Weak Economy Will Hit Markets, Lift Gold And Some Miners

by: Emmet Kodesh

I have been researching an article on a promising silver miner but the hilarity in liquidity-driven markets and distress in the economy keeps demanding attention. Let us consider recent measures of decline and how they make a positive case for PM (precious metals) and some miners amid the sector's long decline, negative sentiment and diverse forms of assault on the commodity most at odds with the realm of fiat currency maneuvers and debt: that is, with the game to concentrate wealth and power.

May 2 saw another new nominal high, 1,598, on the S&P but the ISM (Institute for Supply Management) April PMI (Purchasing Managers Index) reports show a drooping economy. Chicago PMI for April fell from 52.4 to 49: below 50 indicates a contracting economy and this was nearly a 6% monthly drop. The employment sub-component fell even more steeply, from 55.1 to 48.7. The overall US PMI for April was 50.7, down from 51.3. The FOMC minutes and press release indicated as expected that QE would continue and "might increase" from its official $1.2 trillion new debt/year. The Fed, like the ECB, will remain "very accomodative." If the banks loaned out more of this "currency" (instead of lodging it at the Fed) inflation's true face would appear. Consumers could not sustain increased debt because income and jobs are sagging. The negative trend in employment is at 43 months and registers 50.2. For the grim reality on this issue see John Williams on the U-6 and other more troubling numbers. A sagging economy and more liquidity (debt) will support buying of gold and its place as peg for a new world reserve system.

Stepping back for a 2-year view, the ISM (Institute for Supply Management) composite manufacturing index, PMI since 2Q 2011 is troubling: a sharp drop from near 60 to 54 and then a jagged decline to the current 50.7. This tracks the chart from 4Q 2005 to 4Q 2007: a drop from 57 to 50. Then, after a brief plunge and recovery in 1Q 2008 came the drop from late spring 2008 to the sub-basement in March 9-13, 2009. The past 2 years echo this pattern but now there is $7 trillion more national debt, $1 trillion in student debt, etc. True, the pre-crash economic decline lasted longer than the malaise of the past 2 years. From a PMI high at 61 in 1Q 2004 the index descended for 17 quarters till the collapse that began in 2Q 2008. As I have suggested, the economy remains in a secular bear that began when the dot com bubble burst and the 13-year composite chart shows that on May 1, 2013, the PMI was still 9% below the 2000 top. There was a cyclical recovery from 4Q 2001 to 2Q 2004 and then the PMI decline and plunge in "the Great Recession whose V-bounce has been dying for two years. The markets are in a 4-year cyclical bull but the economy is dying. Current buyers are in a fool's market, a bait-and-switch set by CB buying as discussed in my previous article.

About as bad as the Chicago PMI, the Dallas Fed report on April 29 showed that its regional manufacturing dropped from 7.4 to -15.6, a 23 point drop. The expectation was for a +5 reading. New orders fell from 8.7 to -4.9 but the release of this "gigantic miss" in growth Monday morning April 29 did not restrain a two-day rally before a Wednesday correction that has more to do with intra-week market patterns than the magnitude of the underlying economic decline: Thursday's bounce-back showed this. The growth rate of regional new orders fell from -3.2 to -12.4, a plunge of 300%. It might be comforting to chalk that up to seasonality but in a region with much agriculture, livestock and energy production it is a dismal signal on economic basics.

There is no joy in Mudville or on Main Street but nominal top hilarity persists even as the Titanic approaches the iceberg. The PMI and other signals are not holiday fireworks but distress flares.

As my previous piece discussed, a plunge in equities could arrive anytime given the inflation of asset prices by Sovereign market interventions via debt creation and direct equity buying. Institutional investors tag along and the May 2 Lipper report shows that retail investors have reversed six weeks of aversion to join the mad dance, spilling $6.61 billion back into equities. I hope they are just nibbling at mega-caps in defensive sectors.

Underlying worry on Main Street expresses itself in the key measure of retail sales: they have been sagging for 21 months. In August 2011 retail showed 9.56% growth while today it is at +2.64%. This 70% decline signals major economic distress and aligns with the 2-year PMI drop.

Diagnosis: the soaring markets of the past 16 months are flying above the deteriorating base of America's post-production economy. For perspective, in January 2012, retail sales growth was +6.54. We are down about 60% since then. Everything I have written about the break between the markets and the economy is amplified by these trends and levels in manufacturing and retail. Americans with full time jobs remain about 58.3% as discussants of Fed policy concede even while they focus on their "moderate" QE.

The takeaway is that despite the affliction of the PM mining sector, a bit of PM miners and PMs remain an essential hedge against current stagflation, the probably brief jolt of inflation to result from increased debt creation and then a painful deflationary depression. Most miners should be largely sold off during the inflationary spike before deflation hits hard while bullion is held for the period when markets rejoin the stumbling economy on the floor.

Those in pain from ongoing mining sector distress should look at the analyst estimates of +34.60 this quarter for the industry and 124.20% for 2013. They show 83.7% for 2014 while S&P 8.30% this year and 12.30% in 2014. JPMorgan Chase (NYSE:JPM) and Jim Rogers believe the commodity super cycle still has "about a decade left." Those not scarred by the miners and with cash to invest have the sector in which "fortunes will be made" as Rick Rule said early in March though a further slide in the near term is seen. Those with the stomach and adequate income stream can consider the estimates by using the search bar at the previous link to check outlook on various mining companies some of which I mention below.

The best miners are those with the most reserves because gold is being bought by CBs, retail investors and for jewelry throughout but not only in Asia. Barrick (NYSE:ABX) is sharply cutting its capex. It has floated bonds most of whose interest is not due for thirty years and still has enormous reserves at American mines like Goldstrike and Cortez. Analysts at Yahoo see 13.4% growth in 2014. Gold Corp (NYSE:GG) has enormous reserves and a better balance sheet. Its 2013 decline is past what analysts at Yahoo Finance believe and expect a +38.1% surge in 2014. The 17 major firms listed at nasdaq.com rate GG a strong buy, 8-4-5. At current levels, Sprott Physical Silver (NYSEARCA:PSLV) and Physical Gold (NYSEARCA:PHYS) are reasonable plays.

If your income stream is +10% your life basics consider adding GG and shares of Eldorado Gold (NYSE:EGO) and Yamana (NYSE:AUY), which is lowering already low all-in cash costs and damping down capex. Analysts see strong recovery from AUY's terrible YTD and forecast 35% growth next year. Kinross Gold (NYSE:KGC) is estimated to begin a surge in 4Q 2013 and achieve 23% growth in 2014. Streaming company Silver Wheaton (SLW) which I have followed since it was junior miner Wheaton River Minerals a decade ago, and Sandstorm Gold (NYSEMKT:SAND) are very profitable. Consider Freeport McMoRan (FCX), a wealth preserver not only because of its move into American oil and gas but because its Grasberg site is the largest gold mine in the world. By 2017 it is slated to increase Au product rapidly to supply the appetites of sovereigns that by then will be flush with physical asset and establishing a new world currency system with some relation to real value. Kinder Morgan (NYSE:KMI) is another that should ride out a looming deflationary period.

PM prices may take another hit but the major capitulation event likely has occurred. Be careful of equity markets except the mega caps noted in my previous piece.

Disclosure: I am long FCX, SLW. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.