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February 20, 2019

Global Market Comments
February 20, 2019
Fiat Lux

Featured Trade:

(THE NEXT COMMODITY SUPER CYCLE HAS ALREADY STARTED),
(COPX), (GLD), (FCX), (BHP), (RIO), (SIL),
 (PPLT), (PALL), (GOLD), (ECH), (EWZ), (IDX),
(WHY THE REAL ESTATE BOOM HAS A DECADE TO RUN),
(DHI), (LEN), (PHM), (ITB)

The Next Commodity Supercycle Has Already Started

When I toured Australia a couple of years ago, I couldn’t help but notice a surprising number of fresh-faced young people driving luxury Ferraris, Lamborghinis, and Porsches.

I remarked to my Aussie friend that there must be a lot of indulgent parents in The Lucky Country these days. “It’s not the parents who are buying these cars,” he remarked, “It’s the kids.”

He went on to explain that the mining boom had driven wages for skilled labor to spectacular levels. Workers in their early twenties could earn as much as $200,000 a year with generous benefits.

The big resource companies flew them by private jet a thousand miles to remote locations where they toiled at four-week on, four-week off schedules.

This was creating social problems, as it is tough for parents to manage offspring who make more than they do.

It’s starting to look like we are on the eve of another great commodity boom, the start of a long-term super cycle. China, the world’s largest consumer of commodities, is currently stimulating its economy on multiple fronts, including generous corporate tax breaks and relaxed reserve requirements. Get a trigger like a settlement of its trade war with the US and it will be off to the races once more for the entire sector.

The last bear market in commodities was certainly punishing. From the 2011 peaks, copper (COPX) shed 65%, gold (GLD) gave back 47%, and iron ore was cut by 78%. One research house estimated that some $150 billion in resource projects in Australia were suspended or canceled.

Budgeted capital spending during 2012-2015 was slashed by a blood curdling 30%. Contract negotiations for price breaks demanded by end consumers broke out like a bad case of chicken pox.

The shellacking was reflected in the major producer shares, like BHP Billiton (BHP), Freeport McMoRan (FCX), and Rio Tinto (RIO), with prices down by half or more. Write-downs of asset values became epidemic at many of these firms.

The selloff was especially punishing for the gold miners, with lead firm Barrack Gold (GOLD) seeing its stock down by nearly 80% at one point, lower than the darkest days of the 2008-9 stock market crash.

With both prices and volumes in a race to the bottom, the effect on profits was especially traumatic. Highly leveraged, smaller, undercapitalized firms have filed for bankruptcy in droves, such as the Western Australia-based Allmine Group (see http://www.allminegroup.com), a service provider.

You also saw the bloodshed in the currencies of commodity-producing countries. The Australian dollar led the retreat, falling 30%. The South African Rand has also taken it on the nose, off 30%. In Canada, the Loonie got cooked.

The impact of China cannot be underestimated. In 2012, it consumed 11.7% of the planet’s oil, 40% of its copper, 46% of its iron ore, 46% of its aluminum, and 50% of its coal. It is much smaller than that today, with its annual growth rate dropping by more than half, from 13.7% to 6.6%.

The rise of emerging market standard of living will also provide a boost to hard asset prices. But as China goes, so does its satellite trading partners, who rely on the Middle Kingdom as their largest customer. Many major commodity exporters themselves, like Chile (ECH), Brazil (EWZ), and Indonesia (IDX), are looking to come back big time.

As a result, western hedge funds are currently moving money out of paper assets, like stocks and bonds, into hard ones, such as gold, silver (SIL), palladium (PALL),  platinum (PPLT), and copper. A massive US stock market rally has sent managers in search of any investment that can’t be created with a printing press. Look at the best performing sectors this year and they are dominated by the commodity space.

The bulls may be right for as long as a decade, thanks to the cruel arithmetic of the commodities cycle. These are your classic textbook inelastic markets. Mines often take 10-15 years to progress from conception to production. Deposits need to be mapped, plans drafted, permits obtained, infrastructure built, capital raised, and bribes paid. By the time they come on line, prices have peaked, drowning investors in red ink.

So a 1% rise in demand can trigger a price rise of 50% or more. There are not a lot of substitutes for iron ore. Hedge funds then throw gasoline on the fire with excess leverage and high-frequency trading. That gives us higher highs to be followed by lower lows.

I am old enough to have lived through a couple of these cycles now, so it is all old news for me. The previous bull legs of super cycles ran from 1870-1913 and 1945-1973. The current one started for the whole range of commodities in 2016. Before that, it was down from seven years.

While the present one is short in terms of years, no one can deny how business cycles have been greatly accelerated by globalization and the Internet.

Some new factors are weighing on miners that didn’t plague them in the past. Reregulation of the US banking system is forcing several large players, like JP Morgan (JPM) and Goldman Sachs (GS) to pull out of the industry. That impairs trading liquidity and widens spreads— developments that can only accelerate upside price moves.

The prospect of flat US interest rates is also attracting capital. That reduces the opportunity cost of staying in raw metals, which pay neither interest nor dividends.

The future is bright for the resource industry. While the gains in Chinese demand are smaller than they have been in the past, they are off of a much larger base. In 20 years, Chinese GDP has soared from $1 trillion to $10 trillion.

Some 20 million people a year are still moving from the countryside to the coastal cities in search of a better standard of living and improved prospects for their children.

That is the good news. The bad news is that it looks like the headaches of Australian parents of juvenile high earners may persist for a lot longer than they wish.

 

 

 

 

 

The Terrible News the Bond Market is Telling to Gold

The news from Australia?s Perth Mint was horrific last week. The refiner for the world?s second largest producer reported that sales hit a new three year low.

And the worst is yet to come.

Shipments of gold coins and bars plunged to 21,671 ounces in May, compared to 26,545 ounces in April. Silver sales have seen similar declines.

I have been warning readers for the last four years that investors want paper assets paying dividends and interest, not the hard stuff, now that the world is in a giant reach for yield.

Ten-year US Treasury yields jumping from 1.83% to 2.43% this year is pouring the fat on the fire.

This all substantially raises the opportunity cost of owning the barbarous relic. With bond yields now forecast to reach as high as 3.0% by the end of the year, the allure of the yellow metal is fading by the day.

The gold perma bulls have a lot of splainin? to do.

Long considered nut cases, crackpots, and the wearers of tin hats, lovers of the barbarous relic have just suffered miserable trading conditions since 2011. Gold has fallen some 39% since then during one of the great bull markets for risk assets of all time.

Let me recite all the reasons that perma bulls used your money to buy the yellow metal all the way down.

1) Obama is a socialist and is going to nationalize everything in sight, prompting a massive flight of capital that will send the US dollar crashing.

2) Hyperinflation is imminent, and the return of ruinous double-digit price hikes will send investors fleeing into the precious metals and other hard assets, the last true store of value.

3) The Federal Reserve?s aggressive monetary expansion through quantitative easing will destroy the economy and the dollar, triggering an endless bid for gold, the only true currency.

4) To protect a collapsing greenback, the Fed will ratchet up interest rates, causing foreigners to dump the half of our national debt they own, causing the bond market to crash.

5) Taxes will skyrocket to pay for the new entitlement state, the government?s budget deficit will explode, and burying a sack of gold coins in your backyard is the only safe way to protect your assets.

6) A wholesale flight out of paper assets of all kind will cause the stock market to crash. Remember those Dow 3,000 forecasts?

7) Misguided government policies and oppressive regulation will bring financial Armageddon, and you will need gold coins to bribe the border guards to get out of the country. You can also sew them into the lining of your jacket to start a new life abroad, presumably under an assumed name.

Needless to say, things didn?t exactly pan out that way.

The end-of-the-world scenarios that one regularly heard at Money Shows, Hard Asset Conferences, and other dubious sources of investment advice all proved to be so much bunk.

I know, because I was once a regular speaker on this circuit. I, alone, a voice in the darkness, begged people to buy stocks instead.

Eventually, I ruffled too many feathers with my politically incorrect views, and they stopped inviting me back. I think it was my call that rare earths (REMX) were a bubble that was going to collapse was the weighty stick that finally broke the camel?s back.

By the way, Molycorp (MCP), then at $70 a share, recently announced it was considering bankruptcy. Rare earths didn?t turn out to be so rare after all.

So, here we are, five years later. The Dow Average has gone from 7,000 to 18,000. The dollar has blasted through to a 14 year high against the Euro (FXE).

The deficit has fallen by 75%. Gold has plummeted from $1,920 to $1,150. And no one has apologized to me, telling me that I was right all along, despite the fact that I am from California.

Welcome to the investment business. Being wrong never seems to prevent my competitors from prospering.

Gold has more to worry about than just falling western demand. The great Chinese stock bubble, which has seen prices double in only nine months, has citizens there dumping gold in order to buy more stocks on margin.

This is a huge headache for producers, as the Middle Kingdom has historically been the world?s largest gold buyer. As long as share prices keep appreciating, demand there will continue to ebb.

So now what?

From here, the picture gets a little murky.

Certainly, none of the traditional arguments in favor of gold ownership are anywhere to be seen. There is no inflation. In fact, deflation is accelerating.

The dollar seems destined to get stronger, not weaker. There is no capital flight from the US taking place. Rather, foreigners are throwing money at the US with both hands, escaping their own collapsing economies and currencies.

And with global bond markets having topped out, the opportunity cost of gold ownership returns with a vengeance.

All of which adds up to the likelihood that today?s gold rally probably only has another $50 to go at best, and then it will return to the dustbin of history, and possibly new lows.

I am not a perma bear on gold. There is no need to dig up your remaining coins and dump them on the market, especially now that the IRS has a mandatory withholding tax on all gold sales. I do believe that when inflation returns in the 2020?s, the bull market for gold will return for real.

You can expect newly enriched emerging market central banks to raise their gold ownership to western levels, a goal that will require them to buy thousands of tons on the open market.

Gold still earns a permanent bid in countries with untradeable currencies, weak banks, and acquisitive governments, India, another major buyer.

Remember, too, also that they are not making gold anymore, and that all of the world?s easily accessible deposits have already been mined. The breakeven cost of opening new mines is thought to be around $1,400 an ounce, so don?t expect any new sources of supply anytime soon.

These are the factors which I think will take gold to the $3,000 handle by the end of the 2020?s, which means there is quite an attractive annualized return to be had jumping in at these levels. Clearly, that?s what many of today?s institutional buyers are thinking.

Sure, you could hold back and try to buy the next bottom. Oh, really? How good were you at calling the last low, and the one before that?

Certainly, incrementally scaling in around this neighborhood makes imminent sense for those with a long-term horizon, deep pockets, and a big backyard.

GOLD 6-8-15

GDX 6-9-15

ABX 6-9-15

MCPOops!

 

John Thomas -GoldMaybe It Doesn?t Look So Good After All

Buy the Big Dip in Gold.

Look at the charts for the barbarous relic below and you can only come to one possible conclusion. If the Federal Reserve disappoints on Thursday, just a little bit, even by a smidgeon, and does not deliver QE3 and gold sells off big, you should jump in and by the stuff like crazy.

All of the charts for gold and the derivative plays are showing major breakouts to the upside. This is true for spot gold and the ETF (GLD), which broke a major downtrend line last week. It is the case for the gold miners ETF (GDX). It is also the reality for silver, the silver ETF (SLV), and the silver miners (SIL).

The entire precious metals space has been floated since the prospect of further quantitative easing from the world?s central banks started in earnest on May 15. Since then, it has been prudent and profitable to buy every dip.

European Central Bank president Mario Draghi did the heavy lifting in mid-July by promising to ?Do whatever it takes to rescue the Euro? (read: huge quantitative easing). He then put his money where his mouth was last week by announcing an unlimited bond-buying program.

Assorted dovish Federal Reserve governors have done their bit by talking up the prospect of further monetary easing. China threw in its ten cents by announcing a $150 billion reflationary budget on Friday. Even the Bank of Japan has been heard murmuring about additional money printing. It all has the smell of an international coordinated effort to reflate the global economy.

Where exactly do you get back in? The sweet spot in the (GLD) will be the 200 day moving average at $159.66, which fell at the end of August. That is down $7.94 in (GLD), or $79.40 in the spot market from here.

 

 

 

 

 

 

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