set for a significant multi-week correction.

Gold Stocks

Updated historical comparisons

It's time to update our charts comparing the gold sector's current situation with its situation following the large declines of 1968-1970, 1974-1976 and 1998-2000, using the Barrons Gold Mining Index (BGMI) to show performance during the 1970s and the HUI to show the more recent performance.

First up, the BGMI's performance following the cyclical bottom of 1970 suggests that the HUI's current advance will soon become more 'choppy' and that the bulk of this year's gain will be in place by the end of June.



Next, the BGMI's performance following the cyclical bottom of 1974 suggests that there will be a peak around the end of this month followed by a long period of horizontal range-trading.



Lastly, the HUI's performance following the secular bottom of 2000 suggests that there will be a multi-week pullback from a late-March short-term high followed by a strong advance to an intermediate-term peak in June.



The historical record's overarching message is that the bulk of this year's gains will be in place by the end of June, a message that is supported by the relatively large number of equity financings arranged over the past two months. Due to the upward trend in prices, many of the participants in financings during January-March will take profits when the standard 4-month hold periods expire during May-July. This additional supply will put downward pressure on prices.

Current Market Situation

It might seem as though the gold-stock indices reacted anemically to last week's break above $1350 in the gold price, but significant upward progress was made in that last week's gain was sufficient to break the HUI above the top of its long-term downward-sloping price channel. Refer to the following weekly chart for details.



It will make sense to be a little more aggressive about selling gold stocks when the HUI gets to resistance in the 280-300 range. It will get there -- the only unknown is whether it will get there within the next two weeks as part of a Ukraine- and China-inspired flight to safety or 1-2 months from now as part of a more orderly advance.

HUI resistance at 280-300 is equivalent to resistance in the low-$50s for the Junior Gold Miners ETF (GDXJ). GDXJ under-performed last week and was unable to break above its channel top (refer to the weekly chart displayed below). This indicates that the modest increase in risk aversion that affected many financial markets last week also affected the market for gold-mining stocks (the higher-risk gold-mining stocks were relatively weak).



The Currency Market

The following chart shows that over the past few years the Dollar Index has usually trended in the same direction as the SPX/STOX5E ratio (the ratio of large-cap US equities to large-cap European equities). It also shows that a divergence from the normal relationship has recently occurred, with the US$ weakening even though US equities were relatively good performers.

This divergence could be related to the brewing conflict involving Ukraine, Russia and the West, but whatever its cause an implication is that the Dollar Index probably won't make a sustained break below 79 in the near future (although a spike below 79 would not be surprising).

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 14th March 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) issued its mandatory annual reports for 2013. The financial statements indicate that the company ended the year with working capital of around $170M, which is $10M less than we were expecting thanks to greater-than-expected spending on project development.

Due to the recently-completed merger with PMI Gold, AKG's current balance sheet is now very different from the balance sheet included in the aforementioned reports. We will therefore have to wait for the Q1-2014 reports to get a clear picture of the company's current financial situation.

Construction of Phase 1 of the Asanko Gold Mine is scheduled to begin in Q3-2014. Phase 1 is expected to result in annual production of 200K ounces in 2016. It is fully permitted and involves the development of an open-pit mine and processing facilities at the Obotan project contributed by PMI Gold.

  *Dragon Mining (DRA.AX) reported updated resource estimates for its projects in Finland and Sweden. Here's a summary of the updated gold resource:

a) At the Vammala Production Centre (Finland), the resource now contains 263K ounces in the M&I category and 97K ounces in the Inferred category (down 18% since the preceding estimate).

b) At the Svartliden Production Centre (Sweden), the resource now contains 45K ounces in the M&I category and 6K ounces in the Inferred category (down about 60% since the preceding estimate).

c) At the Kuusamo project (Finland), the resource now contains 315K ounces in the M&I category and 192K ounces in the Inferred category (up 10% since the preceding estimate).

Overall, there was a small decline due to mining depletion and more stringent grade assumptions.

  *Pilot Gold (PLG.TO) reported additional drilling results from the Western Flank target at its Kinsley Mountain gold project in Nevada.

Just to set the scene, last November PLG reported an exceptional intercept of 8.53 g/t gold over 36.6 metres from Hole PK91CA drilled into the Western Flank target. This intercept was preliminary, albeit significant, evidence that the company was onto something special. More evidence came via an exceptional intercept of 6.85 g/t Au over 41.7 metres from Hole PK127C reported last month.

Still more evidence that PLG is onto something special (a multi-million-ounce gold deposit with good continuity and high grades over substantial widths) came last week with the reporting of two additional spectacular intercepts: 10.5 g/t Au over 42.7 metres in Hole PK131C (the best hole ever drilled at Kinsley) and 7.53 g/t Au over 53.3 metres in Hole PK132C. There is still a long way to go, but the evidence is now well beyond preliminary. Actually, PLG's Kinsley Mountain discovery is showing signs of being one of the best gold discoveries of the past few years.

On the back of the three Kinsley Mountain drill holes reported over the past few weeks, PLG's stock price has gained about 20%. On the back of the same drilling news the stock price of Nevada Sunrise Gold (NEV.V), PLG's minority partner at Kinsley Mountain with a 21% stake in the project, has gained about 300%. The leverage offered by NEV to successful drilling at Kinsley Mountain is why we highlighted this illiquid microcap's speculative appeal and added it to the TSI Small Stocks Watch List in early February when it was trading at C$0.17.

In other PLG news, the company announced that it is topping up its treasury via a $20M "bought deal" equity financing priced at C$1.53/share. This is a reasonable move. The right time for exploration-stage miners to raise money is when speculative demand is relatively strong and there is no urgent need for the cash. This is the time when the smart managers (e.g., the managers of PLG and PVG) do the bulk of their fund raising. The wrong time for exploration-stage gold miners to raise money is when the market is weak and the 'cash cupboard' is almost bare.

  *Pretium Resources (PVG) announced that James Currie has been appointed as chief operating officer of the company to lead the development of the high-grade Brucejack project into production. Mr. Currie previously led the construction and development of New Gold's New Afton gold mine in B.C., which went into production ahead of schedule in 2012.

Note that PVG's plan is NOT to build a mine at Brucejack. Its plan is to sell the project to a senior or mid-tier producer prior to the start of mine construction. However, to strengthen its negotiating position it must continue to do everything it needs to do to rapidly move the project into the construction phase.

List of candidates for new buying

From within the ranks of TSI stock selections, the best candidates for new buying at this time are:

1) AAU in the US$1.40s (last Friday's closing price: US$1.53).

2) ORE.TO (last Friday's closing price: C$0.67).

3) PLG.TO in the low-C$1.50s (last Friday's closing price: C$1.57). A new buying opportunity is being created by the fact that the C$1.53/share financing announced last week has prevented PLG's share price from responding appropriately to the exceptional Kinsley Mountain drilling results.

4) RSG.AX below A$0.70 (last Friday's closing price: A$0.70).

Note: Sometimes value, and value alone, will prompt us to single-out a stock as one of the few best candidates for new buying. For example, RIOM during the final two months of last year. Most of the time, however, we take into account value and the price chart when coming up with our weekly short-list of 'best buys'.

A good place for new buying is near the bottom of what appears to be a consolidation pattern within a short-term upward trend. For example, over the past month we've regularly included LYD.TO in our short-list of 'best buys', with our specific suggestion being to buy in the low-C$1 area. With reference to the first of the following daily charts, this was because the low-C$1 area coincided with the lower portion of a consolidation pattern and also with two moving averages. LYD broke upward from this consolidation pattern last week and is probably on its way to resistance at C$1.40-$1.60. For another example, a week ago and again this week we suggested buying AAU in the US$1.40s. With reference to the second of the following daily charts, this was/is because the stock has been drifting downward for about one month and would reach its 200-day and 50-day moving averages in the high-US$1.40s.

List of candidates for profit-taking

Here are some ideas as to where it could make sense -- depending on an individual's current positioning -- to scale back exposure to certain stocks:

1) EDV.TO is testing intermediate-term resistance at C$0.95-C$1.00. Some selling could be appropriate at this level. Note that longer-term resistance at C$1.80 is a realistic 6-12 month target.

2) LYD.TO would be a short-term selling candidate at around C$1.50.

3) PG.TO would be a short-term selling candidate at around C$3.00.

4) PVG would be a short-term selling candidate at US$7.50-$8.50.

5) RIOM would be a short-term selling candidate at US$2.70-$2.90, even though it would still offer excellent value at this price. Note that US$4 is a realistic intermediate-term target for this stock.

Chart Sources

Charts appearing in today's commentary are courtesy of:

http://stockcharts.com/index.html