<% 'pass = Request.Form("pass") IF ((Request.Form("pass") = 1) OR (Session("pass") = "pass")) THEN %> Speculative-Investor.com
   -- Weekly Market Update for the Week Commencing 25th November 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 Neutral
(04-Nov-13)
Bullish
(26-Mar-12)
Bullish

US$ (Dollar Index) Neutral
(24-Dec-12)
Neutral
(18-Sep-13)
 
Neutral
(19-Sep-07)

Bonds (US T-Bond) Neutral
(11-Nov-13)
Neutral
(18-Jan-12)
Bearish
Stock Market (DJW) Neutral
(18-Nov-13)
Bearish
(28-Nov-11)
Bearish

Gold Stocks (HUI) Neutral
(04-Nov-13)
Bullish
(23-Jun-10)
Bullish

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

Industrial Metals (GYX) Bearish
(06-Nov-13)
Bearish
(13-Nov-13)
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.

The Widowmaker Trade

Due to the Japanese government's massive debt burden (as a % of GDP, Japan's government has almost three times as much debt as the US government), Japan's bearish demographics and Japanese bond yields that are so low they couldn't possibly go much lower, there is always a great temptation to 'short' Japanese Government Bonds (JGBs). However, despite the obvious appeal of this trade it has lost money almost every year for the past two decades. That's why it has come to be called "the widowmaker trade". It is said that you can't claim to be a serious speculator until you've lost money shorting JGBs.

At one point it looked like 2013 would be the year in which the JGB 'shorts' finally profited in a big way. As evidenced by the following chart of the 10-year JGB yield, they certainly could have profited in a big way if they were nimble and had excellent timing. Specifically, big profits were available to anyone with the skill or the luck to have established a short JGB position (a bet on rising yields) near the bottom of the late-March-to-early-April yield plunge and then closed the position near the top of the April-May yield surge. However, very few traders would/could have accomplished this.

For those who were short JGBs at the start of 2013 and maintained their position, it looks like being another losing year. The reason is that with only about 5 weeks left in the year, the bond yield is materially lower than where it began the year (0.63% at the end of last week versus around 0.80% at the beginning of the year). The "widowmaker trade" therefore continues to live up to its reputation, despite the 'valiant' efforts of the BOJ to depreciate the Yen.



We have never bet against the JGB market, but at the start of this year we did cite the potential bursting of the government bond bubble in general and the JGB bubble in particular as one of the biggest risks facing the financial world. Here's what we wrote in our 2013 Yearly Forecast:

"There's a new big intermediate-term risk facing the financial world as 2013 gets underway: the risk that the government bond bubble will burst. The bursting of the government bond bubble is a more pressing concern today than it was, say, 6 months ago due to the immense political pressure being put on the Bank of Japan (BOJ) to reduce the purchasing power of the Yen. We don't know yet if the BOJ will actually take the actions required to reduce the Yen's purchasing power at the rate demanded by Japan's new government, but if it does then bond yields will be pushed a lot higher in Japan and the yields on other 'safe haven' government bonds will likely follow."

To say that 2013 generally hasn't panned out as we expected would be an enormous understatement. However, even though the JGB yield remains near its all-time low, we don't think we were wrong to single-out the bursting of the JGB bubble as a global risk. The risk hasn't yet materialised, but the probability of it doing so within the coming 12 months is uncomfortably high.

We like the risk/reward of betting against the JGB market with the 10-year yield below 0.70%. A bearish JGB speculation (a bet on falling bond prices and rising bond yields) actually interests us much more than a bearish T-Bond or T-Note speculation, because the JGB yield is a lot lower and because the JGB market is further along in its major topping process. We aren't going to risk any money on the "widowmaker trade", though, because with limited resources we can't attempt to profit from every opportunity. 

The Japanese Government's Tail-Chasing

Although Japan's rate of monetary inflation remains relatively low, currency traders became convinced over the past 12 months that a great Yen depreciation was in the offing and aggressively sold the Yen against the US$. The Japanese government therefore got the large reduction in the Yen/US$ exchange rate it was hoping for. However, the overall effect of this devaluation is probably not what was hoped for, even though it is exactly what should have been expected by anyone with a modicum of economic sense.

In their efforts to spur exports by devaluing the Yen, the Japanese government is 'chasing its tail'. In Yen terms exports are rising, but imports are rising faster. Moreover, the reason that imports are rising faster than exports is Japan's current need to import the bulk of its energy-related commodity usage. The further the Yen falls on the foreign exchange market, the higher the prices paid in Japan for imported oil, coal and natural gas. The result: Japan just reported its largest-ever October trade deficit.

Devaluing a currency can never provide a net benefit to an economy. In the short and intermediate terms, all it does is change how the economic pie is divided. Some entities benefit from the devaluation, but only at the expense of other entities. In the long term the price distortions and unfair wealth redistribution caused by the devaluation make the overall pie smaller than it would otherwise have been.

In Japan's case, for example, multi-national corporations are the main beneficiaries. This is generally not because the relatively cheap Yen enables these corporations to be more competitive, but because foreign earnings are given an artificial boost when converted to Yen. Take, for instance, Toyota and Honda. These large Japanese automakers sell a lot of cars in the US, but most of the cars they sell in the US are made in the US. The cheaper Yen therefore doesn't make a significant difference to US sales of Toyotas and Hondas, but it does mean higher Yen-denominated profits for these automakers since every US dollar of profit is worth 20% more Yen today than it was a year ago. The higher profits of companies such as Toyota and Honda are effectively being paid by Japanese consumers of energy.

Uranium Update

A small rebound in the uranium price has resulted in a small increase in the demand for uranium-related equities. This is reflected by the uptick at the end of the following weekly chart of URA (the Global X Uranium ETF).

With reference to the following chart, notice that all of the significant rebounds in URA over the past two years have ended at or just below the 50-week moving average (the blue line). A solid break above this moving average would therefore signify a change of character.

When it eventually happens, we will consider a weekly close above the 50-week MA to be clear-cut evidence that the long-term bear market in the uranium-mining sector is over.

The Stock Market

Why it is different this time

"This time it's different" is one of the most dangerous sentiments in the world of investing, but in some respects the present is always different from the past. No two situations are identical, and sometimes the investment landscape changes in a way that is, for all practical intents and purposes, permanent.

The current market situation is different in a very important way from any prior situation.

We are referring to the fact that this is the first time in its 100-year history that the Fed has aggressively pumped money into the economy and put extreme downward pressure on interest rates with the stock market at/near an all-time high. The full implications of this difference are not yet known, but one possibility is that the current cyclical bull market in US equities will break the longevity record.

The current cyclical bull market is already the third longest of the past 100 years (behind the cyclical bulls of the 1920s and 1980s) and would become the longest if it were to extend beyond July of next year.

We are not forecasting such an extension and we certainly wouldn't bet on it. We are simply acknowledging the reality that the most extraordinary monetary accommodation in US history could lead to the longest cyclical upward trend in stock prices in US history.

As mentioned in an earlier commentary, in the unlikely -- but not impossible -- event that the bull market does continue for another 12 months, there will probably be a shift in leadership, with commodity-related (including gold-related) stocks shifting from laggards to leaders. This would be similar to what happened during the final 12 months of the 1982-1987 bull market.

Current Market Situation

Over the first 6 months of this year there was an upside blow-off in the broad US stock market (as represented by the SPX) relative to the gold sector of the stock market (as represented by the XAU). This is the parabolic advance culminating in late June shown on the following SPX/XAU chart.

For a while it looked like the July-August decline in the SPX/XAU ratio marked the beginning a new trend of at least intermediate-term significance, but the decline was cut short and a second upside blow-off is now in progress.

There is no way of knowing how far this latest blow-off will extend, or even if it will extend beyond last week's high. What we do know is that upside blow-offs are almost always retraced in full, and that once they get underway the retracements usually happen quickly.

This week's important US economic events

Date Description
Monday Nov 25 Pending Home Sales Index
Dallas Fed Mfg Survey
Tuesday Nov 26 Housing Starts
Case-Shiller Home Price Index
Consumer Confidence
Richmond Fed Mfg Index
Wednesday Nov 27 Durable Goods Orders
Chicago PMI
Leading Economic Indicators
Consumer Sentiment
Thursday Nov 28

US markets closed for Thanksgiving

Friday Nov 29 No important events scheduled

Gold and the Dollar

Gold

GLD's Gold

When the public's demand for an investment increases, the financial intermediaries of the world (banks, brokers, etc.) will come up with new products that can be sold to the public to take advantage of the rising investment demand. Therefore, in 2004, after it became obvious that gold had commenced a new bull market and that the general desire to own gold-related investments was on the rise, products to capitalise on this new trend were inevitably born. An ETF called the SPDR Gold Trust (NYSE: GLD) was one of these products.

Each GLD share is fully backed by physical gold in a vault, with the amount of gold per share falling by a tiny amount each year due to the cost of storing the physical gold. Furthermore, arbitrage trading by "authorised participants" (AP's) ensures that the market price of a GLD share never deviates far from its net asset value (NAV), where the NAV is determined by the market value of the physical gold held by GLD.

For example, if the market price of a GLD share rises above its NAV, an AP will take advantage of the opportunity to make a risk-free profit by either 1) buying physical gold, exchanging the physical gold for GLD shares (injecting gold bullion into GLD) and selling the GLD shares on the stock market, or 2) selling GLD shares and simultaneously buying physical gold. Note that whereas the first of these arbitrage trades could only be done by an AP, any large trader with low transaction costs could do the second trade.

For another example, if the market price of a GLD share falls below its NAV, an AP will take advantage of the opportunity to make a risk-free profit by either 1) redeeming GLD shares for physical gold, selling the gold and using the proceeds to purchase GLD shares, or 2) buying GLD shares and simultaneously selling physical gold. Note again that any large trader with low transaction costs could do the second arbitrage trade, but only an AP could do the first.

Due to arbitrage trading and the fact that GLD is a convenient way for large speculators to gain exposure to a physical gold surrogate, the GLD price tends to rise faster than the bullion price during major upward trends in the gold market and fall faster than the bullion price during major downward trends in the gold market. Consequently, while there has been no consistent correlation between short-term changes in the gold price and short-term changes in GLD's holding of physical gold, the major upward trend in the gold price during 2004-2011 resulted in a substantial increase in GLD's inventory (arbitrage trading causes physical gold to be added to GLD's inventory when GLD's price rises faster than the spot gold price) and this year's major downward trend in the gold price resulted in a substantial decrease in GLD's inventory (arbitrage trading causes physical gold to be removed from GLD's inventory when GLD's price falls faster than the spot gold price). The following chart depicts this relationship.



Now, although the flows of gold into and out-off GLD are not important determinants of gold's long-term or intermediate-term price trends, these flows almost certainly exacerbate the existing trends. That is, GLD gold flows almost certainly caused the gold price to move higher than it would otherwise have done during 2004-2011 (especially from Q4-2008 through to 2011, when GLD became popular with some very large speculators) and then fall by a greater percentage than it would otherwise have done during 2013. In more general terms, the existence of GLD and similar funds will tend to give the overall investment demand for physical gold an additional boost during cyclical up-swings and reduce the overall investment demand for physical gold during cyclical down-swings. Like leverage, therefore, GLD is a 'doubled-edged sword'.

Current Market Situation

The recent price action suggests that gold is headed for a test of its June low ($1150-$1200).

There isn't much in the way of chart-related support between the current price in the $1240s and the June low, although the market action since the August high could be defining a downward-sloping channel with a bottom currently around $1220. That is, there is possibly some short-term support near $1220.

Former support at $1270 is now the first significant level of resistance.



On a short-term basis, sentiment is the most important factor in gold's favour. Almost everyone, including the majority of long-term bulls, now expects a test of the June low. The gold market could therefore catch the maximum number of traders off-side by making a sustainable turn upward from near its current price.

As mentioned in last week's Interim Update, we would now view consecutive daily closes above $1280 as evidence that a sustainable turn upward had occurred.

Gold Stocks

The XAU ended last week at its early-October low and the top of the short-term channel from which it escaped during the second half of October. In other words, it ended last week at short-term support. More important support is defined by the June low -- about 5% below last week's close.



GDXJ, a proxy for the junior end of the gold-stock universe, ended last week marginally below its June low. This means that during its 4-year lifespan GDXJ has never been lower than it is right now.



Sentiment in the gold-mining sector already reached levels consistent with a bear-market bottom several months ago. Since then, the price of the average gold-mining stock has essentially flat-lined, but we get the impression that sentiment is now even more depressed. Prices could still go lower in the very short-term, especially at the junior end of the market in reaction to tax-loss selling, but anyone with a sizeable cash reserve should be licking their lips due to the bargains on offer.

Currency Market Update

With the Dollar Index and the euro in consolidation mode and not doing anything noteworthy, we'll address the recent performance of the Australian Dollar (A$).

Our most recent A$ update was in the 28th October Weekly Update -- just after this currency had tested major resistance in the 96-98 range. At that time we wrote:

"When the A$ broke below support at 96-98 during the second quarter of this year it completed a major topping pattern. After slumping to 89 during the third quarter it has since rebounded to the former support (now resistance) at 96-98.

Here are the two most likely A$ scenarios:

1. A bear market rebound has just ended and a downward trend to new multi-year lows has just begun.

2. The bear market is not over, but perceived recovery in China and weakness in the US$ mean that the rebound is also not over. In this case, the A$ will consolidate over the next few weeks and probably drop back to near its 50-day MA before resuming its short-term upward trend.
"

With the A$ having since broken below its 50-day MA and lateral support at 93 (refer to the following daily chart), the first of these scenarios has become by far the more likely. However, the A$ is now 'oversold' on a short-term basis, so a 1-2 week consolidation/rebound will probably soon begin.

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 22nd November 2013:

[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]

  *Pilot Gold (PLG.TO) reported the first batch of results from the 2013 drilling program at its Kinsley Mountain project in Nevada. Included in this batch were several significant results, such as 15.6 g/t Au over 3.0 metres in Hole PK083C and 2.51 g/t Au over 16.8 meters in Hole PK102, and one spectacular result: 8.53 g/t Au over 36.6 metres in Hole PK091CA.

It's early days, but these results are consistent with PLG-management's theory that Kinsley Mountain hosts a geologically similar deposit to the Long Canyon deposit that was sold to Newmont Mining for about $2B in 2011.

For TSI stock selections, PLG's initial set of Kinsley Mountain drilling results was the second-best news of the past week.

  *Premier Gold (PG.TO) announced the initial resource estimate for its Cove gold project in Nevada. The total initial resource is around 420K ounces (143K ounces Indicated plus 279K ounces Inferred) at an average grade of about 10-g/t. A resource estimate of this size is not the sort of development that is going to generate meaningful speculative interest in the stock in the current depressed market, but it constitutes a good start. Of particular significance is the high grade of the resource.

PG also announced some drilling results from the Cove project that suggest expansion potential beyond the main deposit.

After holding up relatively well over the preceding few weeks, PG's stock price fell sharply last week. We suspect that this was due to technically-oriented trading in reaction to the break below obvious chart support at C$2.00.

PG is now testing support defined by its June low. It is likely to rebound relatively quickly once the overall sector turns higher and is a good candidate for new buying.



  *Pretium Resources (PVG) announced results from the milling of its 10,000-tonne bulk sample prior to the start of trading last Friday. This was about two weeks earlier than anticipated. With 82% of the milling complete, the amount of gold produced is about 4,200 ounces. This is 200 ounces more than predicted by the Snowden resource model for the full 10,000 tonnes and suggests that production from the entire bulk sample is going to be in the 4,500-5,000 ounce range. The final results are now expected in mid-December.

The fact that the amount of gold produced from the bulk sample is going to be higher than predicted means that the average grade of the portion of the deposit that was sampled is a bit higher than indicated by the Snowden resource model. This is VERY good news, but doesn't fully resolve the concerns raised by Strathcona about the validity of the resource model.

The next step in addressing the concerns of the skeptics will be a comparison of the gold produced from each cross-cut of the bulk sample with the amount of gold production predicted by the resource model for the same cross-cut. Such a comparison will provide a better indication of the accuracy of the resource model than simply comparing total ounces predicted with total ounces produced. We assume that a comparison of this nature will form part of the final test results reported in mid-December.

Appropriately (given the news), there was a huge rally in PVG shares last Friday on enormous volume. The following chart illustrates the situation.



Considering the decline in risk due to confirmation that the bulk sample contains at least as much gold as projected, PVG is a better buy now than it was in the immediate aftermath of the first Strathcona 'bombshell' in early October. However, for four reasons we would not buy at this time. First, Friday's ferocious rebound took the stock almost all the way back to substantial resistance. In the absence of a big sector-wide rebound it is unlikely to exceed this resistance between now and year-end. Second, when the HUI was trading at its current level in June, which was well before the Strathcona controversy, PVG was trading at around US$6.00. This suggests to us that if not for the Strathcona-caused fear, PVG would now be trading at around US$6.00. This is only about 5% above Friday's intra-day high and 15% above Friday's close. Third, the good news announced last Friday doesn't completely resolve the issue. Fourth, a better buying opportunity will probably arise late next month in response to some additional near-term weakness in the overall sector and/or tax-loss selling.

  *Ramelius Resources (RMS.AX) advised that it has sourced a temporary replacement for the failed ball mill motor at its Mt Magnet gold mine. The temporary replacement will enable the mill to operate at 85% capacity until the original motor is reinstalled at the end of January.

The company intends to announce the expected effect on production in early December.

List of candidates for new buying

This week we don't have a list, just a single stock. The reason is that as a result of recent price action this stock clearly stands out as the best candidate for new buying in today's depressed market.

We are referring to Rio Alto Mining (NYSE: RIOM, TSX: RIO). RIO has recently been clobbered in the stock market, despite the fact that it is one of the few gold producers that is very profitable at the current gold price. Golden Star Resources (GSS) is much cheaper than RIO by most valuation measures, but GSS is not close to being profitable at the current gold price. Endeavour Mining (EDV.TO) also has a lower valuation than RIO, but EDV would be doing little more than breaking even at the current gold price.

Chart Sources

Charts appearing in today's commentary are courtesy of:

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



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