Loading ...Most markets found their footings last week with gold, silver, and the S&P all staging sharp reversals but then again, it was an easy call with the Fear-Greed index at “1”. Performance year-to-date has once again placed gold in the “outperformer” category (an event that must be driving White House economic advisor Larry Kudlow absolutely off his rocker). Gold has done exactly what it was supposed to do in times of turmoil and while silver has not, it is still performing better than the S&P year-to-date. Furthermore, the March 17th COT report has finally tilted in favour of a silver rally and it couldn’t happen at a more opportune time.
Of even greater significance is the performance of gold in non-U.S.-dollar currencies and no better one to show than the Canadian dollar gold price which, for Canuck investors, has been a veritable nugget of safe-haven alpha for the prescient portfolio manager.
If you are an American investor looking for a currency play, the gold miners whose production is primarily in Canada or Australia (or both) are enjoying the dual benefits of weak domestic currency and weak energy. This allows a huge boost in revenue while expenses drop and what falls out of the bottom is increased profits, the mother’s milk of all bull markets
It was two weeks ago that I published the two charts of GDX and GDXJ with the caption “Generational Buying Opportunity” and the lows of that following Monday were textbook bottoms with those purchases now serving to significantly repair the damage done by the silver takedown, an event I most surely did NOT expect. I elected to go “All-In” with the Senior Gold Miner ETF (GDX:US) not because of any self-congratulatory “analysis” but because I totally missed the March 16th lows in the junior ETF (GDXJ:US) under USD $20 because a) I was overly pessimistic about the opening price (I bid $16 – idiot) and b) I was terrified. Actually, I have learned over the decades that fighting the terror of a knife-catching bottom is, if successful, a 100% winning trade and no better example was the GDXJ that day.
The only problem I have right now with the gold and silver miners is this: Will they, as “stocks” be able to decouple from the algobot-driven attack dogs that are controlling the broad stock market. With gold back in the USD $1,600’s and with oil around USD $21, you could not get a more bullish fundamental backdrop for the gold producers but as we know, when you are up against a swarm of bid-destroying algo’s, fundamentals don’t count and therein lies the conundrum.
The stock market has bounced but as I have preached for years, there is always a retest and if one looks back to 2009-2011, the bailouts occurred three months before the actual bottom so I post the above chart not to frighten anyone but more as a reminder that the impact of this lockdown upon the global economy might be mild but it might also be severe and anyone that makes a prediction on his or her blog is only making a guess, because nobody has a clue, least of all me, as to the outcome. From the chart shown above, I think that as far as the PM’s and their public traded brethren are concerned, we are somewhere between “fear” and “capitulation”. However, will a deflationary wave swamp the golden vessel, or will the hyperinflationary policy moves be a surfer’s dream? Only time will tell.
As for silver, the biggest question that I get from subscribers and followers constantly is why the GSR (gold-to-silver ratio) exploded to 130 when all the rocket scientist “analysts” have pounded the table in abject certainty that silver is in “shortage”. How can something in shortage be allowed to trade at USD $14.50 in one market an $24.50 in another? How can retail websites be quoting one-ounce silver buffalos at USD $24.23? That is where the title of today’s missive comes in; this is “a tale of two markets”.
Years ago, I was at the Tinka Resources booth and ran into a Glencore executive and started to pitch him on TK’s Colquipucro silver deposit in Peru. The gentlemen listened to me patiently while I gave my version of “power close 101” and why this 30 million ounce open-pit could be Glencore’s for the bargain basement price of CAD $.50 per share. After I finished yapping, he looked me and said “All due respect, we really don’t have interest in your deposit. You see, we have slag heaps sitting idle from our copper-zinc operations that have five times that amount of silver.” The extent to which I was dumbfounded was exceeded only by the extent to which I was embarrassed and as I skulked away in near-mortal sheepishness, I thought to myself that I would never forget that conversation when thinking and talking about silver -which brings me to the point.
One look at the charts of copper and zinc and you can’t help but see a global economy under stress and you just know that with the prices of copper and zinc so depressed (and that was before COVID-19 showed up), the CEO’s of these base metal giants must be under huge pressure to augment and enhance their forward guidance any way possible. Why then would a Glencore or a BHP not mobilize those mountains of idle, slag-heap silver in order to bolster cash flow? There comes a point in any mining operation where the credit from bi-product ore becomes meaningful and that is either from a spike in the value of the bi-product or a crash in the primary metal price.