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-- Abbreviated Market Update, 24th December 2016
Summary of current
thinking/positioning
1) Expecting the overall
downturns in gold, silver and the associated mining indices to extend into
the first half of 2017, with intervening rebounds beginning in
early-January. Will view strength during the first two months of 2017 as
an opportunity to lighten exposure to the gold-mining sector unless the
fundamental backdrop becomes more favourable for gold. That being said,
maintaining greater long-term exposure to gold than to any other equity
sector.
2) Maintaining long-term exposure to non-gold commodities
(natural gas, coal, copper, zinc, agricultural products), but concerned
that the early-2016 price lows might be tested in some commodities prior
to the start of the next multi-quarter bullish period.
3) Expecting
a decline in the oil price to a January-February bottom and positioned for
this outcome via USO put options expiring in February. In addition to
being a speculation, these options have been purchased as a hedge against
short-term weakness in commodity-related equities.
4) Thinking that
the US Treasury Bond is close to a short-term price bottom within a
long-term bearish trend.
5) Expecting a 6-12 month extension of the
equity bull market and looking for opportunities to add to general non-US
equity exposure.
6) Thinking that the Dollar Index is close to a
1-2 month top, but that it won't reach a major top before the second
quarter of 2017.
7) Maintaining a large cash reserve in recognition
of the short-term downside risk in most equities (current cash percentage
is about 35%) and on the lookout for opportunities to raise more cash.
Despite the attractive valuations now available in the gold-mining sector,
this is not the time to be aggressive.
TSI schedule reminder
This bare-bones update is in lieu of the Weekly Market Update that would
otherwise have been published on Sunday 25th December. An Interim Update
will be published at the usual time during the coming week (Thursday 29th
December), but there will be no Weekly Update on Sunday 1st January. The
normal two-times-per-week commentary schedule will then resume.
Have a wonderful Christmas!
Current Market
Situation
It turned out to be a good week
to take a break, because almost nothing happened in the major financial
markets. In particular, the US$ gold price, the currency market (as
represented by the Dollar Index, the euro and the Yen), the S&P500 Index
(SPX) and the T-Bond price all moved within narrow ranges and ended
roughly flat on the week. Consequently, there was no sign of a short-term
trend reversal or trend acceleration in any of the major markets.
We won't be surprised if each of the above-mentioned markets signals a
short-term reversal within the next two weeks, with the reversal direction
being up for gold, the euro, the Yen and the T-Bond and down for the
Dollar Index and the SPX. However, we haven't yet placed any bets on
short-term reversals due to the risk that the current trends will
accelerate. There is also the reality that the fundamental backdrop
remains definitively gold-bearish and US$-bullish, which means that any
short-term rebound that begins within the next couple of weeks in the
market we think has the best long-term risk/reward (gold) is likely to be
unimpressive.
Zooming in on gold, what we have is a market that in
momentum terms is now extremely 'oversold'. This is evidenced by the fact
that gold's daily RSI (a short-term momentum oscillator) has constantly
been in 'oversold' territory for about 6 weeks, which is rare, and by the
fact that gold's weekly RSI (a medium-term momentum oscillator) is at a
3-year low.
At the same time, the speculative net-long position in
Comex gold futures is 134K contracts. This is a vast improvement on what
it was a few months ago and is actually lower than we originally thought
it would become prior to an intermediate-term price bottom (for a
sentiment indicator such as this, the lower the better), but, as we've
explained in the past, context is critical when it comes to sentiment
indicators. If we were dealing with a bull-market correction then a
speculative net-long position of around 150K contracts would constitute an
extreme and would likely coincide with an intermediate-term price bottom,
but if we are dealing with a market that has not yet entered a cyclical
bullish trend (as is very likely the case) then the speculative net-long
position could drop all the way to zero prior to an intermediate-term
extreme.
Also, there is very little in the way of chart-related
support for gold between the current price in the $1130s and the
$1040-$1080 range.
The potential for additional speculative
long-liquidation and the significant distance to meaningful support
suggests the risk of a final $50-$90 plunge prior to a tradable rally.
Just to be clear, we are not forecasting a trend-ending plunge, but there
is currently enough chance of it happening to prevent us from betting on a
short-term reversal to the upside.
It's a similar story with
silver, the euro and the T-Bond. The euro, for example, didn't
follow-through to the downside last week after breaking below major
support at 105 during the preceding week, but by doing no better than
rebounding to the breakdown level it also didn't provide any evidence that
the breach of support was a false signal. These leaves the door open to
some acceleration to the downside prior to a short-term reversal.
We won't attempt to cover all the markets of interest in this abridged
update, but comments on three industrial commodities are appropriate.
First, the divergence between oil and the C$ became even more
pronounced last week, with oil hovering near its high for the year and the
C$ dropping back to near a 9-month low. This points to substantial
downside risk in the oil price.
Second, the copper price has
declined to within a few cents of its 50-day MA in the $2.40s. This means
that the decline from the November spike high has almost achieved the
minimum that would be achieved by a routine short-term correction within a
bull market.
Due in part to gold's performance over the past two
months, we are sceptical that a copper bull market has begun. We are also
concerned about the record-high speculative net-long position in copper
futures that was reached during the week before last, because such a surge
in speculative enthusiasm creates substantial downside risk. Therefore,
while there will probably be a bounce in the copper price from near its
50-day MA (currently at $2.43 and rising), we will not be increasing our
exposure to copper in the near future.
Third, the uranium price has
rebounded by about 15% from a 12-year low. This constitutes
very-preliminary confirmation of the rally in uranium-mining equities that
got underway last month.
The price of a useful commodity will never
go to zero and it's certainly possible that at its recent low of
$17.90/pound the uranium price was as close to zero as it is ever going to
get, but it's way too soon to draw any conclusions about the
sustainability of the price reversal. Our assumption therefore continues
to be that uranium-mining equities have recently been bid-up as part of a
general increase in the speculative demand for industrial-commodity
equities.
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 23rd December 2016:
[Note: AISC = All-In Sustaining Cost, FS = Feasibility Study, FY =
Financial Year, IRR = Internal Rate of Return, ISR = In-Situ Recovery,
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]
*Premier Gold (PG.TO)
reported the final batch of results from this year's 60,000m drilling
program at the company's 100%-owned Hasaga gold project in Ontario. There
were several intercepts of around 100 gram-metres (intercepts where the
width multiplied by the average grade was around 100), which is indicative
-- in a back-of-the-envelope sort of way -- of a very good result.
Drilling results and the results of metallurgical testing suggest that
Hasaga has the potential to be developed into a gold mine, although there
is still a long way to go to demonstrate economic viability. The next step
will be an initial resource estimate, which is scheduled to be complete
during the first few weeks of 2017.
Considering its strong balance
sheet and extensive portfolio of mining assets, including two operating
gold mines with combined annual production of around 140K ounces, PG's
market valuation recently became unreasonably low. It certainly became
much lower than we thought was probable. A decline from a Q3 peak of
around C$5.00 to, say, C$3.00-$3.50 would have been perfectly normal for a
volatile gold-mining stock such as PG, but PG's decline to a low of C$1.87
was far from normal and can only be explained by the manic-depressive
nature of the stock market.
*Taseko Mines (TGB)
has received the final permit (the underground injection control (UIC)
permit) to construct and operate a production test facility at its
Florence copper project in Arizona.
The plan is for the Florence
project to be developed into an in-situ recovery (ISR) operation. This is
a method of mineral extraction that has a very small environmental
footprint and is therefore generally easier to permit than either an
open-pit or an underground mine. It is common for uranium, but rarely used
for copper.
The project contains 2.4 billion pounds of copper in
340 million tons of probable reserves (at a grade of 0.36% copper) and
according to an April-2013 PFS would be economically robust (36% IRR) at a
copper price of $2.75/pound. Once commercial production is reached, the
project will produce an average of 75 million pounds annually for over 20
years.
If all goes well, the test facility will confirm the
technical viability of this project.
The main reason for our
interest in TGB is the company's 75% ownership of the Gibraltar copper
mine in B.C., Canada. The Gibraltar stake gives TGB about 100M pounds/year
of current production and levers the company's financial performance to
changes in the copper price. However, Florence could add substantial
value, especially if the copper price can make a sustained move above
$2.75.
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) ALK.AX (last Friday's closing price:
A$0.31)
2) BLK.AX (last Friday's closing price: A$0.43)
3)
ESM.TO (last Friday's closing price: C$0.65)
4) EVN.AX (last
Friday's closing price: A$1.75)
5) SCP.TO (last Friday's closing
price: C$0.51) or ADI.V (last Friday's closing price: C$0.17). Note: These
companies are merging.