I cannot stop. Reading, talking, questioning, researching – the markets are so up and down, excitable and depressive, liquid and illiquid.
There are so many questions, each with such a range of answers.
Is the end of quantitative easing in the United States significant? Did the greatest financial experiment in the modern world work? How long will Japan’s surprise move into QE fuel global markets? Is Europe sliding into recession and/or deflation? How high can the greenback go? Where and when will gold bottom? Why is silver always so confusing? Will the Fed raise interest rates? When will supply constraints start driving metals back up? Is cheap oil a good thing?
The list of questions goes on. None are easy and all are interrelated. Thinking it all through feels like a Choose Your Own Adventure book, full of binary decisions that dictate what will happen.
For example, if I decide that the US recovery is real and markets have already accounted for the end of QE, it follows that the greenback will continue to strengthen and gold decline while North American equities trend upwards.
But wait a minute. Major indices are up 200% in just
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When precious metals struggle, investors favor bullion over stocks. It is sensible: the gold price can fall but cannot go to zero, while stock prices most certainly can. Thus bullion is safer.
As a result, the ratio of gold equities to the price of gold falls in a weak market. In 2001, the post Bre-X low, the ratio dipped to about 0.16. Over the next six years, during gold’s best bull market ever, it averaged twice that.
Then in the 2008 crisis the ratio again crashed, falling below 0.08. Over the subsequent 20-month recovery it almost doubled.
Today, following gold’s three-year slide, the gold equities-to-gold price ratio is just 0.05 – far below either of those bottoms. Gold equities are as friendless as they have ever been.
However, the gold price is rising – and setting up for a bull run, because production can’t meet demand in the medium term and fiat currency questions abound.
The disjoint means investors have to return to gold equities at some point, because if the market wants more gold it has to support the publicly traded companies who discover, develop, and produce the yellow metal.
The astute John Embry, chief
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In the last decade we saw $140 billion worth of Canadian juniors taken over. Many of the deals targeted copper projects, which means bigger fish already own many of the best copper deposits.
The same is not true of gold. Some gold discoveries were taken over but many are still held by juniors. And they will stay there until share and metal prices start to climb for real, because until then majors will stay mostly on the sidelines.
But that will change when the gold price moves confidently above $1,200 per oz., a number that has become imbued with significance by a three-way coincidence.
The first is that $1,200 is just enough above where gold bottomed – at $1,140 per oz. on Nov. 5th, as called by yours truly – to provide confidence the worst is over.
And confidence is so important with gold.
Gold is the most reliably cyclical of all metals, so in a down cycle speculators simply bide their time, awaiting a clear bottom before returning for the ride back up. The fact that gold has hovered near $1,200 for two months is providing precisely that confidence.
The second coincident happening
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Seasonality is a real thing in the investment arena. Some annual market moves actually relate to the seasons, like natural gas prices rising in the heat of summer and freeze of winter as air conditioner and heater demand ramps up.
Other seasonal moves have nothing to do with the weather – but are just as reliable.
The one I want to point out: outsize gains over the next three months.
The chart below shows the Toronto Venture Index from mid-December to mid-March each year since the winter of 2001-2002.
Almost every line boasts a positive slope. Even more significant: most of these three-month gains represent a significant out-performance of the index over the rest of the year.
Of the 13 years covered:
- The period between mid-December and mid-March has outperformed the rest of the year 12 times.
- The Venture Index has only lost ground twice in those 13 years, compared to six January-to-December losses
- Twice the Venture Index achieved multiples of its annual gain in the December-to-March period.
- Four times the Venture Index gained December-to-March before going on to end the year down.
- Three times the period from December to March provided
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There is so much analysis out there that, the more one researches, the more confusing it can become. And just when you’ve got one aspect sorted – like the fact that gold bottomed on Nov. 5th – another seismic shift, like a tanking oil price, throws everything else around.
That’s why it’s good to get away from my computer and my usual group of gurus and get a wider swath of opinion. And a swath of opinions is definitely what you get when you linger near the bar at a mining sector Christmas party.
The US recovery is real, the dollar is climbing, and that will hurt gold. No – the recovery is shaky and the end of the shale boom will derail it, hurting the dollar and helping gold. (I think both arguments miss more important pro-gold points about currency uncertainty, limited physical supply, and central bank buying, but everyone is entitled to an opinion.)
Copper is cheap and deficits are looming. What? Copper is overvalued and Chinese demand is sliding, so supplies are more than sufficient!
Uranium had its rally – stockpiles will keep it trading sideways for the next year. Pardon? Uranium is just getting
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In my last missive I made the long-term gold argument. That’s great – but it’s easy to make claims without timelines.
Sure, at some point in the future the US dollar will no longer dominate global trade. At some point it will be supplanted by a yuan backed by stacks of Chinese gold. As for when – I don’t know.
It will take many years. Paradigm shifts do not happen overnight. Comfortable in their established structures, society fights against dramatic change even when change is needed.
That fight will push the process one step back for every two steps forward, and occasionally the other way around. Every time the dollar resists its demise gold will give up some of its gains.
But overall gold will rise. The dollar owes its recent strength to being the best of a bad lot. As currency dynamics shift – as the renminbi gains acceptance, as gold regains strength, as the petrodollar system dissipates – the dollar will face increasing competition as a safe haven investment and an international trade facilitator.
But I am getting lost in the long term again. What I really want to discuss is what is happening with gold right
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As a newcomer to this newsletter business, I face a conundrum.
I believe in gold. I see gold adding several hundred dollars over 2015. In the longer term I believe the yellow metal will go significantly higher, propelled by its unique role as an intrinsic store of value and increasing constraints on its production.
I could talk about gold almost every day…but that would make me a gold bug. And gold bugs can be hard to bear.
It’s hard to listen to anyone tell the same story or make the same argument over and over.
Most gold bugs fit that bill. They cemented their storylines during gold’s bull run, each added dollar creating the confidence to take their tales one step farther. By the time gold peaked in 2011 amidst massive quantitative easing, the bugs were convinced gold’s run to the rafters was unstoppable.
They were wrong, of course. Gold has since lost almost 40%. Now, with consensus growing that we are at the bottom (led by yours truly) or at least very near to it, the gold bug battle cry is again growing loud.
The most vehement cries are easier to dismiss, coming as
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The emails started as soon as the Venture exchange dropped below 747 points on Friday.
“Hate to say I told you so, but…!”
“Three weeks – was that the rally you kept talking about?”
“Sorry to see your first big call turn sour so soon…”
You see, I had called Nov. 5th as the bottom for the mining sector. On that day gold, the Venture, the Euro, the gold miners’ index, the junior gold miners ETF, and silver all hit multi-year lows. Some fell to those lows with a ferocity not seen since the financial crisis.
And it happened in the context of a sector ready for a rebound. Mining is cyclical because metals are necessities of life. Demand tracks population and growth upwards. Investment follows. In time, production rises above requirement and then everything has to calm down again. Speculation amplifies each movement.
It’s the nature of the sector, but the sector has been in a downward trend for four years. That’s the kind of correction that kills exploration, strangles development, and squeezes production to the point where there is not enough gold or zinc or silver to meet demand.
At the moment, that is
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Burkina Faso’s ousting of its 27-year dictator, endless labour strife in South Africa’s mines, power outages and mining code revisions in the Democratic Republic of Congo, tax increases in Zambia, Ebola in Guinea, Sierra Leone and Liberia – enough uncertainties arise in Africa in any given month to make the continent seem the riskiest place in the world to mine.
But risk comes in many forms and sneaks into places that seem very stable.
Say a junior explorer with a nice copper-gold porphyry piques your interest. What do you do before investing? You investigate the management team, assess the geology, pick through the financials and share structure – and contemplate risk.
Where is the project? What hurdles might trip up progress? Is there social opposition, a slow permitting regime, an uncertain tax structure, or a debate over water rights? Is the government reliable and is there any risk of expropriation?
We tend to assume risk is inversely proportional to national development: highly developed countries like Canada or the United States should portend less risk than developing nations like Ecuador or Burkina Faso.
But this is not necessarily so.
Ecuador is a good example. Now known to host
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When I called the bottom as having happened Nov. 5th, I got lots of feedback.
I was called gutsy, bold, overly optimistic,
naïve, and ballsy (my personal favorite), among other adjectives.
Many wrote to me outlining all the deflationary
pressures that will supposedly strengthen the greenback, stifle economic
growth, and hold gold down.
I disagree.
I know I’m the new kid on the block. I am not
an economist and I’ve been in the business less than ten years – but these days
I am finding those deficiencies are my advantage.
Because I don’t have a point to prove. I’m not
a gold bug or a mining bear or a currency warrior or a debt deflator. I’m a
scientist and a journalist, so I research and then reason.
Let’s just think about gold. Where gold goes,
the mining sector generally follows. There are independent forces at work on
copper and zinc and silver and iron ore and so on, but a
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