Precious Metals True To Form As Markets Wake To Reality

by: Emmet Kodesh

(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)

According to the New York Times and many other mainstream info sources, the markets were surprised that the Fed decided not to taper. This is the nature of public discourse in recent years: first, false expectations or a false narrative is established (e.g. "the Fed will taper in September"), then when that false narrative predictably fails, everyone is "shocked, Rick: shocked" as Louie tells Rick in Casablanca.

As I have several times suggested, the Fed would not taper unless they intended that the bond and housing markets would crash, which soon would crush the stock indices and the struggling economy, first ours and then the world's. The Fed and the top economists and diplomats with whom they confer decided this was not time for such catastrophes: wait a few months, maybe twelve-fifteen months. In the meantime, make hay while the sun shines. After Congress passes the debt-ceiling resolution so DC can continue squandering the nation's substance, the markets will soar while the economy falls to its knees under the weight of "Affordable Care" and regulatory and tax burdens. Our 1-1.5% GDP consists largely of money spent to destroy the practice of medicine and fund what are called clean energies, which result in American coal getting shipped to China where it's burned raw and pollutes the world. "Green" cars run on electricity supplied mainly by coal and nuclear plants. Tax and regulate them into oblivion and the price of electricity will be exorbitant.

Also note that bond yields were driven down successfully but bounced back Thursday, a pattern that will bear watching. It is prudent to continue to underweight fixed income.

Before discussing what we can take away from action in PMs (precious metals) the past two days, here are two charts: American workforce participation by age groups and the increasing gap between jobs and population. They show the harsh reality beneath the glimmering surface of rising equities:

Change in Number of Jobs Since 2007

(Click to enlarge)

This data from Michael Shedlock is grim. Population, boosted by illegal as well as legal immigration is soaring while jobs disappear. The core 25-54 age group is slipping, 20-24 age group jobs are sagging and for 16-19 year-olds they are disappearing as seniors stay in or re-enter the workforce.

Percent of Population Group in Work Force

(Click to enlarge)

Those 65+ years old are competing for jobs with those aged 16-25 and in every group the gap widens between dwindling jobs and growing population. Even the 45-54 year cadre, which sees a slight increase in jobs, greatly lags people in that bracket (top chart). The grim job situation cramps consumer spending, consumer businesses (70% of the economy) and insures economic collapse. As I showed in an article on our de facto recession, if you simply add the Y/o/Y increases in basic expenses (food, heating oil and gasoline, phone and cable services, electricity, property taxes, "education" and medical insurance) you will find that actual inflation is about 10% in recent years.

So, on Thursday September 19, the markets awoke after two hours of euphoria that began Wednesday at 2pm (S&P up 12 points in 5 minutes, then another 13) to the fact that as time goes by, the fundamental things apply to the economy and ultimately to markets. The Fed's easing has saved housing, debt service and fixed income nominal values for now but inflation is high, the economy is laboring and the equity uptrend that likely will resume is at the cost of increasing debt borne by a declining workforce. That is a bad combo. Barring a significant change in governance and values, this nation will be in rough shape three years from now: it already is.

As for PMs, the funds and other "smart money" as well as retail investors took the news from the Fed to mean the USD will depreciate against hard assets of all kinds. PM gains of 10-15% were widespread within ninety minutes though most faded toward the close. September 16 nearly all issues gave back significant portions of their gains as the metals indicated that their roller-coaster nature had not gone away. Do not expect a steady sustained rise in the sector like that which occurred July 23 - Oct. 2, 2012. When you enter a PM company you should have a clear idea of whether it is for trading or for holding for a substantial gain before trimming. Bear in mind that the rush into equities that is likely to continue into 2014 may blunt the strong rise in PMs that some people expect.

With those postulates in mind, it is useful to look at some of the better companies in the sector to see how they fared the day after the QE go sign flashed. Price action is important in considering what horses you will ride.

Among the four main streaming and royalty companies, Franco Nevada (NYSE:FNV) was first in class, +.79% on a day when most of the sector including the other three streamers fell. Silver Wheaton (SLW), the pioneer in the group, lost 1.67% after its mighty, 12% intraday surge on Wednesday. As I have noted in previous pieces, since the June 26 PM bottom, FNV has led the sector's rise, outperforming all major companies. SLW has been among the best, too, rising from $17.75 to $27 on September 18 before the profit-taking. A bit of a surprise was the relative tenacity of junior streamer Sandstorm Gold (NYSEMKT:SAND) which has under-performed in recent months because falling bullion prices squashed E&D in the juniors that are its main partners. Thursday SAND dropped only 1.17% after rising 15% intraday September 18. Royal Gold fell hardest, down 3.02% on Thursday's fall back.

Two interesting but challenged mid-tiers, Kinross Gold (NYSE:KGC) and IamGold (NYSE:IAG) that have suffered respectively from negative $4.45 EPS and negative growth (IAG, -25.6%) gave back 2.80% and 2.04%. Since the June bottom, IAG has performed far better, perhaps because its positive but slender $.39 EPS and revenues 2.2 x debt are better than the larger KGC which still has revenues 2 x debt despite walking away from onerous tax demands that Ecuador put on its rich Fruta del Norte site. IAG also has a decent cash flow while KGC has been grievously negative, $4.9 billion or 15% above total revenues. In the absence of continued rise in bullion prices, KGC faces tough sledding. IAG has had more up than down days since August but even by the flighty standards of the sector it is extremely volatile. It has been paying a 4.7% dividend on a moderate 32% payout which is consolation to some investors. Its strong revenues to debt and positive cash flow should help it recover if bullion prices do not take further hits. They should rise because Sovereigns and retail investors will keep buying gold to hedge a shaky fiscal-economic situation.

The best companies by revenue / debt, cash flow, multiple producing sites, growth and a board filled with experienced miners, geologists, metallurgists and prospectors are First Majestic Silver (NYSE:AG), Endeavour Silver (NYSE:EXK), Eldorado (NYSE:EGO), Fortuna Silver (NYSE:FSM) and Yamana Gold (NYSE:AUY). Among these top companies, junior FSM held up best Thursday, down a slight .70% and AG fell 1.63%. AUY, -2.33% and EXK, -2.98% had a rougher sell-off while EGO was hit hard, down 3.70%. The worst performer among companies I mention among the top ten in the sector, Silver Standard Resources (NASDAQ:SSRI), whose Pirquitas site is producing 8.6 million oz. silver / year, eleven E&D properties and a great development project in Durango, Mexico fell 5.31% Thursday. Tahoe Resources (NYSE:TAHO) with its massive site at Escobal in San Rafael las Flores, Guatemala nearing production hardly was touched by the retreat, down .49% after a big rise September 18. See my focus piece on TAHO, here.

One other issue you might watch is Gabriel Resources (OTCPK:GBRRF), a junior development company one of whose Directors, Igor Levental is President of the Electrum Group. GR has a great site at Rosia Montana in Romania. There has been tax and ecological issues there but those following have seen GBRRF rise 60% since mid-August. It gave back almost nothing of this rise Thursday.

Hard assets should appreciate as the USD softens and the debt-fueled markets flee a sluggish economy with alarming demographic and spending issues. China's last two PMI numbers signal growth but debt-laden Sovereigns and challenged Central Banks may impede global recovery. While silver's tech-industrial uses grow and retail interest remains strong, its price action, and that of the miners that produce it follows gold. In addition to being a hedge against weak or failing currencies, gold appeals to many people as a commodity that both embodies and symbolizes true value in an age when values of all kinds are fraying. Choose companies that score well by the criteria noted above, follow the price action and make a good entry and hold, trimming a bit when gains are solid. Two major macro issues are working for PMs: if growth picks up and people can spend more, PMs, especially silver should rise strongly. If economies start to roll over and currencies fail, they also will beckon.

If you can handle roller coaster action, pick your companies and enter. Be long the market, too. There will be plenty of red days as the revelers awaken from Wednesday's party and Congress wrangles. Keep an eye on the weather, stay loose and take care.

Disclosure: I am long AG, 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. I own precious metal companies in diversified funds and individually.