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)

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.

Outlook Summary

No Interim Update this week

Please note that we won't be able to do an Interim Update this week. We will, however, send out an email alert if the market action requires an urgent update. 

The Stock Market

The long-term trend

Whether the stock market is in a long-term bullish trend or a long-term bearish trend can't be determined by looking at nominal prices. The reason is that the nominal price of an investment is determined by the value of the investment AND the value of the money in which the price is denominated, meaning, for example, that it would be possible for a large rise in the stock market to be primarily the result of a large decline in the value of money. To put it another way, if the stock market's major trend were determined solely by the change in the nominal price level, then the central bank could create a bull market simply by depreciating the currency. How, then, should we determine the stock market's long-term trend? Let us count the ways.

The first way is to look at the long-term trend in valuation terms (for example, the average P/E ratio) rather than in nominal price terms. During a long-term bull market the average valuation should make progressively higher highs and higher lows, whereas during a long-term bear market the market's valuation should make lower highs and lower lows. Furthermore, we know from the historical record that once a long-term bull market gets underway it doesn't end until the average valuation becomes very high, and that once a long-term bear market gets underway it doesn't end until the average valuation becomes very low.

With regard to the US stock market, we present the following chart of the S&P500's Cyclically-Adjusted P/E ratio (also known as the "Shiller P/E") and point out that:

a) The average valuation was a lot lower at the 2007 peak than at the 2000 peak and the average valuation was lower at the 2008-2009 bottom than at the 2002-2003 bottom. This tells us that a long-term bear market commenced in 2000.

b) Although the average valuation at the 2008-2009 bottom was reasonable, it wasn't unusually low by historical standards. This suggests that the long-term bear market did not end at that time.

c) The market now appears to be rolling over to the downside from a significantly lower average valuation than existed at the 2007 peak. If this turns out to be the case it will confirm that the long-term bear market is still in progress.


                              Chart Source: http://www.irrationalexuberance.com/index.htm

As an aside, while the current valuation is very low compared to the valuation at the 2000 peak, it is roughly the same as the valuation at the secular 1966 peak.

The second way of determining the stock market's long-term trend is to look at performance in terms of inflation-adjusted (IA) currency. Provided that a realistic measure of inflation adjustment is used, this will indicate whether the market is falling or rising in purchasing-power terms. Irrespective of its nominal price performance, an investment is not really in a bull market unless its purchasing power is trending upward.

With regard to the US stock market, the following chart shows that the inflation-adjusted (IA)* Dow Industrials Index has been making lower highs and lower lows since 2000. This chart is therefore consistent with our assessment of the long-term valuation trend -- it shows that a long-term bear market commenced in 2000 and does not contain any evidence that the bear market is over.



The third and final way of determining the stock market's long-term trend is to look at performance in terms of gold. This works because gold tends to at least maintain its purchasing power over the very long haul and because secular gold bull markets invariably coincide with secular equity bear markets.

With regard to the US stock market, the following chart shows that the Dow/Gold ratio commenced a long-term downward trend in 2000.



Fortunately, the three reasonable methods of determining the long-term trend of the US stock market are in synch. Each method indicates that a long-term bear market definitely began in 2000 and that the long-term bear market is probably still in progress.

    *We use a method of adjusting for the effects of US monetary inflation that is far more accurate over the long term than either the official CPI or the Shadowstats.com CPI.

Current Market Situation

The US

"The S&P 500 index has increased by over 34% since the beginning of 2011, of which 28% has come from multiple expansion. During the same period, growth in corporate earnings has slowed. The trailing 12-month earnings for S&P 500 companies rose 2.4% in 2012 and another 2.5% for the first seven months of this year, registering the slowest earnings growth in non-recession years since 1998."
    -- Scott Minerd, CIO at Guggenheim Partners

By closing below 1675 last week, the S&P500 Index signaled the start of either a short-term correction or a new cyclical bear market. At this stage there's no way of knowing which of these scenarios is happening.

It is reasonable to view the June low (1560) as the demarcation between a routine short-term correction and a new bear market. If the June low is decisively breeched it will mean that a 1-2 year bear market has probably begun.



While the SPX needs to close below 1560 to clearly signal the start of a new bear market, an earlier warning could be provided by the Home Construction sector. After all, a lot of today's bullish economic and stock-market sentiment is based to some extent on the belief that a new major upward trend has begun in the residential real estate market.

In this vein, the iShares Dow Jones Home Construction ETF (ITB) warrants close scrutiny. As illustrated by the following chart, this ETF came close to breaking out to the downside last week and ended the week slightly above important support.

A sustained break below $21 by ITB would signal that a major top was in place for this sector of the market and give an early warning that a major top was in place for the overall market.



If the S&P500 drops by another 50-100 points over the next couple of weeks, Fed officials will probably start making speeches in which they suggest that there won't be any 'tapering' this year.

As previously explained, the Fed is caught in a trap of its own making. It has created the situation where equity valuations and a lot of economic activity are dependent upon the continuation of substantial 'monetary accommodation'. It wants to reduce the level of accommodation and it wants to avoid short-term pain, but doing both is not possible.

The Emerging Markets

The following chart compares the EEM/SPX ratio (the "emerging markets" relative to the US market) with the Industrial Metals Index (GYX). This chart illustrates the comment we made in last week's Interim Update -- that emerging-market equities are being temporarily supported by the same forces that are giving industrial metals' prices a boost. In other words, it seems that the relative performance of emerging-market equities is linked to the performance of the industrial metals complex.

We are bearish on both EEM and the SPX, but the SPX is likely to be the poorer performer as long as the industrial metals are rallying.

This week's important US economic events

Gold and the Dollar

Gold and Silver

A short-term risk eliminated

We mentioned in TSI commentaries over the past few months that the large GLD stake held by John Paulson's hedge fund constituted a short-term downside risk for the gold price. This is because Paulson's fund qualified as a 'weak hand' that could be forced to sell at some point. In public, Paulson said that he remained bullish on gold and comfortable with his GLD position, but he would naturally make such public statements regardless of whether his intention was to hold or sell. The reason is that you would be stupid to do otherwise if your long position was big enough that other traders would likely 'front run' your selling, causing you to receive a lower price.

Due to a regulatory filing with the SEC last week we now know that Paulson substantially reduced his GLD stake during the quarter ended 30th June -- from around 22M shares to around 10M shares. This selling was no doubt partly responsible for the June weakness in the gold price.

Paulson's GLD stake is no longer a significant short-term threat to the gold market. In fact, news that the 'Paulson overhang' had been largely removed was probably the catalyst for gold's upside breakout last Thursday.

Current Market Situation

A week ago we wrote: "Important resistance lies at $1350. Taking out this resistance could prompt many speculators to start thinking along the lines of "hey, maybe the gold bull market has resumed", leading to significant upside follow-through.

A test of longer-term resistance at $1480-$1530 will be a realistic possibility in September if $1350 is decisively breeched in August."

As illustrated by the following daily chart, resistance at $1350 was decisively breeched over the final two trading days of last week. This opens up the possibility that longer-term resistance at $1480-$1530 will be tested in September.



Gold sentiment remains constructive. In particular, the Central Gold Trust (GTU) and the Central Fund of Canada (CEF) are still trading at discounts to their respective net asset values and the speculative net-long position in COMEX gold futures has only just begun to rise from a 10-year low.

In last week's Interim Update we mentioned the $23-$24 range as a likely short-term target for silver. Due to a price surge over the final two trading days of last week, the bottom half of this range has already been reached.

Silver is now short-term 'overbought', but the speed of last week's price rise increases the probability that major resistance at $26 (the extreme short-term upside target mentioned in last week's Interim Update) will be tested prior to the next 1-3 month peak.



Gold Stocks

The HUI didn't quite make it to important resistance in the 290s last week, but the XAU made it to equivalent resistance at 110-111. Refer to the following daily chart for details.

If the XAU can consolidate for at least a few days and then break above 111, the short-term target will be the 200-day MA and lateral resistance at around 130. This higher resistance level should be viewed as the maximum realistic upside potential with regard to the coming two months.

Note that 130 for the XAU is roughly equivalent to 330-340 for the HUI.



GDXJ, an ETF that holds junior gold and silver miners, has resistance at US$51 and then at US$60. The following daily chart shows that the lower of these resistance levels was tested last Friday. The higher of these resistance levels should be viewed as the maximum realistic upside potential with regard to the coming two months.



Currency Market Update

It was an uneventful week in the currency market, with the major currencies generally making insignificant moves.

As was the case at this time last week, the Dollar Index could be close to a short-term bottom. But as was also the case at this time last week, there is no evidence that a meaningful/tradable US$ rally is about to get underway. Of particular note, sentiment is neutral despite the Dollar Index's recent sharp multi-week decline. In other words, speculators are presently more bullish on the Dollar Index than they would ordinarily be considering the price action. This creates the potential for a further shake-out of US$ longs prior to a sustained reversal.

As has been the case for the entire year, the most important support for the Dollar Index lies at 79. This support could be tested within the next few weeks as part of a continuing correction, but it shouldn't be breeched.

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 16th August 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]

  *Asanko Gold (AKG) issued its quarterly reports for the June-2013 quarter. Of particular interest, as at 30th June AKG had no long-term debt and $189M of working capital, making it one of the best-positioned exploration-stage gold miners from a balance-sheet perspective. Also of interest, the FS for AKG's Esaase gold project is on track for completion during the final quarter of this year.

  *Carpathian Gold (CPN.TO) issued its quarterly reports for the June-2013 quarter. These reports indicate that the 100K-oz/year RDM gold project in Brazil is on track to commence production this quarter and to ramp up to design capacity in the final quarter of 2013. That's the good news. The bad news is that CPN's financial situation is now precarious. Additional financing will be needed within the next few months.

Interestingly and a little surprisingly, CPN's stock price rebounded on strong volume after the quarterly report was published. Considering the company's pressing need for additional financing, further price strength over the next few weeks should be viewed as an opportunity to scale out of this high-risk stock.

  *Endeavour Mining (EDV.TO/EVR.AX) reported its financial results for the quarter ended 30th June 2013. There were no surprises.

The all-in sustaining production cost during the quarter was $1,038/oz, which is about 20% below the industry average. EDV's management expects the cost to fall to $1,000/oz in 2014 due to cost-reduction measures and the start-up of the low-cost Agbaou mine.

EDV's liquidity position remains strong, in that the company had about $100M of working capital at the end of June and recently added another $100M by drawing down a long-term credit facility. It should only need to invest another $30M-$35M to bring Agbaou into production and its other projects should be cash-flow positive as long as the gold price is above $1250/oz, meaning that the company should have more than enough cash to fund its current operations and its growth.

  *Energy Fuels (EFR.TO) shareholders have approved the merger with Strathmore Minerals (STM.TO). The approval of STM shareholders is expected to happen at a meeting scheduled for 20th August and the merger is expected to be completed on 28th August.

EFR shareholders have also approved a share consolidation. The share consolidation (likely: 1 new share for 10 existing shares) has been in the works for more than 12 months, will occur at the discretion of the company's board of directors sometime after the merger with STM is completed, and will hopefully pave the way for an NYSE listing for EFR.

Separately, EFR issued its quarterly reports for the June-2013 quarter. Production at the company's White Mesa mill totaled 511,000 pounds of uranium and 490,000 pounds of vanadium during the quarter. The uranium production cost worked out to about $39/pound.

At 30th June 2013 the company had $33.8M of working capital, which is down from $42M at 30th September 2012 (the end of EFR's 2012 financial year) and up from $33M at 31st March 2013. During the June-2013 quarter the company raised $6.6M via an equity financing, which effectively means that its business was cash-flow negative by about $6M during the June quarter and $15M during the 9 months since the end of September last year. This is obviously not good, but it's also not surprising considering the performance of the uranium market.

EFR probably has enough working capital and financing options to survive another year of low uranium prices, but good returns for shareholders will require a much higher uranium price or the belief that a much higher uranium price is in the cards.

  *Golden Star Resources (GSS) reported its financial results for the quarter ended 30th June 2013, the quarterly production results having been reported about five weeks ago. The financial results were bad, but not worse than expected.

GSS's main problem is its relatively high cost of production. In the March quarter, for example, the company's consolidated cash operating cost (the combined cash cost across its two operating mines in Ghana) was $1124/oz. This was the net result of a reasonable $809/oz cost at the Wassa mine and a very high $1531/oz cost at the Bogoso mine. In the June quarter the consolidated cash operating cost was $1078/oz, comprising a cost of $736/oz at Wassa and a cost of $1584/oz at Bogoso, and the all-in sustaining production cost was $1,378/oz.

The Wassa mine therefore continues to operate very well and is generating significant positive cash-flow at the current gold price, whereas the Bogoso mine continues to drain the company's cash at a rapid pace. However, Bogoso's terrible performance was in line with expectations considering the pit-wall failure that disrupted the operation in early May. GSS's management previously announced its plans to substantially reduce Bogoso's costs over the next few quarters.

Like many other gold producers, GSS took a large non-cash impairment charge during the June quarter to reflect the potential long-term effects of a lower gold price. In GSS's case the non-cash charge was about $170M.

GSS's balance sheet deteriorated by about $40M during the June quarter, but the company isn't in danger of running out of cash this year.

  *Lydian International (LYD.TO) issued its quarterly reports for the June-2013 quarter. Based on these reports, the company has about $20M of working capital. This should be enough to fund it through the next 12 months or until the start of mine construction at the Amulsar gold project, whichever comes first. The timing of mine construction will depend on the completion of the FS and the receipt of all permits, both of which are dependent upon successful resolution of the issue discussed in the 29th July Weekly Update.

LYD is trading at a very low valuation and has one of the most economically robust feasibility-stage gold projects that we know of. If not for the permitting/political issue discussed in our 29th July commentary it would be our top candidate for new buying at current prices, but until this issue is sorted out it would be prudent to hold off on new buying.

  *Pilot Gold (PLG.TO) issued its quarterly reports for the June-2013 quarter. The key points are:
1) PLG has sufficient working capital ($29M at 30th June) to fully fund its exploration programs for the next 18 months.
2) There will be a steady stream of drilling results over the remainder of this year.
3) The company expects to complete an initial resource estimate for the KCD Target at its TV Tower project (Turkey) by the end of this year.

  *Premier Gold (PG.TO) issued its quarterly reports for the June-2013 quarter. These reports confirm that the company has about $80M of working capital, which should be enough to fund it through the next two years.

  *Pretium Resources (PVG) reported results from the on-going bulk sample program at its Brucejack high-grade project. The results from underground drilling being done as part of the program continue to confirm the projections of the resource model. And as is normal for this gold deposit, the latest results included some spectacular intercepts. For example, one hole intersected 10,850 g/t over 0.5m.

The bulk sample program is due to be completed early next month. The independent consultant (Strathcona Mineral Services) will then prepare its report.

  *Rio Alto Mining (RIO.TO) issued its quarterly reports for the June-2013 quarter.

Financial performance during the June quarter was a little worse than we were expecting and, judging by the initial reaction of the stock price, the market was expecting. For us, the negative surprise was that while RIO's balance sheet remains healthy, there was a $13M quarter-on-quarter decline in working capital.

Earnings and production costs were fine. The company reported an all-in sustaining cash cost of $1,041/oz, which is about 20% below the industry average, and adjusted net income for the quarter of $0.06/share.

The stock price quickly recouped its initial post-results loss, however, for two reasons. First, the company's management made a bullish forecast for the second half of this year (RIO is forecast to produce 110K-120K ounces of gold at an all-in sustaining cash cost of less than $1000/oz during the second half of 2013). Second, management noted that the average grade of the ore mined at the company's flagship La Arena project was higher than the grade projected by the resource model. To put it another way, the oxide gold deposit is turning out to be richer than expected.

Candidates for new buying

Over the past several weeks it has been very easy for us to identify short-term buying opportunities, because all members of the TSI Stocks List were both very under-valued and 'oversold'. However, this week it is a lot more difficult. A good argument can be made that every TSI stock remains very under-valued, but as a result of the price action some of the most obvious candidates for new buying over recent weeks are now short-term 'overbought'.

In general, the relatively low-risk/high-quality juniors have enjoyed the strongest rebounds. This prompts the question: With the lower-risk stocks having risen sharply, does it make sense to start focusing on the higher-risk plays as far as new buying is concerned?

With the one possible exception mentioned below, we don't think so. At this early stage of what will probably turn out to be a new multi-year bull market in the gold-mining sector it probably still makes sense to direct most new buying towards the under-valued stocks of companies with strong balance sheets and relatively low-risk assets. With most stocks in this category now 'overbought' on a short-term basis, our current list of short-term buying opportunities contains only two suggestions.

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

  - EDV.TO/EVR.AX at C$0.75 or lower (Friday's close: C$0.80)

  - SBB.TO, ideally in the low-C$1.20s (Friday's close: C$1.30)

The one possible exception to the idea of maintaining focus on the relatively low-risk juniors is Clifton Star Resources (CFO.V). Although CFO's stock price has only just begun to turn upward from an ultra-depressed level (see chart below), last Thursday it had the highest single-day upside volume (in terms of shares traded, not in dollar terms) since 2010. One of the risks is that the company only has about $4M of cash, which means that it will have to raise more money within the next 6 months.

It could be appropriate for risk-tolerant speculators to buy some CFO shares at C$0.30 or lower.

Short-term price targets and candidates for partial selling

Here are chart-based short-term upside price targets for TSI gold stocks that have rebounded strongly over the past two weeks. Depending on individual portfolio considerations, it could make sense to do some selling near these price targets if the targets are reached by mid-September. Depending on individual portfolio considerations, such as the amount of money at risk in a particular stock, it could also make sense to do some selling at lower prices as part of a methodical scale-in-during-weakness/scale-out-during-strength process.

1) Almaden Minerals (AAU): AAU broke above resistance at US$1.80 last week. The first target is the 200-day MA (currently at US$2.15), which was almost reached last Friday. The more significant target with regard to taking money off the table is lateral resistance at US$2.50.



2) Asanko Gold (AKG): AKG's recent break above resistance at US$2.80-$2.90 suggests a short-term target of US$4.00.



3) Endeavour Mining (EDV.TO): EDV is testing minor resistance at C$0.80. A break above C$0.80 will create near-term targets of C$1.00 and C$1.20, although EDV won't encounter major chart-based resistance until it reaches C$1.80.

C$1.80 should be viewed as an extreme upside target as far as the remainder of this year is concerned, but as a reasonable upside target with regard to the coming 12 months.



4) Evolution Mining (EVN.AX): EVN has resistance at A$0.95-$1.00, A$1.25 and A$1.50. The first of these resistance levels is currently being tested and the second is a realistic short-term target. We suspect that resistance at A$1.50 won't be tested until next year.



5) Golden Star Resources (GSS): GSS has significant resistance at US$0.90-$1.00. This resistance was almost reached last week, which is remarkable considering that the stock began the week at only US$0.47.

If GSS manages to break above US$1.00 within the next few weeks then the next target will be the $1.20s.



6) Premier Gold Mines (PG.TO): When PG broke above C$2.50 last week it completed a multi-month basing pattern. Above the current price there is resistance at C$3.00 and then at C$3.50. Ideally, former resistance at C$2.50 should now act as support during any pullback over the days immediately ahead.



7) Pilot Gold (PLG.TO): PLG is testing resistance in the C$1.20s. If/when it breaks through, the short-term target will be the C$1.50-$1.60 range.



8) Pretium Resources (PVG): US$9.00 is the top of a multi-month basing pattern for PVG. A break-out from the base will create a target of US$12.50, although along the way the stock will undoubtedly encounter resistance at $10.00 and $11.00.



9) Rio Alto Mining (RIO.TO, RIOM): We added RIO to the TSI List at C$2.00 as a short-term trade in anticipation of a rebound to C$3.00-$3.50. The lower boundary of this target range was touched last Friday, but the potential exists for significant additional upside following some consolidation below $3.

$3.50 will be the obvious target after a break above $3.00. For TSI record purposes, we will exit the short-term position if the stock trades at C$3.30.



10) Sabina Gold and Silver (SBB.TO): SBB is bumping up against resistance at C$1.35-C$1.40. If/when it breaks above this resistance, the short-term target will be C$1.75-$2.00.

Chart Sources

Charts appearing in today's commentary are courtesy of:

http://stockcharts.com/index.html
http://bigcharts.marketwatch.com/