The
Holiday Season is here and a volatile 2014 is coming to a close. Be prepared
to pick up quality situations during tax loss selling season and benefit off of
a powerful January Effect rally.
Recently
we heard the comments from Fed Chairwoman Yellen which appeared to be dovish.
Crashing
oil prices and a rising US dollar will put a halt to any interest rate
increases from the Fed. Weak Holiday sales and increasing unemployment in
2015 are a possibility especially as I expect layoffs in the once booming
fracking sector.
Divergence Between TSX Venture and S&P500 Not Seen Since Dot Com Bubble
Equities
are rallying and following tax loss selling season the TSX Venture which is
hitting decade lows may experience a major bounce due to the January Effect.
The January Effect often benefits small cap beaten down situations as large
investors reposition for 2014.
The
divergence between the S&P500 and the TSX Venture and XAU has not been
seen since the late nineties. At that time similar to today no one wanted to
touch gold miners or natural resources and favored the US large caps and tech
names. That was a big mistake because after the dot com crash, the junior
miners outperformed the large equities for about seven years until the credit
crisis hit the world.
At that
time in 2008, Central Banks and Governments printed money like crazy to solve
the bad debts and save the big banks. This led to a concurrent rally in
equities and commodities from 2009 -2011.
In the
middle of 2011, the US cut back on QE while Japan and Europe accelerated
currency debasement. This led to a flight of capital to the US dollar and
equities and out of commodities especially copper, oil and precious metals.
So from 2011 until today we have seen a decoupling of a rising US dollar and
equity market with a declining natural resource market. This has not been
seen since the late nineties.
Could QE4 Be a Possibility in 2015?
Similar
to the late nineties, negative sentiment for the miners is at an all time
high as investors are panic selling shares in order to chase the high flying
equity markets. The global economy is not as strong as investors believe and
this rising dollar and collapsing oil price could drive the US back into
recession. QE 4 may be the next option or negative interest rates right here
in the US.
It was
interesting to see the reaction after the Fed Meeting going into tax loss
selling season. Investors are beginning to once again realize that zero or
negative interest rate policies are here to stay in the West. Notice the
Swiss instituted a negative rate policy to deter capital flight from Russia.
Meanwhile,
the Russian Ruble is in freefall as the Central Banks raise interest rates to
over 20%. Russians are buying gold as they realize that the US dollar rally
could fizzle out soon should the Fed propose QE4.
Remember Powerful January Effect for Junior Miners
This
down period in the resource sector in prior years was followed by a very
powerful first quarter. Late December buying has provided some excellent
trading opportunities in the resource sector in the past.
As we
close out the year and tax loss selling season, we must not ignore the
historic situation we are in right now with recent black swan events with
Russia which has driven the US dollar and large US equities to nosebleed
valuations and crashing the commodities market to historic lows.
It is
my opinion that investors sitting on US dollars are approaching a huge buying
opportunity during this tax loss selling season when junior resource stocks
are beaten down to a historic pulp.
Smart
investors should be placing stink bids now before they leave for the
holidays. Buys in late December and sells around March have proven to be good
trading strategies for the resource sector in prior years.
Game Changers in 2nd Half of 2013
1.
I believe recent turmoil in the financial markets
are economic efforts to keep Russia in check following the annexation of
Crimea. This recent foreign exchange volatility has caused a collapse in the
Russian Ruble and Euro and a massive run in the US dollar. Remember wars can
be fought without bullets utilizing foreign exchange and financial market
manipulations.
2.
Concurrently, the Saudi's boosted oil output
cutting the price to below $60 a barrel. This could've been payback for
Russia's support of Assad's regime in Syria.
3.
US Central Bankers have been cutting back on QE
allowing the dollar to rise. A rising dollar and low oil prices is
devastating to many emerging resource rich nations such as Russia, Nigeria,
Venezuela and even the US and Canadian Oilshale boom.
4.
Banks sit on a lot of energy loans and defaults
could increase. A potential bond default affecting a major bank is possible
leading to further volatility.
Outlook for 2015:
Remember
that historians show that financial volatility and hyperinflation like what
we are seeing in the resource rich emerging nations could usher in extreme
radical political parties, regime changes and geopolitical instability.
Gold is
hitting record highs in Russia, yet is hitting new lows in dollar terms. Some
compare 1933 Germany to today's Russia. Only time will tell.
Incredibly,
gold has held in versus a rapidly declining oil price and the gold to oil
ratio is hitting new three year highs. This could be a boom to large tonnage
and open pit gold producers where a large portion of their cash costs are
based on the oil price. I expect some of the major miners to outperform in
the new year factoring the cheaper energy prices.
This
could benefit the high quality junior miners with economic assets that could
fuel low cost production.
Watch Safe Haven Demand Return to Precious Metals in 2015
Safe
haven demand should increase for gold and junior miners in 2015 as the US
dollar rally fizzles out due to a Fed reluctant to raise rates. We expect
some of the gold resource funds to see inflows of capital in the new year as
negative or zero interest rates are prevalent in the West.
Even
though the Venture has free fallen on what I call the Putin Put on
Commodities. I expect savvy investors to come in and finance high quality
junior mining opportunities where we could see outsized gains. I follow price
volume action during seasonally weak periods to identify savvy accumulation
by institutions.
