From the July 31, 2017 HRA Journal: Issue 273
The trend to a weaker US Dollar and strengthening gold, and base metal, prices continues. As I note in the main editorial, there are 2-3 data points dead ahead that should determine whether the oversold greenback gets a bounce. I say “should” because the clown show in Washington keeps getting in the way of economic metrics, so who knows?
Even if the USD bounces after this week’s payroll report the downtrend is very strong and will be hard to reverse. Gold really should be trading higher already. We won’t get a lot of lift for gold producers until it does I think.
Things look a lot brighter at the junior end of the sector. A few companies that announced discoveries have been able to generate large price increases and, so far, hold them. It’s very spotty still but this is how large-scale resource stock rallies generally start. Fingers crossed. We’re entering one of the strongest periods of the year for the sector so if gold keeps cooperating and we see a few more sets of good news the autumn should be fun. Continued strength in zinc and surprising strength in copper should just add to the positive momentum for the exploration sector overall.
There is a lot of news in this issue, another trend that will continue through reporting season. Keep an eye on your watch lists as results are finally starting to flow.
We’re starting a little later than normal but northern reporting season is underway. The timing is good for a change too. After weeks of weakening metal prices and drifting junior stocks We’re finally getting some relief. The combination of a steadily weakening US Dollar, political drama in Washington and Pyongyang and somewhat better economic readings offshore has helped both precious and base metal prices.
Companies reporting discovery holes lately have been well rewarded by the market. That sort of thing helps the entire sector. Traders have more dollars to spend and more comfort that good news will mean price gains. You can see trading volumes increasing across broad groups of exploration stocks.
It’s too early to say any of the early winners have meaningful economic discoveries on their hands but the important point, for now, is that positive liquidity events were created. Early adopters were able to take profits and a good percentage of those profits were redeployed in other juniors.
Overall, volumes are still low and plenty of traders are on vacation. The Venture index hasn't moved much but at least its going in the right direction. The “autumn” rally that is such a common feature in the resource sector actually starts in August most years. We should see solid news for a few months going forward.
One comment I made in the last Journal deserves to be reinforced. I talked to a number of management groups at the just completed Sprott Summit in Vancouver. Most of them had seen or heard of comments I made about assay turn arounds slowing and heartily agreed.
With the northern exploration season in full swing that problem will get worse for at least the next couple of months, if not longer. I’m already hearing labs are prepping samples in northern BC and Vancouver then shipping the small subsample that is actually assayed to locations in Central and South America that have less backlog. For the next few months, at least for most North American labs, expect to wait 5-6 weeks for assays, not 2 or 3. The one good thing about that development is that we’ll be seeing assays from summer field work in Canada well into December. That could potentially lengthen the “fall” rally so long as enough of those results are positive ones.
There is a lot more reason to hope for a rally now than there was a month ago. We’ve been through another Fed meeting. While the FOMC announcement wasn’t much different than the one released after the last meeting, traders read it as being more dovish.
Traders may just be making assumptions based on weak economic releases. Whatever their reasons, their actions have been clear enough. After declining to just above $1200 early this month, gold has staged an impressive turnaround, reaching $1270 at the time this was written.
The chart below tracks the gold price for the past six months. Recent gains have been impressive but we still need to see gold get above $1300 to really give traders some comfort.
Senior gold stocks have not put in anything like the performance of bullion itself. Gold stocks have gained but the increase have mostly been tepid, even though most producers have met or exceeded guidance with their Q2 financial reporting. Combine that with the fact that the most popular gold ETF, GLD is still facing redemptions and you have the picture of an unconvinced market.
We have seen things improve a bit with the seniors in the past few sessions but I still think it will take a move through $1300 to really motivate new buyers, or a correction in NY that has traders reaching for a bit of insurance.
The two charts below show the US Dollar index, as well as gold with a trace of its correlation to the US Dollar overlain.
As you know, I was bearish on the USD in late 2016 and early 2017. This was because I expected the “Trump bump” to disappear and because I thought most analysts were being too US centric and underestimating the potential for Europe and China to hold their own. Even so, I’ve been surprised at the scale of selling in the USD market. What gives?
In part, USD weakness simply reflects the strength of currencies it trades against, especially the Euro which makes up a little over half the USD Index. I expected the Euro to make a comeback but its exceeded my expectations as the currency block, especially Germany, continues to beat consensus with its economic readings and the US continues to (mainly) fall short.
The USD is now sitting at two-year lows and important technical levels while the Euro trades at levels not seen in over a year. Shouldn’t gold be trading better?
Many people think so. There are plenty of gold bears around, mainly because they are concerned about gold’s relative weakness in the face of such a USD decline.
While the lower chart on this page doesn’t supply a reason, it does show how gold briefly swung to positive correlation with the falling USD in early July. This was the height of the central banker speeches about fiscal tightening. What turned things in mid-July was Congressional testimony by Yellen that was deemed dovish followed by a huge miss on US inflation readings. That was followed by more misses on consumer spending and the initial Q2 GDP number.
You can see gold’s correlation with the USD coming full circle yet again, currently sitting at-0.91, close to perfect negative correlation. That’s good news as long as the USD keeps falling.
The US Dollar is technically very oversold on a short-term basis. There are some important data points dead ahead that will determine if we see the high side of $1300 in the near term.
We’ll see both manufacturing and Service ISM readings (Tuesday and Thursday) followed by the July Payroll report on Friday. Regional indices of US economic activity have come in below consensus so traders are expecting slightly lower ISM readings. Currency traders watch these closely so they could generate large swings in the US and gold. Weak ISM reading will be positive for gold, and vice versa.
The 800-pound gorilla in the room, as always, is the payroll report. Consensus estimates are for 180k new jobs. If there is a large “beat” on that number we could see a large bounce in the USD and if there is a negative surprise I’d expect the Dollar to get crushed, oversold conditions or not.
As with other recent payroll reports, it’s the hourly wage number I will pay the most attention to. There has been no wage surge, just as there has been no growth surge in the US. The chart below shows wage gains declining (the aqua line) even as jobs got more “plentiful”.
Inflation is well below the Fed target and I don’t see how it rises to it without wage gains that help drive spending. Consensus is for 0.3% month-over-month increase in hourly wages, or 2.4% year over year. If those come in light it should put a floor under gold prices even if the payroll number is a beat. If both jobs and hourly earnings miss, odds are we see a $1300 gold price quite soon.
The market is now pricing in only a 40% chance of a US rate increase in December and virtually no chance of one in September. The Fed’s jawboning has failed. That is positive for gold and other metals. It will take stronger hard economic readings to bring the bond market around now.
The real surprise this month was copper. The three-year chart shows the huge move it had, rising to two year highs. The move is supported by labour disruptions at the world’s two largest copper mines. It’s estimated the copper market moved from surplus to deficit in the past two months. There has been a drop in refining charges in China which indicates smelters are finding concentrate harder to get.
The biggest part of the move came after news that China’s government would ban certain types of copper scrap imports at the start of 2018 for environmental reasons. Scrap is an important part of the copper market. If imports are disallowed China will have to buy refined copper to replace them.
I’m happy to see any metal reacting well, but copper has moved enough to make me a bit cautious. We don’t know the specifics but the ban on scrap is not a complete one. The impact could be anywhere from 300k-1MM tonnes. That is a hole that could be filled if its at the lower end of the range. Its positive for copper but perhaps not as positive as traders are reading it. Copper could go higher on speculation alone but I’ll be surprised if it can get to $3.00/lb and hold it without other supply problems to support it. The move so far is helping copper developers on the HRA list but we’ll need to see a longer run of copper warehouse inventory declines before it affects the speculative end of the sector.
The bottom line is we have three major metals, gold, copper and zinc, at market supportive levels. If that situation holds or improves we should have a good rally from now through autumn. Lets hope the overly bullish traders on the main indices don’t do anything to screw that up.
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