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Why the Current Resource Sector Ebullience will be Short Lived

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Published : January 27th, 2014
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Category : Gold and Silver

Oh the hyperbole and gush frothing forth as the TSX Venture takes another moon shot at regaining some of its former glory. Its enough to make one want to resurrect their online trading account and stuff it full of dollars in anticipation of the return of the bull.

But soft! young trader!

Woulds’t thou toss away so carelessly what remaining ducats ye have retained through the foul tempest of markets most recently endur’d?

While I’d like to embrace the idea that there is a reason to pop the cap offa chilly or two in commemoration of the End of Agony, I do not believe the time is yet at hand, and there are a few headlines out there that bear further scrutiny.

For instance, its always a good idea to identify what has fundamentally changed to induce a reversal in trend that threatens to become sustained and substantial. In the absence of any such fundamental evidence, astute market sleuths tend to conclude that the reversal is not, in fact, a trend reversal, but merely a bear market correction, also known as a “flash in the pan”.

And scrutinize as thoroughly as my gnat-like attention span permits, for the life of me, I don’t see any fundamental explanation for the sudden new-fouind new year exuberance in our erstwhile badly beaten venture market.

There has been no recovery in metals prices, nor any explosion of growth in GDP, employment, retail sales, wages, or real estate, to suggest a return to fundamental primary demand. Nor have the debt loads of the world’s largest economies diminished in the slightest relative to their respective GDP numbers. Quite the opposite. Fundamentally, things don’t look any better than they did in 2009.

The only area in which we have seen tremendous growth in the last five years is in government fabricated liquidity, and in derivatives markets, where paper profits are generated by gambling with government fabricated money.

Could this be the foundation upon which economists the world over are building their increasingly bullish predictions as to a broadly enjoyed global economic prosperity for 2014?

If it is, then it would appear the government and financial services communities, who are the inevitable source of positive economic outlooks, are very much “talking their books”, for they certainly don’t make a lot of money when skepticism keeps chequebooks tucked away and savings shielded from the grasping paws of investment bankers. But their rationale for an improving economic outlook is based on the artificial demand engendered by multiple governments issuing multiple billions of currency each month, which is in turn dutifully loaned as credit, but only to those qualified to access it.

Since the onset of the “financial crisis”, the number of people who can access credit to buy houses, cars, stocks or any other asset of the consumer class has trended steeply downward. As outlined by Marc Faber of Doom Gloom and Boom report fame, one net result of government capital fabrication programs has been a massive divergence in economies, wherein the working class economy continues to wallow in conditions characterized by low wages, fewer jobs, shorter hours where jobs exist, closing factories against rising prices in everything from fuel to food staples. Since the bulk of world demand for durable and consumable goods originates with this economic class, there can be no real demand growth from this sector, as long as such conditions persist.

The uppermost class of income earners, typified by bankers, lawyers, politicians, corporate titans, etc., have seen their earnings soar to exponentially greater heights, which skews the broad economic picture toward one of health, even while those who enjoy such abundance are in the vast minority, and therefore, incapable of moving the demand needle in the right direction.

And those housing recovery numbers? That is the relatively nascent situation where the refinement of the Collateralized Debt Obligation and Mortgage Backed Securitized Debt cash machines of the financial sector have replaced consumer demand for residential real estate by empowering banks to become landlords to an ever expanding renting class.

So if somebody could please enlighten me as to where exactly fundamental demand is supposed to materialize from within the broad economy, I will gladly retract my pessimistic outlook, and rebroadcast such intelligence in support of genuine and legitimate growth, as such analysis is woefully missing from the financial discourse among those who can be relied upon not to be shilling under the guise of forecasting.

Real Catalysts Needed

That is not to say that there is no chance of a recovery in fundamental demand to drive worldwide economic prospects. On the contrary, there are a range of potential catalysts that could constitute the onset, or return, of a secular bull market for mineral commodities.

The advent of any of these conditions, however, are also likely to portend the onset of collapse in U.S. dollar confidence, an inevitability so widely shared among “real money” advocates as to be taken for granted. And such a collapse, expressed in terms of flight from first U.S. Treasurys to then any asset class denominated in USD, would have negating impacts on a revival in mineral commodity demand.

But here they are, nonetheless:

1) A rebound in the price of precious metals would certainly be the primary economic indicator to suggest that faith in the ability of the United States to repay its debts might be eroding. And such a rebound would definitely ignite the resource sector again. If it happens in time, major troubled miners such as Barrick Gold Corp. might even be saved, though time is running out for the increasingly catatonic gold giant. Less debt encumbered behemoths such as Newmont, Goldcorp, Anglogold Ashanti etc. will likely weather the current storm for longer than Barrick.

But certainly the return of the gold bull would spell both the end of the capital fabrication-induced swoon now underwriting the futures market-distorted price of gold and silver, and catalyze a fierce rebound in the TSX Venture market. If this is going to occur, I elect Q3 2014 as the most likely time frame, as it is going to take until at least then to learn both the effect of and intentions toward the concept of “tapering” of the capital fabrication program being led by the United States Federal Reserve Bank.

2) An in that vein, should reduction in the rate at which capital fabrication is undertaken prove to undermine the current effusiveness of U.S. equity markets, thus damaging the U.S. Treasury’s and White House’s ability to sell Rosy Outlook to her various Johns in the top-tier financial services universe, we might see a reversal of that policy. Which could mean a redoubling of the capital fabrication program to beyond $85 billion a month, which would be necessary to recover the lost ground in stimulated stats, and coax the bulls back into equity markets.

If that were to happen, and G7 nations jumped on that wagon, (except of course, the perpetually smug Canada), a coincidental rise in the stridently Rosy Outlook’s voice could be expected, and would likely induce the same superficial happiness apparent in markets throughout 2013.

The result would be the same kind of spillover into the resource sector that appears to driving the early enthusiasm in early 2014 we currently see in our barometrically representative TSX Venture exchange.

The fact that Janet Yellin has taken the Fed stage is a mark in favour of the likelihood of this reaction to any sign of dejection on the part of U.S. equity markets continuing beyond the end of January.

How Long Will the Economic Winter of Resources Last?

In May 2012, after what then turned out to be a short-lived rally in the TSX Venture, I opined that we could be in for a four year economic winter. In May 2014, we will have reached the two year mark of that prediction, and numerous indeed will be and have been these index-headfakes to the upside by the TSX Venture and other resource-focused companies. If my assessment is correct in total, then we will not likely see any meaningful return to substantial demand growth for base and industrial minerals until mid-2016.

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James West is an independent writer who has been active in the management, finance and public relations of public companies in both the resource and technology sectors for over twenty years.
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You seem to lump the "resource sector" and the TSX all together with gold, silver, and, I assume, platinum and paladium into your negative prediction, but then you end your article with,

"If my assessment is correct in total, then we will not likely see any meaningful return to substantial demand growth for base and industrial minerals until mid-2016."

But the market for "base and industrial minerals" and the market for the PMs are not particularly related, except as they are traded together by certain funds. Fundamentals of those two markets, on the other hand, are quite different. Perhaps you are saying that the resource sector of the market, primarily the base and industrial minerals, might receive some degree of drafting / lift from the PM market should it take off?
Latest comment posted for this article
You seem to lump the "resource sector" and the TSX all together with gold, silver, and, I assume, platinum and paladium into your negative prediction, but then you end your article with, "If my assessment is correct in total, then we will not likely see  Read more
j T. - 1/29/2014 at 10:12 PM GMT
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