-- Weekly Market Update for 24th June 2019

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.

The BULL market in US Treasury Bonds that began in the early 1980s ended in mid-2016, but there will be many years of topping action in bond prices and bottoming action in bond yields before major new trends get underway. A major decline in government bond prices will unfold during the 2020s. (Last update: 11 September 2017)

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.), gold-denominated prices and inflation-adjusted prices. This secular trend will bottom in 2020 or later. (Last update: 11 September 2017)

A cyclical BEAR market in the US Dollar began in 2016-2017. (Last update: 11 September 2017)

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 in 2020 or later. (Last update: 11 September 2017)

Commodities, as represented by the CRB Index, 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 2020 or later. (Last update: 11 September 2017)

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.

True Fundamentals Summary [Notes: 1) The date shown next to the current True Fundamentals Model (TFM) signal is when the most recent change occurred. 2) Charts of the Gold and Equity TFMs are included in the "Charts and Indicators" section of the TSI web site]

Last week's posts at the TSI Blog

There were no blog posts last week.

Summary of current thinking/positioning

1) The Dollar Index (DX) has commenced a downward trend, but it could be a few months before the new trend becomes consistent. In the meantime the price action could be choppy, beginning with a counter-trend rebound that kicks off within the next two weeks.

2) The US$ gold price went straight to a 5-year high (above $1377) without any intervening correction. Significant additional gains are likely within the next three months, but a test of last week's upside breakout probably will occur within the next three weeks. The US$ silver price stands a good chance of making a catch-up move over the months immediately ahead.

3) The gold-mining indices/ETFs have blown through resistance levels and signaled that we are dealing with intermediate-term upward trends rather than counter-trend reactions. However, on a short-term basis they are now as 'overbought' as they ever get, so a correction should begin soon.

4) The SPX made a marginal new all-time high last week. The new high was not confirmed by other stock indices and does not affect our view that a significant decline will get underway by mid-July at the latest.

5) An upside blow-off has set the stage for a large T-Bond decline. The decline should begin by early July at the latest.

6) Oil's correction is probably very close to complete, at least in terms of price, although stock market weakness during July-August could push the oil price to a new multi-month low.

7) We are holding a cash reserve of 25%-30%.

The coming T-Bond decline

A large divergence between two fundamentally-correlated market prices is important because such a divergence usually will be closed via a big move in one or both prices. However, divergences sometimes build for an inconveniently long time before they start to matter.

The gold/commodity ratio (the US$ gold price divided by the GSCI Spot Commodity Index) and the T-Bond are strongly correlated over the long term. They also tend to be well correlated over shorter timeframes, but significant short-term divergences sometimes occur. One such divergence has been developing since the beginning of this year, with the T-Bond making a sequence of higher highs while the gold/commodity ratio stays below its late-December high. Note that even last week's impressive up-move and break to a new 5-year high by the US$ gold price was not enough to push the gold/GNX ratio above its late-December high.

The current divergence and previous similar divergences (higher highs for the T-Bond in parallel with lower highs for the gold/commodity ratio) are illustrated by the following chart. The previous similar divergences led to large declines in the T-Bond price and we can think of no reason to expect that it will be different this time.



Commodities

Oil confirms its double bottom

A week ago we wrote that the oil price probably had made a 'double bottom' that would hold for at least a few weeks. That probability became a virtual certainty last week.

Last week the oil price gained 9.4% and in doing so broke above resistance at $55. It has moving-average resistance at $59-$60 that probably will limit the near-term upside unless there is a further escalation of geopolitical tension in Middle East.



Due to the strong positive correlation between the oil and stock markets, there is still a risk that the oil price will breach its June low before the overall correction is complete. However, market sentiment (as indicated by the COT data) and fundamentals (as indicated by the oil futures curve) are both supportive, so if there is a breach of the June low it probably will be short-lived.

Copper Update

The copper price has spent the past 12 months oscillating between support at $2.55-$2.60 and resistance at $2.95-$3.00. We won't be surprised if it continues to 'chop around' aimlessly for up to three more months, but the next substantial move is more likely to be higher than lower.

Our intermediate-term bullish outlook for copper is based more on macroeconomic factors and inter-market relationships than on copper-specific supply/demand fundamentals. We think that inflation expectations are bottoming and that the next 12 months will be characterised by rising bond yields, a weakening US$ and strength in late-cycle investments/speculations.



The Stock Market

The Fed and the "trade war"

As we warned could happen a couple of weeks ago, the S&P500 Index (SPX) has made a new all-time high. The buying pressure that led to this new high was generated, at least in part, by optimism regarding easier monetary policy and a cease-fire in the US-China "trade war". Hope that the Fed will soon start cutting its targeted interest rates was bolstered last week by strong hints from the Fed, while hope for a US-China trade deal was rekindled by news that presidents Trump and Xi will meet on the sidelines of the G20 meeting to be held in Osaka on June 28-30.

The best that can be reasonably expected from a trade deal at this time is the removal of the tariffs put in place over the past year, although if a deal is done it certainly will have other aspects. For example, the Chinese government probably will agree to the purchase of more US-produced agricultural and energy commodities, because they already agreed to that a year ago, and commit to doing more to protect "intellectual property rights", because it wouldn't cost them anything to make such a commitment. They also could promise to maintain a stable Yuan/US$ exchange rate, because they most likely see it as in their interest to do so in order to minimise capital flight and reduce the costs of imported goods. What they won't do (regardless of any promises to the contrary) is slow the pace of the "Made in China 2025" program or the pace at which China's sphere of influence is broadened via strategies such as the "Belt and Road Initiative".

Ironically, if the stock market gets what it wants on the international trade front then the chance of it getting what it wants (and currently expects) from the Fed will be greatly reduced. The reason is that the removal or scaling-back of the government actions that are crimping international trade and depressing economic growth will make a series of pre-emptive rate cuts seem less appropriate. Therefore, we suspect that if a trade deal is done within the next few weeks then the Fed either won't cut its targeted rate at the next FOMC meeting (scheduled for end-July) or will make a 0.25% cut in July and use words that imply a wait-and-see approach regarding further cuts. Putting it another way, getting what the market currently expects from the Fed over the next six months probably requires the continuation of the "trade war".

Is there any evidence of a bear market?

Late last year there were signs that US equities had commenced a cyclical bear market, but most of these signs disappeared in January. One long-term bearish sign that didn't disappear early this year and remains in place today is the downward reversal in Margin Debt. The following chart shows that last year's downward reversal in NYSE Margin Debt is similar to the reversals that occurred around major price tops in 2000 and 2007. It also shows that Margin Debt did not recover with the SPX during the first half of this year.



The measure of margin debt displayed above could be providing a misleading signal, however, because it isn't adjusted for the size of the market. In the same way that government-debt/GDP is a more meaningful figure than government debt in nominal currency terms, to get a feel for the extent of debt-based leverage in the stock market it probably makes more sense to look at margin debt as a percentage of total stock market capitalisation than to look at the dollar value of margin debt.

When margin debt is calculated relative to the overall market, a very different picture emerges. The picture is shown below, using the Wilshire5000 to represent the entire US stock market.

The following chart shows that unlike 2007-2008 and 1999-2000, there was no surge in the adjusted Margin Debt in the lead-up to last year's price top. Instead, this measure of debt-based leverage was essentially flat during 2009-2017 and turned down without first rocketing upward. It is now at its lowest level since 2005.



Note that the above charts were taken from https://www.yardeni.com/pub/stmkteqmardebt.pdf.

Perhaps it is different this time and a major price top has been put in place without a preceding surge in the adjusted Margin Debt figure, but when we consider all the evidence (more to the point: the absence of bear-market evidence) we arrive at the conclusion that the cyclical bull market probably will extend into 2020.

Current Market Situation

The following daily chart shows the new all-time high made late last week. If this marginal new high had been accompanied by a bearish divergence in the NYSE Advance-Decline Line (ADL) then, given that a put/call sell signal is in effect, we now would be very enthusiastic about bearish stock market speculations. However, the chart also shows that the ADL remains very strong and actually led the SPX into new high territory. This tempers our enthusiasm for bearish stock market bets, although we bought some SPY September $270 put options late last week as much for hedging purposes (to hedge exposure to non-gold commodity stocks) as for speculating purposes.



Aside from the put/call sell signal, the main reason to be concerned at the moment about short-term downside risk is that most US stock indices are not showing as much strength as the SPX. For example, the following chart shows that the June rebound in the Dow Transportation Average (TRAN) has, to date, only retraced about half of the May decline and that TRAN ended last week below its 50-day and 200-day MAs.



We continue to expect that another multi-week stock market decline will begin by mid-July at the latest.

This week's significant US economic events [Notes: 1) The most important events (to the markets) are shown in bold. 2) A list of global economic events can be found HERE]

Gold and the Dollar

Gold

While we were putting together last week's Interim Update the US$ gold price was breaking out to the upside. This prompted us to write:

"Gold's correction from its early-June high turned out to be very brief and shallow. The gold price has now broken above multiple important resistance levels on an intra-day basis, but the key will be how it finishes the week. A weekly close by the August contract above $1362 would be a confirmed breakout that would point to additional gains prior to the next multi-month peak."

As shown by the following weekly chart, gold not only managed to end the week above $1362, it also managed to end the week above long-term resistance in the $1370s. The following chart also shows that gold's weekly RSI, an intermediate-term momentum indicator, ended last week at its highest level since 2011. Although this implies that the market is stretched to the upside and in need of a correction, it is a sign of strength.



The price action is in line with the fundamentals as indicated by our Gold True Fundamentals Model (GTFM). Refer to the following chart comparison of the GTFM and the US$ gold price for more detail. Note that the GTFM moved a little further into bullish territory last week due to the US dollar's downside breakout.



Speculators have been getting more optimistic and adding to their collective long positions in gold futures as the price has risen, but as at 18th June (the date of the latest COT report) speculative optimism was not close to a dangerous extreme.

With the fundamental backdrop still gold-bullish and speculative optimism not yet at a level that warns of large downside price risk, we have no reason to expect anything more bearish over the weeks ahead than a routine correction that tests last week's breakout.

The one concern we have is that part of the sharp upward move in the gold price during the second half of last week was due to rising fear of military conflict in the Middle East. As we've mentioned many times in the past, the idea that gold is a hedge against military conflict is a widely-held superstition that leads to a price rise whenever the risk of war appears to increase, but the market has NEVER sustained such price gains and there is no good reason that it should. Therefore, whatever proportion of last week's price gain was war-risk related will be given back within the next few weeks.

We would be more concerned about the effect on the gold price of war-related fear if not for the fact that the true fundamentals (the things that really matter) have been gold-bullish all year and became a little more so last week.

Another point is that last week's upside breakout in the US$ gold price does not imply or confirm that gold is in a bull market. As illustrated by the following weekly chart, the gold/SPX ratio barely moved over the past two weeks and remains well below both its 200-week MA and its late-December top.

It's possible that a new cyclical gold bull market began last August, but it hasn't been confirmed yet.



Finally, this week is the final week of the month and the quarter, so the closing prices on Friday 28th June could be critical. If gold manages to end this week above US$1378 (the July-2016 high) it would be a breakout on the monthly chart.

Silver

Last week the US$ gold price broke above its July-2016 high. If silver had done the same it would now be trading north of US$21.00/oz. Instead, although it was strong enough last week to break above some notable resistance around $15.00, the following weekly chart shows that the US$ silver price remains mired in a multi-year downward-sloping 'wedge'.

The extent to which silver is lagging gold suggests that the silver market has a lot of catching-up to do.



Silver has considerable resistance at $15.50-$16.20. Getting above this resistance on a weekly closing basis would project a rather quick move up to $21-$22.

Gold Stocks

GDX's daily RSI(14), a short-term momentum indicator, hit its second-lowest level ever last August. What this meant was outlined as follows in the 15th August 2018 Interim Update:

"Based on what tends to happen when a sell-off generates the sort of momentum extreme achieved by the gold-mining indices and ETFs on Wednesday 15th August, here's a likely short-term scenario for GDX:

1) A multi-week price low within the next two weeks, probably not far below the 15th August low.

2) A sharp rebound to the 50-day MA or lateral resistance (former support) at $21.00, whichever is the lower.

3) A decline that tests and possibly breaches the August price low, with a positive RSI divergence.

4) A stronger and longer rebound."

Apart from the initial rebound from the momentum low (step 2) not reaching the 50-day MA, the pattern unfolded exactly as described above.

When we wrote last week's Interim Update the gold mining indices and ETFs were already short-term 'overbought'. This suggested: "...a top that holds for at least a few weeks is close in terms of time, but not necessarily in terms of price. If gold can hold the bulk of its after-hours gains during Thursday's US trading session then the gold-mining sector could make significant additional headway over the next few trading days."

In response to the upside breakout in the gold price, the gold-mining sector moved sharply higher over the final two days of the week. As a result, GDX's daily RSI, which hit its second-lowest level ever last August, is now at its highest level ever. What does this tell us about the future?



Unfortunately, the price pattern following an upward momentum extreme is not as predictable as the price pattern following a downward momentum extreme. What we can say is that when an upward momentum extreme occurs within a few weeks of an important bottom it usually will be followed by some consolidation, but it tends to have BULLISH implications with regard to the ensuing 2-4 months. Also, following a momentum extreme such as the one just achieved by GDX, a new short-term buying opportunity is created by a correction of sufficient magnitude or duration to test the 50-day MA or push the daily RSI(14) down to 50.

Here are some other implications of last week's moon-shot in the gold-mining sector:

1) GDX ended last week at long-term resistance. Perhaps there will be a spike above this resistance early in the new trading week, but this increases the probability that a correction/consolidation will begin very soon.

2) The more short-term bullish of the two 1980s models discussed a week ago is now the more relevant.

3) The HUI/gold ratio has blasted above its 40-day and 150-day MAs (see chart below). This is what should happen during the first few weeks of a strong intermediate-term advance and is in stark contrast to what happened during all other gold-mining rallies since early 2017.



As advised in last week's Interim Update, for new buying it makes more sense to pick away at the stocks that have not moved by much from their lows -- provided that they are fundamentally sound -- than to jump into stocks that have rallied hard already. In general, this means that new buying should be focused on high-potential juniors that are still trading at depressed levels.

The Currency Market

The following daily chart shows that the DX broke out to the downside from its 'rising wedge' last week. This is more evidence that an intermediate-term downward trend is in progress. If so, the DX will make a series of lower highs and lower lows over the coming 6-12 months.



We doubt that the DX will extend its short-term decline by more than one point before it commences a multi-week rebound. The reason is that the currency market is becoming a little stretched on a short-term basis. In particular, the DX is almost 'oversold' and the currencies that have led the anti-dollar move are now short-term 'overbought'. An example is the Swiss Franc (SF). The SF has made a solid break above a confluence of resistance at 100-101, but a 'pause for breath' involving a pullback to 101-101.5 to test its recent upside breakout would be normal.



The Australian dollar (A$) has been one of the worst-performing major currencies over the past 12-18 months and has just tested its 10-year low. Here's the relevant chart:



However, there is a good reason to expect that the A$ will be one of the best-performing major currencies over the coming two years. The reason has to do with the very strong performance over the past two years of the A$-denominated gold price (gold/A$).

Here's a chart showing that gold/A$ has been trending upward since mid-2017 and is now immersed in an upside blow-off (quite possibly a trend-ending move).



Gold/A$ tends to lead A$/US$ by 2 years plus/minus 6 months. (Note: There is a fundamental reason for the lead-lag relationship, but we won't get into that right now.) Most recently, for example, the late-2015 bottom in gold/A$ led to the late-2017 bottom in the A$, the mid-2016 top in gold/A$ led to the early-2018 top in the A$, and the gold/A$ correction from mid-2016 to mid-2017 led to weakness in the A$ over the past 12 months.

The large rise in gold/A$ since mid-2017 suggests that A$/US$ will trade a long way above its current level in 2021, but it doesn't provide any information about the likely short-term twists and turns.

We would take a weekly close above 71 as an early warning signal that a multi-year A$ upward trend had begun.

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 ending Friday 21st June 2019:

[Note: AISC = All-In Sustaining Cost, EBITDA = Earnings Before Interest, Tax, Depreciation and Amortisation (a measure of cash flow), EV = Enterprise Value or Electric Vehicle, FS = Feasibility Study, FY = Financial Year, IRR = Internal Rate of Return, ISR = In-Situ Recovery, JV = Joint Venture, 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%, NSR = Net Smelter Return or Net Smelter Royalty, P&P = Proven and Probable, PEA = Preliminary Economic Assessment, PFS = Pre-Feasibility Study]

  *When Golden Arrow Resources (GRG.V) published its latest quarterly report 3-4 weeks ago it was clear that the company would have to do another equity financing very soon. A small financing (6M shares at C$0.20/share to raise C$1.2M) was completed last week.

This financing will keep the lights on for another month or two, but unless the company's minority-owned Pirquitas-Chinchillas project is now cash-flow positive there will be yet another equity financing within the coming three months.

GRG can be likened to a long-dated out-of-the-money call option on the silver price. In the absence of a significant silver rally, a long-dated silver call option will lose value steadily due to a shrinking time premium and GRG shares will lose value steadily due to a growing supply of shares. The difference is that GRG shares don't have a fixed expiry date.

If the silver price gains a few dollars at some point over the next several months, which is quite likely in our opinion, then the prices of both GRG shares and long-dated silver call options should rocket upward.

  *US Gold Corp. (USAU) has raised US$2.5M by indirectly issuing new shares at US$1.14/share (the financing involves "Preferred Stock" exercisable into common stock). The financing also includes share purchase warrants exercisable at US$1.14 that should bring in another US$1.25M before year-end.

The main purpose of this financing is to fund this year's drilling at the highly prospective, but very early stage, Keystone gold project in Nevada.

List of candidates for new buying

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

1) A40.AX (last Friday's closing price: A$0.15)

2) CGT.TO (last Friday's closing price: C$0.18)

3) KBLT.V at C$4.00 or lower (last Friday's closing price: C$4.13)

4) PPLT (last Friday's closing price: US$76.46)

5) TK.V (last Friday's closing price: C$0.27)

The above list is limited to five stocks. It sometimes will contain less than five, but it never will contain more than five regardless of how many stocks are attractively priced for new buying.

Some speculating ideas

1) Osisko Gold Royalties Warrants (TSX: OR.WT). Recent price: C$0.57

Our most recent mention of these warrants was in the 27th February 2019 Interim Update, when they were trading at C$0.44. The price subsequently rose to the C$0.90s and then dropped all the way back to the C$0.40s before rebounding to the mid-C$0.50s.

The warrants have an exercise price of C$36.50, meaning that they are a very long way out of the money (OR ended last week at C$14.78). However, they don't expire until 18th February 2022, so there is still a lot of time for the sort of increase in the stock price that would inject substantial value into the warrants.

We doubt that OR will ever trade above the C$36.50 exercise price of these warrants, but we estimate that it would take only a 30%-40% gain in the stock price within the next 6 months -- to around C$20-$21/share -- to generate a gain of around 200% in the warrant price.

Here's a weekly chart of OR.TO.



2) Taseko Mines (TGB, TKO.TO). Recent price: US$0.53

TGB has 246M shares outstanding, current copper production of around 100M pounds/year at a mine in British Columbia, an interesting development-stage copper project in Arizona that could be put into production over the coming 12 months, and a couple of potentially-valuable exploration-stage projects. It has been in and out of the TSI Stocks List multiple times in the past, most recently entering the List in July-2016 at US$0.54 and exiting in January-2017 at US$1.47.

The company has mediocre management and its balance sheet is far from healthy (there is long-term debt of C$340M), but it does not appear to be at risk of going broke. Importantly, the stock can be relied on to provide substantial upside leverage during copper-price rallies and offers reasonable liquidity.

We think that copper will perform well in US$ terms and also outperform gold over the coming 6-12 months. If so, TGB could do extremely well over this period -- potentially returning to the US$1.50-$2.00 area.

TGB appears to be building a base in the US$0.45-US$0.75 range and we won't be surprised if the base-building process continues for a few more months.



Chart Sources

Charts appearing in today's commentary are courtesy of:

https://stockcharts.com/