Gold and gold stocks have maintained their gains since early May. And it's
largely due to a significant downside miss in the nonfarm payrolls report for
April: Against consensus expectations of 205,000 jobs created in the month,
April's number came in at just 160,000 jobs. It wasn't quite as bad as the
headline number may indicate: Average hourly earnings rose by 8 cents (0.3%),
while the average work week added 0.1 hour.
Still, in an interview recently on CNBC, Atlanta Federal Reserve President
Dennis Lockhart volunteered a 200,000-job benchmark as a level that would be
conducive to further Fed rate hikes. The miss on jobs, combined with dismal,
0.5% GDP growth for the first quarter, should put a stake in the heart of
hopes for a rate hike at the Fed's mid-June meeting.
Moreover, Britain's Brexit vote-coming a few days later on June 23-remains
a formidable barrier to any Fed action in advance of the vote.
In fact, expectations for the timing of the next hike have now been pushed
well into 2017 before we get to a "50/50" projection.
So, the market was a bit dizzy after the sharp run higher in the metals at
the end of April. Investors had temporarily lost sight of why the metals
were rising.
Said reason being the persistent weakness in the U.S. economy that seems
to be constantly postponing any Fed action, or at least any Fed moves to
raise rates. There also remains the lingering possibility that, should GDP
growth slip into the negative zone, the Fed may actually move to ease
monetary policy again.
In fact, there's the chance that the Fed would join many of its fellow
central banks in instituting negative interest rates-a move that would
quickly send gold far, far higher.
Regardless, from both technical and fundamental standpoints, gold seems to
have proven that this year's run is much more than the typical, short-lived
rallies that we've seen at similar times during the long bear market.
Of course, the mining stocks have been saying this for some time.
Looking back, the current market environment reminds me of 2002. Early in
that year, gold had risen more than 30% from its lows, and the mining stock
indices had more than doubled.
That was it-the big move was obviously over-was the consensus opinion.
But it was far from over. In fact, gold and mining stocks would multiply
over and over again in the coming years. And the biggest winners soared 10,
20 and more times in value.
That's the scope of the opportunity that's facing us today.
Now, we still have the massive commercial net short position working
against us, and in truth it has likely been this iceberg sell order that has
kept gold from breaching $1,300/ounce and staying there.
But more fundamental news like the April jobs number will put the pressure
back on the commercials, and greatly increase the chances of overwhelming
them.
Considering the truly extraordinary profits we've realized so far this
year (and considering how miserable the previous four-and-a-half years were),
we simply have to seriously look at taking some profits off of the table.
We need to remain strongly positioned in the sector, because this market
has surprised everyone with its staying power. But shaving profits as we go
does not equate with abandoning the market altogether.
In fact, we also need to look at gold plays that have heretofore
underperformed for some reason.
Two companies come to mind: Pershing Gold
Corp. (PGLC:NASDAQ) and Columbus Gold Corp. (CGT:TSX; CBGDF:OTCQX).
In the case of Pershing Gold, the company is up "only" about 15%
so far this year. This compares against many other gold plays that have more
than doubled.
The underperformance is likely due to two things: One, an unfortunately
timed financing that was priced at lower levels earlier in the year but not
closed until the end of March, after the market had already run considerably
higher.
And, two, some remaining skepticism that Pershing will be able to
successfully produce gold at the Relief Canyon mine, where previous operator
Pegasus had run into difficulties, including recovery rates.
The latter point revolves around a perception that all of the high-grade
gold at Relief Canyon is contained in troublesome sulphide ore. This much may
be true, but skeptics fail to realize that such ore makes up only about 2% of
the total resources, and isn't factored into the economics in any case.
With a lot of news coming up, including a resource update and preliminary
economic assessment due at some point over the next couple of months,
Pershing Gold could go a long way toward catching up with the rest of the
market.
For Columbus Gold, the performance news is a bit better: The stock is up
about 86% so far this year. Still, the company's relative underperformance
was largely due to a very large shareholder that had been unloading its
position from mid-December until very recently. The company has just
facilitated the purchase of the remaining shares held by Auplata S.A.
As of mid-December, Auplata had owned about 20 million shares of Columbus,
which it had received as partial compensation for the sale of the Paul Isnard
property in French Guiana to Columbus in 2011.
With this overhang removed, the way would appear clear for Columbus to
also play catch up to its peer group.
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With a career spanning four decades in the investment markets, Brien Lundin serves as president and CEO of Jefferson
Financial, a highly regarded publisher of market analyses and producer of
investment-oriented events. Under the Jefferson Financial umbrella, Lundin
publishes and edits Gold Newsletter, a cornerstone of precious metals
advisories since 1971. He also hosts the New Orleans Investment Conference.
Disclosure:
1) The following companies mentioned in the article are sponsors of
Streetwise Reports: Pershing Gold Corp. and Columbus Gold Corp. The companies
mentioned in this article were not involved in any aspect of the interview
preparation or post-interview editing so the expert could speak independently
about the sector. Streetwise Reports does not accept stock in exchange for
its services. The information provided above is for informational purposes
only and is not a recommendation to buy or sell any security.
3) Brien Lundin: I or my family own shares of the following companies
mentioned in this article: None. I personally am or my family is paid by the
following companies mentioned in this article: None. My company has a
financial relationship with the following companies mentioned in this
article: None. I determined which companies would be included in this article
based on my research and understanding of the sector. Statement and opinions
expressed are the opinions of Brien Lundin and not of Streetwise Reports or
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