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   -- Weekly Market Update for the Week Commencing 30th March 2015

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

Market
Short-Term
(1-3 month)
Intermediate-Term
(6-18 month)
Long-Term
(2-5 Year)
Gold N/A Bullish
(26-Mar-12)
Bullish
US$ (Dollar Index) N/A Bearish
(26-Jan-15)
Neutral
(19-Sep-07)
US Treasury Bonds (TLT) N/A Neutral
(18-Jan-12)
Bearish
Stock Market (DJW) N/A Bearish
(28-Nov-11)
Bearish
Gold Stocks (HUI) N/A Bullish
(23-Jun-10)
Bullish
Oil N/A Bullish
(17-Dec-14)
Bullish
Industrial Metals (GYX) N/A Neutral
(15-Sep-14)
Bullish
(28-Apr-14)

Notes:

1. Our short-term expectations are discussed in the commentaries, but except in special circumstances we won't attempt to assign a "bullish", "bearish" or "neutral" label to these expectations.

2. The date shown below the current outlook is when the most recent outlook change occurred.


3. "Neutral" means that we think risk and reward are roughly in balance with respect to the timeframe in question.

4. Long-term views are determined almost completely by fundamentals and intermediate-term views are determined by a combination of fundamentals, sentiment and technicals.

Last week's posts at the TSI Blog

Why were the Commercials so wrong about the euro?

Expensive Copper

Gold's price should be consistent with the prices of other things

The ECB is trying to follow in the Fed's bubble-blowing footsteps

The monetary data published by the ECB last week showed that the rate of euro-zone TMS (True Money Supply) expansion continued to accelerate in February -- to a year-over-year growth rate of 11.8%, from 11.4% in January and 'only' 6.4% last October. Here's a chart that puts the current monetary inflation rate into perspective.



The ECB didn't begin its new QE program until March, so the above chart doesn't include any of the effects of this new program. In fact, the effects of the new program probably won't start becoming apparent until the April monetary data are published in late-May.

In one way, the current situation in Europe is similar to the situation in the US during the final few months of 2012. Back then, the Fed embarked on an aggressive new money-pumping program despite the year-over-year rate of US TMS growth already being in double digits and despite the prices of US stocks and bonds being near multi-year or all-time highs. Now we have the ECB embarking on an aggressive new money-pumping program despite the year-over-year rate of euro-zone TMS growth already being in double digits and despite the prices of European stocks and bonds being near multi-year or all-time highs.

The QE program introduced by the Fed in late-2012 did not help the US economy, but it did inflate a new stock market bubble. It also encouraged stock buybacks at the expense of capital investment, incentivised the continued accumulation of debt at a time when both the private and public sectors were over-indebted, and fostered an investment boom in the shale-oil industry that's now in the process of collapsing.

Apart from the specific example of the oil-investment boom, it's possible that the QE program introduced by the ECB this month will end up having similar effects.

Oil and Gas

Checking on oil's bottoming process

The oil price needed to fall by more than $2/barrel on Friday to avoid generating a bullish signal in the form of a weekly close above its 10-week MA. Fall by more than $2 is what it dutifully did, ending the week just below the aforementioned MA.



Based on the way the oil market has performed in the past in the aftermath of a price collapse, when oil closes above its 10-week MA it will suggest that an important price low is in place and that one of the following is about to occur:

1) An upward trend lasting several months.

2) A few additional weeks of upside and then a decline to test the low prior to the start of an intermediate-term upward trend.

We favour the second possibility, but first oil must signal a bottom by making a weekly close above its 10-week MA.

Natural Gas (NG) is also searching for a price bottom

The NG price broke out to the downside during the second half of last week from what currently looks like a bearish consolidation, which suggests that another leg down has begun. That's the obvious interpretation, but we aren't confident that it's the right one. Another possibility is that NG will do something along the lines of what the Industrial Metals Index (GYX) did during the week before last, which is reverse upward shortly after breaking out to the downside.

Like oil, NG could be close to an important bottom, but, like oil, it hasn't yet done anything to signal a bottom.

Commitments of Traders (COT) Charts

A few of the markets we follow have interesting COT situations at the moment, so for this week's report we've created a separate COT section. The charts presented below are courtesy of Sharelynx.com. On these charts, the blue bars show the net position of commercials in the US futures market, the red bars show the net position of large speculators, and the thin black line shows the net position of small traders. We lump the large speculators and the small traders together under the label "speculators".

1) Gold

The gold-price rebound that began on 18th March hasn't yet affected gold's COT situation, in that the speculative net-long and the offsetting commercial net-short positions on the COMEX remain close to their recent lows. This indicates that the rebound was not driven by speculative buying in the futures market, which is very unusual and is a short-term plus for the bulls. It's a short-term plus because it means that there is still plenty of capacity for new speculative buying.



2) Silver

According to the COT data, there is presently a lot more speculative enthusiasm for silver than for gold.

As illustrated below, the recent price rebound began with the speculative net-long position at a higher-than-normal level for a price low, and there was a surge in speculative buying during the first five days of the price rebound. The speculative net-long position in silver futures is not yet high enough to signal a precariously high level of optimism, but it's more than half way there.



3) Copper

Over the past three years, short-term rebounds in the copper price have begun with the speculative net-short position and the commercial net-long position near multi-year highs and have usually ended at around the time that these net positions were reduced to around zero.

The current COT situation indicates that there is scope for another test of resistance at $2.90-$3.00 prior to the next short-term price top.



4) The Euro

The rebound in the euro that began on 18th March was accompanied by another wave of speculative short-selling in the futures market. This is so unusual that we don't know what to make of it.

It would be more typical for the speculative net-short position in euro futures to peak just ahead of, rather than just after, a short-term price low, so on a short-term basis last week's increases in the speculative net-short position and the offsetting commercial net-long position to new all-time highs is not bullish. However, the additional build-up in the speculative net-short position means that there is now even more fuel to power an eventual euro rally.

The Stock Market

The US stock market did what it needed to do last week to remain in synch with the short-term bearish scenario that we favour. Additional weakness is needed over the next several days to provide further validation, or at least to avoid invalidation, of this scenario.

As noted in last week's Interim Update, the Dow Transportation Average (TRAN) is likely to be one of the first important US stock indices to generate a clear-cut short-term bearish signal. It would do this by closing below lateral support at 8600. This support was re-tested last Thursday.



Due to its relative weakness over the past 12 months, the Bank Index (BKX) is now in a position where it could be one of the first indices to generate a long-term bearish signal. The BKX's potential major topping pattern is illustrated below.

If the BKX follows the pattern of the past 12 months then it will rise to around 76 before making its next short-term top. However, last week's downward reversal indicates that a short-term top could already be in place. If so, a decline to below 66 on a weekly closing basis would generate clear-cut evidence of a major top.

This week's significant US economic events (The most important events are shown in bold)

Date Description
Monday Mar 30 Personal Income and Spending
Pending Home Sales Index
Dallas Fed Mfg Survey
Tuesday Mar 31 Chicago PMI
Consumer Confidence
Case-Shiller Home Price Index
Wednesday Apr 01 Construction Spending
ISM Mfg Index
Thursday Apr 02

Factory Orders
International Trade Balance

Friday Apr 03 Financial markets closed for Good Friday
Monthly Employment Report

Gold and the Dollar

Gold

The problematic comparison with the 1970s

We suspect that the gold bull market that began in 2001 is, in very rough terms, an elongated version of the 1971-1980 bull market. Part of our reasoning is that there is evidence in the performance of the gold-mining sector of a bullish gold trend beginning in the early-1960s, with gold itself being unable to reflect this bullish trend until 1971 when it was officially untethered from the US$.

At the point when the official link to the US$ was broken, the gold price was like a coiled spring. After it was released it shot upward in spectacular fashion to a high in 1974 and then plummeted to a low in 1976, all as part of trying to find the level that best reflected gold's value under the new monetary system.

Our point is that due to gold's price being fixed at $35/oz until 1971, what would have been an 18-20 year bull market ended up being compressed into 9 years.

This time around the gold price has been free to fluctuate in response to changing economic and financial-market conditions. As a result, the rise to the 2011 top was much longer and steadier than any of the cyclical advances of the previous secular bull market and the decline from the 2011 top has also been longer and steadier than the single cyclical decline of the previous secular bull market.

A consequence of the gold price being fixed at $35/oz during what was, we think, roughly the first half of the previous secular gold bull market is that it's not possible to say something along the lines of "we are now at the equivalent of point X from the previous bull market". For example, although using the following weekly gold chart to make a superficial comparison of the two bull markets could lead to the conclusion that the current bull market is near the equivalent of the previous bull market's point B, we need to take into account that the pattern of the 1970s partly results from the elimination of the advance that would have taken place from the early to the late 60s if the gold price hadn't been fixed. This 'missing' advance of the 1960s in the bullion market is clearly evident on the chart of the Barrons Gold Mining Index (BGMI) displayed below the gold chart.



So, whereas a superficial view of the US$ gold price action could lead to the conclusion that the present is the equivalent of somewhere in the 1976-1977 range, an argument could be made that the present is actually more like the early-1970s. Although the gold price chart doesn't show it, the early-1970s was really when the first cyclical decline of the earlier long-term gold bull market came to an end. In addition, the position of the broad US stock market today certainly has a lot more in common with 1972 than 1976-1977.

The fixing of the gold price during the 1960s also makes it difficult to directly compare the secular bear market of the S&P500 relative to gold that extended from the late-1960s to the early-1980s with the secular bear market that began during 1999-2001. The reason is that if the gold price had been free to fluctuate, the SPX/gold ratio most likely would have been in a downward trend during the 1960s instead of having the slight upward bias shown on the following chart.

At a superficial level the SPX/gold ratio's performance over the past few years looks most similar to its performance during 1975-1976, but, again, this is largely a result of gold's price being fixed prior to 1971.



The prevention of an upward trend in the gold price during the 1960s and the subsequent compression of a secular bull market into the space of only 9 years gets in the way of direct chart-based comparisons between the current secular gold bull market and the preceding one. That partly explains why such comparisons have been unreliable, although it should always be kept in mind that there are going to be significant differences between the current cycle and any previous cycle.

Current Market Situation

Gold fell on 11 of the 12 trading days ending 17th March. It then rose for 7 trading days in a row, fully retracing its preceding near-vertical decline and creating a classic 'V' bottom. Last Friday was the first down-day since the day before the 18th March FOMC Statement, although Thursday's reversal following a spike up to $1220 signaled that a near-term top was in place.

Last Thursday's upward price spike appeared to be a reaction to news that Saudi Arabia's airforce was attacking targets in Yemen. The idea that gold should be bought in response to military conflict remains a popular superstition, despite the fact that the gold-price gains that are made on the back of such developments are never sustained.



We suspect that gold just completed the first stage of a multi-week rebound, with several days of consolidation in the $1175-$1205 range possibly lying ahead. The 200-day MA near $1240 remains a viable target for the rebound.

Gold Stocks

To date, the HUI's rebound from its March low has been weaker than the rebounds in gold and silver. Whereas gold managed to reach its 50-day MA before pulling back and silver managed to exceed its 50-day MA, the HUI didn't get close to its 50-day MA (the blue line on the following chart) and wasn't even able to accomplish a solid break above its sharply-declining 20-day MA (the black line on the following chart).



The lacklustre performance of the gold-mining sector last week doesn't offer any clues as to what the coming week holds in store, although it is consistent with the view that gold will probably break below last year's low before beginning a major rally.

With the gold-mining indices trading near multi-year lows there are few signs of meaningful strength among the individual gold stocks. However, as is always the case, many individual stocks within the sector are positioned differently from the indexes that represent the sector. Below are the charts of two that we follow closely.

Unlike the HUI, which turned lower last week from well below its 50-day MA, Endeavour Mining (EDV.TO) ended the week slightly above this moving average and not far from a 5-month high. However, there appears to be enough resistance just above the current price to prevent this stock from making significant additional progress without some help from the gold-mining indices.



McEwen Mining (MUX) hasn't been as strong as EDV, but it did make it to the 50-day MA before reversing course last week. A daily close above the 50-day MA would now suggest a near-term target of US$1.40, although, as is the case with EDV, MUX probably won't make significant additional progress without some help from the gold-mining indices.



The Currency Market

The VGK/SPX ratio, our favourite measure of how European equities are performing relative to US equities, broke out to a new high for the year last week. This accentuated the divergence between relative equity performance and the euro that began to develop in early-January.



It's possible that the small but not trivial risk of a Greek exit from the euro-zone ("Grexit") is getting in the way of a decent euro rebound. On the surface it could seem like the euro-zone would be stronger without Greece, but this ignores the interconnectedness of banks and the extent to which the ECB and other supranational organisations are exposed to Greek government debt. It also ignores the risk of default that would immediately have to be priced into the bonds issued by other 'peripheral' euro-zone governments. In particular, if the Greek government were permitted to default on its debt, there would likely be a rush to get out of the bonds issued by Portugal, Spain, and a few other euro-zone governments.

Bear in mind that at no point over the past few years has Greece or the government of Greece been bailed out. The holders of Greek government bonds were the ones who were bailed out at the expense of taxpayers and savers throughout the euro-zone. The Greek government ended up being saddled with a vastly greater debt burden, the people of Greece ended up with higher taxes, and people throughout the euro-zone were indirectly put on the hook by virtue of the transfer of Greek government default risk from private banks and other bondholders to public institutions such as the ECB. This created the perception that buying the bonds of bankrupt euro-zone governments was risk-free. Something that challenges this perception could create a financial crisis.

The probability of "Grexit" happening within the next few months is small, but it isn't zero. If it does happen it will, we think, precipitate a banking, debt and financial-market crisis in the euro-zone that results in panic buying of both the US$ and gold.

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 27th March 2015:

[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) advised that it plans to spend $2M in 2015 on exploration near the deposits that form Phase 1 and Phase 2 of the Asanko gold mine in Ghana. This is a small budget considering AKG's financial resources and the high probability that there's a lot more gold to be discovered on the company's existing tenements, but it's a reasonable budget considering the market environment and the importance of remaining focused on mine engineering and construction.

  *Dalradian Resources (DNA.TO) published its financial results for the year ending 31st December 2014. According to these results, the company had C$30M of working capital at the end of last year.

Accounting for spending and the C$19.6M raised since the end of last year, the company probably now has C$45-C$47M of working capital. This will be more than enough to fund 2015's costly work program involving drilling, bulk sampling and detailed mine planning, which aims at having a completed PFS before year-end.

  *Golden Star Resources (GSS) reported a large reduction in P&P reserves and a small increase in M&I resources across its projects in Ghana. The large reduction in reserves was due to a change in mining strategy at the Wassa project (from open-pit to open-pit plus underground), the removal of the Prestea Underground reserves pending the completion of a revised FS in mid-2015, and some parts of the Bogoso resource being rendered uneconomic by the lower gold price.

GSS also reported the results of the FS for the new Wassa mining strategy, which involves changing the mine from open-pit to a combined open-pit and underground operation. The FS follows up on the PEA published last September.

At the $1200/oz gold price assumed in the study it makes economic sense to add the underground operation to the existing open-pit mine at Wassa. The result would be a lower-cost and more profitable operation with a higher IRR. Financing is the problem. Although the estimated pre-production capex for the transformation is only about $40M, GSS does not appear to have sufficient balance-sheet strength to fund this capex. That being said, orders have apparently been placed for some of the underground equipment, so GSS's management obviously has something in mind for the financing.

The precarious condition of GSS's balance sheet makes it too risky for new buying at the current gold price. For this stock to be worth the risk there would probably have to be either a sustained rise above $1300/oz in the gold price or a substantial injection of new capital.

  *Pilot Gold (PLG.TO) published its financial results for the year ending 31st December 2014. According to these results, the company had US$17.8M of working capital at the end of last year.

PLG's 2015 exploration budget is for expenditure of $1.6M at the Kinsley Mountain project in Nevada, $4.6M at the TV Tower project in Turkey and $0.3M at the Halilaga project in Turkey. It therefore has more than enough cash to fund this year's work program, although the company will probably look for an opportunity during the second half of this year to top up its treasury.

  *Pretium Resources (PVG) provided us with the most important company-specific news of the week when it announced that it has been issued an environmental assessment certificate for the Brucejack gold project by the British Columbia Minister of the Environment and Minister of Energy and Mines. This means that PVG now has Province-level environmental approval for the Brucejack project. Federal approval is still pending. If all goes according to plan, Federal approval will be obtained during the second quarter of this year.

  *Timmins Gold (TGD) advised that shareholder meetings to approve the takeover of Newstrike Capital (NES.V) will take place on 29th April.

TGD also advised that the C$10M private placement that was originally expected to occur in conjunction with the approval of the NES takeover has been cancelled "due to current market conditions". In other words, with the stock price below C$1 the investors that had previously agreed to buy shares at C$1.25/share balked and the company let them off the hook.

  *True Gold Mining (TGM.V) announced that it has found a new CEO. TGM's new CEO is Christian Milau, who, prior to last week, was the CFO of Endeavour Mining.

This is a good hire by TGM, because as part of EDV's senior management team Mr. Milau had success in doing exactly what TGM's previous CEO failed to do, which is to work with all stakeholders to ensure that a new mining development does not run into any governmental or community-relations obstacles. Also, Milau's decision to make this move is a knowledgeable vote of confidence in the potential of TGM's Karma project, because the decision would only have been taken after doing careful study of the situation on the ground in Burkina Faso.

Despite this positive development, we would continue to hold off on new buying of TGM shares until it is clear that the reasons for the suspension of construction activities have been addressed and a construction re-start date has been confirmed.

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) AKG (last Friday's closing price: US$1.50).

2) EDV.TO (last Friday's closing price: C$0.61).

3) EVN.AX (last Friday's closing price: A$0.84).

4) MUX (last Friday's closing price: US$1.03).

5) TGD (last Friday's closing price: US$0.75).

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

Chart Sources

Charts appearing in today's commentary are courtesy of:

http://stockcharts.com/index.html



 
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