Disappointing Politicians

From the July 21, 2014 HRA Journal: Issue 217 

We’re half way through the dog days of summer and metals and juniors haven’t collapsed yet.  So far so good.   I don’t expect them to but this time of year the markets can generate big swings on even fairly minor news. 

Metals in general continue to perform well and gold is fighting its way back from a $60 smack down. As you know, I’ve never been one for conspiracy theories but even I was shocked at the scale and timing of the sells in the futures market that drove the bullion price down last week.  

I think it's more important to focus on the fact large scale selling didn’t panic the market this time.  If we have already seen the pullback we’re going to off the latest geopolitical spike then the market is well positioned to move higher.  Many will disagree with me on that point.  That’s good too.  I’m not seeing overwhelming bullishness which would be a negative sign at this stage. Slow and steady is exactly what we want until we get past Labour Day.

I’m still waiting for gold and the Venture to exceed their March highs.   I’m confident it will happen but realize many others won’t be at all confident until it does.   If you share my conviction about a good fall market the time to be laying in bids is now.   The early bird gets the bait in these situations.

Eric Coffin

***

The headline must seem like an oxymoron to most of you.  It is to me too.  Disappointments are to be expected from politicians. Promises are made during elections and never followed through on. That is how elections are and anyone who has seen a few is thoroughly unsurprised by that outcome.

This editorial isn’t about dumping on politicians (much) but it seemed political decisions had more impact on markets than just about anything else since the last issue so I’m pinning everything on them.

The first chart below shows the Industrial Metals Index that was also the first chart in the last issue.   As you can see it’s made no headway but has managed to hold the best level its seen since early 2013.  That is encouraging and further evidence that there are some basic changes in sentiment happening.

I added five year charts for zinc and zinc warehouse inventories on the next page which I did not include last issue.  You can see from those that this isn’t a minor bounce for the galvanizing metal.  It’s seeing the best prices it has since the wheels came off the metals markets in 2011 and I see no reason it won’t go higher.  While I’m not as confident about copper because of new production I’m more confident that if copper has a pullback it probably won’t be a large one.  Something in the order of 10% would be reasonable and I don’t see that impacting project valuations that much.

Resilience of the industrial metals complex came against a backdrop of big geopolitical swings in other markets.  The biggest by far was due to the downing of the Malaysia Airlines flight over eastern Ukraine.   That of course stemmed from a disappointing political decision by Putin to arm the pro-Russian insurgents with some serious weaponry.

Putin has been crying foul (naturally) but you can’t shoot down a jet at 10,000 metres with anything but a modern sophisticated missile system.  I don’t think it was the Russians—trained troops wouldn't have been that dumb—but they gave the Ukrainians the hardware so it’s on them.

This is just a continuation of the violence but the optics are very different, especially in Europe.  The EU and US were toughening sanctions already when the plane was shot down.  Washington seems ready to really step things up again and it’s going to be much tougher for the EU and Britain to duck.  We could see sanctions that actually have economic impacts now.

For gold bugs, the disappointing politician was Modi, who unveiled his first budget after winning what amounted to a landslide in the Indian elections last month.  The budget didn’t contain any cuts to import duties or changes to the 80:20 rule for jewelers importing gold that were hoped for.

Gold bugs shouldn’t feel singled out.   Modi managed to disappoint everyone.  It was a surprisingly wimpy budget from a guy who is supposed to be an agent of change.   We’ve all seen that movie before of course.

What was interesting and, again, encouraging was the lack of response to this news in the gold market.   Given all the ink expended talking about India as a potential bullish factor traders took the news on the budget with surprising calm.   The gold market barely budged.

More interesting to me was the news shortly after that Indian gold imports in June were 65% higher than in May (in currency terms) and 12% higher than June 2013.That seemed counterintuitive to me.  As I noted in the last issue I would have expected bullion dealers to hold off on purchases if they were expecting relaxed import duties from the budget.

Some local commentators noted this might have been “one off” demand from new banks that were added to the list of allowed importers in June.  Maybe, but why would their traders not wait for the budget too?   My cynical side tells me the dealers knew at some point there would be no gifts for them in the budget and started buying again in June.

That may still mean it was pent up demand and there will be no follow through in the Indian physical market.  There’s no way to be sure until we get a couple of months more data.  I think its positive news though and if there is a good monsoon and good crop yields (the jury’s still out on that) we’ll see at least steady physical demand from India.

The Indian news came in the wake of a smack down in the gold market that knocked $60 off the price in the course of two days.   There was no obvious reason for the selloff.  Many blamed it on US Fed chair Janet Yellen’s congressional testimony but didn’t contain any real surprises.  She brushed off concerns about inflation and refused to be talked into a corner when it comes to timing of an initial rate hike.   Other Fed governors have been less reticent.  It may be that we see the first increase in rates before the end of 2014.   If and when that happens it could be a shock to the gold market.

I still think the more important question is whether the Fed stays behind the inflation curve, intentionally or otherwise.  I think if Yellen has the final say it will.   She continues to voice concerns about the labor market and I think those concerns are at least as much about quality as quantity.

Overall, job numbers have been good and the unemployment rate has dropped.  Yellen is well aware that a large percentage of the new jobs are of the low paying service sector variety.  It’s hard to generate a growth lift off when new jobs are the sort that doesn’t create much if any discretionary income.

Yellen is also well aware that there are still millions underemployed or off the books because they have given up looking.  She sounds like she will err on the side of lax monetary policy which is exactly what I think she should do.

The next US inflation print will come soon after you read this.  I’m not expecting another lift like we had last month.  I think the rate may stabilize but even that is more than many central bankers seem to expect.  I don’t see a big fall back in coming months.

That will be a positive for commodities.  The initial estimate of Q2 growth in the US could move things either way.  I’m expecting a strong number if only due to mean reversion.   If Q2 GDP growth for the US comes in initially at 4% plus it could spook some gold traders.  It shouldn’t.  After a final print of negative 2.9% for Q1 I’d be a lot more spooked if growth isn’t at least 3.5%.  Anything below that and there is real potential for a spike up in precious metals.

With all the crosswinds in the past two weeks and the summer doldrums gold, the GDX and the Venture all held up well.  Gold and the Venture put in higher highs and higher lows. The Venture is yet to move off that higher low but there has been a distinct improvement in volume which is a good sign in the dog days of July.

As we exit July I expect to see junior stocks firming again and the real strength should be expected in September onwards.  The same goes for gold which will start seeing a seasonal pick-up in demand next month.  It’s possible there will be more give back in price after the latest Ukraine spike but that looks like it’s already done.  Tensions and death tolls in the Middle East are rising but that is such an endless situation it’s hard to imagine it impacting even the oil market unless things blow up dramatically.

Companies on the list are out generating news now.   I’m tracking a large number of other stories though I have to say there have been fewer really interesting exploration stories than I had hoped to see at this stage.  There will be a couple of additions to the list over the next week or two so keep an eye out for those.

Another thing to keep an eye out for is the next Subscriber Investment Summit in Vancouver.  The venue has already been booked for October 9th.  A website is being built that will make it easier for you to find information and follow links to the registration page.   I will send out information on that in coming days.  I expect the room to fill fast this year so don’t wait once you have the sign up info in hand!

Eric Coffin, editor of HRA, looks for companies with the potential to at least double over one or two years based on asset growth and development of metals deposits for production or take over by larger companies. HRA also uncovers high risk/high potential exploration plays, the kind of "swing for the fences" trade that can yield returns of hundreds or even thousands of percent.

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