No Renewed Bull Phase for Metals Miners Just Yet

by: Bill Cara

The Physical Platinum Exchange Traded Commodity [ETC] [LSE:PHPT] fell -30% in the week to Aug 17. This data may be of interest.

Stephen Jen, currency specialist at Morgan Stanley has issued an excellent report (“My Thoughts on Currencies”) dated Aug-18. Here is the summary, making many points I am in agreement with:

Bottom line: The rally in the dollar in the past two weeks, though sharper than I had expected, makes a lot of sense to me. (Apologies for the radio silence during this time as I was on vacation.) I believe that the dollar has established a genuine medium-term floor. The path forward will likely be marked by a two-steps-forward, one-step-back pattern; but this path will be up for the USD, for at least the remainder of the year. The ‘Dollar Smile’
that I proposed at the end of last year is finally working more visibly against a broader range of currencies; it already began to work against the Asian currencies in early May. The global economy is likely to slow further in the months ahead, with several large economies flirting with outright recessions. But global weakness is precisely the key ingredient for the ‘Dollar Smile’ to work, which wasn’t present in 1H this year. (1) The stars were
aligned 2-3 weeks back for the dollar to rally. (2) The AXJ currencies will likely dictate and lead the general trend of the dollar. I see them weakening further in the months ahead, as cross-border (as opposed to cross-asset) risk-reduction gains momentum. The INR, KRW and other AXJ currencies will continue to weaken against the
dollar. (3) Though I don’t believe that China will slow dramatically in the period ahead, investors are likely to be excitable in the post-Olympics period and inclined to be bearish on China. Such bearishness and caution will set the tone for the rest of Asia. (4) The US and the world’s Phillips Curve should remain relatively stable, i.e., if the
world falls into a recession, inflation will decline; the spike in oil prices may have disturbed this relationship. (5) What real money investors do with their hedging strategies will be the single-most important determinant for the dollar, in my view. Hedge funds and model accounts are important in the short run, but US real money accounts, which haven’t hedged much of their overseas exposures, may start to elevate their hedge ratios. This is a sea change for the dollar, in my view. (6) The strong dollar is a positive development for the world, as it encourages virtuous circles through lower commodity prices. Also, there will be virtuous circles through general sentiment regarding the US, as an economy and as a society, that – in turn – will be positive for USD assets, including the dollar itself.

On the weekend in the Week-In-Review, I opined that the $USD was in a new Bull phase, which when recognized a few weeks ago pulled the precious metal prices down. After weeks of virtual free-fall in the metals, when the $USD powered north, this weekend I advanced the notion that very long-term oriented traders as well as day traders may find it to their benefit to buy the depressed shares of the gold companies.

In the case of the long-term oriented traders, that would be the start of an averaging down strategy. For the day-traders it would be done to try to capture a +4% to +8% move in share prices.

What happened Monday, on a day when the huge majority of share prices plunged, was that the goldminers group rallied, as I said I expected they would. That’s cutting it pretty fine.

The DJIA dropped over -180 points and the major market indexes fell by an average -1.5%, but the Goldminers ($XAU) lifted +1.5% and $GOLD lifted +$13.50/oz on the day. My monitor showed some very good gains:

(NYSEMKT:GSS) Golden Eagle Res +3.5%
(MFN) Minefinders +5.3%
(NYSEMKT:NG) Novagold +2.2%
(NASDAQ:PAAS) Pan American silver +5.0%
(NASDAQ:RGLD) Royal Gold +3.6%
(NASDAQ:SSRI) Silver Standard +1.1%
(NYSE:ABX) Barrick +2.6%
(NYSE:AEM) Agnico-Eagle +6.5%
(NYSE:AUY) Yamana Gold +2.0%
(NYSE:GG) Goldcorp +2.8%
(NYSE:HL) Hecla +2.3%
(NYSE:IAG) Iamgold +1.9%
(NYSE:KGC) Kinross Gold +3.1%
(NYSE:NEM) Newmont Mining +1.3%
(NYSE:SLW) Silver Wheaton +4.0%
(OTC:AUREF) Aurelian +3.6%
(OTC:GEAFF) Gold Eagle Mines +2.3%
(KRY) Crystallex Intl +4.3%
[LMA] La Mancha Res +3.2%
(NYSE:UXG) US Gold Corp +2.6%
(WGW) Western Goldfields +3.6%

But please don’t misconstrue my words. I am not calling for the start of a renewed Bull phase for precious metals or goldminer shares. At least not yet.

There has been a lot of technical damage done that must be repaired, which simply means a new cycle bottom must be constructed where the Bulls and the Bears come into balance, for a while. That period may cover a week or a month; we’ll have to wait to see.

Now is the proper time to study the quality of the goldminers and explorers to assess their future prospects. Don’t waste it. More to the point; don’t waste your precious time reading the back and forth nonsense from the newsletters and chat boards. The only thing important to you is found in the market price and volume data and in the fundamentals and quant data contained in the research reports from Wall Street and Bay Street.