From the HRA Journal: Issue 214
The song remains the same. There have been plenty of triple digit days
on the big markets lately but all the movement hasn't amounted to much
overall change in the level of the markets. We're heading into what is
supposed to be the quiet time of year. For that reason alone the bias is
for slightly lower markets though I don't see a compelling argument for
either "up" or "down" as yet.
Gold has also gone basically nowhere. That may be a good thing as the
Ukraine seems to be off trader's screens even though the situation seems
to get more volatile each day. Summer approaching argues for lower metal
prices but here too things can go either way.
We're finally starting to see more news flow and that trend at least
should continue to improve. Funding remains tight but companies that have
laid out coherent exploration plans are getting placements done. We'll
see a lot more news in the next 2-3 months and some of the deals I'm tracking
should be ready to talk about sooner. I'm hoping for a break to the upside
by the juniors once news flow really picks up -assuming gold hasn't been
beaten down yet again.
I added a company to the end of the Update section that will be followed
on a "not rated" basis as I have agreed to advise them on an ongoing basis.
Eric Coffin
For all the volatility experienced by traders the net change in most
indices has been modest so far this month. Plenty of noise but not much signal.
If things continue this way for the rest of the year even my "10% at best" call
for NY will turn out to be optimistic.
Many markets are now range bound. That can get boring but they shouldn't be
ignored. Markets that fluctuate within a tight range for an extended period
have a habit of making significant moves once they finally break out of the
channel. The bad news is that it's very hard to read whether the break will
be to the upside or downside. It could still easily go either way.
The six month gold and 10 year Treasury yield charts on the following page
are a case in point. 10 year bond yields started falling after the taper was
announced, dropping back to 2.6% by February then traded sideways until a week
ago. It now looks like yields have made a break to the downside, the opposite
of what was expected by most market observers. Bond traders continue to refuse
to play by the script. Lower growth expectations? Ukraine? Deflation worries?
It could be any of the above or just a reaction to social media and other concept
stocks topping out.
Perhaps yields will pop up after a couple of good economic readings but the
strength of the bond market has been unexpected. There has been a reversal
of fund flows recently with bond funds getting inflows and equity funds seeing
net outflows for the first time in over a year.
Major indices keep testing new highs but the level of discomfort is a lot
higher among traders than you would think if you just looked at traditional
risk readings like the VIX. It's still too early to say how this will play
out but as I noted in a recent issue, bond traders getting defensive against
the backdrop of higher expected growth and the QE taper is not a signal that
should just be ignored.
Unlike the 10 year yield, gold has not made a move out of its range and that
range is getting tighter and tighter. Based on that alone is seems we should
expect a breakout in the very near future.
Based on the way gold has traded since March including a number of marginally
lower highs in the past three weeks the safest assumption is that gold will
break to the downside.
We're about to move into the weakest part of the calendar when it comes to
physical demand and physical demand from Asia has been a major support. That's
the mainstream view and it's compelling, but there is a contrarian take on
the data as well. Isn't there always?
The chart below shows quarterly percentage changes in overall lending and
leasing activity at US commercial banks since Q1 2013. After falling back to
a meagre 1% growth rate at the end of last year when the taper was finally
unveiled bank lending is accelerating again. Lending growth reached almost
4% in Q1 and has continued to accelerate since. Not explosive growth but a
strong and strengthening uptrend.
In my discussion early this year about the end of QE I pointed out that the
market might be in for surprises when it comes to money supply growth and even,
potentially, inflation as QE is scaled back. I noted then that in terms of
the money supply that matters bank lending is the key metric, not US Fed liquidity
operations. Indeed, the chart above backs that up since new bank lending was
hitting multi-year lows as the scale of QE was peaking.
We may be about to see a turn in inflation readings, at least in the US. It
will take enough optimism to tweak the growth in lending higher still and greater
capacity utilization before there is a move of any size but the ground work
is getting laid now.
The best periods for gold are periods of negative real interest rates. Rates
are currently negative in the US out to three years duration. If bond yields
weaken further and the uptick in CPI and PPI isn't a one hit wonder real rates
could get more negative still.
Negative real rates are more important than high inflation per se. That is
because they indicate the central bank is "behind the curve". In this case
it would be intentional. Most US Fed governors have made it clear full employment
is the part of their mandate they are focused on. With inflation still below
1.5% and weakening bond yields it should be.
I'm not saying it's a sure thing inflation will move up but inflation does
tend to surprise and to accelerate faster than expected when the trend changes.
It bears watching.
Another factor capping the gold price is strength in the US Dollar. It would
be more accurate to call it weakness in the Euro.
The Eurozone continues to underperform and clearly has no inflation issues.
Deflation is a real threat there. The ECB indicated it will move on more QE
or lower interest rates at its next meeting in a few days. That knocked the
Euro down and created the latest spike in value of the trade weighted Dollar.
Action by the ECB is at least partially priced in.
There could be more selling in the gold market on really aggressive action
by the ECB. Conversely, if the market is disappointed by a weak or non-response
at the next meeting the Euro could bounce again. It seems improbable the ECB
will do nothing after foreshadowing more easing in recent interviews but they
have surprised the market by sitting on their hands before. We'll know in a
few days.
Trading in the Junior space continues to be lackluster and the Venture is
also near the bottom of a tight trading range. It too could ease further before
the new bull market resumes. I am seeing financings getting closed though and
news flow is finally starting to pick up. The discoveries we need to renew
interest will hopefully follow.
Listen to Eric Coffin's latest radio interview with Jay Taylor
on 'Turning Hard Times Into Good Times' radio show, April 29, 2014.
Eric shares his views on the metals markets and gives listeners a couple of
his favorite junior mining picks. Click
here to listen now.
