No regional Fed President emerged Friday to bolster the sagging indices. In the closing hour the slump became a plunge as the QE-nurtured DJIA shed 209 points. Though impoverishing for equities and bad for long and intermediate term bonds, the day was rich in lessons on the world economy and US sector trends.
The rise of the USD Friday illumined relative strength among major commodity and basic material producers including PM (precious metal) miners. I monitor these in relation to economic fundamentals and market trends for perspective on where we are and where we are heading. First I glance at action in the currency space as context for considering valuations and resilience in the PM sector as we head into June and summer.
The USD rose sharply from 8am till almost noon on May 31. For weeks it has been in the upper part of its 52-week range, rising strongly from a low of 79.13 on February 1. After a late April drop to 81.48 May saw strength: the DXY was 83.598 mid-morning May 31 but its subsequent slide did not help equities or commodities that fell on signs of declining global growth. Up till Friday afternoon the inverse relation of the USD to PM bullion and miners seemed intact: three days of USD decline matched recovery in miners with the PM space being strongest (daily gains above 5% were common). Then two days of renewed USD strength saw declines in mining. But as May ended the PM sector outperformed the indices, other commodities and basic materials signaling a shift of investor focus and sentiment.
Let us consider whether the relative strength of the PM sector is a reversion to mean and value buying and what else its relative strength may indicate about the economy and markets.
First key point: USD strength is relative to other fiat currencies and most of the major peers in the DXY basket are faring poorly. European growth is contracting, joblessness is at record levels and the Euro (57% of the DXY basket) has fallen. German retail sales were part of the systemic weakness. Another component of the DXY, the Yen lost 3.4% against the USD in May as attempts by the BoJ to jump start a moribund economy by devaluation have had predictably bad results with great intraday and day-day volatility. The CAD and Swiss Franc also have slumped.
The main US indices showed on Wednesday that our markets depend on QE to sustain a rise but Friday's action showed that even with those injections they are overbought. "Everyone is trying to make heads or tails of what is going on with the Fed" was a typical market strategist view. Confusion and anxiety pervade the markets while economic basics give alarm. "The end result," as JP Morgan's Joseph Tainous noted, "is increased volatility." Asian markets have tanked for two weeks due to confusion about Fed policy: the MSCI Asia-Pacific index is down 6.6% in that time. Clearly world markets are running on debt rather than fundamentals and strain is showing. Minneapolis Fed President Kocherlakota said June 01 that "greater concern about risks" in the markets, building since 4Q 2007 will dissipate "slowly." This is another signal that QE will not be withdrawn from a debt dependent economy. That will help indices in the short term but should serve as a caution about allocation.
The lack of confidence reflects serious structural issues like those in the regional Fed reports which demand attention. Consumer behavior ultimately will reflect the reality glimpsed in data which shows that at this point concern is healthier than bullish excitement.
Second main point: major miners suffered with the USD rise and well-founded doubts about economic growth (see my previous piece on the regional Fed reports) in America and China whose May PMI was 49.6. As the major indices plunged toward the May 31 close, BHP Billiton (BHP) ended - 2.91%, Freeport McMoRan (FCX) -2.54%, Rio Tinto (RIO) - 4.16%, Southern Copper (SCCO) - 2.87% and Vale (VALE) -4.64% gave back gains earlier in the week with VALE, as often YTD being weakest and FCX best or, in Friday's case, least bad. However, note that part of the FCX share price decline as May ended reflects the special dividends it will pay as part of completing its acquisition of Plains Exploration (PXP): $3/share to holders of PXP and $1/share to FCX shareholders of record July 1. FCX paid its most recent quarterly dividend May 15.
Third main point: a notable exception to the declines in the indices, Basic Materials and Commodities (Grains (JJG) were the sole exception) were major PM miners which held up well and showed their attractive force as value and dividend plays. Goldcorp (GG), -.58 and Barrick Gold (ABX), -.80% held up best, bucking a sector and market-wide trend to rise at and after the close. The action suggests that institutional and retail investors understand that the negatives about Barrick's Pascua Lama are priced in and overblown. With its 4.2% dividend and huge reserves including copper, ABX is beginning to shed some of the negative sentiment that has crushed its price the past six months. The other major in the PM mining space, Newmont (NEM), held up better than the S&P (SPY) which fell -1.53. NEM surged after hours to end the date fractionally off, -.20, showing substantial strength relative to the entire productive sector and the indices. NEM yields 4.14% and goes ex June 10. Still near its 52-week low of $30.30 in mid May, Newmont is a solid value and dividend buy below $35 as ABX is below $22. At nasdaq.com, analyst sentiment on NEM is mostly "strong buy" with a 12-month consensus target of $41.80. The consensus on ABX at nasdaq is $30 while GG is rated "Buy-Strong Buy" with a 12-month target of $38.25.
As the market digests evidence of weakening global growth, these major PM producers of products with tech - industrial and wealth preservation uses will return to their mean while hi-flying equities in other sectors confront realities of shrinking growth and monetary disorder. NEM, GG and ABX also held up well next to mega-cap Energy producers including British Petroleum (BP) down 1.56%, Chevron (CVX), - 1.87%, royal Dutch Shell (RDS.B) -1.80% and Exxon (XOM) -1.74%. The carnage included major steel and chemical makers like Arcelor (MT), Nucor (NUE), DuPont (DD) and Dow (DOW). Basic commodities like Copper (JJC), Agribusiness (MOO) and Timber (CUT) all fell as much or more than the S & P.
Bottom line: the USD remains the cleanest shirt in the laundry basket of fiat currencies. However, as reflected by increasing market uncertainty and sensitivity to monetary policy, the USD and other fiat currencies are shaky and are not helping the struggling economies beneath their volatile markets. Having been badly beaten down YTD and especially since April 10, bullion and PM metal miners as June begins represent value and the larger miners invite investment for yield sustained by proven resource reserves.
In the mid-tier space Kinross Gold (KGC) held up best (down 1.18%) and rose strongly after the close to end May 31 +1.57%: it is rated "Buy-Strong Buy" and its target, $8.95 is 40% above its current price. IamGold (IAG) suffered a 6.74% decline only slightly mitigated after hours reinforcing my view that for this year it is a trading vehicle. The best among junior gold miners, McEwen Mining (MUX) continues to outperform not only its junior peers but most of the PM sector. For example, Vista Gold (VGZ) was down 6% and the Junior Gold Miners ETF (GDXJ) fell 4.49% though it gained back +1.74 after hours. GDXJ was among the top gainers of the week, rising 7.5% with the main Gold Miners ETF (GDX) up 7.3% to close the month. Major players have invested in the depressed GDXJ. As for MUX, in a bad year it outperformed when the sector rose in 3Q 2012, again during its 4Q 2012 plateau and in the difficult YTD. It closed May at $2.54, 36% above its 52-week low set in April. It is rated "Strong Buy" with a target of $5.11, double its current price.
The final takeaway is that some major mixed commodity miners like FCX and the main PM miners are set to outperform in times that may be volatile and difficult. Major retail PM buying worldwide and by Asian CB's from Turkey to South Korea indicates the enduring value of precious metals in a time of wealth consolidation and disorder in the monetary system. With Au closing May at $1389/oz and Ag at $22.22 the new basing period is still in process but the fundamentals are strong whether your means allow purchase of three, thirty-six or two hundred coins or fifty, two hundred or more shares of a major producer still near its secular low.
Additional disclosure: I own shares of PM miners in two mutual funds and a diversified ETF.