Uranium stocks may soon be on the radar of investors again as the spot price of the underlying commodity surged to recent high US$44 a pound, up 28% from year-ago levels and about 57% since bottoming out at US$28 during the summer. The following five speculative stocks could get a big boost if money begins to go back into this sector:
CHF Capital Markets Executive Vice President Mark Lackey offers up his insight on the recent gold price decline, reveals some factors investors should consider before buying a junior resource stock, and mentions a small energy name he likes that’s set to begin production.
The intelligent, entertaining and enlightening Grant Williams delivered a wonderful presentation at our recent Canvest Toronto Conference in September.
He draws parallels to turn of the century wars and explains where he believes we are on the Kondratiev wave.
Last week I had the opportunity to travel through Germany and Switzerland with 15 public companies. The trip was hosted by The Canadian Securities Exchange and Zimtu Capital Corp. Our good friend Chris Berry was a keynote speaker and acted as an MC during the presentations and seminars.
I have linked his recap below of the trip and his EU views below.
By Chris Berry (@cberry1)
For a PDF copy of this note, click here.
Europe has always fascinated me. A thousand years of rich history confront you regardless of the country or city you visit. Opportunities to talk to Europeans from all walks of life regarding their views on current events or the global financial markets put in a unique historical context are worth the time and effort it takes to plan a trip.
My recent trip to Frankfurt, Munich, Zürich, and Geneva was no exception. I went as a keynote speaker on the Fourth Annual Zimtu Capital Bus Tour where I spoke in each city and also served as a moderator and emcee. Accompanying Zimtu were a well-rounded stable of companies representing resources as varied as diamonds, potash, coal, and uranium. Representatives from the Canadian Securities Exchange along with several CSE-listed companies were also in attendance, and as these companies were not natural resource-focused (vertical farming, biotech, high tech), it gave this year’s tour a more diverse flavor than in years past. Everyone – from institutional and individual investors to the companies themselves – had a unique opportunity to view the small cap discovery sector in a different light.
That said, this note focuses on European investors opinions of the resource sector now that we are three years into what feels like a seemingly relentless malaise. My experience in Germany wasn’t unlike that of years past. The typical investor appears more interested in owning the physical silver or gold bullion than mining shares (although this isn’t universally the case). This is interesting, indeed, relative to the overwhelming opinion of analysts that deflation is a more likely scenario for the EU in general.
While I would argue that many individuals I know have accepted the reality of lower precious metals prices for the foreseeable future – many people I spoke with in Germany thought that gold and silver should be – and would be – trading higher soon. The rationale for this wasn’t always clear as the usual arguments about manipulation and looming hyperinflation were trotted out while deflationary trends so evident were not given much credence.
I did an interview at the Munich Precious Metals show with Miningscout which you can see here.
The meetings in Switzerland were notable for their dynamism, commentary, and questions from the attendees. The discussion of the Swiss gold referendum (20% backing of the Swiss currency by physical gold) loomed large over the conferences with the audience split 50/50 on it passing. The main issue wasn’t the disbelief that the precious metals and mining company shares were falling. This appeared to be an accepted reality and the question was more of “What do we do given this new lower metals price environment?”
One exchange I had in particular stood out. While talking about gold and silver, my counterpart turned and asked:
“What if this is 1982 again?”
The chart below explains her fears and provides context.
After a parabolic boom in the gold price in the late 1970s, the gold price collapsed (circled in black) and remained range bound until the early 2000’s. I add this chart not to invite scrutiny from gold bugs, but to demonstrate this woman’s concerns. If we are indeed at a point in the gold cycle resembling 1982, this has profound implications for your gold and currency investments. What will you do as a gold investor if the gold price remains flat for the next 20 years?
For the record, while I think gold will tread water in the near-term, I don’t believe were in another 1982-type scenario. The global economy is much more integrated than ever before, and is drowning in debt and derivatives. I think many now view gold as its own asset class rather than its traditional role as a hedge against inflation. In this way, gold is a victim of its own success, as is silver. Days where the price of gold rises or falls $20 per ounce are looked upon as trading opportunities and the long-term rationale for owning precious metals or company shares has taken a back seat. This type of thinking is dangerous. If anything, the concern should be for higher, rather than lower gold prices based on the potential for widespread economic instability and Central Banks unable to mop up excess liquidity in the financial system fast enough to prevent inflation.
However, that’s not the casein Europe. This has everything to do with Central Banks around the world jawboning the equity markets higher with zero interest rates and QE and talking down inflationary expectations. Regular readers will know that we are at least in the disinflation and possibly in the deflation camp. While in Europe, I made this case to each audience. With a collapsing velocity of money, excess labor, capital, and dormant liquidity choking the global financial system, excess inflation (and by extension the need for the precious metals) is currently a distant reality.
The Euro Zone is struggling to generate sufficient economic growth and is clearly fighting disinflation rather than generating inflation, China continues to moderate its growth rate, and Japan has just entered its fourth recession since 2008. Who will serve as the engine of global demand to ignite wage pressures and the inflation Central Bankers covet? How did we get to this point where Central Banks covet inflation but can’t seem to generate it
The Japanese battle with deflation began with a stock market collapse in 1989 as a result of a real estate bubble. When banks in Japan curbed their lending, wages halted their climb and sufficient organic economic growth has never really returned. This scenario should sound familiar to everyone in the US as almost the exact same scenario has unfolded there since 2008. One must believe that Federal Reserve officials in the United States are watching the developments in Japan and the failure of their own version of QE (Abenomics) to generate growth with increasing concern.
As I said before, I don’t yet believe we’re at another “1982-style” inflection point for a number of reasons. Regardless of that, turning on the television and watching the price of gold and oil fall and assuming the entire commodity complex is suffering the same fate is a big mistake. I also made this point to my audiences.
Despite what the doom and gloom crowd would have you believe, the global economy has never been more prosperous and generally speaking living standards are still on the ascent. It’s important to remember that the global economy is, on balance, still growing. Scientists and entrepreneurs all over the world are at work in R&D labs focused on finding solutions to some of life’s most pressing issues. Finding those high growth opportunities is exactly what small cap disruptive discovery investing is about and my travels in Asia and Europe have reinforced this view.
I’ll be speaking about these themes at Mines & Money in London Dec 1 – 4. Please reach out if you’ll be there.
The material herein is for informational purposes only and is not intended to and does not constitute the rendering of investment advice or the solicitation of an offer to buy securities. The foregoing discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (The Act). In particular when used in the preceding discussion the words “plan,” confident that, believe, scheduled, expect, or intend to, and similar conditional expressions are intended to identify forward-looking statements subject to the safe harbor created by the ACT. Such statements are subject to certain risks and uncertainties and actual results could differ materially from those expressed in any of the forward looking statements. Such risks and uncertainties include, but are not limited to future events and financial performance of the company which are inherently uncertain and actual events and / or results may differ materially. In addition we may review investments that are not registered in the U.S. We cannot attest to nor certify the correctness of any information in this note. Please consult your financial advisor and perform your own due diligence before considering any companies mentioned in this informational bulletin.
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Geopolitics Plays Interference
It seems that once again the direction or trend playing out in the markets has been interrupted by geopolitical tensions heating up between Russia, Ukraine, and the Western powers. Precious metals finished the week on higher footing, with gold initially touching below 1,150 USD this past Friday morning, but going on to finish the day approximately 40 dollars higher just shy of 1,190 USD. The predicament for those who have been anticipating a bottom in the precious metals is determining whether or not this is simply just noise that will once again wash through and see the trend of a stronger greenback and weaker precious metal prices continue.
If weeks prior can provide any indication for what Russia-Ukraine tensions mean, it’s that they have led to unsustainable rallies in the metals market. The escalation of sanctions and threat of increased violence simply subside with time, and metals prices tracked lower accordingly. Thus, a suitable question becomes why does the market again react to similar events we have witness play out before if inevitably, time will pass and they will soon be forgotten?
For certain the liquidity of the gold and precious metal markets is one factor for the surge in prices as the relatively smaller market becomes a very quick and instantaneous hedge for the US dollars and risk assets. Short term investors or traders are less concerned about the price level of gold, but instead will go long gold as it exhibits its safe haven characteristics during these time periods.
Perhaps another reason though is the ongoing uncertainty surrounding the Russian economy. And although what we are currently witnessing with Russia is simply antagonizing tactics with Ukraine, the likelihood of escalation of sustained violence (or war) becomes more and more likely as their economy worsens. The Russian Ruble has depreciated 23 per cent against the US dollar over the past three months. Inflation becomes a huge issue for the Russian consumer with prices up nearly 8 per cent over the last year, and it is a trend that is likely to continue as the economy is extremely dependent of imports of food and agriculture as they are unable to substitute for what is inadequate domestic production.
As the Russian economy gets choked off from the rest of the world, and it’s the citizens that feel the brunt of the pain and suffering as their lifestyles adjust to a weaker economy that makes the majority of them worse off, options become limited. The uncertainty, which is very much priced into the market for Russian Rubles, and attracting a safe haven bid in precious metals, is how far into a corner is Putin backing himself, and what will be the repercussions of his actions.
And one potential repercussion becomes, as the media has been questioning, the likelihood of another cold war. Ongoing and increased sanctions with Russia are slowly cutting the economic ties to the west. It’s not without coincidence that the largest buyers of physical gold in the last quarter were Russia, Kazakhstan, and Azerbaijan. But all central banks in aggregate have bought gold now for 15 consecutive quarters. These are the long terms investors, and as one UBS analyst put it, in this kind of environment, “diversification would be deemed a logical outcome.”
Small cap fund manager Steven Palmer of AlphaNorth Asset Management spoke with Gravitas Financial’s Vikas Ranjan recently about October’s stock market sell off and why he believes the broader trend will continue. As well, he explains why he doesn’t have any sector biases and hints that he’s adding some resource names to his portfolio. He also mentions one Venture exchange listed stock that he bought recently that has soared more than three-fold during the past month.
Friday was the best single day for gold in 14 months. This is as the markets seem to be playing a risk-on, risk-off tug of war with the US dollar. Despite the strong dollar trade dominating as we witnessed through the beginning of the week, it corresponded to the weakness in gold. The pullback we witnessed in the dollar into the close Friday stems from concerns over what may be the repercussions of a strong dollar for the US economy. Without doubt though, the trend is and has been for lower gold prices. A key day for the gold market was when we swiftly broke the 1181 USD support level, which the market had tested on three prior occasions beginning in June of 2013. As this was the first time the market has been sub-1180 since mid-2010, the physical markets were and are awash with new buyers.
As we learned over the last few weeks, despite the US Federal Reserve calling an end to their current round of experimental monetary stimulus, the game still lives on outside of North America. Although it certainly seems plausible that quantitative easing from the US Fed could make a return should the US economy warrant it, focus is what central banks are doing outside North America, particularly both the ECB and the Bank of Japan (BoJ).
The Bank of Japan shocked the markets into the end of last week as their governor, Haruhiko Kuroda, announced it will increase its purchase of government bonds from 50 trillion yen a year to 80 trillion. This was announced in tandem with the Government Investment Pension Fund announcing they’ll double their allocation to domestic stocks. The BoJ in essence is crowding savers out of an already conservative investment environment that is Japan. And although the BoJ and GPIF are putting through initiatives that will perhaps help Prime Minister Abe generate that desired 2 per cent level of inflation, uncertainty remains whether it can be successful.
The lingering question is what will be the impact on Japanese savers who do not see the same availability of government debt to purchase and hold. Will they seek out riskier assets, like equities, as was witnessed in the US through QE? Or, is this another factor supporting a strong dollar trade that sees the Yen sold for the alternative of being positioned in US assets, and the benefit of the deepest most liquid capital and treasury markets in the world?
At a conference this week hosted by the Bank of France, former PIMCO CEO Mohammed El-Erian made some very revealing comments. He said, “this is a world which places too much of a burden on central banks. This is a journey, not a destination. If the journey lasts too long, central banks go from being part of the solution to perhaps being part of the problem.” For the moment, only time will tell how this all plays out.
However, if El-Erian’s assertions prove to be correct, than those buying gold at these levels may be one step ahead of the pack if in fact Central Banks continue on their current path. And at this point there is absolutely no reason to think that they won’t.
There Will Be Haircuts
It’s puzzling why Europe is more an issue now than it was a few months ago. It seems the market has finally come to grips with the fact that their economy is stagnating, and hopes for growth are diminishing. Disinflation remains a central issue to their economic union. Youth unemployment levels remain disturbingly elevated. And the structural reform and fiscal discipline that many had been looking to member governments to implement and abide by are still yet to be seen.
Even more alarming is that Europe’s second and third largest economies, Italy and France, are disregarding the fiscal agreements made with member countries to rein in their debt levels. The required ratio is to move debt to GDP back towards 60 per cent. France’s debt to GDP ratio is estimated to be near 96 per cent by yearend, and Italy is faring worse at 135 per cent and continuing to grow.
As troubling as the increasing debt levels seen in Europe have become, it’s the latest commentary on the region that represents a fifth of the world’s output that stems concern. The norm seems to suggest with certainty a likely scenario would be a stagnating Japan style economy for the years to come. Some mainstream media has gone even further to suggest something as drastic as a significant debt restructuring. But these really should not strike as anything new, as the ongoing problems have been evident all along. The fact of the matter is with Europe nothing has changed since 2008, and debt restructuring or defaults and the threat of deflation are just becoming that much more of a reality.
Deflation is the central fear in Europe as it could be the contributing factor to their third recession in six years. Some are quick to cite a similar Japan style situation where their economy moved past a deflation episode in the 1990’s, but the dynamics of the two economies are much different. Where with Japan, as the Economist notes, it was a “homogenous society” that was somewhat isolated from the rest of the world, whereas Europe is much more linked to the global economy through emerging markets, and thus contagion once again rears its ugly head.
The greatest fear though is whether their economies will attract new investment going forward. It seems inevitable that growth levels will have trouble measuring up against the debt overhang of the majority of their economies. Thus, the resulting question is how much of that debt could ultimately be subject to restructuring or haircuts. Already in mortgage markets in countries like Ireland, lenders are offering non-recourse loans that prevent lenders from pursuing the borrowers personally. Reckless lending practices are already coming back into place, where mismanagement of debt was the problem in the first place.
With a lack of coordination between fiscal and monetary policy, the negative outlook for Europe continues to weigh on financial markets. If the ECB were to embark on a QE style stimulus where they were to purchase sovereign debt, the question becomes whether that would make a difference and actually address some of the structural problems in their economy. As former Fed Chair Ben Bernanke remarked regarding his own experimental monetary policy, they would have to weigh the “benefits, costs and risks.”
Newsletter writer Thom Calandra attempts to explain the recent sell off in gold and why he believes hyperinflation isn’t required to move the price higher.
He also outlines some of the warnings signs investors should be wary of before putting money into any of these names and mentions some of the stocks he likes at this time.
It’s a challenge to put a finger on what was the most significant event that took place in financial markets this past week. It might have been the price of crude oil further deteriorating to touch below 80 dollars a barrel for a brief instance on Wednesday, or the volatility index, the VIX coming within a hair of a 30 print. For certain, the most revealing of all markets was for US Treasury bonds as investors in a herd fashion reached for the safe haven and saw yields dip below the 2 handle and touch a low of 1.85 per cent. It is uncertainty that continues to be the theme that casts a shadow over economic growth prospects, but as commentators noted this week, investor complacency amongst the masses leading to excessive risk taking is what is fundamentally shifting these markets.
This correction we are witnessing in the equity markets almost seemed long overdue, and the supply glut in the global oil market was perhaps the catalyst that acted to push these markets over the edge. The S&P500 moving over 1000 trading sessions without seeing that down move of 10 per cent or greater has left behind a number of investors waiting to participate in the rebound of US equity markets, and as the buying that took place on Thursday and Friday of this week, and the speedy rebound (for the time being) highlighted how welcomed this correction was.
But perhaps there was another factor contributing to the turnaround we saw towards the end of the week, and it was inspired by comments from St. Louis Fed President James Bullard. Bullard made the point that the FOMC should remain adaptive to when they choose to end their bond purchase program, and even hinted that an end to Quantitative Easing, expected to be announced at the end of this month, could only be temporary as they stand ready to support financial markets and continue to artificially boost asset prices. Bring on the speculation for QE4.
Former PIMCO CEO, Mohammed El-Erian comments that investors should be careful what they wish for. One of Ben Bernanke’s famous quotes when justifying the Fed’s accommodative policy was that the benefits were always outweighing the costs and risks. If the Fed was to embark on QE4, it would become incrementally harder for their policy committee to justify whether the benefits would outweigh the increasing costs and risks.
The US economy continues to experience record low interest rates. Falling oil prices will ultimately create yet another significant boost to an economy that is 70 per cent consumer driven and now sees gasoline prices 25 percent off their summer highs. And employment as a whole continues to see strong and stable growth above 220 thousand new positions a month. The takeaway though is not what’s driving the US economy via Fed policy. It’s how Fed policy is impacting financial markets, and that’s the reason for concern.
As has always been, the single biggest risk of the Fed’s accommodative policy is how investors have become dependent on their asset purchases in order to see risk assets trade higher. Thursday and Friday are further evidence of this. A sobering reminder comes with this, which is how overcrowded consensus trades have become, and really a question about how deep the liquidity or support in these markets really is when the majority of investors with the same mentality are all selling.
Newsletter writer John Kaiser, of Kaiserbottomfish.com, describes why he thinks the gold price has been selling off recently and why it could be stuck in a trading range for several years. He also weighs in on the underperformance of small cap stocks and reveals which type of junior miners he likes currently.
David Morgan: At the time there was no silver focused event anywhere in the world. With silver near the five dollar per ounce level and knowing silver had the potential to increase ten fold we wanted to get the message out not only to silverbugs, but the investing community at large.
CH: What can experienced mineral investors expect to discover at Silver Summit?
DM: New companies, new ideas, networking, which means the more experienced resource investors will improve their circle of influence because the caliber and content of this particular event is unique in the resource sector.
CH: Would novice investors find value at Silver Summit?
DM: Silver is undervalued at the present time and anyone with an open mind to examine the facts with critical thinking stands to gain when reflected upon.
CH: We’ve heard from many experts lately that now is a great time to buy silver, especially considering recent geopolitical events. Do you see conflicts in Russia, Iraq, Syria and elsewhere impacting mineral investment?
DM: Yes, which means the physical purchase is more important than ever! Since silver is essential in so many applications it is considered a strategic asset in some countries, therefore mining shares must be selected carefully.
CH: What other crucial intelligence will investors find at Silver Summit?
DM: Every time something unexpected takes place at the Silver Summit which means this year will be no different. Because this summit is so unique and underappreciated gaining that crucial factor could pay off in a big way going forward.
CH: What else would you tell the “uninitiated” to convince them of the value of this conference?
DM: Any time you can buy a commodity under the price of production (silver in this case) and wait you will make a profit. The shares offer this opportunity to a far greater extent.
CH: What will you specifically be discussing at your keynote address?
DM: Silver Solutions, how silver solves so many problems in industry, when silver is a solution to portfolio diversification. Ebola and Silver, more to be determined.
CH: Ebola and Silver, oh my! Can you give us a teaser of what you and your colleagues are thinking regarding the implications of a global outbreak?
CH: Events influencing silver are changing at a breakneck pace. Should an investor look to forge relationships that will be valuable in staying up-to-date on important issues?
DM: This is key in my view and building relationships will certainly help investors to make informed decisions.
CH: For investors unfamiliar with purchasing physical silver in an uncertain time, how will Silver Summit prepare them to make smart choices?
DM: This will be stressed by a number of the speakers at the conference and silver will be available for purchase at the event.
CH: What is the significance of holding the Silver Summit in Spokane, WA? It’s clearly a superb location for networking with mining companies.
DM: The initial idea sprang from this area which is very close to the “Silver Valley” in Wallace Idaho so it started here as a natural occurrence of those that founded the Silver Summit.
There have been an increasing number of factors that have begun to put pressure on global financial markets. Just over the past week the International Monetary Fund once again revised lower their outlook for growth, and cited that the global recovery was relatively uneven between different geographic regions. This triggered yet another down move in energy markets, which translates to pressure on a number of smaller commodity based economies (like Canada) and emerging market economies. As well, the Fed released minutes from their September meeting midweek and cited concerns over a stronger US dollar, which led investors to briefly question the timing of the Fed’s tightening schedule. Finally, manufacturing data out of Germany signalled the Eurozone’s perhaps only remaining beacon of light may too be headed for recession.
The aforementioned reasons could all be factors that three years ago would be used to explain higher gold prices. That they are not today gives reason to believe that there will remain attractive buying opportunities in the months to come. Ultimately investors’ appetite for precious metals is not yet there. Gold, as we have witnessed, is not performing as its typical safe haven asset for capital, and part of the reason may still be tied to a loss of confidence following a year when the asset class of precious metals were nearly decimated and gold lost close to 30 percent. In a global environment where investors where holding gold for its relative stability, this traumatizing event would inevitability lead many to seek a safe harbor elsewhere.
The forward looking question though is can gold outperform the US dollar? As the IMF outlines in their most recent report, we remain in an unbalanced global recovery. As North American economists look to whether the US and North American economies can “go at it” alone, with 60 per cent of US exports destined for Canada and Mexico, the IMF, with a more international focus, is left to ponder whether US growth is strong enough to support the rest of the world. The scenario though with the United States acting as the leader and the first to step forward from accommodative monetary policy is the reason for the US dollar strength.
As we witness outside the US, Europe is at a near standstill and recent data seems to point to being on the cusp of a German recession. Brazil, who was once the poster child of the emerging market economies (the B in BRIC) is ahead of Germany now actually in a recession. Analysts continue to call for a slowdown in China as their GDP growth retreats from once double digits to below 7.5 per cent. Passing on the debate of whether the landing will be soft or hard, their demand for the world’s resources at this point seem to be tapering off. This leads to commodities. We remain plagued with the uncertainty of where this global supply glut can meet a slumping demand.
Gold cannot behave like a commodity forever. Unfortunately, it seems it will until investor confidence is restored in its ability to act as a relatively stable asset that’s uncorrelated with most other markets, making it that ideal hedge. And as has been most often the case with the precious metal, its shine is revealed after its bigger moves rewarding those already holding it. Right now, however, it maintains it’s near perfect negative correlation to the US dollar, and any dollar strength is inevitability bad for gold in the near term.
The first inaugural Canadian Investor Conference was a great success. Over 1200 people convened over the two days to listen to the top thought leaders in finance, resource, technology and venture capital opportunities in Canada. We were happy to film 19 interviews over the two days that we can now share with you. Take time to watch a few or simply hit the “Watch later” option in youtube to save them for later.
Small cap stocks can be risky but also have the potential to produce big rewards for patient, knowledgeable investors. In our latest edition of “Ask the Analyst,” Gravitas Financial analyst Stefan Muchal talks about how to invest successfully in mining stocks and points out possible warning signs every potential shareholder should be aware of before putting money into one of these names.