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

US money pumping by decade and Fed chairman

A large increase in the money supply will always lead to large increases in prices somewhere in the economy. However, monetary inflation affects different prices in different ways at different times, so the pertinent question is: which prices? The answer to this question is important from the perspective of almost everyone and is always obvious with the benefit of hindsight, but it is often difficult to determine ahead of time. Also, depending on which prices are affected the inflation will sometimes be widely perceived as a problem and at other times be widely perceived as a benefit or a non-issue.

Due to the dramatic differences in the general perception of inflation that stem from the specific details of inflation-related price rises, in the US there has been no correlation over the past several decades between the amount of monetary inflation and the extent to which "inflation" is perceived as a problem. As evidence we present the following bar chart showing the compound annual growth in the US True Money Supply (TMS) during each decade since the 1960s. Of particular interest, the 1970s is widely considered to be a decade when "inflation" was out of control, but our chart shows that the money supply grew at a much faster average pace during the supposedly 'disinflationary' 1980s than during the 1970s. Also, during the first 4 years and 5 months of the current decade the US money supply grew almost twice as fast as it did during the 1970s, and yet very few people perceive a US inflation problem at this time.



The lack of correlation between the amount of monetary inflation and the general perception of "inflation" leads to a lack of correlation between the general perception of a Fed Chairman's performance and his/her actual performance. Paul Volcker is the best example. Volcker is generally considered to have been a hard-nosed inflation-fighter, but based on annual rate of growth in the money supply he currently holds the record as the most inflationary Fed Chairman of the past 60 years. Ben Bernanke is in second place, followed by Arthur Burns (Fed chief during most of the 1970s), Alan Greenspan, and then William McChesney Martin (Fed chief during the 1950s and 1960s). Refer to the following bar chart for specific details.

Note: The chart omits George Miller, who was Fed Chairman for only 17 months during 1978-1979, and Janet Yellen, who only recently took over from Ben Bernanke.



On a related matter, Volcker is widely regarded as a hard-nosed inflation fighter simply because a commodity-price collapse got underway within 6 months of his August-1979 appointment as Fed Chairman. However, thanks to the steep decline in the money-supply growth rate that began in late-1977 and the fact that the US had spent the 6 months prior to August-1979 in monetary deflation, a commodity price collapse was 'baked into the cake' when Volcker took the helm of the Fed. Whoever was appointed Fed Chairman in August 1979 would now have the credit for having ended the "great inflation" of the 1970s, almost regardless of what actions they took.

Finally, it's actually a problem that the rapid money-supply growth of the past 5 years has not yet led to general concern about "inflation". It all but guarantees that the Fed will continue to react to economic and/or stock-market weakness by pumping up the money supply, especially since the new Fed Chair clearly believes that the central bank can create jobs and economy-wide prosperity by adjusting monetary levers and the price of credit. The likely result will be an economic bust within the next few years that dwarfs what happened during 2007-2009. 

T-Bond Update

TLT, an ETF proxy for long-dated US Treasury securities, is probably close to completing a routine short-term correction within an on-going upward trend.

Our view that TLT's recent pullback to the vicinity of its 50-day MA will be followed by a rise to new highs for the year is supported by a very bullish sentiment mismatch in the Treasury futures market. We are referring to the fact that despite the bullish price action of the past six months, speculators, as a group, continue to bet heavily on falling 10-year T-Note prices (rising 10-year interest rates).

The Stock Market

The US

Perhaps we are clutching at straws to justify the maintenance of a bearish outlook in the face of a continuing upward trend, but we think the following chart comparison of the SPX (S&P500 Index) and the SPX/gold ratio is another reason to anticipate a top of at least intermediate-term significance.

The chart's message is that divergences between the SPX and the SPX/gold ratio are important. For example, when the SPX/gold ratio began to trend downward in early-2011 while the SPX continued along its upward path it was a sign that the SPX's next meaningful multi-month move would be to the downside, and when the SPX/gold ratio began to trend upward in August of 2011 while the SPX remained weak it was a sign that the SPX's next meaningful multi-month move would be to the upside.

There is currently no evidence in the SPX's price action that its upward trend is about to end. However, the SPX/gold ratio reversed downward two weeks ago after making only a marginal new high for the year. Provided that the downward reversal in the SPX/gold ratio 'sticks', this suggests to us that the SPX's next meaningful multi-month move will be to the downside.



Japan

Although Japan's Nikkei225 Index is still lower than it was at the beginning of the year, it has stubbornly refused to break down and has recently been stronger than expected. As things currently stand, the Nikkei's so-called "Death Cross" in early-April marked the low for the year.



The Nikkei is short-term 'overbought' and probably won't make much additional headway before pulling back, but if it remains at or above its 50-day MA during any 'corrective' activity over the next few weeks then the sideways trading of the past year will start to look more like a mid-trend consolidation than a topping pattern.

This week's important US economic events

Gold and the Dollar

Gold

Current Market Situation

The gold price broke out to the upside last Thursday, signaling an end to the correction that began in March. The upward reversal was not surprising, but its exact timing was unpredictable.

The gold market is likely to test resistance at $1400 within the next two months and could trade as high as $1500 before year-end, but we have no opinion on what it will do over the next two weeks. The RSI shown at the bottom of the following daily chart reveals that the market is now short-term 'overbought', but this only means that a 1-2 week consolidation would not be out of the ordinary. It doesn't mean that the price won't continue to move higher. For example, the gold price continued to move higher for about three weeks after the daily RSI reached a similar 'overbought' level in February.

What we can say is that the 50-day and 200-day moving averages, which are currently in the $1285-$1290 range, should act as a price floor if a pullback begins in the near future.



By the way, while the historical record indicated that the so-called "Golden Cross" (the 50-day MA crossing from below to above the 200-day MA) that occurred in March would probably mark a short-term price high and that the so-called "Death Cross" (the 50-day MA crossing from above to below the 200-day MA) that occurred at the end of May would probably mark a short-term price low, the next Golden Cross -- which is likely to occur within the coming month -- will have no predictive value.

The reason for the gold reversal

Despite much press coverage putting last week's sharp rise in the gold price down to increasing Iraq-related tensions and/or the Fed's confirmation that official US interest rates would not be raised for a long time, neither explanation rings true. First, increasing tension in Iraq would affect the oil market more than the gold market and would also affect the equity and bond markets, but there were no signs of heightened concerns about Iraq in any of these markets. Second, the Fed's plan to keep its targeted interest rate near zero for the foreseeable future is not news. Everyone was already aware of this.

It could be argued that by emphasising her devotion to hopelessly flawed Keynesian ideas at a press conference last Wednesday, Janet Yellen gave a gentle downward push to confidence in the Fed. Given that gold's perceived value is the reciprocal of confidence in the Fed, this could have helped to 'get the gold ball rolling'. However, last Thursday's surge in the gold price had been telegraphed well in advance by the performance of the gold-mining sector, so we don't think it makes sense to attribute the rise to any particular piece of recent news.

We think the upward reversal can be adequately explained by the combination of fundamental drivers and a bullish mismatch between sentiment and price action (sentiment had become far more bearish than warranted by the price action). As stated in the 9th June Weekly Update: "It seems that almost every 'technical analyst' on the planet is calling for gold and the gold-mining indices to make new lows within the next few months. The long-term bulls expect a final decline to marginal new lows prior to the start of a multi-year upward trend, whereas the long-term bears expect a decline to well below last year's lows as part of a continuing bear market. Enough strength over the weeks ahead to confirm that the March-June decline was a correction to a new upward trend rather than the continuation of the 2011-2013 downward trend would therefore catch the maximum number of chart-huggers and price-followers off guard. This doesn't mean that gold is about to reverse course and prove the majority wrong, but it does mean that there is plenty of sentiment-related fuel to propel the price upward. As discussed in previous commentaries, there is also now plenty of fundamentals-related fuel for a gold rally..."

Silver

The silver market also broke out to the upside last week. The breakout is not clearly evident on the following 10-year weekly chart, but it is obvious on short-term daily charts.

Except for those periods when the silver market is either crashing or immersed in a manic upside blow-off, the significant swings in the silver price are usually limited by a 15% envelope around its 10-week moving average. This envelope is represented by the blue lines on the following chart. An implication is that the silver price is likely to rise to $22.50-$23.00 within the next several weeks, but is unlikely to make a sustained move above $23 in the short-term.

The view that silver's short-term upside potential is limited to about 10% is consistent with the fact that the silver/gold ratio is now very 'overbought' on a short-term basis (while remaining 'oversold' on a long-term basis).



Gold Stocks

The decline from the March-2014 peak was deeper and longer than originally expected (we originally thought that the HUI's decline would not go beyond the 220s), but there was never much doubt that it would turn out to be a correction. To put it another way, there was never a realistic chance that it would prove to be a continuation of the 2011-2013 bear market.

The positive divergence between the GDXJ/GDX ratio and the HUI from mid-April through to mid-May was the first evidence that the correction was nearing its conclusion. More evidence came on 10th June, when the outperformance of the junior end of the gold sector, as indicated by the GDXJ/GDX ratio, went from interesting to dramatic. The 10th June price action prompted us to send out an email alert in which we noted the increasing weight of evidence that a short-term bullish scenario was developing and upgraded our short-term outlooks for both gold and gold stocks to "bullish".

There will necessarily remain a smidgen of doubt until after prices make new highs for the year, but as a result of last week's market action it's now a near-certainty that a) the decline from the March high was corrective in nature and b) a rally to a new high for the year is in progress. Of greater interest, however, is that last week's price action generated additional evidence that a new cyclical bull market commenced in December. The evidence to which we are referring is illustrated by the following weekly charts.

The first weekly chart shows the HUI relative to its 50-week MA. The HUI has just achieved a weekly close above its 50-week MA, which is not in itself a reliable bullish signal. After all, the HUI also achieved a weekly close above its 50-week MA in September of 2012, shortly before it embarked on a huge multi-quarter decline. In this case it is bullish, though, because by closing above its 50-week MA in March of this year and again last week the rise from the December-2013 bottom has differentiated itself from the counter-trend rally that unfolded during 2012.



The second weekly chart shows the HUI/gold ratio relative to its 60-week MA. By ending last week above its 60-week MA the HUI/gold ratio has done something it hasn't done since early-2011. This is another clear sign that the advance from the December-2013 bottom is different from any of the rallies that occurred over the preceding two years. It is a sign that we are dealing with a new bull market, not a bear-market rebound.



The junior end of the gold-mining sector, represented by GDXJ, has led to the upside and the downside. Over the past few weeks it has led to the upside, but by the close of trading last Thursday it was short-term 'overbought' and at intermediate-term resistance. It would therefore be normal if GDXJ were to consolidate before resuming its advance, but it's unlikely that anything more than a 1-2 week top is in place.



Quarterly changes to indexes and index trackers such as GDXJ had big effects on many junior gold and silver mining stocks last week. These effects included some big-percentage high-volume moves last Friday. Last Friday's moves are likely to be at least partially retraced on Monday, after which normal trading should resume.

The Currency Market

Over the past 9 months the Dollar Index has oscillated between 79.0 and 81.5. A break through either the top or the bottom of this range would likely be followed by a tradable multi-month move in the direction of the breakout. We are expecting a downward breakout.

Over the past three weeks the Dollar Index has traded in a very narrow range near its 200-day MA. Unfortunately, there is nothing in this price action to suggest whether the next move of consequence will be to the upside or the downside.



The performance of the Dollar Index is mostly determined by the performance of the US$/euro exchange rate. Not surprisingly, therefore, the euro's recent trading has been as non-committal as that of the Dollar Index.

That being said, we are encouraged to maintain our short-term bearish outlook for the Dollar Index by two developments. First, last week's upside breakouts in the gold and silver markets could be signaling future weakness in the US$. Second, the speculative net-short position in euro futures just hit its highest level since May of last year. The last time speculators were as bearish on the euro as they are right now, the euro was close to an important bottom.

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 20th June 2014:

[Note: AISC = All-In Sustaining Cost, FS = Feasibility Study, IRR = Internal Rate of Return, MD&A = Management Discussion and Analysis, M&I = Measured and Indicated, NAV = Net Asset Value, NPV(X%) = Net Present Value using a discount rate of X%, P&P = Proven and Probable, PEA = Preliminary Economic Assessment, PFS = Pre-Feasibility Study]

  *Asanko Gold (AKG) updated the market on its progress. Detailed engineering and early works programs are proceeding on schedule, with ground breaking at the plant site for Phase 1 of the Asanko gold mine development expected to happen in August. An updated capital cost estimate is in the final stages, a preliminary mine plan is expected to be ready in July and a final mine plan is expected to be complete within the ensuing two months.

The detailed mine plan and the updated capital cost estimate will be combined with an updated resource estimate into a Definitive Project Plan, which is scheduled to be completed in Q4 2014.

  *Energy Fuels (EFR.TO, UUUU) obtained a Wyoming-based gold-copper project, known as the Copper King (CK) project, when it bought Strathmore Minerals last year. This non-core project has a low-grade resource comprising roughly 1M ounces of gold and 300M pounds of copper.

The CK project has been transferred into a new company called CK Mining Corp. in exchange for some cash and 50% of the shares of CK Mining. The remaining interest in CK Mining will be held by a private investor group with extensive experience in developing gold projects and building mining companies.

This deal seems like a reasonable way for EFR to obtain value from an asset that is presently being assigned no value.

  *Evolution Mining (EVN.AX) announced during the week before last that it had entered into a farm-in and JV agreement with Emmerson Resources (ERM.AX) over the Tennant Creek gold-copper project in Australia's Northern Territory. EVN can earn 65% of the project, which is very prospective and has a current high-grade resource of 900K ounces, by spending $15M within 3 years, and can increase its stake to 75% by spending an additional $10M. As part of the deal, EVN will pay $1.9M for a 13% stake in ERM and issue 2.5M EVN shares to ERM.

We suspect that this could turn out to be a good deal for both EVN and ERM, although it has minimal financial significance for EVN at this time.

  *Pilot Gold (PLG.TO) reported results from four more holes drilled at the TV Tower project in Turkey. These results were from the K2 porphyry target, which is 1.5km from the Valley porphyry target. Recall that the Valley target generated a very good gold-copper intercept (0.99 grams/tonne gold and 0.39% copper over 153.1 metres starting from near the surface) during the week before last.

The latest drilling results were only mildly interesting. The reported grades were too low to be economic, but the grades and widths were sufficient to suggest that more exploration is warranted.

  *Pretium Resources (PVG) reported the results of the updated FS for its Brucejack high-grade gold project in BC, Canada. The proposed underground gold mine would have average annual production of 404K ounces at a very low AISC of $448/oz over an 18-year life. The initial capital cost is estimated to be $747M.

The calculations of project economics shown in the FS were based on gold prices of $800/oz, $1100/oz and $1400/oz. To facilitate comparisons with the calculated economics of the development-stage projects of other gold miners, most of which are based on gold prices in the $1250-$1350 range, we scaled the figures in the Brucejack FS to estimate the economics at $1300/oz.

At $1300/oz, the project is estimated to have a post-tax NPV(5%) of US$2B and an IRR of 35%. The FS therefore shows that the project is economically robust near the current gold price. Taking into account PVG's current market cap of US$820M and the estimated initial capex of around $750M, the FS also shows that PVG offers good value near today's price of US$7.52/share (in this case, good value is evidenced by the sum of the market cap and the estimated capex being less than the calculated post-tax NPV).

In summary, the FS is positive. However, it does nothing to resolve the Strathcona-generated controversy over the resource estimation methodology because the FS is based on the assumption that the Snowden resource estimate is correct. If Strathcona's concerns regarding the resource estimate are valid then the FS published last week is meaningless.

We suspect that the resource estimate put together by Snowden and used in the FS is close to the mark, but we have no way of knowing and no reason to be confident given that experienced geologists have differing views on this matter or have expressed uncertainty. Of importance to us as speculators/investors, the uncertainty regarding the validity of the resource estimate probably means that PVG will have to build the mine itself. That is, there is unlikely to be a takeover prior to production.

Due to the value of the Brucejack deposit indicated by the FS, we think that PVG would be a buy if it pulled back to around US$6.50. At that price there wouldn't be much downside risk, because there is little doubt that the project has the potential to be developed into a profitable gold mine at the current gold price. The doubt/disagreement revolves around whether it should be developed into a 400K-oz-year operation using bulk mining or a much smaller operation using selective mining. However, due to the uncertainty regarding the appropriate mining method and the low probability of a takeover bid, we would be sellers at US$9.50-$10.00.

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 around US$1.40 (last Friday's closing price: US$1.47).

2) EDV.TO (last Friday's closing price: C$0.80).

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

4) TGM.V in the low-C$0.40s (last Friday's closing price: C$0.43).

Chart Sources

Charts appearing in today's commentary are courtesy of:

http://stockcharts.com/index.html