From The June 2013 HRA Journal
Gold continues to struggle and so do explorers. I am seeing encouragement
in the trading of some discovery stories but this is a very small subset
of the junior sector.
I think the precious metals markets are well set up for a rally but gold
rallies don't usually happen in the summer. It's still possible but I don't
think a rally strong enough to drag the juniors along for the ride can
be assumed in the short term.
I will continue to focus on discovery and potential discovery stories.
The lack of well-funded companies with targets I really like means I haven't
been adding new names to the list recently. I don't see that changing soon.
In a low liquidity bear market no one wants to get stuck with the wrong
stock. There are a handful of situations that look interesting but I'm
waiting for the market to come to me. If that happens those of you on the
SD list will hear about it first.
Most of the companies I have been concentrating on are either drilling
or will be before the next issue is out. That is where the rubber meets
the road for this type of speculation. We've had one work out and I'm hoping
to see other successes before much longer. The summer doldrums are almost
upon us but companies that announce important discoveries will still get
attention.
Markets just keep getting stranger. Traders are obsessed with guessing when
the US Fed will start to taper their QE program. This has been generating a
lot of counterintuitive trading.
The US economy continues to post positive economic readings though it looks
like things may be slowing a bit.
It's clear market participants don't think the US economy is strong enough
yet to advance without prodding by the Federal Reserve. Every comment by a
member of the Fed Open Market Committee (voting or not) sends markets stampeding
one way or another. Volatility levels are high. A lot of retail money recently
entered the markets for the first time in years. It will be interesting to
see if the wild swings during the last couple of weeks are too hard on their
nerves.
The overwhelming concerns about QE or no QE can be seen in the reaction to
major economic readings through the last month. In a "normal" market that has
seen the sort of move the S&P 500 has the past few months any sort of negative
or even contradictory economic reading would be a disaster. That certainly
hasn't been the case lately.
The US employment report for May is a perfect example. The US economy produced
175k jobs in May, slightly higher than the consensus estimate of 165K jobs.
Revisions to March and April data basically accounted for the amount above
consensus. Normally this would have produced a flat or down session in the
markets as traders who bet on a strong reading exited.
Instead of that we got a huge rally in equities and a pummeling (again) for
gold. Most mainstream finance sites credited an employment report that "beat
consensus" for the rally. I think a widespread belief that the job gains would
not be strong enough to convince the Fed to cut QE was the real reason stocks
soared.
The charts above show recent action in the gold, $US and Yen markets. Gold
has continued to struggle, which is not comforting given the looks of the $USD
chart.
The Dollar Index has put in what looks like an important top, losing 4% and
dropping below its 200 day moving average. At least some of this is due to
the bounce in the Yen. Traders closing Yen short/Dollar long positions certainly
accounts for some of the move. It's also part of the reason precious metals
have reacted so weakly to the Dollar move.
Another trade that may be affecting the Dollar is a move out of US Treasuries.
It's hardly a stampede but yields on 10 and 30 year treasuries have increased
by a third (from a record low base, admittedly) in the past month or so. This
too is a reflection of traders betting on how and when the Fed exits QE.
I can't read Bernanke's mind any better than Wall St traders can but I'm not
convinced he's as close to pulling the trigger as many assume. Swings in the
markets are making the decision that much harder. The Fed Open Market Committee
is well aware of the impact this move will have. They want to time it to ensure
the change in QE buying does not become a self-fulfilling prophesy that crashes
bond markets and takes Wall St down with it.
Based on comments by Bernanke he is looking for at least a 200k per month
increase in employment for several months running. We haven't got that yet.
Job growth is still light and the jobs being created are mainly low quality
ones.
Another important factor the Fed will consider is the lack of inflation. The
chart above shows the longer term trend in the Personal Consumption Index deflator,
the Fed's preferred inflation measure. It's at 1.1% (ex food and energy) and
has been trending down since early 2011.
I'm not bearish on the US economy and would be shocked if the PCE went negative.
That said, I don't see Bernanke risking it. Deflation is VERY hard to get rid
of if it gets entrenched. Japan is throwing everything and the kitchen sink
at the problem. Inflation is fairly easy to beat when you have a zero interest
rates. You just jack rates up if you think inflation is trending up. Deflation
is a low probability outcome but one Bernanke would be unwilling to risk.
The Fed sets interest rates, but only some of them. Treasury and LIBOR markets
provide benchmarks for many loan types. When QE ends the Fed will cease being
a large buyer in the Treasury as well as some mortgage markets. This could
have a big impact, generating interest rate increases that will be damaging
if they are timed wrong. QE will end, but perhaps not as fast as some fear.
None of this will help the gold market unless the Fed announced firmly that
QE will continue. Gold has managed to hold its price range but hasn't been
able to rally convincingly. Recent moves by the Indian government to make gold
buying more expensive has put a dent in gold demand. It's too early to say
if that drop is permanent but it's not helping. Given corruption and incompetence
in the Indian financial sector it's hardly surprising many Indians prefer to
hold gold.
I still think the gold market is set up for a rally but will continue to focus
on discovery stories until that rally arrives.
