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Conference Clarity

I love attending conferences. Spending a day or few immersed in mining gives me new energy and ideas. Meeting subscribers is such a pleasure. And preparing a talk forces me to step back and really pin down my perspectives.

Writing the weekly letter performs a similar function, but the weekly note is much more zoomed in. Updating on seven days worth of developments in the metals investment world means detailed looks at financial data, sector developments, price moves, and geopolitics – and often without a lot of big picture perspective, because that’s the constant current.

But when I’m presenting at a conference I have to assume the audience doesn’t know my outlooks. I have to start from the start and explain what I expect in the near, medium, and long term and why.

I speak at conferences about once a month and creating each talk is a litmus test of whether I have thought through my big picture perspective fully.

Last Friday was the Metals Investor Forum in Vancouver. I gave the first talk of the day. The title:

It’s A Multi-Metal Party and Everyone’s Invited!

I appreciated the process of putting the talk together so much that I thought it a good idea to go through the ideas here as well. If you prefer video, HERE is a link to a video of my presentation.

To start: gold has gained notably of late. Why? Pick a reason!

  • North Korea
  • Fed Reserve members: tightening is off the table in the near term
  • Disappointing US jobs report
  • Weakness in the US markets (until recent days)
  • Declining US dollar
  • Political dysfunction in Washington
  • Gold breaking up through technical barriers

All matter and all lead to the conclusion: investors are gravitating to gold in the face of mounting geopolitical and economic uncertainty, exacerbated by a declining dollar.

That last comment deserves a deeper look. How much credit should the US dollar get for gold’s gains? Some, for sure. The greenback is down almost 10% in 2017, in a move that surprised many with its scale, so gold’s gains are in part a catch-up reaction to the dollar decline.

But it’s not all about the dollar.

It’s like how some people analyze stocks based on fundamentals while others assess technicals. The gold-dollar relationship is technical and absolutely matters – but fundamentals are at work as well.

Investors know that gold moves in cycles. It’s also common knowledge that gold is a safe haven investment and therefore new gold cycles often start in periods of high uncertainty. And investors also know – either from profitable past experience or because they missed out – that gold cycles can be very profitable.

Here’s a strong example to underline that last point. From 2000 to 2010, the XAU (the longest-standing gold fund) gained 456%. That’s impressive – and even more so when you realize that the current US bull market, known as one of the longest and strongest on record, has boosted the S&P by only 268%.

That’s the backdrop. Those points are the reason that momentum in gold feeds itself – once gold gets going within a supportive context, it just goes. And at the moment the context is aligned.

  • We are positioned cyclically for a new gold bull market
  • Uncertainty is rife (plus low to negative real rates)
  • Gold-oriented investors have moved in. Generalists have not…but they will as prompts to do so increase

What prompts?

  1. Rates. Expectations for near-term rate hikes in the US have dropped to near zero. Janet Yellen has done her utmost to telegraph the Fed’s moves to the market ahead of time for years. When she said nothing about tightening in her closely watched speech at Jackson Hole, gold busted up through US$1300/oz. Not being hawish is being dovish!

More generally, low to negative real interest rates are THE fundamental driver of the gold price. And real rates today remain exactly that: low to negative.

  1. The more metals, the merrier! Multimetal rallies are far stronger than those propelled by gold alone and that is precisely what is happening.

Copper is up 20% in 2017 and 38% in 12 months. The problem, in short, is a tight market made worse by falling headgrades (after mines high-graded during the bear market), strikes, and politics while electrification lifts demand. The answer is new mines…and that requires prices to remain strong for some time.

Zinc is up 100% in 18 months (!) and in that time the price has already stepped back, consolidated, and surged again. The problem is a market facing major structural deficits. The answer (at the risk of sound repetitive) is new mines, which requires the zinc price to go even higher and stay there.

After breaking up through several trendlines, gold has technicals on its side. It has piles of fundamental arguments, from geopolitics to real interest rates. And base metal are strengthening at just the right time, fortifying the gold market.

For now, though, the gold market is still missing something. Leverage.

When gold turned up in early 2016 gold-oriented investors jumped aboard. Their buying created the leverage that gold stocks usually provide in a good market, giving stocks three to four times the gains enjoyed by gold alone.

That leverage has been lacking in 2017. The problem: generalist investors have not yet moved in.

This graph from Merrill Lynch shows clients’ allocations to precious metals, as per ETF holdings. In the last bull market you can see that holdings held in the 7% level. Today that are at or near record lows. In other words, generalists have not rotated into gold.

That is why leverage has been lacking. It will return as generalist investors turn to gold. So how, when, and why will that happen?

It could happen as a result of a significant correction or crash in the broad stock market. It could also happen gradually, as the opportunity offered by gold becomes clear.

Here’s the slide I used to describe that opportunity.

After such a big long run, the US markets are pushing it. Questions of sustainability swirl constantly. But it is impossible to know when or if they will correct or crash. A bull market remains a bull market until it isn’t.

As such I’m not banking on a crash to propel investors into gold. More likely, I think, is that the sharp contrast in risk and value between gold stocks and the broad market will become increasingly apparent and will lure investors over.

If you’re already on the 40th floor, you can’t go much higher and the risks involved in falling are very serious. That’s the US markets. Gold stocks, by contrast, are still on the first floor, with oodles of height left to gain and minimal risks to boot.

The chart below captures this idea. The ratio of XAU (The Philadelphia Gold and Silver Index) to the Dow Jones Industrial Average has averaged 31.8. Today the ratio stands at 3.7.

As this opportunity gains traction, gold momentum will start building. And then it will be game on.

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