Gold has been gaining nicely in recent weeks. The biggest driver has been the US Dollar. The greenback has been sliding since almost reaching 95 in mid-November; it sits at 92.25 today.
That loss helped propel gold’s seasonal rally, which got underway as soon as the Federal Reserve raised rates on December 13th (just as predicted).
It’s a nice seasonal move, for sure! The question is how much more is yet in store and that is tough to answer given the number of factors in play. The below is nothing close to a complete list of the forces influencing gold at the moment:
- Equities: investors love to watch the first trading days of the year as an indication of how the market will perform over the year. There is some validity to the practice – if US equities are up on the second trading day of the year (they were up today), they often end the year up – but I feel like that’s due as much to chance as cause! More generally, investors remain incredibly optimistic about US equities and complacent about risks, which suggests the bull market will remain a bull market for some
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Today’s Maven Monday comprises two short articles clipped from last week’s Maven Letter. The rest of the letter focused on identifying stocks offering the best leverage should the metals markets do what they usually do and go on a run to start the New Year.
To get those ideas, become a Resource Maven subscriber!
From The Maven Letter: December 6, 2017
The Copper Argument
BHP Billiton released a nice article last week summarizing its bullish view on copper. Describing the red metal as “an extremely attractive commodity,” the company gave ten reasons – five related to supply, five related to demand – supporting its pro-copper stance.
I thought it a nice, clear argument that captures all the pertinent points. To me, copper is the obvious bet in the electrification gamble. Lithium, cobalt, graphite – these commodities certainly offer opportunity, but between opaque markets, difficult metallurgy, oligarchic control, and the potential for demand to shift away these commodities carry a lot of
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Gold is staying steady and copper and zinc are holding their ground, but all anyone’s talking about are cryptocurrencies. I am among the many who (1) wish I had bought in ages ago, (2) would have exited well below current levels, and (3) know this is undoubtedly a bubble, but as with all bubbles it’s impossible to know how large it will grow before it bursts.
Is Bitcoin stealing gold’s thunder? Yes. Certainly some of the funds that have flowed into cryptos over the last year came from investors seeking diversification, an investment that balanced the risk of a major market crash, a safe haven. And those investors would likely have put their money into gold had cryptocurrencies not been born.
But I think safe haven buying is only a drop in the Bitcoin bucket. Investors are being drawn in far more for the novelty, for wanting to be involved in the next big thing, and simply for the profits than they are for conventional safe haven arguments. In other words, I think only a small fraction of the funds invested in cryptos would otherwise have landed in gold.
There is also, though, the competition factor. When gold does
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Last week’s Maven Letter had a series of short articles summing up the major themes I’m seeing in the mining markets today. Most of those notes are included below.
The Letter then continued with Part I of a complete portfolio review focused on identifying tax loss buying opportunities. Yes, you read that right: in my view, the selling focus this time of year is backwards and instead investors should be looking for stocks to buy.
Buys can either be fundamental value bets that are available at 52-week lows right now or can be seasonal trades – stocks that are cheap now but that will offer leverage to the mining sector’s reliable Jan-Feb run. The buys in the second category are trades: prepare to sell in February after locking in 20 to 30%.
Enough chatter: on to the goods! As always, if you enjoy these Maven Monday articles consider subscribing to The Maven Letter here.
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From The Maven Letter: November 15, 2017…
Busy Busy Days
It’s hard to explain how busy things are right now.
For one, it seems strange that business would be so busy when the markets are so
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US markets continue to ramp higher, with all three major indices – the S&P, Dow, and Nasdaq – notching new all-time highs today after minutes from the last Federal Reserve meeting reinforced expectations of another rate hike in December.
I can’t help but feel like the market is the dog and the Fed is the tail…and guess who I think is wagging whom?
For the stock market to gain on news of monetary tightening is backwards. This long, strong bull market happened because years of ultra low interest rates made credit easily available and pushed dollars into equities rather than bonds.
Indeed, loose monetary policy plus oodles of quantitative easing did indeed create inflation – of stock prices.
So the end of this era should be a negative for stocks. Higher rates should strengthen the dollar, which pushes money out of stocks and into bonds and creates headwinds of US firms trying to sell goods abroad, and reduce the availability of capital to grow businesses.
And yet the markets love the idea of tightening. All three major indices jumped today after the Federal Reserve Open Market Committee released the minutes from its September meeting, which reinforced the idea of
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After sliding last week, gold started this week with a jump, propelled by news that North Korea took Trump’s tweets as a declaration of war. The move erased the losses that followed last week’s Federal Reserve meeting, where the committee decided to leave rates unchanged but start ‘normalizing’ the balance sheet.
Both decisions were totally expected. Traders had, in fact, overly priced them in, which is why the dollar gained following a decision to not raise interest rates.
In the Maven Letter editorial, snipped below, I look at that reaction. And I assess the suggestion that the Fed will hike three times next year, in the context of immense personal, corporate, and government debt.
If you like these Maven Mondays, you’d probably like the rest of the Maven Letter, including what stocks I’m buying and selling in the sector and why. Subscribe today!
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No Hike… (Snipped from The Maven Letter: September 20, 2017)
Just as the market predicted, Janet Yellen and co. did not raise interest rates today. In response, the US dollar gained almost a percent.
If that doesn’t make sense to you, you’re not alone.
Higher
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I love attending conferences. Spending a day or few immersed in mining gives me new energy and ideas. Meeting subscribers is such a pleasure. And preparing a talk forces me to step back and really pin down my perspectives.
Writing the weekly letter performs a similar function, but the weekly note is much more zoomed in. Updating on seven days worth of developments in the metals investment world means detailed looks at financial data, sector developments, price moves, and geopolitics – and often without a lot of big picture perspective, because that’s the constant current.
But when I’m presenting at a conference I have to assume the audience doesn’t know my outlooks. I have to start from the start and explain what I expect in the near, medium, and long term and why.
I speak at conferences about once a month and creating each talk is a litmus test of whether I have thought through my big picture perspective fully.
Last Friday was the Metals Investor Forum in Vancouver. I gave the first talk of the day. The title:
It’s A Multi-Metal Party and Everyone’s Invited!
I appreciated the process of putting the talk together
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It’s been days since President Trump sent missiles into Syria, targeting chemical weapons facilities. We still have no idea how successful that effort was; the US claims almost every one of its 100 missiles hit its intended target while Syrian ally Russia says Syrian defenses shot down 71 of them.
At this point, it looks like the risk of a real war between the world’s two largest militaries has eased. However, the confrontation is far from over.
For now, focus has just shifted to financial attacks. The US moved first, implementing a suite of new sanctions. Russia responded by introducing legislation that it could use to tighten or even cease uranium trade with the US.
A draft law now before the Russian National Parliament (the Duma) calls for stopping international cooperation in the aircraft and nuclear industries, not only with the US but also with other foreign states that support US sanctions against Russia or support Washington’s position on Syria.
If this law passes, it could create a serious uranium supply shock. The US relies on nuclear reactors for about 20% of its electricity. Only 4% of the uranium feeding those reactors is produced domestically;
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Is M&A back in the gold sector? You might think so, because in the last month we’ve seen three major deals: Hecla Mining (NYSE: HL) buying Klondex Mines (TSX: KDX), Alio Gold (TSX: ALO) buying Rye Patch Gold (TSX: RPM), and Gold Fields (NYSE: GFI) partnering with Asanko Gold (TSX: AKG).
M&A is always a good sign for the sector. However, all of these deals share one important similarity: a smaller miner facing dire financial circumstances. Which is why I don’t see these deals as a signal that mining M&A is hot. It’s just tepid.
In the case of Klondex, the company had overextended itself trying to grow production in recent years. Its growth had necessitated several credit facilities, gold loans, and gold streams that all hindered profitability; it ended 2017 reporting a net loss of US$23.7 million. The market watched the company struggle over the year and kept on selling, pulling Klondex down from $7.50 a year ago to less than $2. Recently it started to look like the worst might be over. Apparently Hecla had the same thought and moved on the company, offering a cash-and-share deal worth US $462-million. It was a move that
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It was a busy week in the gold space and the price responded accordingly: The big move up came after the Federal Reserve boosted interest rates. Soon after, the US-China trade war ramped up with the US announcing tariffs on Chinese goods and China immediately retaliating. And then President Trump appointed known aggressor John Bolton as his new national security advisor.
Whew!
I commented on the rate hike last week and just a few notes to add here. The first is this chart: This is the latest GDP prediction from the Federal Reserve. They see real GDP growth rising to 3% this year before drifting back to around 2% in the long run. And that mediocrity is enough for them to remain reasonably hawkish, guiding two more rate hikes this year.
It’s yet another aspect in the endless debate over where this economy and bull market are going. The economic data are so mixed, bullish in one report and bearish in the next. I still see reliable – if not robust – growth in the US. But does that justify these sky-high stock market valuations?
That’s the question more and more people are asking. That’s
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