From The Maven Letter: March 21, 2018
So the new chairman of the Federal Reserve, Jerome Powell, did exactly what we all expected and bumped the benchmark interest rate up by 0.25% today.
Yes, higher rates are supposed to hurt gold, but traders always seem to overprice the hike in ahead of time. That means the news itself ends up being good for gold. The yellow metal has gained every time the Fed has raised rates since the tightening cycle started and today was no exception, with gold gaining 1.4% to reach US$1,334 per oz. Powell didn’t say anything unexpected. He continued the commentary of slow and steady economic expansion and a tight labour market. Like Yellen did so many times, he noted that inflation is still running below the target of 2% and said he expects it to rise gradually towards that level.
The Fed increased its estimate for US growth to 2.7% this year, up from 2.5% in its December projection. It also boosted its 2019 target to 2.4% from 2.1% and suggested unemployment will continue to fall, slowly, reaching as low as 3.6% by the end of next year.
If that happens, darn
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The most common question during and following PDAC is: How did you find the mood? Unless we’re smack in the middle of a strong bull market, it’s usually a difficult question to answer.
This year was no exception. Really, opinion was very divided.
Some companies are moving ahead full speed. They have promising projects and the funds to advance those projects. Many others, though, are really struggling. They have projects and vision but are struggling to find funds, and have been so for perhaps a year.
What differentiates these groups? Those in the former group have at least one of:
- Novelty. Newly formed companies can often raise money because of inexpensive valuations out the gate. This effect obviously wears off, but an initial raise offering the excitement of early value can give a group enough money to explore – and hopefully generate some success. Contact Gold (TSXV: C) and Allegiant Gold (TSXV: AUAU) are good examples.
- Real momentum. The general lack of funding for exploration means not very many projects have developed real momentum, but a few have. Good groups raise money when their share prices show life – and raise enough to get through the subsequent lag
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What a week it has been! Explanations abound for the market’s dive and the return of volatility. Most comments blame rising interest rates and worries about inflation juxtaposed against valuations that had swooned in the last two months.
Indeed, the sell-off started right after the US Labor Department reported strong job growth in January and revised December’s numbers up, while also reporting that average hourly earnings rose 2.9%. For years the economy has repeatedly failed to meet inflation targets; to suddenly not only meet but beat expectations was, I guess, more than the market could handle.
That’s fair enough as a starting point. It’s also fair enough to state that the parabolic gains of December and January were never going to just keep going, and moves like that rarely taper gently – they correct.
However, while interest rates and inflation are playing a role, there’s a bigger picture that I think deserves comment.
The biggest trade of recent years has been to short volatility. To short is to bet against. After spiking to 60 in the financial crisis, volatility as per VIX (the CBOE Volatility Index) has held one clear trend: down. And seven years
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Gold fell with stocks on Friday, which was disheartening. Today that changed; gold gained alongside the US dollar while stocks fell. Of course, gold and greenback rarely rise together. It can happen, but it requires some kind of pervasive fundamental rationale. Today that rationale was good old safe haven buying.
I think what is happening is a run-of-the-mill bull market correction. Those often entail losses in the 10 to 15% range, so we’re only halfway there (hold onto your hats!). If that is the case, it’s a good thing. A correction would really strengthen the bull market’s base, giving it the foundation to continue for a while yet.
And as metals investors, we want that. The big bull argument for commodities right now depends on coordinated economic growth; a stock market crash would derail that.
A correction would also do much to shift perspectives on how to invest at this stage of the game. This bull market has been so long and strong that FOMO – Fear Of Missing Out – has become the primary investment rationale. A real correction will encourage investors to instead fear the day when the market turns down for real, which
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Well that was quite the week! The third week of January is mining conference week in Vancouver, with three back-to-back-to-back events running across seven days. It’s enough to attract a large swath of the mining industry to town and meetings between juniors, majors, funds, investors, analysts, and brokers take over coffee shops and restaurants for blocks around the Vancouver Convention Center.
I certainly drank my fair share of coffee while learning about deals I didn’t yet know and getting updates on those I did. Every day also offers a packed schedule of talks – project presentations, commodity outlooks, investment themes, social governance, jurisdictional risks and opportunities, regional exploration overviews, and more.
Having emerged from the other side of it all, my editorial in the weekend edition of the Maven Letter covered the concepts that stuck with me the most, including the biggest risks I see to our bullish excitement. Included in today’s Maven Monday is one part of that discussion.
Subscribers also heard about a new recommendation, and two additional ideas will follow shortly. If you’d like to hear what Maven is buying and selling and why, subscribe to the Maven
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The analysts at Scotiabank made a nice argument that copper is set up for a near-term rally and backed up their argument with a collection of charts. I am absolutely bullish on copper in the medium term, as I am confident a supply deficit looms unless the entire world goes into a significant recession.
But I thought I’d go through Scotia’s argument about the near term, as food for thought.
Setting the stage: worries about global trade wars and slowing growth in China have punished the price of copper, which is now down 19% since mid-summer.
Copper is the second-worst performing metal in 2018 year to date; only zinc has fallen further, but it did so after making immense gains in the previous 18 months.
Scotia’s analysts think there’s reason to think copper is doing better than its spot price suggests…which if true would mean the spot price is set to soon play catch up.
First, copper inventories on the London Metal Exchange have declined sharply since April. The same is true in Shanghai, where warehouses have seen similar drawdowns. Both suggest demand remains robust.
Another good way to test the
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Great Bear Resources (TSXV: GBR) has been in the Maven Letter portfolio since December. That’s when I met with president and CEO Chris Taylor and heard one of the best exploration stories I had heard in a long time.
Chris and VP Exploration Bob Singh are experienced, sensible, and intelligent guys. They put this company together on their own during the bear market, assembling a highly prospective but underexplored land package in prolific Red Lake and putting it in a company with a very tight share structure.
Their first drill program at Dixie Lake had easily confirmed the high grades from limited historic work, which had been poorly recorded, and that gave Chris and Bob the confidence they were onto something. As importantly, the work supported their theories on how the gold came to be and where there might be more.
In December, when I met Chris, they were completing a small financing, just enough to do a small drill program. Drilling at Dixie Lake is very inexpensive – there is Tim Hortons exploration, and in the heart of Canadian gold country. I invested and offered it to Maven Premium subscribers.
That program again returned
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I really like owning this stock at $0.20. I like it even better at a zero cost base, which is where I sit after selling half of my position into strength that took the price to almost $0.40 last summer.
This is exploration, after all, and more than that this is exploration for high-grade gold in a vein system. There is zero guarantee the next holes will be as good…but Aben will do its very best. If we use GT Gold’s performance from last year as an example, the first few sets of good holes generated great market response.
It wasn’t until several sets in that the market started to look at the developing deposit more critically and worry about things like continuity. That’s when the price gains abated.
So if Aben can generate more hits in the next few holes, I would guess the market will respond similarly, keeping ABN shares rising like GTT’s shares did last summer. If that all pans out, you will wish you had bought more today. However, that will require hits as good as the first, which was simply stellar.I put the odds of that at less than 50%. Almost-as-good results, which are
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It’s the dog days of summer on every level – volumes are down across the markets, gold is hurting, good earnings reports and economic data hardly garner any response, and my pooch spends his afternoons lying directly in front of the fan amidst a true Vancouver heat wave.
What should we take from it all? Not much, I would say. The dog days of summer are a normal thing, particularly for the gold market but also across the board. I would suggest not assuming that quiet days in New York or Toronto foretell an end to the broad bull market; rather, the adage “Never short a dull market” seems more apt.
That’s a concise capture of my sense of things: that the overall markets are really just on summer vacation, rather than in the midst of a downturn. (Did you notice the US GDP growth number for Q2? It was 4.1%, which is very strong.) Yes, endless talk of tariffs and almost-inverted yield curves make it seem that things are on a precipice…but only if you’re paying attention and I think what’s key right now is that few are paying any attention at all.
The Federal Reserve is meeting
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As metals investors it’s easy to get caught in the day-to-day. And daily news does matter, especially if you’re invested in the kind of high-risk exploration stocks that lots of us buy. Tracking those stories closely is important because exploration successes or failures make or break junior stocks in a moment.
But every day my inbox is also filled with multiple long assessments of why metal prices moved half a percent this way or that.
There are lots of reasons for metal prices to move like that. Some of those reasons end up being significant, but most are not. And getting caught up in the day to day is not only time consuming – it also distracts you from the story that matters.
That story is the big picture. Are commodities broadly bullish or not? Are the reasons fundamental – related to supply and demand – or speculative? And if the situation is fundamentally bullish, like it is today, day-to-day gyrations hardly matter.
What matters is positioning for the big picture. And that is what major miners are starting to do.
In the last week metal prices slid, mainly because the escalating
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