Big Picture View

Here is a summary of our big picture view of the markets. Note that our short-term views may differ from our big picture view.

In nominal dollar terms, the BULL market in US Treasury Bonds that began in the early 1980s will end by 2013. In real (gold) terms, bonds commenced a secular BEAR market in 2001 that will continue until 2014-2020. (Last update: 23 January 2012)

The stock market, as represented by the S&P500 Index, commenced a secular BEAR market during the first quarter of 2000, where "secular bear market" is defined as a long-term downward trend in valuations (P/E ratios, etc.) and gold-denominated prices. This secular trend will bottom sometime between 2014 and 2020. (Last update: 22 October 2007)

A secular BEAR market in the Dollar began during the final quarter of 2000 and ended in July of 2008. This secular bear market will be followed by a multi-year period of range trading. (Last update: 09 February 2009)

Gold commenced a secular bull market relative to all fiat currencies, the CRB Index, bonds and most stock market indices during 1999-2001. This secular trend will peak sometime between 2014 and 2020. (Last update: 22 October 2007)

Commodities, as represented by the Continuous Commodity Index (CCI), commenced a secular BULL market in 2001 in nominal dollar terms. The first major upward leg in this bull market ended during the first half of 2008, but a long-term peak won't occur until 2014-2020. In real (gold) terms, commodities commenced a secular BEAR market in 2001 that will continue until 2014-2020. (Last update: 09 February 2009)

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Outlook Summary

Our history of being early

We have a history of being too early to adopt a new long-term view on each of the major financial markets that we analyse. Here are some examples:

1) We were at least 2 years too early in turning long-term bearish on the US stock market and US dollar in the late-1990s.

2) We were at least 2 years too early in turning long-term bullish on gold and commodities in the late-1990s.

3) We were 6-12 months too early in turning long-term bearish on China's stock market and the China growth story in 2007.

4) We were 6-12 months too early in upgrading our long-term US$ outlook (from bearish to neutral) in 2007.

5) We were several months too early in coming to the conclusion that oil was close to a long-term peak in real terms in 2008.

6) We were about a year early in downgrading our long-term industrial-metals outlook in 2010.

One implication of our record of being too early in getting positioned for a major trend change is that at those rare times when our long-term outlook changes you should probably file the information away for at least 12 months. Another implication is that we are far more likely to downgrade our long-term gold market outlook well in advance of the ultimate price top than to stay long-term bullish beyond the ultimate price top. 

China Credit Crunch

T-Bond Update

In a world where central banks have eliminated the most important information contained in the default-free interest rate (a change in interest rates is supposed to reflect a change in the economy-wide desire to spend in the present, with interest rates falling as the savings rate rises and interest rates rising as the savings rate declines), changes in inflation expectations tend to dominate changes in long-term bond yields. The way it is supposed to happen and the way it has invariably happened up until this year is that a significant reduction in inflation expectations causes long-term interest rates to fall and bond prices to rise. As discussed last week, the strangest aspect of the recent sharp decline in the T-Bond price and the associated sharp rise in the T-Bond yield is that it happened in parallel with a PLUNGE in inflation expectations.

We usually show what has happened to inflation expectations by displaying a chart of the 10-year Expected CPI, which we define as the yield on the 10-year T-Note minus the yield on the 10-year TIPS. For the sake of variety, however, today we are showing a chart of the 5-year Expected CPI (the yield on the 5-year T-Note minus the yield on the 5-year TIPS). The message is the same: inflation expectations have plunged over the past three months.



By using our imagination we can come up with explanations for why the T-Bond has recently sold-off sharply in parallel with a sharp decline in inflation expectations. We have also read others' explanations for the unusual behaviour. However, none of these explanations holds up under close scrutiny. At this time the T-Bond's short-term performance is a quandary.

Regardless of why the T-Bond market has done what it has done, there's a good chance that it is now close to a short-term bottom in terms of both price and time. Judging by the following weekly chart, it could even be close to an intermediate-term bottom. The chart shows that the T-Bond is now within 1% of intermediate-term support at 135 and that the T-Bond's weekly RSI is at its lows of the past 5 years.

Previous intermediate-term bottoms over the past 5 years were put in place after the T-Bond spiked below its 200-week moving average (the red line on the following chart), which suggests that there could be as much as five points of additional downside between now and the next important reversal. However, the short-term risk/reward is now skewed towards reward. Our short-term T-Bond view is therefore now "bullish".

The Stock Market

Where secular valuation trends begin and end

The following chart shows the S&P500's P/E ratio since 1900.

No secular equity bear market since 1900 ended until after the S&P500's P/E ratio hit the horizontal green line drawn on this chart. We don't see a good reason to believe that this time will be different.

The S&P500's P/E ratio has been in a downward trend since 2000, but it still has a long way to go to reach the sort of valuation at which secular bear markets end.


          Chart Source: http://www.chartoftheday.com/20130619.htm?T

Current Market Situation

Last week the Dow Jones World Index (DJW) tested support defined by its February-April lows and almost reached its 200-day MA (the red line on the following daily chart). A spike below the 200-day MA to intermediate-term support at 260 looks distinctly possible within the next two weeks, but regardless of the longer-term outlook the index is probably not far from a short-term bottom.

This week's important US economic events

Gold and the Dollar

Gold

More thoughts on paper versus physical

Many gold market pundits spend far too much time analysing flows between different parts of the market. As explained in previous TSI commentaries, these flows generally provide no information about why the gold price did what it did in the past or, more relevantly, what the gold price is likely to do in the future. Many gold market pundits also spend far too much time looking at price differences between gold in its various forms. Regardless of whether gold is in a bull or a bear market, there will sometimes be significant differences between the widely-recognised "spot price" and the per-ounce prices of various items manufactured from gold. As far as gold's investment merits and major price trend are concerned, these differences are generally neither here nor there. There is, however, one price difference that would be important if it ever arose.

The only price difference of importance would be 400-oz gold bars in the major gold markets (primarily London and New York) trading at sizeable and sustained price premiums to gold futures; or, to put it another way, gold futures contracts trading at sizeable and sustained discounts to 400-oz gold bars in the major/liquid markets.

This price difference has not arisen at any time to date, but if it did arise it would probably be the result of -- and therefore signal -- a plunge of confidence in paper claims to gold that would have serious ramifications beyond the gold market. In this case, the driver of the price difference would be increasing demand for physical gold at the expense of paper gold. It could also be the result of an attempt to manipulate the gold price downward by aggressively short-selling gold futures contracts. In this case the price driver would be increasing supply of paper gold.

We emphasise that the only price difference between 'paper gold' and physical gold that would really matter has not appeared to date. We also emphasise that this price difference would definitely appear IF there were either a plunge in confidence in paper gold or aggressive selling of paper gold (on a large-enough scale to be effective beyond the very short-term) with the primary goal of artificially lowering the gold price.

The only price difference that really matters might never appear. This is because the futures market could continue to function correctly, allowing speculators to speculate on future price movements and allowing commercials (bullion banks, producers, wholesalers) to hedge their exposure to the physical. Fortunately, the continuation of gold's long-term bull market does not depend in any way on the emergence of such an intra-market price difference.

Current Market Situation

Based on sentiment and fundamentals, we expect the next major advance in the gold (and silver) market to begin from this year's low. Prior to last week we thought it was an even-money bet as to whether this year's low was already in place or would be put in place during October-November (a time-window when major turning points tend to happen). By eliminating the first possibility, last week's price action decisively shifted the odds in favour of a major October-November low.

Turning to gold's daily price chart (see below), last week's breach of the April low creates a measured objective of around $1200. Unfortunately, that doesn't mean much. We will be surprised if gold trades much lower than last Friday's intra-day low ($1268) at any time over the next few weeks, but the gold market has lately been making a habit of surprising us.



It's strange, but we are becoming increasingly optimistic. Perhaps it's because every fundamentals-based gold-bearish argument we read is flimsy. As is always the case, though, after the price of an investment has fallen a long way the public will believe almost any bearish argument, no matter how nonsensical.

Gold Stocks

Current Market Situation

Prior to last week we thought that the two most likely gold-stock scenarios could be described as follows:

a) The May-2013 low was the ultimate low of the major correction (or cyclical bear market) that began in September of 2011. According to this scenario a new cyclical bull market was in its embryonic stage.

b) The May-2013 low was significant, but not the ultimate low of the cyclical bear market. According to this scenario the most likely timing for the ultimate low was October-November of this year.

The first of these scenarios was ruled out by last week's price action. The second scenario is very much still in play, although we would not have predicted last week's breakdown even if we had known for certain that the ultimate low was destined to occur during October-November. Even under the second scenario it would have been reasonable to expect a more substantial rebound prior to a breakdown.

With the absence of a strong rebound throughout this year to date, 2013 is unfolding similarly to 2000.

The first of the following daily charts shows the HUI's performance during 2000. A bull market began in November of that year. The second of the following charts shows the HUI's performance over the past 12 months.

If the HUI didn't reach an interim low last Friday, it will probably do so early this week.

Index and ETF adjustments cause large high-volume price declines

In the 17th June Weekly Update we mentioned the TSI stocks that would potentially be driven downward on Friday 21st June due to changes in S&P/TSX indices and GDXJ holdings. The two TSI stocks that ended up being most affected by the selling of index trackers were RMS.AX, which dropped by as much as 20% in Australian trading last Friday on massive volume, and EDV.TO, which fell 14% in Canadian trading last Friday on the highest volume in at least 5 years. Two non-TSI stocks affected in the same way by index/ETF changes were Lake Shore Gold (LSG.TO) and Aucana Corporation (AUN.TO), which fell 37% and 19%, respectively, last Friday.

Currency Market Update

From mid-February until about two weeks ago the Dollar Index was positively correlated with global equities. This was anomalous behaviour in the context of how the relationship between the currency and stock markets had operated for many years. However, last week's market action, with a sharp rebound in the Dollar Index coinciding with significant declines in most stock markets around the world, suggests that the more typical inverse relationship between equities and the US$ is in the process of being re-established.

A week ago we thought that the Dollar Index was likely to rebound by about 2 points, regardless of whether or not the overall decline from the May-2013 high was complete. The Dollar did gain a couple of points last week and, as a consequence, is no longer short-term 'oversold'. It also isn't 'overbought' and there is nothing in the chart to indicate the most likely direction of the next 2-point move.



We are tempted to downgrade our short-term Dollar Index outlook to "bearish" on the basis that a) a pullback to test support at 79-80 has a better-than-even-money chance of happening at some point over the next several weeks, and b) there is a small chance that support at 79 will be breached if the EZ's banking system holds together for at least a few more months. We are resisting this temptation, though, because we aren't confident that the EZ's banking system will hold together for at least a few more months.

All it would take to signal the start of the next banking crisis in Europe would be a solid break by the EURO STOXX Banks Index (SX7E) below support at 100. This support is only 2% below last Friday's close.

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 21st June 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) advised that work is underway on the FS for the 5M-oz Esaase gold project, Ghana. The plan is for the FS to be complete, $150M of mine financing to be arranged and all necessary permits to be in place by early next year. The longer-term plan is for Esaase to be producing gold at the rate of 200K-ounces/year by the end of 2015.

AKG also advised that it has identified opportunities to expand production and reduce costs and thus improve on the project economics contained in the May-2013 PFS. The implication is that although the project economics outlined in the PFS were good, those outlined in the upcoming FS will be better. We'll see.

As a result of last week's sector-wide decline, AKG is now trading at around cash value. That is, the company's market cap is now roughly the same as its net cash, meaning that the stock market is assigning zero value to the Esaase project. The Esaase project is worth a lot more than zero.

  *Batero Gold (BAT.V) issued a press release last Tuesday. Following a lengthy and uninteresting discussion about relatively unimportant soil/rock-chip samples and a planned drilling program, the press release mentions that the PEA for the La Cumbre deposit (by far the most important upcoming milestone for BAT) would be complete during Q3-2013. The strange thing is that in a 14th May press release the company confirmed that it was on schedule to deliver the PEA during the second quarter of 2013. So, in the space of a month the completion of the PEA has been delayed by at least one month. Not good.

  *Clifton Star Resources (CFO.V) reported a very good intercept from its on-going drilling program at the Duparquet project (Quebec). We are referring to Hole BD13-22, which intersected 34.0 meters grading 5.64 g/t Au. The hole was drilled within one of the proposed pits (that is, within the bounds of the existing resource) and therefore probably won't expand the project's overall resource, but it adds to the confidence level.

CFO plans to announce an updated resource estimate within the next two weeks that will include the results of all drilling completed up to 6th May. This resource estimate will then form part of the in-progress PFS.

  *Golden Star Resources (GSS) published its latest operational update, which is the news we've been waiting for since the company's previous operational update early last month. The previous operational update announced the failure of a pit wall at GSS's Bogoso/Prestea mine (Ghana), resulting in 2013 production guidance falling from 335K ounces to 300K ounces. The previous update also reported very high "cash costs" at Bogoso/Prestea, introducing the possibility that this operation would be placed on care-and-maintenance and, therefore, that 2013 production would fall to around 200K ounces.

According to the new operational update, production will continue at the Bogoso/Prestea mine. Costs will remain high over the next three quarters, but a revised mine plan indicates that costs will be 30% lower by mid-2014. In the mean-time, the company expects that the Wassa mine will generate enough cash to offset the Bogoso mine's cash drain.

With production continuing at Bogoso, GSS has kept its 2013 guidance at around 300K ounces. That is, there hasn't been a reduction in guidance beyond the reduction from 335K to 300K ounces advised last month. Despite the reduced production, the per-ounce "cash cost" guidance is being maintained at the original 2013 level of $1050-$1150. This was made possible by various cost savings outlined in last week's press release.

In addition to finding enough savings to maintain its "cash cost" guidance, GSS has reduced its planned 2013 spending on sustaining capital, development capital and exploration. This should ensure that the company has enough cash to survive the next 6-12 months even if the gold price drops a bit lower.

On the whole, this latest news from GSS is neither good nor bad. It's good that the company has found a way to keep its Bogoso mine in production, but keeping Bogoso in production increases the risk for the overall company because this mine will be a drain on cash reserves for the next three quarters or until the gold price moves back above $1600/oz.

  *Pretium Resources (PVG) provided an update on the progress and schedule of its Bulk Sample Program. Excavation of the bulk sample is scheduled to commence this week and is expected to be complete in late July or early August. The underground drilling being done in support of the bulk sample testing is scheduled to be complete by mid-August. The report by the third party consultant (Strathcona Minerals Services) responsible for overseeing the bulk sample data collection and analysis is expected to be available during the final quarter of this year.

  *Ramelius Resources (RMS.AX) traded 30.5M shares on Friday 21st June. This compares to average daily trading volume of about 1.4M shares. Friday's massive volume was almost certainly related to RMS's 21st June deletion from GDXJ, which we warned about in the 17th June Weekly Update.

Due to its recent price plunge, RMS now has a negative enterprise value. In other words, the company is now being valued at less than its net cash.

In lousy market environments it occasionally happens that exploration-stage gold miners trade below their cash in the bank, but it is extremely rare for a gold miner with 3M ounces of in-ground resources and 80K ounces/year of current gold production in the world's best mining region (Western Australia) to trade below cash value.

We bought some more RMS shares at A$0.10 on Friday.

Two changes to TSI Stocks List

In last week's Interim Update we discussed three stocks that would be added to the TSI List if certain price levels were reached -- Lydian International (LYD.TO) and Premier Gold (PG.TO) as (potentially) long-term positions and Rio Alto Mining (RIO.TO) as a short-term trade. Of these, only RIO fell far enough to reach our stipulated buy level of "low-C$2", although the other two came close.

RIO was at C$2.40 when we wrote the Interim Update, but traded as low as C$1.80 on Friday and ended the week at C$1.97. It has been added to the TSI List at C$2.00 as a short-term trading position.

The main short-term risk with RIO is that its all-in gold production cost is only about $50/oz below the current gold price. This means that if gold were to extend last week's decline, the stock price could be hit again. On the plus side, the stock price should quickly recoup some of its recent losses when the gold price rebounds and there's a high probability that RIO will announce good quarterly production results next month.

We are buying in anticipation of a rebound to the C$3.00-C$3.50 range within the coming two months, at which point we would exit.



The other change to the TSI Stocks List is the addition of a short-term trading position in Endeavour Mining (EDV.TO). The TSI List already contains long-term exposure to EDV, but the short-term risk/reward is now extremely attractive as a result of last week's price action.

As is the case with RIO, there is a potential stock-specific short-term catalyst for an EDV price rebound. We are referring to the gold hedges that EDV still holds as a result of its takeovers of Adamus and Avion. Based on the most recent financial statements, EDV has a total of 114K ounces of gold committed via forward sales and call options. It also has 27K ounces of gold bullion, leaving a net hedging position of 87K ounces.

At the current gold price the value of this hedging position would be about $26M higher than the value included in the 31st March financial statements. This opens up the possibility that EDV will report a significant boost to its balance sheet when the next set of financial statements is issued in early-August.

Ideally, EDV's management will take advantage of the current weakness in the gold market to close out the remaining hedges.

We have added a short-term trading position in EDV at Friday's closing price of C$0.55. The goal is to exit this position following a rebound to around C$1.00.



We will add long-term positions in LYD.TO and PG.TO if these stocks trade at C$1.05 and C$1.80, respectively, within the next two weeks.

Chart Sources

Charts appearing in today's commentary are courtesy of:

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