Don't Fret the Details. The Bottom is Here.
I cannot stop. Reading, talking, questioning, researching – the markets are so up and down, excitable and depressive, liquid and illiquid.
There are so many questions, each with such a range of answers.
Is the end of quantitative easing in the United States significant? Did the greatest financial experiment in the modern world work? How long will Japan's surprise move into QE fuel global markets? Is Europe sliding into recession and/or deflation? How high can the greenback go? Where and when will gold bottom? Why is silver always so confusing? Will the Fed raise interest rates? When will supply constraints start driving metals back up? Is cheap oil a good thing?
The list of questions goes on. None are easy and all are interrelated. Thinking it all through feels like a Choose Your Own Adventure book, full of binary decisions that dictate what will happen.
For example, if I decide that the US recovery is real and markets have already accounted for the end of QE, it follows that the greenback will continue to strengthen and gold decline while North American equities trend upwards.
But wait a minute. Major indices are up 200% in just over five years. The S&P is trading at almost 18 times earnings, compared to an historic average of 16
times. Can corporate earnings rise fast enough to justify that multiple? Seems unlikely, especially given that large US companies generate a lot of their sales outside the country – 30% of sales by S&P 500 companies are international, for example – and key international buyers (Europe, Japan) are struggling. Plus, a stronger dollar will make those exports a harder, more expensive sell.
Adding to that, QE's main effect was to support equity and bond issuers. While the Fed was printing money, there was no chance of higher interest rates. Low interest rates make long-term assets more valuable, because discount rates are reduced. Low rates also discourage portfolio managers from holding cash; instead they put their dollars into equities and bonds representing long-term assets. That action bids up prices and encourages more of the same.
As more follow this path, valuations rise and the moves seem smart, building momentum. The result: certainty of low interest rates means higher equity valuations and better bond markets, both of which encourage spending.
Now that encouragement is gone: QE is over and there is no knowing when the Fed might raise interest rates. That makes an ever-ascending market seem less and less likely.
Then there's gold, priced such that a third of production is already uneconomic. Curtailments are around the corner. As production falls off, supply will fail to meet demand and the price will have to rise.
Maybe I should have chosen the other adventure?
Bottom line: it is very hard to assemble a comprehensive picture of what has happened, is happening, and will happen.
That doesn't stop me from having a few predictions.
The most important one is this: whatever happens in the next month, metals and miners are at a bottom in a broad sense. For investors positioning to capture the sector's next cycle, the broad-sense bottom is all that matters.
Gold will fall farther in the coming weeks. For one, tax loss selling is just getting underway in earnest, which will put added pressure on a beat-up junior market.
More generally, for now the US economy seems to have momentum. While that persists, aided by cheap oil, the greenback will keep rising. Gold usually opposes the dollar, so a strengthening dollar is bad for gold.
Where will it bottom? Forecasts range from $1,100 to $700 per oz.
I don't care to pick a bottom. What I will say is that the price of gold cannot stay below $1,000 for long before production starts to dry up in a significant way.
Gold also has support. China has been buying gold like mad of late (see Koos Jansen's latest article on China's insatiable gold appetite for details). India is also buying significantly. Russia too – Putin bought 37 tonnes of gold in September to lift Russia's stockpile to its highest level since 1993.
Similar arguments can be made for silver, copper, and nickel. For uranium too, though the timeframe there is longer, and for iron ore and metallurgical coal.
It comes down to this: metals are primed for a real rebound, one based on prices, supply, and demand. It will not start tomorrow. When it does start, it will at first feel very slow.
But it will happen. China is preparing a massive infrastructure program, one designed to move 250 million people into cities and turn them into consumers. That program will generate enough copper demand alone to catalyze a mining rebound. India, Mexico, and perhaps the resurgent US will add to demand, along with others.
Metal supply and demand are very real. While the rest of the market went on a spectacular run over the last four years, metals and miners wallowed in a brutal slump because demand did not rise, prices fell, and costs climbed.
Going forward I see the disjoint continuing. The Dow Jones, the S&P, the NASDAQ – they might correct or they might continue upwards. That will depend on the price of oil, whether Europe embarks on more easing, the performance of the yen against the dollar and the euro, housing starts, inflation assessments, jobs reports, even ebola.
Whichever happens will have some impact on mining stocks, but these equities are so low, so pummeled, that there is little room for further beating.
The world's biggest gold miners are trading at multi-year lows. Shares in Barrick, the biggest of the bunch, are worth just $13.54, down from $55 three years ago. ABX shares haven't been so cheap for more than a decade. Same goes for Kinross and IAMGOLD. Goldcorp, Yamana, and New Gold are trading at their 2008 lows.
This is what I mean by a bottom in a broad sense. Gold will fall somewhat farther in the coming weeks. These miners will likely fall with it. But in two or three years, when the metals rebound is in full force, it will matter not whether you bought at the precise bottom.
It will only matter than you bought.
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