The word ‘decouple’ is once again making the rounds. I like it – but my decoupling isn’t the same as most.
Last time ‘decouple’ was popular was in 2009. It was applied to emerging markets, which investors hoped could keep running despite the global financial crisis.
This time around people are hoping the US can ‘decouple’ from the rest of the world, continuing its economic recovery despite a recession in Japan, a stagnant Eurozone, and a slowing China.
Sure. Whatever.
I say that because the market I care about – mining – was completely excluded from the big ol’ bull run of the last few years that lifted the S&P 500 by more than 200%, the Dow by almost 170%, the Toronto big board by 100%.
Whether those runs can continue is a topic of endless debate.
Believers point to improving jobs, construction, and economic growth numbers in the United States to argue America truly is recovering. If so the rally was justified and can continue – provided the US can decouple from the stuttering economies of Europe and Japan.
Non-believers point to the
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The Federal Reserve was not in an easy position. Anticipation of a rate raise by June, if not by April, had built to a frenzy leading up to today’s news conference. Consensus was that to not signal a move to higher rates would hurt confidence in the US economic recovery.
Turns out the US economy did that job itself. Economic data from the world’s largest economy has been weak of late, including lower retail sales, reduced home construction, limited industrial production, weaker consumer sentiment, and flagging wage growth.
Meanwhile, an ever-stronger US dollar has made US goods and services more expensive in other countries. A rate raise would add to that pain for American exporters by strengthening the dollar more while also increasing borrowing costs, while international competitors enjoy rate cuts, devalued currencies, and cheap loans.
So, despite all the pressure and expectation, there’s no way Yellen could have suggested raising rates. It would have punched a recovering-but-still-ill economy in the guts.
Instead, she removed the word ‘patient’ from the timeline for a raise while cautioning that the Fed would wait to raise rates until it saw “further improvement in the labour market and is
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Amongst the blogs and articles making the resource rounds this weekend was a Globe and Mail article titled Big mining companies to take lead on Canadian prospecting.
The idea: with juniors strapped for cash, it is major miners who are planning the most significant exploration programs in Canada this year. Goldcorp’s exploration spending is up 10%. Agnico Eagle is pouring money into the Meliadine gold project in Nunavut; Centerra is pouring even more into the Trans-Canada project in Ontario.
Last year juniors spent $743 million exploring in Canada, while majors spent $1.2 billion. For majors to outspend juniors on exploration is indeed anomalous, as it is usually juniors who explore their way to the discoveries that larger companies then develop.
But this long, deep bear market has created two new realities. First, cash for juniors is very limited and is only really available to advance discoveries towards resource expansion or, better yet, production. That means grassroots exploration has slowed to a crawl.
Second, majors generally prefer to spend their dollars buying advanced assets from juniors rather than exploring themselves. (Majors just aren’t that good at early-stage exploration.) But the list of acquisition-ready projects is actually pretty short.
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To predict the gold price always involves a lot of factors, but the situation today is about as complicated as it gets.
How long can the US dollar continue to climb? Is the US equities run ending? Will the Fed raise rates? What do those jobs numbers really mean? How much downside is left for the Euro and the Yen? How long can gold keep gaining against other currencies but sliding against the greenback? Will gold repeat its reliable strong season from July to December? How will oil’s slide impact the US economy?
In the longer term, other questions arise. What impact will the Shanghai gold fix have on the gold market? If we are truly at Peak Gold, when will supply shortages become significant? Will generalist investors return to the gold market? Can the gold market somehow sidestep the outsize influence of paper trading and return to a basis in supply and demand? Why does the World Gold Council continue to drastically underreport Chinese gold demand? When and how will the fundamental shift of gold holding and trading from West to East really start to have an impact?
To answer them all would require (1) several hundred pages
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All kinds of reports and newsletters file into my inbox. One that I read late last week got me thinking about how I view the investment landscape over the next year.
It was Jared Dillian’s The 10th Man newsletter. He mused about how we are all formed by our experiences – in particular, how the state of affairs during our first few years in the business determines our investing outlooks and biases.
Dillian started working in finance in late 1999, just before the top. For the first three years of his career stocks went down relentlessly. As a result, he is pervasively bearish.
He offered a couple other good examples.
“One of my bosses at Lehman was an options trader back in the ’90s. What he liked best was to just buy naked call options on stuff. Why not? It sure worked in the ’90s. Volatility was underpriced, and markets only went up. Not so much in the 2000s, when markets went sideways and vol was more challenging. But he kept buying naked upside calls—it was what he knew how to do…
“Guys who got rich trading tech stocks in 1996-1999 are still trading tech stocks. Never mind
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Gold may have declined in the last two weeks but I remain as bullish as ever, for reasons old and new. I will explain all, but first an apology.
Sorry I disappeared for eleven days. For those of you who wait with baited breath for my next missive, I hope you survived the suspense! The reason was medical: I had to have my thyroid removed, along with a malignant little bugger growing off of it, and the surgery took more out of me than I expected. But all is now well (or getting there) and I have good reason to believe no more treatment will be needed.
It seemed a pity to remove my thyroid, a perfectly functioning organ, because of something attached but exterior to it – but that’s how things often go, isn’t it?
Take gold in 2012. After the price soared to overbought levels in August 2011 it had to correct and it did, falling 19% by mid-2012. Gold stocks fell multiples of that, with the Market Vectors Gold Miners ETF (NYSE: GDX) sliding more than 40%.
That might have been that. Gold staged a double bottom in May and started to rebound…until the Federal Reserve
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“We are very close to peak gold, by which I mean this: our industry is never again going to mine as much gold as we did this year.”
So said the head of the largest gold company in the world by market cap – Chuck Jeannes, president and CEO of Goldcorp – in his keynote address at Roundup.
Granted, the guy is biased to believe in gold. But success doesn’t stem from acting based on wants, it stems from acting based information.
And the data behind peak gold make a lot of sense.
The fundamental reason is simple: the cost to discover an ounce of gold keeps climbing. Since 1975 discovery costs have increased 100-fold. Then, as discovery costs have climbed, exploration spending has declined.
Higher cost + less funding = fewer ounces discovered.
Making matters worse: of the shrunken pool of exploration dollars, majors are spending a larger portion than usual. That is not a good thing because, as Jeannes himself says, “Majors are not very good at grassroots exploration. We much prefer to let juniors do that and then come in and buy the assets.”
Those are the reasons. The results have been manifesting for years.
Gold
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It’s a common stat in the sector: only 1 in 1,000 discoveries becomes a mine. But David Harquail, president and CEO of Franco-Nevada, takes that sobering fact one step farther.
Harquail started in the business as a child, following his father around as the elder Harquail assessed projects for famed mine-finder Thayer Lindsley. Harquail later took on a similar role with similarly famous resource titans Pierre Lassonde and Seymour Schulich.
That team became curious: how many mines actually produce economic returns? They assessed mines in western Canada and determined a full half were either disappointments (did not return the cost of capital) or failures (did not even return invested capital). Another 40% did not give a good rate of return.
That produced the sobering conclusion that only 1 in 20 mines generates a good rate of return – which means only one in 20,000 exploration projects becomes a good mine!
That’s bad, but not terrible from an investment perspective.
For one, those numbers were crunched in the 1980s. Hopefully mine developers have improved their success rate since.
Even if they have not, junior exploration investing is not always – or even often – about identifying projects
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It’s easy to forget gold started 2015 under $1,200 per oz.
On January 2nd an ounce of gold was worth $1,172. This morning it is worth $100 more than that, after spending chunks of time last week above $1,300.
Gold companies and their bankers have clearly been awaiting this opportunity. Last week six companies announced bought deal financings, raising a total of $790 million (!).
Funds raised best a billion if you expand the time frame by a few days to include Yamana Gold’s $260-million deal and Lydian International’s $16.5-million raise.
The companies that announced deals last week were:
- Romarco Minerals: $300 million, shares only (no warrants)
- Detour Gold: $141 million, share only (no warrants)
- Osisko Gold Royalties: $200 million, shares and warrants
- Primero Mining: $75 million, convertible debentures
- Asanko Gold: $40 million, shares only (no warrants)
- Richmont Mines: $34 million, shares only (no warrants)
The flood of financings is a strong reminder of two things. First, seasonality is very real. Miners know about it and have likely been planning for months to wait until the January boost to raise money.
Second, while there are good reasons to think gold still has short-term legs,
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What a week it has been.
Gold climbed above $1,300 per oz., a level it has not seen in five months. Today’s close above $1,300 marks a gain of almost 14% since gold’s early-November low of $1,142.
Gold was already on its way up, following Switzerland’s move late last week to abandon its currency’s peg to the Euro. Much can be said about the what and why of such a decision, but market reaction boils down to this: it gave investors a specific way to react to pervasive concerns about currency devaluation, quantitative easing, and economic stagnation, around the world but especially in Europe. And react they did, depressing the Euro, lifting the Swiss franc, and giving gold a shot of adrenaline.
Then gold got two more reasons to rise in the last few days.
The first came yesterday: the Bank of Canada’s surprise decision to lower interest rates by a quarter of a percent, to 0.75%. The rapid decline in oil prices clearly has economists worried that Canada’s economy will run out of fuel, hence the provision of interest rate stimulus.
The world did not much notice BoC’s move, but Canadians certainly did. Cheaper debt is
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