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 will end by 2013. In real (gold) terms, bonds commenced a secular BEAR market in 2001 that will continue until 2014-2020. (Last update: 23 January 2012)

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

Money-Pumping Update

The Fed continues to pump aggressively

During the six months since last September's introduction of "QE3", the Fed has grown its balance sheet by $341B by monetising (buying with money created out of nothing) mortgage-backed securities and Treasury securities. Moreover, $201B of this $341B increase has occurred over the past two months.

The recent acceleration in the Fed's money creation hasn't yet had a noticeable effect on the year-over-year (YOY) rate of growth in US True Money Supply (TMS). As illustrated below, at the end of February-2013 the YOY TMS growth rate was at the bottom of its 4-year range. The bottom of the 4-year range is still high by historical standards (almost 10%), but our calculation of the current monetary inflation rate is lower than expected considering what the Fed has done over the past few months.



We can't be certain, but the lack of response in US TMS to the Fed's recent aggressive money-pumping probably stems from the fact that the US TMS calculation is, by definition, the amount of US dollars within the US economy. It isn't the global supply of US dollars, which means that in addition to monetary inflation and deflation in the US it will be affected by the flow of dollars into and out of the US. For example (and as noted in TSI commentaries at the time), US TMS was given a significant artificial boost during the second half of 2011 and the first half of 2012 by eurodollars (dollars deposited in bank accounts outside the US) fleeing Europe's beleaguered banks for the perceived relative safety of the US banking system. With a general belief taking hold over the past six months that Europe's debt crisis is over it's likely that at least some of the money that fled Europe for the relative safety of the US has shifted back to Europe, creating a partial offset in our TMS calculation to the Fed's recent money-pumping.

By the way, bank depositors in Cyprus, a tiny euro-zone country with a disproportionately large banking industry, are being asked to take a 'hair-cut' of up to 10% on their deposited funds as part of a bail-out just cobbled together by the euro-zone's political and monetary leadership. This news could lead to another reversal in the net flow of dollars between Europe and the US if it creates fear that depositors in one of the larger euro-zone countries will lose some of their money.

While the flow of money to/from the US makes it more difficult for us to monitor what's happening on the monetary inflation front, it doesn't alter the actual situation. International money flows made the calculated rate materially higher than the actual rate from mid-2011 through to mid-2012 and are probably now making the calculated rate materially lower than the actual rate, but the actual rate is only affected by the money-creation/destruction activities of the Fed and US-based commercial banks.

The money pumping temporarily creates the illusion of a real recovery

Creating money out of nothing and pumping it into the economy can't possibly help the overall economy. Some individuals will be helped at the expense of others, but the net effect over the long term will be a weaker overall economy. This is because the monetary inflation distorts the price signals upon which producers and investors rely. The only question relates to exactly how prices will be distorted. Which prices will rise the most and when will these price rises occur?

The answer to the above question is never known in advance of the money-pumping, even by those doing the pumping. However, educated guesses can be made. When the economy has been greatly weakened due to the effects of earlier monetary-inflation-caused price distortions (mal-investments), gold will almost certainly be a major long-term 'beneficiary' of the money-pumping. That's unless gold has already become so expensive that it has fully discounted the future economic problems. In such circumstances gold will also often be a major short-term beneficiary, although that certainly hasn't been the case over the past six months. Over the past six months the stock market has been the biggest beneficiary of the monetary inflation. This has surprised us more than it really should have.

That the monetary inflation has boosted nominal equity prices isn't a surprise. Due to the way that "QE" pushes new money into the economy, stock markets will often be among the early beneficiaries. We are referring to the fact that the early receivers of the new money created by "QE" programs of the type implemented by the Fed will include investors/speculators who are likely to direct some of the new money towards equity purchases. The surprise is that for the moment the monetary inflation has given equity prices a substantial boost in REAL terms (in purchasing power terms and relative to gold). This is indicated by the following daily chart of the S&P500/gold ratio and the S&P500/gold ratio's 390-day (roughly 18-month) rate-of-change (ROC). There is no evidence in this chart that the S&P500 Index has ended its secular bear market relative to gold, but notice that S&P500/gold's 390-day ROC recently hit its highest level since the major stock market peak and gold trough of 1999-2000.



The market action of the past several months has brought about an unusually-wide divergence between economic performance and stock market performance. Clearly, the financial markets are discounting a real recovery in response to money-pumping. They will be proven wrong, but not necessarily right away. 

The Stock Market

Everyone is bullish on DXJ, a proxy for the Yen-denominated performance of Japan's stock market (DXJ is quoted in US dollars, but currency changes are hedged such that DXJ's performance reflects the performance of the Japanese stock market in Yen terms). Everyone is bullish on DXJ because everyone knows that the Bank of Japan (BOJ) is going to deviate from its practice of the past twenty years and inflate the Yen to oblivion. Everyone knows that this will happen even though the BOJ has a) not yet done anything different and b) stated that it will not do anything different until at least early-2014. Everyone also knows that aggressively inflating the Yen will boost the Japanese economy, even though continued Yen depreciation would greatly increase Japan's energy-cost burden, reduce productivity due to the price distortions caused by the inflation, and lead to a sufficiently large rise in interest rates to bring about a government debt default.

Will everyone be right for the first time in history? Perhaps, but that's not a good bet.

We are becoming increasingly interested in taking a bearish DXJ position, either by purchasing August put options or by going short. However, we haven't done anything yet. Our preference would be to purchase August put options, but the options are difficult to trade due to insufficient liquidity.



It was an uneventful week for the US stock market. The S&P500 Index ended the week up 10 points, while the NASDAQ100 Index (NDX) ended the week down 5 points. The NDX remains near the top of its "rising wedge".

The lack of stock market volatility has led to a decline in the Volatility Index (VIX) to a new 6-year low (see chart below). Could the VIX move down to the multi-decade low reached near the end of 2006 and the beginning of 2007? Possibly, but that would constitute an additional decline of only 10%.

The VIX is almost certainly within 10% of a major low. This suggests a trading opportunity, but the case for going long the VIX (via an ETN or the futures market or call options) isn't as 'open and shut' as it superficially seems. One reason is that the VIX could bounce around near its low for a couple of months, but the main reason is the substantial "contango" in the VIX futures market. In effect, the futures market has already priced-in the likelihood of increased volatility. For example, while the 'cash' VIX ended last week at 11.3, April VIX futures ended the week at 14.70 and August VIX futures ended the week at 17.9. This effectively means that the futures market has priced-in a 30% increase in the VIX over the next month and a 60% increase in the VIX over the next five months. This doesn't negate the opportunity to profit from going long the VIX, but it means that traders will have to be very accurate with their timing to avoid getting 'eaten alive' by the contango.

This week's important US economic events

Gold and the Dollar

Gold

The amount of gold bullion held by GLD, the largest gold ETF, has dropped by about 120 tonnes since the beginning of this year. Over the same period the US$ gold price has dropped from $1657 to $1595. Of greater interest, since 20th February the amount of bullion held by GLD has dropped by about 70 tonnes (about 2.1M ounces) while the gold price has RISEN from $1588 to $1595.

The relationship between changes in GLD's bullion holdings and the gold price hasn't been consistent enough over the years to enable it to be used as a timing indicator. That GLD's bullion quantity has declined by a significant amount over the past 4 weeks in parallel with a small rise in the gold price does, however, support the view that there is a mismatch between gold-market sentiment and price performance, with sentiment being disproportionately bearish. We say this because the decline in GLD's holdings means that there has been greater urgency to sell on the part of GLD holders than on the part of gold investors/speculators in general, which, in turn, suggests that the 'dumb money' (the public) has been more eager to sell than the 'smart money'.

The change in GLD's holdings is definitely not something we would rely on, but it adds to the evidence that the sentiment situation is constructive.

The US$ gold price is struggling with resistance at $1600 and the euro gold price (gold/euro), a daily chart of which is displayed below, is struggling with resistance at 1230-1240. If gold/euro manages to close above 1240 in the near future (a likely outcome), the short-term chart-based target will be 1300.



Gold Stocks

The HUI's performance over the past week was neither bullish nor bearish. The preceding week's upward reversal was not invalidated, but, at the same time, no additional evidence of a sustainable price low emerged.

The following weekly chart shows that the HUI remains extremely 'oversold' (as indicated by the steepness of the decline and the unusually low level of the weekly RSI displayed at the bottom of the chart), with an important price low possibly having been put in place during the week before last. A daily close above the 373-385 resistance range would elevate this possibility to a high probability.



Last week was better for the junior gold miners represented by GDXJ than for the senior gold miners represented by the HUI. As illustrated by the following weekly chart, GDXJ built on the preceding week's upward reversal over the course of last week. It is now testing resistance at $16.73-$17.30, which is the equivalent of HUI resistance at 373-385.



There's presently a lot of bearish gold-mining commentary doing the rounds. This is something that always happens near important price lows in any market, although the proliferation of bearish commentary doesn't guarantee that an important price low is at hand.

Just keep in mind that after a market has been trending downward for a long time the price chart will always look ugly and the reason for an imminent reversal from down to up will never be obvious. That's the nature of a financial market.

Currency Market Update

83 was the chart-based short-term target for the Dollar Index after it broke above 80.5. After finally reaching this target last week the Dollar Index has begun to pull back. A normal pullback would take it down to 81.0-81.5.



Although the US dollar's recent strength coincided with stock market strength, a longer and more substantial US$ advance will likely require pronounced stock market weakness. In particular, we doubt that the Dollar Index will be able to make a sustained move above last year's high of 84 unless/until the broad stock market embarks on an intermediate-term downward trend.

The Australian Dollar (A$) has just bounced from the bottom to the middle of its 8-month horizontal trading range. Sentiment indicators suggest the potential for the A$ to make additional gains over the next few weeks, but a lot will depend on the timing of a stock market peak. The period from early-January through to early-March was strange, in that commodities and the commodity currencies were weak in parallel with a strengthening broad stock market. However, we doubt that the A$ will be able to extend its rebound if the stock market begins to trend downward.

Note that a daily close below support at 101.5-102.0 would suggest that a decline to 96 (last year's low) was in progress.

Update 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 15th March 2013:

[Note: 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]

  *Americas Bullion Royalty Corp. (AMB.TO) announced that it has received an additional 6.2M shares of Silver Predator Corp. (SPD.TO) under Silver Predator's option agreement to acquire a 100% interest in the Taylor Project (a past-producing open-pit silver mine in Nevada). AMB now owns about 13.8M shares of Silver Predator, or about 25% of the company. If SPD completes its earn-in to the Taylor project then AMB will end up with an additional 5M-6M SPD shares, taking its ownership stake to around 33%. With SPD shares trading at only C$0.12 the current value of AMB's stake is not significant. However, this investment could pay-off for AMB in the future.

There was more news from AMB after the close of trading last Friday. The news was bearish, but not in a big way. We are referring to the announcement that AMB has arranged a non-brokered private placement of up to 8.5 million shares at a price of 24 cents per share to raise up to $2.04M. It's not good that the company is issuing new equity at such a low price, but the damage is mitigated by the fact that the placement is small (it will increase the total share count from 153M to 162M) and includes no stock warrants.

This unexpected placement is possibly a knock-on effect of the delay to the government approval of the Brewery Creek project discussed in AMB's 19th February press release. The approval delay could prevent AMB from drawing additional funds from the $35M credit facility provided by Red Kite last September.

A typical reaction to this news would result in AMB dropping to the C$0.24 financing price, creating a much better buying opportunity than we thought would occur.

  *Dragon Mining (DRA.AX) reported the results of drilling below the current underground workings at its Orivesi gold mine (Orivesi is one of the two mines that provide ore for the company's Vammala production centre in Finland). There were some good intercepts, including 30.8m of 11.1-g/t gold.

DRA is finding enough new gold to sustain its production rate. The problem is the cost of production.

  *Endeavour Mining (EDV.TO, EVR.AX) had two pieces of good news. First, the final results of in-fill drilling at the company's development-stage Hounde project in Burkina Faso had numerous good intercepts, including 73.9m of 5.26 g/t gold and 38.0m of 5.93 g/t gold. These drilling results probably won't significantly increase the overall project resource, but they demonstrate continuity of the mineralisation and should improve the project's economics by enabling Inferred resources to be upgraded to the M&I category. The next important milestone for the Hounde project is the completion of the FS, which is scheduled for late this year.

The other piece of good news was the announcement that the construction of EDV's Agbaou Gold Mine in Cote d'Ivoire is on-budget and on-schedule. Initial production is scheduled for Q1-2014.

Although you would never know it by looking at the stock price, EDV continues to operate very well. Eventually the stock market will notice.

  *Pinetree Capital (PNP.TO) announced that as at February 28, 2013 its per-share net asset value (NAV) was C$1.28. Taking into account the TSXV market action since 28th February, its current per-share NAV is probably about C$1.26. This compares to last Friday's closing price of C$0.62.

  *Ramelius Resources (RMS.AX) made two announcements last week, both of which were positive in a small way.

First, the company reported an initial underground resource of 63K ounces below the Water Tank Hill pit at its Mt Magnet gold mining operation. When combined with the previously-defined 62K ounces below the nearby St George pit, RMS believes that it now has sufficient resources in close proximity to the existing St George decline to justify an engineering study to demonstrate the economic viability of mining these underground resources. It is expected that the study will be completed during the June quarter.

Second, the company reported that mining of the Western Queen South deposit, which is located about 90kms from the Mt Magnet mining operation, has commenced. Western Queen South is expected to add 23K ounces of production during its 12-month life.

  *Sabina Gold and Silver (SBB.TO) had its highest trading volume of the year and its third-highest trading volume of the past seven months last Friday. The relatively high volume was almost certainly related to SBB's deletion from two S&P/TSX indices (as mentioned in last week's Interim Update). That the stock ended the day only 1c lower is bullish, considering the downward pressure created by the selling of index-tracking funds.



  *International Tower Hill Mines (THM) reported its results for the year-ended 31st December 2012 and updated the market on its progress. Here are the two most important details:

1) THM had $27M of working capital as at 31st December. Based on budgeted expenditure, this will be enough to fund the company for another 6-9 months. This means that THM will have to arrange some sort of financing or strategic alliance before year-end, but additional financing is not urgently required.

2) The Livengood FS is said to be on schedule and on budget. We assume this means that the FS will be complete by June-2013.

We don't have a good handle on the economics of the Livengood project. We doubt that anybody does. The reason is that the most recent analysis of the project's economics was the updated PEA completed way back in August of 2011 (THM decided to bypass the PFS stage and go straight from PEA to FS), and in the mean-time there have been substantial changes to the mine plan and the costs of building/operating a mine. We expect the FS to show that the project is economically robust at a gold price of around $1500/oz and that THM is extremely under-valued, but the current market obviously isn't prepared to allow anything for speculative potential.

  *Volta Resources (VTR.TO): Company insiders (senior managers and directors) recently bought 192,000 shares of VTR at C$0.30-$0.31 in the public market. In dollar terms this isn't a lot, but it's enough to be considered a positive development. We like it when managers and directors put their money where their mouths are.

Schedule of resource updates and economic analyses

The following table is a quick reference for the expected timing of resource updates and economic analyses (PEA, PFS and FS) for the exploration-stage mining stocks in the TSI Stock Selections list.

Highest Priority Buys

The stocks that an individual buys will be determined by his/her current exposure, financial situation and risk tolerance, but this is roughly how we would now prioritise TSI gold/silver stocks for new buying (highest priority first). Stocks not mentioned below have less appeal in the current environment, but will possibly become higher-priority buys when the market improves.

a) Producers: Endeavour (EDV.TO, EVR.AX), Evolution (EVN.AX), Golden Star (GSS), Ramelius (RMS.AX).

b) Explorers/Developers: Pretium (PVG), Almaden (AAU), Sabina (SBB.TO), Asanko (AKG), Americas Bullion Royalty (AMB.TO), Batero (BAT.V), Clifton Star (CFO.V).

Chart Sources

Charts appearing in today's commentary are courtesy of:

http://stockcharts.com/index.html