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

Keynesian Economics and the imaginary "savings glut"

Looking at the world through a Keynesian lens is worse than being totally uninformed about economics. If you are uninformed then in all likelihood you will be well aware that you know nothing. You will be under no illusions. However, if you have been indoctrinated with Keynesian economic theories then what you see will often be the opposite of reality, but at the same time you will be blissfully unaware that your interpretation is very different from the way things actually are. This will cause you to come up with nonsensical explanations, a classic example being the "savings glut".

The "savings glut" was concocted by uber-Keynesian Ben Bernanke, and eagerly embraced by the shifty Alan Greenspan, to explain the seemingly endless demand for US mortgage-related debt and low-quality interest-bearing securities during 2002-2006. According to this view of the world, the 2002-2006 boom in the US credit market and the associated boom in the stock market occurred because $10/day Chinese factory workers living 20-to-a-room were saving too much money. That, in simple terms, is what the past two Chairmen of the Federal Reserve either believed (in Bernanke's case) or claimed to believe because it was convenient (in Greenspan's case). It's little wonder that US monetary policy has wreaked so much havoc over the past 12 years.

In the real world, a "savings glut" is not possible. Saving is such an important, foundational part of the economic growth process that a sustainable increase in per-capita wealth cannot happen without an increase in saving. To claim that there is too much saving is therefore akin to claiming that living standards are rising too quickly or that poverty is being eradicated too quickly. However, "savings glut" is the sort of explanation that you could come up with if you don't understand how ramping up the money supply and suppressing interest rates affects the economy and the financial markets.

The outcomes that Bernanke and many Keynesian economists blame on an imaginary "savings glut" are actually caused by a money glut, or, to be more accurate, rapid growth in the money supply. The reason is that when money is created out of nothing at a fast pace it can cause the essential links between consumption, long-term investment and interest rates to break. Rather than a general increase in the propensity to consume in the present leading to higher interest rates and reduced long-term investment, a constant stream of new money can enable interest rates to remain low in the face of increasing eagerness to consume. The impression is thus created that no trade-off is necessary, as both current consumption and long-term investment rise in parallel. There is plenty of money or credit for buying new consumer goods such as houses, cars, TV sets, furniture, and clothes, and at the same time there is plenty of money or credit to embark on capital-intensive long-term projects and to speculate in stocks and bonds. It seems that the problem of scarcity has been solved, and all it took was for central bankers and/or private bankers to type a bunch of numbers into their computers. Why didn't anyone think of it before?

Even a trade deficit, which is never a problem in and of itself, can be symptomatic of rapid monetary inflation, because the ramp-up in current consumption fueled by the easy money can result in greater spending on imported goods. The important word here is "symptomatic", because the problem is the domestic creation of new money out of nothing, not the fact that some of the new money gets exchanged for goods manufactured outside the country. With the exception of a tiny portion that gets tucked away in mattresses, all newly created money will get spent or invested, and then spent or invested again, and again, and again.

Unfortunately, for reasons we've discussed numerous times in the past, an economic boom fueled by monetary inflation is self-defeating. It leads to a bust, and the economy ends up in a much worse state than it would have been if the boom had never occurred. To understand why this must be so, you need to look through the lens of good economic theory. Of particular relevance to this discussion, you cannot possibly understand the situation by looking through a Keynesian lens, because if you do then what you will see is a world where consumption comes first and therefore doesn't have to be funded by anything, where unproductive spending is just as beneficial as productive spending, and where saving is bad if too many people are doing it. That is, you won't see the real world.

Trying to understand the way the world works by starting with Keynesian premises is like trying to understand the movements of the planets by assuming that everything revolves around Earth. You end up with a very complicated load of nonsense.

T-Bonds continue to defy almost everyone's expectations

One of the main reasons that T-Bonds continue to rise in price (fall in yield) is that most speculators continue to bet on a price decline (a rise in long-term interest rates). In other words, the sentiment backdrop remains supportive. It's worth noting, for example, that despite the strong and consistent upward trend of the past 9 months, there is still a substantial speculative net-short position across the 30-year T-Bond and 10-year T-Note futures markets. Therefore, higher T-Bond/T-Note prices and lower long-term interest rates probably lie in store.

That being said, the iShares 20+ Year Treasury ETF (TLT) is now a) very 'overbought' by some measures (momentum, not sentiment), b) within 2% of intermediate-term resistance at 120, and c) within 6% of its mid-2012 all-time high. A test of resistance at 120 will almost surely happen and a test of the all-time high will possibly happen prior to the next intermediate-term peak, but a sustained break into all-time-high territory is very unlikely.



We were short-term bullish on US Treasury bonds from mid-December of last year through to the end of last week. However, due to the extent to which the market is 'overbought' and our opinion that the remaining upside potential is relatively small, as of now we are short-term "neutral".

Just to be clear, we expect to see additional gains in the T-Bond price and additional declines in the T-Bond yield over the next few months, but the short-term risk/reward is no longer skewed towards reward. It is also not skewed towards risk, meaning that the point hasn't yet been reached where it makes sense to bet against this market.

The Stock Market

The following chart shows the NASDAQ Composite Index, the numbers of individual NASDAQ stocks making new 52-week highs and lows, and a 10-day moving average of the NASDAQ's high-low differential. The chart tells us that:

1. Although the NASDAQ tested its July-2014 multi-year high last Friday, on the same day only 66 NASDAQ stocks made new highs for the year. This contrasts with 200 new highs in early July and 400 new highs last October.

2. Despite last Friday's rise by the NASDAQ to its multi-year high, the 10-day MA of the NASDAQ's high-low differential is not far above its low of the past 2 years.

The point is that the NASDAQ's rise is getting narrower and narrower. This is something that often happens near the end of a bull market.



The next chart shows the Bank Index (BKX) and the BKX/SPX ratio (major bank stocks relative to the broad stock market). In nominal terms, the BKX's performance over the past 9 months looks like a major topping pattern. A weekly close below 67 would confirm this interpretation. In relative strength terms, the BKX appears to have peaked in July of last year and to have completed a major topping pattern in April of this year.



The S&P500's recovery from its early-August low has now gone as far as it should go if it is a counter-trend move.

This week's important US economic events

Gold and the Dollar

Gold

Fundamentals

Gold's fundamental drivers are not uniformly bullish at this time (there is rarely a time when they are), but as a group they are clearly still bullish. Of particular importance:

1) The decline in long-term interest rates has caused the US 10yr-2yr yield spread to contract to the point where this fundamental gold driver has shifted from bullish to neutral. We suspect that it will become slightly more negative for gold over the months ahead as the 10-year yield continues its downward trend in absolute terms and relative to the 2-year yield.

2) The decline in long-term interest rates has also caused the real interest rate to decline, resulting in the real interest-rate backdrop becoming more gold-bullish. Furthermore, inflation expectations are unlikely to decline over the next few months, so any additional reduction in the nominal long-term interest rate should cause the real long-term interest rate to fall and be supportive for gold. In effect, the bearish influence stemming from the narrowing of the yield-spread is being counteracted by a decline in the real interest rate.

3) As long as the Dollar Index continues to oscillate between 79.0 and 81.5, the US dollar's exchange rate will be gold-neutral.

4) Last week's decline in the BKX/SPX ratio to a new 12-month low confirms that the banking sector's relative performance remains decidedly gold-bullish.

5) The following chart shows that the HYG/TLT ratio broke to a new 12-month low last week, which means that credit spreads are continuing to widen. This is decidedly gold-bullish.



Sentiment

The latest Commitments of Traders (COT) data show that the speculative net-long position is still near its 12-month high. This means that speculative sentiment remains a little stretched in the direction of short-term optimism, which creates some downside risk but doesn't present a big problem when considered alongside other indicators.

At the same time, the following chart shows that the CEF/gold ratio (the unit price of the Central Fund of Canada, a gold and silver bullion fund, divided by the gold price) remains near a 20-year low. This long-term sentiment indicator is therefore still flashing a major buy signal.



Price Action

On a daily closing basis the gold price barely moved over the course of last week. However, there was an intra-day spike up to test resistance near $1325 on Thursday and then an intra-day spike down to the low-$1290s on Friday. At the end of the week, gold was still above $1300 and still above its 65-week moving average.



Gold needs to close above $1325 to remove most of the remaining doubt that a rally to new highs for the year is underway. Until it does so, the short-term gold bears will have some hope. We expect this hope to be extinguished within the coming fortnight.

Silver

Silver closed at a new multi-week low last Friday. On a short-term basis it is now very 'oversold' in dollar terms and relative to gold. Moreover, the pronounced divergence between the silver price and the SIL/silver ratio that was discussed in last week's Interim Update suggests that a short-term price low is close at hand.



The Central Fund of Canada (CEF) is currently one of the best ways to obtain exposure to precious metals, because:

a) CEF provides roughly equal exposure to gold and silver

b) CEF is trading at a 5.4% discount to its net asset value

c) Relative to gold, CEF is almost as cheap as it ever gets

Gold Stocks

Current Market Situation

Since peaking in July, the HUI has essentially drifted sideways. This sideways or slightly-downward drift looks like a run-of-the-mill short-term consolidation, but we get the impression that it has caused considerable consternation.

The resistance on the HUI chart (see below) that begins at 250 and extends up to 260 is very important and very obvious. It's therefore not surprising that moves up to this resistance have, to date, prompted a sufficient increase in selling pressure to cap the up-moves. At the same time, prices now appear to be well supported just below current levels, which is preventing price declines from gaining any traction.



Last Friday's price action was slightly bullish, for two reasons. First, gold's break below $1300 early in the day did not lead to substantial weakness in gold-mining stocks. In fact, we placed a few gold-stock buy orders just below the market prior to the start of trading on Friday with the aim of catching a downward spike, but not one of these orders was filled. Second, Friday's small declines in the HUI and the gold price were accompanied by a small rise in GDXJ, resulting in the GDXJ/GDX ratio ticking upward on the day. It's possible that GDXJ has just completed another successful test of its 50-day MA.



We expect resistance at 250 for the HUI and equivalent resistance at $45-$46 for GDXJ to be breached before the end of this month.

Senior Gold Miners

We don't plan on publishing any detailed analysis of the senior gold-mining stocks or adding any such stocks to the TSI List as long-term positions. For information purposes, we just want to point out that Gold Fields Ltd (GFI) and Kinross Gold (KGC) offer the best value within the realm of >1M-oz/year gold producers.

Comparing GFI and KGC, at current prices KGC has the advantage of having a slightly lower valuation. It also has the advantages of a 10%-lower all-in sustaining cost per ounce and a stronger balance sheet. However, GFI has much lower country risk than KGC, with GFI now getting less than 15% of its production from high-risk South Africa and almost half of its production from Australia (the lowest-risk country for mining), and KGC having its most valuable assets in Russia (one of the highest-risk countries for mining). In our opinion, the country-risk situation gives GFI a slight edge over KGC.

GFI is close to completing a major basing pattern (see chart below). Chart huggers sometimes refer to this pattern as a "cup and handle".

A solid break above the top of the basing pattern would suggest a target of US$6.00-$6.50. This target could be reached in 2014, although it is more realistic to think of it as a viable 12-month objective.



The Currency Market

For the third week in a row, the Dollar Index failed to achieve a weekly close above 81.5 after trading above 81.5 during the week. Last week it closed at 81.46. The week before last it also closed at 81.46, and the week before that it closed at 81.43. Obviously, 81.5 is an important resistance level.

The Dollar Index's inability to achieve a weekly close above 81.5 means that there isn't yet clear-cut evidence that its intermediate-term trend has reversed upward, which, in turn, means that the scenario involving a final decline to the low-70s remains alive. However, it should not be construed as bearish price action. The fact is that by late last month the Dollar Index had become very 'overbought' on a short-term basis and was likely to consolidate for a few weeks regardless of whether or not its intermediate-term trend had reversed up.

The Dollar Index has so far failed to decisively break above resistance at 81.5, but the RSI included at the bottom of the following daily chart shows that the sideways movement of the past 2-3 weeks has partly addressed the 'overbought' condition.



We remain short- and intermediate-term "neutral" on the Dollar Index, waiting for the market to 'tip its hand'.

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 15th August 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]

  *Almaden Minerals (AAU) published its financial results for the June quarter. Taking into account the balance sheet in the financial statements, the spending that would have occurred since 30th June and the equity financing completed at the end of last month, the company should currently have about C$15M of working capital. This means that AAU should be fully funded for the next 12 months.

AAU also reported some drilling results, the most notable of which was an intercept of 2m grading 26-g/t gold from just outside the currently defined deposit. Additional drilling is needed to determine the significance of this intercept.

  *Asanko Gold (AKG) published its financial results for the June quarter. Based on these results we estimate that the company now has about US$220M of working capital. It also has $150M of undrawn credit, which means that it has access to about US$370M. The development of Phase 1 of the Asanko gold mine (Ghana) is expected to cost about $290M, so AKG is fully funded through to production.

  *Endeavour Mining (EDV.TO, EVR.AX) published its financial results for the June quarter. Despite having an excellent quarter in production terms, EDV did no better than break even in bottom-line profit terms and suffered a small ($6M) deterioration in its balance sheet.

Clearly, EDV can fully cover its costs at $1300/oz, which is more than many other gold producers are capable of doing. However, it will need a gold price of at least $1400/oz to become genuinely and meaningfully profitable.

  *Energy Fuels (EFR.TO, UUUU), one of the two uranium stocks in the TSI List, published its financial results for the June quarter and provided updated guidance.

At the end of the June quarter EFR had working capital of $42M, which is unchanged from the end of the preceding quarter. To ensure that it maintains a healthy working-capital position during the indeterminable period between now and when the spot uranium price moves above the company's production cost, EFR will place its White Mesa Mill on standby following the completion of the current mill run in the fourth quarter of this year. At that time the company will have sufficient inventory to fulfill all of its existing long-term contracts that must be met with produced pounds through 2017. It will then deliver the inventory into these contracts, receiving a minimum of $57/pound. For the contracts that don't have to be met with the company's own production, EFR will purchase material in the spot market. Currently, purchasing in the spot market for sale into long-term contracts yields a gross profit of about $27/pound.

This is a reasonable course of action. It will enable EFR to conserve its cash and weather the depressed conditions in the uranium market. After the uranium price recovers, the White Mesa Mill will be restarted.

  *Lydian International (LYD.TO) published its financial results for the June quarter. The company has about US$20M of working capital, which should be more than enough to get it to the point where a decision can be made to construct a mine at the Amulsar gold project in Armenia.

The MD&A that accompanied LYD's quarterly financial results indicated that the updated FS for the Amulsar project will be completed during Q3-2014 (that is, by the end of next month). Although LYD currently offers very good value based on the initial (September-2012) FS and appears to be 'oversold' within a long-term basing pattern, we would hold off on new buying until after the updated FS is published. The results of the updated FS will determine our next move with this stock.

  *Premier Gold (PG.TO) published its financial results for the June quarter. Based on these results, the $21M asset purchase announced during the week before last and the spending carried out since 30th June, we estimate that working capital is now around $35M. Assuming PG doesn't make any more substantial asset purchases, this should be enough to fund its operations for at least the next 12 months.

  *Pilot Gold (PLG.TO) published its financial results for the June quarter. Based on the balance sheet at the end of June, we estimate that PLG currently has about $27M of working capital. This should be enough to fully fund the company for at least the next 12 months.

  *Pretium Resources (PVG) has issued another 1M shares at US$7.25/share as part of the equity financing completed about three weeks ago. This was due to the underwriters exercising their Over-Allotment Option in full -- a sign that there is strong demand for PVG shares at US$7.25.

Also, PVG has raised an additional US$3.5M by issuing 496K new shares to Liberty Metals. This small financing stems from Liberty's right to maintain its pro-rata stake in the company.

  *True Gold Mining (TGM.V) announced that it has entered into a "streaming deal" with a joint venture owned 75% by Franco Nevada and 25% by Sandstorm Gold (hereafter called the "Streaming JV" or "SJV"). Before we get to the details of TGM's deal, here's what we wrote in the 14th April 2014 Weekly Update about this type of deal:

"In a market environment where debt and equity financing is often either expensive or difficult for a junior gold (or silver) miner to obtain, a streaming deal can look attractive. This is a deal whereby a miner sells the right to purchase part of its future production at a very low price (usually no more than $400/oz for gold) in exchange for an upfront payment, with the upfront payment generally being used to finance the development or expansion of a mine. The company buying the future production "stream" will typically be Franco Nevada (FNV), Royal Gold (RGLD), Silver Wheaton (SLV) or Sandstorm Gold (SAND).

While a "streaming" deal can look like a reasonable way for a junior miner to meet its short-term financing needs at the cost of reduced future profitability, the risk is that by entering into the streaming deal the junior miner has completely relinquished its opportunity to make a profit in the future. This is because most gold mines have slim profit margins after all costs are accounted for. Due to these typically-slim margins, a miner that agrees to sell 10%-20% of its future production to a royalty or streaming company at a nominal price could end up with nothing for its own stockholders even if it doesn't encounter major operational problems. In effect, the mine could end up being operated solely for the benefit of the royalty/streaming company."

Under the streaming deal announced last week, TGM will receive US$100M up front to fund the development of the 100K-oz/year Karma gold mine in Burkina Faso in exchange for:

1. A commitment to sell 20K ounces of gold per year, over the first 5 years of production (2016-2020), to the SJV at 20% of the spot gold price.

2. A commitment to sell 6.5% of Karma gold production, from year 6 onward for the life of the mine, to the SJV at 20% of the spot gold price.

At a gold price of $1500/oz, the SJV would get $120M over 5 years ($150M of gold minus 20%) plus the 6.5% life-of-mine gold stream. Considering the time value of money, $120M spread over 5 years beginning in 2016 is worth less than $100M in the hand today. This means that at a gold price of $1500/oz or lower, the upside for the SJV would be solely in the 6.5% royalty that takes effect in 2021. Consequently, given the risks involved we would view this as a good deal for TGM assuming an average gold price of $1500/oz or lower over the next 7 years.

However, we think that the gold price is headed much higher and will be over $2000/oz by 2018. Assuming an average price of $2000/oz, the $100M that TGM is receiving up front is worth substantially less than the "gold stream" without even taking into account the 6.5% stream that takes effect in the sixth year of production.

Because we are long-term bullish on gold, we don't like the way that TGM has gone about financing its mine construction. The fact is that going down the "streaming" route to complete the financing of the Karma project (TGM should now have $160M-$170M, or $30M-$40M more than Karma's initial capex estimate) removes a lot of the gold-price-related upside potential.

By expanding the Karma mine's production rate, TGM could add back some of the upside potential removed by the "steaming" deal. The exploration results achieved to date suggest that the mine WILL get bigger, but the details are unknown at this time. Furthermore, TGM could add back ALL of the upside potential removed by the "steaming" deal by purchasing $1500 gold call options covering 20K ounces per year from 2016 through to 2020. For some unknown reason, however, it is almost unheard of for gold mining companies with forward sales commitments to use call options to mitigate the risk that would be created, and/or the opportunity cost that would be incurred, due to a rising gold price.

Jumping to the conclusion: It's good that TGM has removed uncertainty by putting in place the additional financing needed to take its project through to production, but we will now be quicker to sell this stock unless it can recoup the upside potential that has been given up as part of the financing.

    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 at US$1.45 or lower (last Friday's closing price: US$1.49).

2) EDV.TO (last Friday's closing price: C$0.89).

3) EVN.AX (last Friday's closing price: A$0.75).

4) PLG.TO (last Friday's closing price: C$1.39).

5) TGM.V at C$0.42 or lower (last Friday's closing price: C$0.44).

Chart Sources

Charts appearing in today's commentary are courtesy of:

http://stockcharts.com/index.html