The snippet from last week’s Maven Letter below goes through my sense of the big picture in the wake of a crazy week. Since this was published fix days ago the geopolitical noise has quieted, Barcelona was hit with a terrifying attack (I was on that exact street only 6 weeks ago), and US markets have declined a few days in a row, which is notable given that this long bull market has until now always bounced right back from declines of 1.5% or more like we saw on Thursday.
Maven subscribers have been in on some great stocks of late. I’m just finishing off a summary of those moves that you will see soon – yes, to encourage you to subscribe to The Maven Letter! Macro commentaries like I send out in these Maven Mondays are interesting and help formulate a big picture perspective, but to make money investing in exploration and mining stocks requires action, requires timed buying and selling of active stocks, and that is precisely what I cover in the letter.
If you’d like to try the Maven Letter on for size, click here to sign up for a free trial. Or if
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Sometimes it feels like far more than just five trading days must have passed since I last wrote because just so much can happen.
This time the ‘much’ included a conference and three site visits in the Yukon for me, a series of weak economic data points for the US, and a gold sector – metals and miners – that turned up.
The Yukon was, once again, a great trip. Most importantly: after managing to avoid the SourToe Cocktail for my five previous trips (a feat of which I was quite proud!) this time the crew caught me and I had no choice.
What is the SourToe Cocktail you ask?
The legend of the first “sourtoe” dates back to the 1920’s and features a feisty rum-runner named Louie Linken and his brother Otto. During one of their cross-border deliveries, they ran into an awful blizzard. In an effort to help direct his dog team, Louie stepped off the sled and into some icy overflow—soaking his foot thoroughly.
Fearing that the police were on their trail, they continued on their journey. Unfortunately, the prolonged exposure to the cold caused Louie’s big toe to be frozen solid. To
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For those who assess exploration stocks, summer is a study in contrasts. Summer doldrums are a very real thing: investors go on vacation, gold makes a seasonal move down, volumes shrink, and prices slide.
But summer is also field season in the northern hemisphere. So analysts like me spend summer visiting projects, kicking rocks to really understand what is known and theorized and planned, so that when results start to flow we know what they mean.
It means site visit season takes me away from the office during the dog days of summer. It works out well, really.
I certainly continue to track the sector. The editorial in last Wednesday’s letter outlined my latest thoughts and is included below. Additional articles in the letter (not included here) commented on silver, zinc, Indian gold demand, and some recent reminders of jurisdictional risk.
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The Not-So-Golden Days of Summer…Might Be Ending Soon
(Snipped from The Maven Letter: July 12, 2017)
Gold certainly did not behave itself while I was away. I tried to disconnect from work but I still impulsively checked the gold price every day. And each day, I wished more and more that I had better impulse
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The biggest issue in the gold sector right now is lack of leverage. Gold has had a great month, gaining 5.2% since May 7th, but gold stocks have barely provided leverage to those gains. The ETF of gold majors, GDX, is up just 8.9% and the junior ETF brother, GDXJ, is up just 11%.
Leverage is the fuel that feeds investment in this volatile sector. Without leverage, why would any of us invest in gold stocks? Gold alone is risky enough, what with it reacting to such a range of economic and political events. Gold stocks add exploration, development, or mining to that equation, multiplying the risk.
The only reason gold bulls invest in stocks, then, is because miners are supposed to provide leverage to the metal’s upside moves. But of late that leverage has been missing. What gives?
I think there are two reasons.
One is a bit of stubborn disbelief. Gold investors are so used to Sell in May and Go Away, so used to a market that slides through the summer, that they are struggling to believe that gold’s gains are real. It doesn’t help that politics have played a major role in gold’s recent gains.
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Before discussing the latest news, let’s set the stage by going through the key forces on gold right how.
- Confidence. From Trump to market overvaluation, from diverging hard and soft data to dollar declines, there are many factors feeding concerns about confidence at the moment. An actual failure of confidence has the potential to end the bull market, erode the dollar, and shoot gold up. Ongoing confidence concerns are less dramatic, but would still generate sustained support for gold.
- Interest rates. A month ago the market had almost completely priced in a mid-June rate hike. Two weeks ago those odds had fallen to only 60%. Today they’re back above 80%. This matters: gold will decline into an expected rate hike and then rise out of it. If the hike does not happen, my take is that gold will still do well (the Fed not hiking means economic confidence is low, which supports gold via point #1) but the reaction would not be as immediate.
- Seasonality. Gold declines in the summer, especially early in the summer season. Gold equities lever this decline. A mid-June rate hike would cut the summer doldrums short.
Confidence is the least tangible but
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Last week was a busy week here in Vancouver. On May 5-6th we had the Metals Investor Forum, which again was a highly informative event.
I know I’m biased because I help put the event together, but I really appreciate the MIF format. For those unaware, the conference brings together a group of subscriber-supported newsletter writers, the key commonality being that none of us take money from companies for coverage. The writers then invite companies they follow (i.e. own) to present.
The result is a high caliber group. I was very familiar with more than half of the companies there but I made sure to learn about the others, because if they earned a recommendation from one of my peer writers then they offer something worth investigating. As a result I left the event very interested in three new ideas.
Of course, it isn’t just the companies that make the conference great. The attendees are a highly informed and engaged group, which makes for very good questions and conversations.
And each of the newsletter writers spends 20 minutes at the podium explaining what opportunities and drivers they currently see in the market.
Those presentations
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As metals investors early in a new bull market, we endlessly assess metal moves and worry that the market is going to fail. And so we should: critiquing one’s thesis is essential.
But I would point to two current market themes that suggest there is still a lot of interest in mining.
The first is price moves on discoveries. I can’t point to a zillion examples because discoveries, by definition, are rare. But if you haven’t seen it already, take a look at Camino Minerals’ (TSXV: COR) share price.
Yup, that’s a price that shot from $0.35 to $1.81 in three days.
The cause was a discovery hole at Camino’s Los Chapitos project in Peru. Known was a zone of oxide copper mineralization at surface; unknown was what lay underneath. Camino drilled through the oxide and through a layer of magnetite into 106 metres of sulphide mineralization averaging 1.3% copper.
Eighteen months ago, I would wager the exact same hole would have elicited nothing more than a yawn from investors. The market was dead. Today it boosts the stock six-fold. Investors are engaged.
The second theme is major moves, by which I mean moves by mid-tier
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After a stellar 80% gain in 2016, the galvanizing metal has stepped back so far in 2017.
The obvious question: is the run over and the price now headed back down, or is this a breather in a market that still has legs?
I think it’s the latter, though with a caveat.
Zinc speculators are rightfully wary of short-lived price pops because the only zinc run in recent decades was brief. It happened in 2006, when zinc ran from $0.60 per lb. to over $2 per lb. in a year. Less than two years later, the price was right back where it started.
That run was predicated on a supply shortage but was really fueled by speculation. Remember the context: in 2006 and 2007 the precious metals markets were rocking, mining markets were hopping, uranium had been on a tear, copper was killing it – the audience was excited to hear about another metal with opportunity and so the run took on a life of its own.
This time the situation is much more fundamental. A series of major mine closures over the last few years has cut into
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Last week I was adamant: gold was butting up against technical and emotional resistance at $1250-$1262 per oz., so to be confident that the spring run still had legs I needed to see the yellow metal break up through that resistance. If gold miners also moved up, erasing some of the lag they’ve shown in gold’s recent move, I would be even more confident.
And if gold failed to break up through resistance, I would consider the spring run done.
So what has gold done? Stayed smack in the middle of the resistance band.
Hence my title: is sideways movement up or down?
The only way to answer is to dive a little deeper.
Take today’s action for example. The day started with a very strong ADP jobs report. ADP always releases its jobs numbers a few days before the official government numbers; they differ only in that ADP counts private sector employees only while the government includes its employees. The expectation was for a disappointment, if for no better reason than that numbers surprised to the upside last month.
Well, expectations were wrong. Companies added 263,000 jobs in March, well above the 185,000 expected. The
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The most important theme right now – indeed, for 2018 – is that precious and base metals are moving up together. They are doing so along with other commodities (oil, agriculturals) and the moves are all grounded by bullish fundamentals and valuations. And all of that bodes well for the next 50 weeks.
The gains aren’t going to continue non-stop all year, but the fact that metals – commodities as a whole – are gaining together matters for several reasons.
First, multi-metal rallies always create stronger equity gains than single-metal markets. This is something I’ve been saying regularly for over a year now. A gold rally attracts gold speculators; a copper move brings growth-oriented investors; but a multi-metal market becomes a story of its own wherein momentum feeds more momentum, creating greater gains.
Second, the timing is right within the greater economy for metals to make a move. The multi-year stock bull market is based in slow but steady economic growth. That growth has been so slow at times that it seemed non-existent, but patience is starting to pay. Several of the world’s major economies are now looking quite good, from the US to Europe, Canada to Japan.
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