Weekly Market Update for
17th June 2019
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,
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
began in 2016-2017.
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
(Last update: 11 September 2017)
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.
update: 11 September 2017)
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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
True Fundamentals Model (TFM)
Gold (US$ Price)
Bullish (04 Jan 2019)|
US Equity (SPX)
Bearish (19 Apr 2019)
Currency (Dollar Index)
Neutral (15 Mar 2019)
Bearish (01 Jun 2018)
Last week's posts at the TSI Blog
The "true fundamentals" are still in gold's favour
Summary of current
1) The Dollar Index (DX) has
signaled a downward trend, but it could be a while before the new downward
trend becomes consistent. A counter-trend rebound is currently underway.
2) The US$ gold price looks set to break above resistance at $1350
within the coming several weeks, perhaps following a correction to the
3) The gold mining indices have extended their
short-term rebounds and are close to resistance that probably will hold
for at least three weeks. These rebounds should evolve into something more
than counter-trend reactions IF the US$ begins to trend downward with
4) The US stock market remains in correction mode. The
SPX could make a marginal new all-time high within the next three weeks,
but we expect that it will test its early-June low within the next three
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.
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%.
Late last month the TSI web site
was moved to a new server, leading to a small number of subscribers
experiencing access problems.
As noted in the 5th June Interim
"Most problems reported to date have come from
subscribers using Apple computers, but there also were a few reported
issues from subscribers using other PCs. In these cases the problem
manifests as a request to confirm a "Security Certificate" and "HTTP Error
403.16". A potential solution is the same -- try using a different
browser. For example, if you have been using Chrome, then try using
Firefox. Also, when the "Security Certificate" request pops up, click
"Cancel" (that is, don't click "OK"). Based on info received from a couple
of subscribers, this can enable access."
Neither we nor our
web hosting company can duplicate the reported problems despite testing
almost every conceivable device/browser combination, making it very
difficult for us to determine the best solution. However, as far as we
know, nobody using the Firefox browser has had a problem with access since
the website relocation.
Please let us know if you are still
experiencing problems accessing the site and which browser you are using.
The Fed's next
According to the prices of Fed
Funds Futures (FFF) contracts, the market currently expects the Fed to
make three (three!) rate cuts before the end of this year and to make its
first rate cut at the FOMC meeting scheduled for July 30-31. The Fed is
not expected to make any adjustments to its monetary levers at the FOMC
Meeting scheduled for this coming Tuesday-Wednesday, but this week's
meeting will be important because if the Fed is going to start a rate
cutting program in July then it will want to lay the groundwork via the
wording of its 19th June post-meeting statement.
With the market
already having priced-in three rate cuts it will be difficult for the Fed
to over-deliver on the side of monetary accommodation. It's more likely
that the Fed will under-deliver, that is, that the Fed will cut rates by
less than the market currently expects, although there is a realistic
chance that the Fed will generate some excitement by making its first move
a 0.50% cut as opposed to the expected 0.25% cut.
What the Fed does
will be largely determined by what the stock market does. If the stock
market performs the way we expect then there will be one or two rate cuts
before the end of September, but none during the subsequent several
months. That being said, we admit to be being surprised by how quickly and
completely the Fed capitulated (abandoned its "monetary policy
normalisation" plan) over the past 6 months.
Taking into account
the performances of the US stock market and economy, it is more than a
little strange that almost everyone now expects a rate-cutting program to
get underway in the near future. As far as we can tell, the main cause of
this unusual (to put it mildly) set of circumstances is the inversion of
the yield curve.
Almost everyone, including everyone in a senior
position at the Fed, knows that a yield curve inversion precedes a
recession. Armed with this knowledge, the Fed believes that it can stave
off a recession by taking action that ends the inversion, that is, by
taking actions that steepen the yield curve.
However, an inverted
yield curve doesn't cause a recession; it's just a symptom that a
monetary-inflation-fueled boom is 'long in the tooth'. Therefore, the Fed
can't prevent a recession by taking actions that eliminate the curve
inversion. This would be like a doctor trying to cure a life-threatening
disease that has high temperature as a symptom by immersing the patient in
cold water. The patient might feel better for a short while, but the
disease will remain.
A bottom, but not THE
bottom, for oil
Last week the oil price tested its early
June low and then turned upward on Thursday. The catalyst for the up-turn
was news that two oil tankers had been attacked in the Gulf of Oman, but
we suspect that the price would have reversed upward without the help of
Last week's successful test of the preceding week's low
has created a 'double bottom' that probably will hold for at least a few
weeks. However, the lack of strength in the oil market in the face of a
strong stock market over the past fortnight suggests that oil's final
correction low is not yet in place.
If oil is going to take out its
early-June low then the most likely time for it to do so will be after the
S&P500 Index (SPX) has dropped to the vicinity of its own early-June low.
The vanadium price went up!
In the 27th May
Weekly Update, under the heading "The most relentless decline ever", we
"The price of vanadium pentoxide (V2O5) in Europe has
not had an up-day since 26th November of last year. Apart from 30-40
'unch' days, since then it has dropped on every trading day. We've never
seen anything like this."
The "most relentless decline ever"
ended on 4th June. Since then, the vanadium pentoxide price in Europe has
edged up from US$7.50/pound to US$8.15/pound.
There are no technical or sentiment indicators that can give us clues
regarding what to expect from the vanadium price over the next several
months. That's because price is determined by supply from the mining
industry relative to demand from industrial users (steel manufacturers,
mostly). We suspect that supply from the mining industry is roughly the
same now as it was a year ago and won't change by much over the next year,
so the price will be driven by changes in industrial demand.
guess is that the industrial demand for vanadium will increase over the
next six months due to the rebuilding of stockpiles that were drawn down
over the past six months and new Chinese rebar standards coming into full
effect. This should result in an upward bias in the price, but not the
sort of spectacular rally that occurred in 2018.
If you don't have
any exposure to vanadium it would be reasonable to add some. In this
regard it's worth revisiting Largo Resources (LGO.TO), a profitable
vanadium producer operating the Maracas mine in Brazil.
In the 22nd
April Weekly Update we wrote that due to its recent price action LGO had
become a worthwhile moderate-risk speculation. At that time the LGO price
was in the C$1.60s and the vanadium price was around US$12. Despite the
vanadium price now being about 30% lower, the LGO price is almost 20%
higher and clearly has broken upward from the channel drawn on the
following daily chart.
We think that LGO would be a good candidate
for new buying if it were to pull back to near its 50-day MA (currently at
C$1.76). Also, Prophecy Development Corp. (PCY.TO), an exploration-stage
vanadium miner and a member of the TSI Small Stocks Watch List, would be a
reasonable speculation below C$0.20.
A new 50-year low for platinum
Last week the
platinum price made a new 50-year low. Not in US$ terms, obviously, but in
gold terms. Also, the platinum price is in the bottom third of its
multi-decade range relative to the silver price. Therefore, investors who
are accumulating physical metal with the aim of holding for at least two
years should favour silver over gold and should favour platinum over both
silver and gold.
Based on the price action there is a risk that the
US$ platinum price will test or spike below its 2018 low near $750 prior
to a long-term reversal, but the remaining downside potential is very
small relative to the upside potential.
A weekly close above the
April-2019 high ($920.40) would confirm a long-term reversal to the
The Stock Market
The S&P500 Index (SPX) made a
new rebound high last Monday and then consolidated over the rest of the
week. It is about 2% below its early-May all-time high, but the lower
section of the following daily chart shows that the NYSE Advance-Decline
Line (ADL), a measure of market breadth, made a new all-time high last
Thursday. As a result, there is now a bullish divergence between the ADL
and the SPX.
The ADL's new all-time high is evidence that the bull
market is not over, but it doesn't preclude another sharp multi-week
decline along the lines of what happened last month.
The TSI Put/Call Indicator (TPCI) is shown in the bottom section of
the following chart. It generated a new sell signal on Friday 14th June.
Such signals were rare prior to last September, but over the past 9
months there have been five -- a buy signal in late-December and sell
signals in late-September, February, April and now June. On the following
chart, green arrows mark the buy signals and red arrows mark the sell
A TPCI signal identifies the sort of sentiment extreme
that often, but not always, occurs near a significant turning point in the
price. All signals over the past two years were useful with the exception
of the sell signal in February-2019.
Last Friday's TPCI sell
signal means that even if the SPX gains some additional ground over the
coming three weeks, it probably will trade well below its current level
within the next three months.
The new high for the ADL suggests that there will be some additional
upside prior to the start of the next tradable decline, while the TPCI
sell signal warns that the direction of the next substantial move will be
It would be reasonable to average into bearish speculations
in anticipation of a meaningful decline getting underway by mid-July. For
traders using options to profit from a market decline, the options should
have expiry dates of September or later.
significant US economic events
1) The most important events
(to the markets) are shown
in bold. 2) A list of global economic events can be found
No important events scheduled|
FOMC Statement and
Powell Press Conference
Q1 Current Account
Existing Home Sales
Gold and the Dollar
Gold versus the Yen
Our most recent
comment on the gold-Yen relationship was in the 27th May Weekly Update. At that
time we concluded: "The gold-Yen comparison...shows that the Yen continues
to trade in a positive manner, suggesting that a gold price rebound will begin
The gold price subsequently gained more than $70 in quick
The following chart shows that gold and the Yen are now back into
line with each other, with both having tested their highs of the past 6 months.
Consequently, there currently are no divergences/non-confirmations or other
hints in this chart as to what the future holds in store. What we can say is
that if one of these markets breaks out to the upside over the weeks ahead, the
other is almost certain to follow.
Over the past several
weeks we described gold sentiment as supportive, albeit not in a big way. We now
view it as neutral, although an argument could be made that it represents a
The current sentiment situation could be viewed as a
serious threat because a) the total speculative net-long position in Comex gold
futures (the inverse of the blue bars on the following chart) has risen to its
highest level since March of last year, and b) a large multi-month price decline
began in April of last year.
The big difference between the current situation and the situation in
March-2018 is the fundamental backdrop. Gold's true fundamentals are bullish
now, but were bearish then.
When the fundamental backdrop is bullish, the
level of speculative optimism can get much higher before it becomes a major
concern. That's why the current sentiment situation doesn't point to substantial
downside price risk.
The Price Action
On Friday morning in the US the gold price spiked above resistance at $1350
to the bottom of the longer-term resistance range that begins in the low-$1360s
and extends to the high-$1370s.
When a market that is short-term
'overbought' breaks above resistance, the breakout often doesn't 'stick'. That
was the case with gold on Friday, as all of the early gains were given back and
the price ended the day essentially unchanged.
We think it's appropriate
to view Friday's price action as part of a correction that began on Monday 10th
June and that could take the price down to around $1310 before coming to an end.
The key word here is "correction", implying that we expect nothing more bearish
than a partial retracing of the recent rally prior to the resumption of the
Silver continues to lag gold and will be at risk
of dropping to long-term support at $13.50-$14.00 until gold makes a sustained
break above $1350. However, if gold stays in an upward trend then silver
eventually will make a catch-up move. That could happen as soon as next month,
but it might not happen until next year.
Uncertainty regarding the timing
of silver's catch-up move is why we have chosen to participate in the coming
rally via SLV options with a January-2021 expiry date rather than, say, a
January-2020 expiry date.
The 1980s model we've been using predicts a decline by
the HUI to a final bottom in early-2020, with an intervening 1-2 month rebound.
This model lines up the 2016 low for the HUI with the 1982 low for the Barrons
Gold Mining Index (BGMI). As evidenced by the following chart, the rebound of
the past two weeks is consistent with this model.
A solid break by the
HUI above its February-2019 high (180.2) would be inconsistent with the model
illustrated below. A weekly close above 185 would do it.
There is another 1980s comparison that suggests a far more bullish
short-term outcome than the one suggested by the above chart. This model
involves lining up the 1984 top in the XAU with the 2016 top in the HUI and is
If we line up the charts as stated above, the HUI's
price action of the past 12 months looks very similar to the XAU's price action
between early-1986 and early-1987. To be more specific, the HUI's multi-month
plunge into its September-2018 low and subsequent recovery has a lot in common
with the XAU's multi-month plunge into its July-1986 bottom and subsequent
recovery. If this comparison is relevant then there could be some consolidation
over the next few weeks, but three months from now the HUI will be a LOT higher
than it is today.
Therefore, comparisons with the 1980s price action suggest two different,
but equally interesting, possibilities. One is that the start of a powerful
rally is still 6-8 months away. The other is that a powerful rally is underway,
with the best part of the rally likely to happen over the next three months.
The Recent Price Action
we concluded the Gold Stocks discussion in last week's Interim Update:
have no opinion about the direction of the gold-mining sector over the next few
days. It's possible that a multi-week top was put in place last week and that
GDX has just completed a successful test of the top, in which case the next 3-5
day move will be to the downside. It's also possible that a multi-week top is
not yet in place and that GDX will move quickly up to the vicinity of its
February high ($23.50-$24.00) before commencing a short-term correction."
The market opted for the latter possibility, with GDX trading as high as
$23.67 on Friday before reversing course.
At this stage we don't know for
sure that a correction has begun, but even in the ultra-bullish short-term
scenario reflected by our second 1980s model there would be some corrective
activity over the next few weeks. The risk is that the original 1980s model is
still in play.
Friday 14th June the HUI didn't quite make it to the February high, but it got
within 3 points before reversing.
a normal correction within the context of a short-term upward trend, the 50-day
MA would hold. Therefore, the performances of GDX and the HUI relative to their
respective 50-day MAs during the next correction should tell us what we are
We think that the currency market holds the key to what
happens in the gold sector over the next few months. In particular, a large
extension to the gold sector's recent up-move probably will require pronounced
weakness in the US$.
The Currency Market
following chart shows that the Dollar Index (DX) broke below short-term lateral
support at 97.0 at the end of the week before last and then rebounded last week.
The DX's 7th June breach of support should be viewed as preliminary evidence
of a downward trend reversal, but, as we noted a week ago, there is more
important support slightly below the 7th June low. This support is defined by
the 200-day MA and the upward-sloping trend-line drawn on the next chart. The
trend-line appears to be the lower boundary of a 'wedge' that has formed over 10
We think that the DX's next 5-point move will be to the downside, but even
if we are correct it's possible that the 'wedge' will develop for a few more
months before the DX starts to trend downward with conviction. Furthermore, an
extension of the 'wedge' could involve a move by the DX to a marginal new
A multi-month extension of the DX's 'wedge' would
frustrate both US$ bears and US$ bulls. Furthermore, it's a plausible
currency-market scenario that could prompt a short-term shift away from anti-US$
speculations such as gold-mining stocks without implying any improvement in the
US dollar's intermediate-term prospects.
on Stock Selections
Notes: 1) To review the complete list of current TSI stock selections, logon at
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
news/developments for the week ending Friday 14th 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]
Resources (ALK.AX) reported another round of interesting results from
exploration drilling in the vicinity of its Tomingley Gold Operations (TGO). As
stated in ALK's press release:
"Significant gold mineralisation has
been confirmed by RC and diamond core drilling between the Roswell and San
Antonio prospects, showing a continuous strike length of 1,600 metres of gold
mineralisation located within 4 kilometres south of the Tomingley Gold
Operations (TGO) processing facility. Together with the El Paso prospect there
is a cumulative strike length of 2,500 metres of gold mineralisation within 8
kilometres of TGO."
The latest results included 78 metres grading
3.51g/t Au from 214 metres and 24 metres grading 3.84g/t Au from 174 metres.
The following map indicates the positions of the targets being drilled in
relation to the TGO.
This is good news as it is further evidence of the potential for a multi-year
extension to the TGO's life.
ALK is in the 'sweet spot' at the moment,
because there simultaneously is increasing demand for gold-related investments
and REE-related investments (ALK offers exposure to gold and REEs). However and
as we've stated in the past, the dual focus on REEs and gold is far from ideal
on a longer-term basis. The dual focus (or lack of focus to put it more aptly)
probably explains the frustratingly-slow pace at which the Dubbo Project (the
host of the REE resource) has been moved forward.
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) AAU (last Friday's closing price: US$0.52)
2) KBLT.V (last Friday's closing price: C$3.47)
3) OIH (last Friday's
closing price: US$13.17)
4) SBB.TO (last Friday's closing price: C$1.16)
5) TK.V (last Friday's closing price: C$0.30)
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.
TSI Small Stocks Watch List (SSWL)
The SSWL is a list of
stocks that are too risky and/or illiquid to be considered for the TSI Stocks
List. We don't track these stocks closely in the TSI commentaries, but they have
favourable risk/reward ratios (in general: high risk versus much higher
potential reward) and could be of interest to speculators who are able to do
their own due diligence. Last week we commented briefly on the progress of three
members of the SSWL and today we are doing the same with two others.
*Artemis Resources (ARV.AX) has several "irons in the fire",
but the only one of real interest to us is the 50/50 JV with Novo Resources
(NVO.V) at the Purdy's Reward conglomerate gold prospect. Purdy's Reward is a
small but significant part of NVO's Karratha gold project in Western Australia.
Speculation regarding the size and economics of the Karratha project pushed
NVO's stock price above C$8.00 and ARV's stock price to almost A$0.60 in late
2017, but the air has since come out of that bubble. Despite the recent increase
in demand for gold-related investments, NVO's stock price is now around C$2.00,
which is close to its lowest level of the past 2 years, and ARV's stock price
has collapsed to only A$0.033.
The Karratha project isn't dead; it has
just been delayed by technical challenges that are in the process of being
addressed. The challenges and the way they are being addressed were outlined in
recent NVO press release. According this release, planned work at Comet Well
and Purdy's Reward includes the preparation for and subsequent implementation of
a 100,000-tonne large-scale bulk sample. With regard to timing, NVO states: "...the
large-scale bulk sample is contingent upon resolving technical challenges with
mechanical sorting technology and approval to take a 100,000 tonne sample.
Potential solutions will be trialed during this 2019 field season at Egina,
where Novo plans to process a number of large samples (each circa 100 tonnes)."
This suggests that the large-scale bulk sample, which is needed to properly
assess the project's potential, won't happen until next year at the earliest.
When it does happen there could be another round of rampant speculation in both
NVO and ARV, but until then ARV could be dead money.
We have a very
small position in ARV to which we recently added. This as a Vegas-style bet that
we will hold in case something exciting happens with the Karratha project.
*Cellcube Energy (CUBE.CSE) was added to the SSWL
last October with the sole purpose of gaining access to the V23 Resource Corp.
spin-out. V23 owns the Bisoni exploration-stage vanadium project in Nevada,
which is next to the Gibellini vanadium project owned by Prophecy Development
The effective date for the spin-out was 4th January 2019.
CUBE shareholders at 4th January will receive one share of V23 for every two
shares of CUBE they held on that date.
V23 is being listed via a reverse
takeover (RTO) of Regency Gold (RAU.H). This hasn't happened yet, but it should
happen soon. Prior to completion of the RTO and the name change to V23 Resource
Corp., the new company plans to raise C$2M at C$0.25/share. We estimate that the
new company will have about 78M shares outstanding when it begins to trade,
giving it a market cap of around C$20M at the financing price.
be a good speculation at C$0.25 or lower, but at current prices (C$0.21 for PCY
and assuming C$0.25 for V23) we think that PCY would be the better speculation
due to the more advanced stage and superior metallurgy of the Gibellini project.
Charts appearing in today's commentary
are courtesy of: