<% 'pass = Request.Form("pass") IF ((Request.Form("pass") = 1) OR (Session("pass") = "pass")) THEN %> Speculative-Investor.com
   -- Weekly Market Update for the Week Commencing 22nd July 2013

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

Market
Short-Term
(1-3 month)
Intermediate-Term
(6-12 month)
Long-Term
(2-5 Year)
Gold Bullish
(17-Oct-12)
Bullish
(26-Mar-12)
Bullish

US$ (Dollar Index) Neutral
(24-Dec-12)
Bullish
(01-May-13)
 
Neutral
(19-Sep-07)

Bonds (US T-Bond) Bullish
(24-Jun-13)
Neutral
(18-Jan-12)
Bearish
Stock Market (DJW) Bearish
(15-Jul-13)
Bearish
(28-Nov-11)
Bearish

Gold Stocks (HUI) Bullish
(24-Dec-12)
Bullish
(23-Jun-10)
Bullish

Oil Neutral
(30-Jul-12)
Neutral
(31-Jan-11)
Bullish

Industrial Metals (GYX) Neutral
(30-Jul-12)
Neutral
(29-Aug-11)
Neutral
(11-Jan-10)


Notes:

1. In those cases where we have been able to identify the commentary in which the most recent outlook change occurred we've put the date of the commentary below the current outlook.


2. "Neutral", in the above table, means that we either don't have a firm opinion or that we think risk and reward are roughly in balance with respect to the timeframe in question.

3. Long-term views are determined almost completely by fundamentals, intermediate-term views by fundamentals, sentiment and technicals, and short-term views by sentiment and technicals.

How to forecast and never be wrong

There are always many possible outcomes. However, laying out all the possibilities and assigning a probability to each is not only pointless, it is shifty.

Assigning a percentage probability to a financial-market forecast implies mathematical precision where no such precision is possible. After all, a forecast of what a market will do in the future is really just a guess. Assigning a probability also involves guesswork, because the actual probability is unknowable. That's one problem with expressing forecasts in terms of probabilities.

From the point of view of the 'forecastee' (the recipient of the forecast), another problem is that a forecast expressed in terms of probabilities can be said to be correct no matter what happens. This, of course, is of great benefit to the forecaster and is why we say that using probabilities in this way is shifty.

To further explain using a hypothetical example, let's say that we forecast the year-end gold price in the following way:

  - 55% probability of being $1500 or higher
  - 25% probability of being between $1180 (the June low) and $1500
  - 15% probability of being in the $1000-$1180 range
  - 5% probability of being below $1000

We've just covered every possible outcome. If gold finishes the year at any price above $1500 we can say "see, we told you that gold would probably be above $1500". And at the other end of the spectrum, if gold continues its downtrend and finishes the year at $900 we can say "see, we warned you that gold could go below $1000".

So, if you want to make forecasts and never be wrong, just express your forecasts in terms of probabilities. 

Inflation-Adjusted Charts

It's about time we updated our long-term monthly charts of some inflation-adjusted commodity prices, so that's exactly what we've done below for gold, silver, platinum, copper and the CRB Index. Before diving into a quick review of these charts it is worth reiterating that we use a method of adjusting prices for the effects of US$ inflation that was first described in a piece about the mythical "Commodity Supercycle" in December of 2010. This method probably won't be accurate over periods of one year or less, but it should come close to reflecting reality over the long term. Also, it will almost certainly come a lot closer to reflecting reality than the price indices reported by the US government and ShadowStats.com.

We'll start with a monthly chart of inflation-adjusted (IA) gold. When we look at this chart the impression we get is that the current long-term bull market is an elongated version of the preceding long-term bull market. That the current bull market has been slower and steadier makes sense, given that the performance of the gold mining sector points to the gold bull market of the 1970s having actually begun in the early 1960s. Gold itself couldn't begin to rise in price until 1971, because prior to then its price was fixed at $35/oz.

Due to the gold price being fixed at a constant level during what was, in effect, the first half of its 1960s-1970s bull market, the entire price advance ended up being compressed into a much shorter timeframe.

The following chart is based on monthly closing prices and therefore doesn't show the 1980 intra-day high. We calculate that the equivalent of the January-1980 intra-day high in today's dollars is about $3700/oz.



Next up we have a monthly chart of IA silver, which is dominated by the massive upward spike of 1979-1980. The nominal January-1980 intra-day high of $50/oz is equivalent to about $215/oz in today's dollars. To put it another way, in real terms silver is currently trading at less than 10% of its January-1980 peak.

There's a good chance that silver will out-perform gold between now and the end of the long-term bull market, but as was the case during the 1970s the bulk of silver's gains relative to gold will probably happen during the final 12 months of the bull market.



The IA platinum price tends to be more volatile than the IA gold price. Also, although the prices of gold and platinum will generally trend in the same direction on a long-term basis, the two markets have different fundamental drivers. Of particular note, the platinum price is sensitive to changes in mine supply and industrial demand, whereas changes in mine supply and industrial demand are almost totally irrelevant to the gold price. Due to these differences, there will sometimes be large divergences between the two markets.

Declining production from South African platinum mines could enable platinum to outperform gold over the coming 12 months.



In IA terms, the copper price is presently near the middle of its 50-year range. Copper will again become an interesting long-term speculation after we get definitive confirmation that the next major price advance is underway in the gold market, but not before then.



The following monthly chart of the IA CRB Index contains no sign that the ultra-long-term downward trend in real commodity prices has come to an end. Significant real price gains were achieved during 2003-2008, but these gains were nowhere near large enough to substantiate the claims that the world was rapidly running out of natural resources. Currently, the IA CRB Index is not far above its lows of the past 100 years.

Monetary inflation will probably push the CRB index to a new all-time price high in nominal US$ terms within the next few years, but we wouldn't bet on the inflation-adjusted CRB Index exceeding its 2008 high, let alone its 1980 high, within this decade.

The Stock Market

Europe

The lead article in the latest Barrons magazine has the heading "Europe's Economy Will Rebound" and the sub-heading "The European Union could emerge from recession in the fourth quarter, and enjoy modest economic growth next year." The first part of the article mentions forecasts for modest euro-zone (EZ) GDP growth in 2014, the body of the article discusses some of the EZ's positives and negatives, and the conclusion is: "While there still is a lot of work to do, the Continent seems to have turned a corner. The euro zone has overcome the threat of systemic failure and dispelled concerns about its long-term viability. The economy is being rebuilt. In short, Europe will soon be back in business." What a relief! So this means we can stop worrying about EZ financial crisis, right?

Unfortunately, no; the causes of the EZ debt/banking crises of the past several years have not been addressed. The stage is therefore set for another crisis, although, as usual, the timing is unknowable. For example, we can't rule out the possibility that the upward trend in the EZ's monetary inflation rate (the year-over-year rate of growth in euro supply is up from 3.6% in May of 2012 to 8% in May of this year) will delay the onset of the next crisis and result in something that looks like a genuine recovery over the next 12 months. This is because monetary inflation tends to boost GDP at the same time as it eats away at the economy's real wealth. Always remember that GDP is purely a measure of economic activity in monetary terms. It does not distinguish between productive activity and counter-productive (wealth-destroying) activity.

The onset of the next EZ crisis will likely be signaled by substantial rises in the yields on the government bonds of countries such as Spain, Portugal and Italy, and/or by a breakdown in the EURO STOXX Banks Index. These things could happen at any time, but they haven't happened yet.

Although it probably won't be the first EZ country to re-enter crisis mode, we suspect that France will end up being the focal point of the next EZ crisis.

France's CAC40 Index, a daily chart of which is displayed below, has very important support at 3600. A breach of this support would warn that the ECB's monetary inflation was failing to create even the illusion of recovery.



Japan

Japan's Nikkei225 Index peaked at 16,000 on 22nd May and then plunged to 12,500. It has since rebounded to a high, last Friday, of almost 15,000.

The up-move from the June low of 12,500 has gone as far as it should go IF it is the counter-trend variety (a rebound within a continuing downward trend). Our guess is that the rebound will turn out to be the counter-trend variety and that the market will now begin making its way down to a new multi-month low, but we could soon know either way. In particular, a daily close above 15,000 would indicate that our guess is most likely wrong.

This week's important US economic events

Date Description
Monday Jul 22 Existing Home Sales
Tuesday Jul 23 Richmond Fed Mfg Index
Wednesday Jul 24 New Home Sales
Thursday Jul 25

Durable Goods Orders
Kansas City Fed Mfg Index

Friday Jul 26 Consumer Sentiment

Gold and the Dollar

Gold

The following chart of the premium/discount to net asset value (NAV) of the Central Gold Trust (GTU), a fund that holds gold bullion, is more evidence that gold sentiment is consistent with the gold price being near a major low. It is not uncommon for GTU's market price to spike below its NAV, but a few months of trading at a discount to NAV -- as has just occurred -- is a rarity. It has never happened during the 10 years of GTU's existence, but it did happen with CEF, a similar fund, near the beginning of gold's long-term bull market in 2001.



Gold spent last week in a narrow horizontal range just below $1300. It looks set to break above $1300 this week and test the far more significant resistance that lies at $1320-$1350.

A break above $1350 wouldn't prove that the major correction was over, but it would indicate that a bottoming process was underway and that any new low later this year would probably be marginal.



Gold Stocks

During February-April of this year we were very uncomfortable with the price action in the gold-mining sector. This was mainly because the price action didn't mesh with any of the likely scenarios we had in mind. We began 2013 thinking that a test of the 2012 low was an even-money bet during the first half of the year, but the decisive break below the 2012 low within the first two months of this year was outside the range of our expected outcomes.

Although there still isn't any evidence that the ultimate price low has been reached, we are now comfortable with the price action. This is because we now know, or at least we think we know, what's going on. The price action earlier this year didn't make sense to us because we didn't seriously consider the possibility that a major/primary correction was in progress. For reasons mentioned in previous commentaries, we assumed that we were dealing with a correction of the intermediate-term variety. This wrong assumption clouded our view.

It is now clear -- or at least as clear as it can be, given that the future is never certain -- that the huge price decline that unfolded during the first half of this year was the final capitulation phase of a primary correction. An implication is that the gold sector will probably trend upward for 3-5 years from this year's low. What's not yet clear is whether the ultimate price low is already in place. Such clarity is unlikely to emerge over the next few weeks.

At this stage there's nothing in the HUI's chart (see below) to differentiate the rebound from the late-June low from the counter-trend rebounds that happened earlier this year. A solid daily close above 250 would be the first piece of price-related evidence that the major trend is beginning to reverse, although it wouldn't alter our view that a sustained turn to the upside will probably wait until October-November.



Currency Market Update

Despite its large decline over the past three months, the Australian Dollar (A$) remains very over-valued on a purchasing-power-parity basis. This over-valuation creates the potential for the A$ to drop a lot further -- to 80 or even lower -- within the coming 12 months, but it seems that much will depend on what happens to China's economy. The reason is that it was evidence of a slowing Chinese economy that finally caused the A$'s over-valuation to matter.

While the A$'s bear market looks set to continue, the extent to which this currency is 'oversold' on a short-term basis makes it likely that a multi-week rebound will soon begin. Former support (now resistance) at 95-96 is a reasonable target for a routine counter-trend rebound.



Unlike the A$, the Canadian Dollar (C$) has managed to hold above important support in the mid-90s. We expect that this support will eventually be breached, leading to a decline to the mid-to-high 80s, but as has been the case for some time we don't think the C$ has as much downside risk as the A$. This is partly because the C$ is not as over-valued as the A$ and partly because Canada's economy is not as leveraged as Australia's economy to China's economic performance.

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 19th July 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]

  *Almaden Minerals (AAU) announced that it has raised $5.4M via a private placement to a small group of Mexican and Mexican focused strategic investors. The new shares were priced at $1.25 and came with a full warrant.

According to the company, issuing new shares at such a low price was justified because a) the participants in the placement will provide important support for the company in developing its flagship Tuligtic gold-silver project in Mexico, and b) the placement ensures that AAU remains in a position to continue development of Tuligtic at a reasonable pace.

Following this financing AAU has about $24.4M of liquid financial assets, comprising $19M of cash (including $2.1M of gold bullion) and $5.4M of equities.

It was subsequently announced that Ernesto Echavarria, a well-known Mexican businessman and the owner of significant stakes in a number of junior Canadian mining companies, participated in the above-mentioned private placement to the extent of 2.8M new shares. Mr Echavarria now owns 7M Almaden shares and 2.8M Almaden warrants, which equates to 10.9% of the company on an undiluted basis and 14.6% of the company on a partially diluted basis (that is, assuming the exercise of the warrants).

  *Evolution Mining (EVN.AX) declared commercial production at its Mt Carlton mine in Queensland. This means that commissioning has been successfully completed and costs will now be expensed rather than capitalised, although full production is not expected to be achieved until next quarter.

Mt Carlton is EVN's fifth operating gold mine.

  *Golden Star Resources (GSS) reported good results from drilling at its Wassa mine in Ghana. Of particular note, step-out holes returned gold intercepts of 62.8m grading 4.1 g/t and 52.9m grading 4.3 g/t. Also, one of the infill holes returned 47.1m grading 7.2 g/t.

The significance of the Wassa drilling results of the past 12 months will now be assessed by the company. An updated resource model and a new resource estimate are expected to be complete before the end of this quarter.

  *Lydian International (LYD.TO) reported a step forward in the environmental approval process for its Amulsar gold project in Armenia.

Specifically, LYD reported that with the assistance of its independent environmental consultants it had presented the detailed development proposal for the Amulsar gold project at a Public Hearing in the village of Gndevaz (the community that would be directly affected by the development of the Amulsar project) on 11th July. At the end of the Hearing, the Gndevaz community approved the concept and environmental impact assessment of the proposed Amulsar heap leach and processing facility. This means that LYD can now proceed to the final stage of the environmental approval process, involving the preparation and approval of an environmental impact assessment (EIA).

We expect important news from LYD within the next two weeks in the form of an updated FS for the Amulsar project.

  *Pilot Gold (PLG.TO): Since we began following PLG at TSI in November of last year, all the project-specific news generated by the company has been associated with the TV Tower project in Turkey. In fact, there was more news from TV Tower last week, with the near-surface silver zone -- that partially overlays a high-grade gold zone -- at the KCD target returning some good results including 327 g/t Ag over 14.5m and 71.7 g/t Ag over 53.9m from step-out drilling. However, PLG has two other high-potential projects: the Halilaga project in Turkey and the Kinsley Mountain project in Nevada.

Halilaga is the most advanced of PLG's three core projects, but in the current market environment it is the least interesting. It is a low-grade copper-gold porphyry deposit with a total resource comprising 2.1B pounds of copper and 3.3M ounces of gold (roughly half Indicated, half Inferred) and a capital cost estimated via a PEA to be well over $1B. Projects such as this aren't worth much in today's financial world.

Although it is the least advanced of PLG's core projects, Kinsley Mountain is almost as interesting as TV Tower. It is an early-stage gold project that is located 90kms south-east of, and is geologically similar to, the Long Canyon project that Newmont Mining acquired in 2011 at a cost of around $2B.

PLG announced last week that it has commenced a 20,000m drilling program at Kinsley Mountain. Consequently, there should be a steady stream of news from PLG over the next few months as drilling results become available from both TV Tower and Kinsley Mountain. Underlying this point, a recent press release noted that assays are pending for 20 completed holes at TV Tower.

  *Sabina Gold and Silver (SBB.TO) was forced by the British Columbia Securities Commission (BCSC) to retract some statements about project resource and economics made in its corporate presentations. None of the retracted statements was deemed to be incorrect, just non-compliant with regulatory requirements. In response, SBB has removed the presentations from its web site.

The main effect of this BCSC action and many other BCSC actions is that retail investors now have access to less information upon which to make their decisions. Therefore, this is just another in a long line of examples of the counter-productive meddling that rational people have come to expect from government regulators.

Notes on price action and candidates for new buying

Asanko Gold (AKG) and Pretium Resources (PVG) have recently been two of the strongest TSI gold stocks. Daily price charts are presented below.

AKG has rebounded strongly since bottoming in late June and broke above the top of an 8-month price channel last week. PVG has also rebounded strongly from its June low and is one of the few gold stocks to hold above the April low during the May-June capitulation.

Neither AKG nor PVG has gained anywhere near enough ground to create a selling opportunity, but each is now approaching resistance and is therefore no longer among the shortlist of top candidates for new buying.



Near current prices, the best candidates for new buying are EDV.TO/EVR.AX, LYD.TO, PG.TO and SBB.TO.

Thoughts on Copper Fox (CUU.V)

Last week there was interesting news from CUU, an exploration-stage copper miner and a former member of the TSI Stocks List (CUU was removed from the List in Q1-2011). CUU has a stake in the large, low-grade Schaft Creek copper/gold project in British Columbia, Canada.

Teck, CUU's partner at Schaft Creek, has just clawed back 75% of the project by paying a lot less than it would have had to pay under an earlier agreement. Specifically, Teck will end up paying as much as $60M or as little as $20M to obtain its 75% stake, depending on whether or not the project is taken through to production (the higher number will apply if the project is put into production). Considering that a much higher copper price will be required to make Schaft Creek's risk/reward sufficiently attractive to warrant a production decision, Teck has effectively paid $20M for a copper call option of unlimited duration.

This is an OK deal for CUU's current shareholders and a terrific deal for CUU's senior management. It is an OK deal for CUU's shareholders because it would not have been surprising, considering the current market environment and the numerous other projects with better economics on which Teck could be spending its money, if Teck had chosen to walk away from Schaft Creek. It is a terrific deal for CUU's senior management because it ensures that the company will have plenty of money to pay management salaries for at least two more years.

The question is: With its stock price trading near a 2-year low at C$0.62, does this deal make CUU a worthwhile speculation?

The answer is no. With about 400M shares outstanding, CUU's market cap is about C$250M. This means that the stock market is valuing 25% of Schaft Creek (CUU's new stake in the project) at $250M even though Teck just bought 75% of the project for $20M-$60M. Teck's purchase of 75% implies a maximum value of $20M for CUU's stake.

Our view is that in today's market environment, the Schaft Creek valuation implied by Teck's purchase price is far more realistic than the Schaft Creek valuation implied by CUU's current market cap.

Chart Sources

Charts appearing in today's commentary are courtesy of:

http://stockcharts.com/index.html
http://www.decisionpoint.com/



 
Copyright speculative-investor.com
<% Session("pass") = "pass" Session.Timeout = 480 ELSE Response.Redirect "market_logon.asp" END IF %>