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The Dog Days of Summer

It’s the dog days of summer on every level – volumes are down across the markets, gold is hurting, good earnings reports and economic data hardly garner any response, and my pooch spends his afternoons lying directly in front of the fan amidst a true Vancouver heat wave.

What should we take from it all? Not much, I would say. The dog days of summer are a normal thing, particularly for the gold market but also across the board. I would suggest not assuming that quiet days in New York or Toronto foretell an end to the broad bull market; rather, the adage “Never short a dull market” seems more apt.

That’s a concise capture of my sense of things: that the overall markets are really just on summer vacation, rather than in the midst of a downturn. (Did you notice the US GDP growth number for Q2? It was 4.1%, which is very strong.) Yes, endless talk of tariffs and almost-inverted yield curves make it seem that things are on a precipice…but only if you’re paying attention and I think what’s key right now is that few are paying any attention at all.

The Federal Reserve is meeting again. No one expects a hike this time around; the only question is what the end-of-meeting communiqué suggests about hikes for the rest of the year. Two or three? Odds of three currently sit at about 65%

Yes, rates are rising. Yes, the yield curve is flattening. No, neither are imminently bearish for the overall market – as much as pundits talk about these as red flags, in fact markets continue to rise for 6 to 18 months after the yield curve inverts.

Of course higher rates are hard on gold, but as always inflation determines the extent. So far rates are rising pretty modestly and inflation is tracking along. As a result real interest rates aren’t helping gold but they aren’t significantly hindering it either.

In lieu of a particular push from rates, I think gold will track with commodities…and I very much still see a broad commodities bull market ahead. The fundamentals for most base metals are very strong and, as I’ve said before, only a significant trade war would derail those outlooks. Fundamentals are at least reasonably bullish for most bulks too – potash and coal and iron ore.

A slew of deals over the last week suggest majors see the same outlook. DeBeers offered $107 million for Peregrine Diamonds to get the Chidliak project on Baffin Island, Lundin officially launched its hostile bid for Nevsun, Hancock Prospecting upped the ante in its pursuit of Atlas Iron, and Newmont laid down $275 million cash for half of the Galore Creek project.

The last deal was the most surprising of the bunch, to me at least. DeBeers has long known and liked Chidliak; they partnered with Peregrine on the project years ago but dropped their option in 2013, a move that decimated Peregrine’s share price. Now they’re getting the entire asset. Lundin’s lust for Nevsun’s Timok project is very well known and the bid was clearly telegraphed in advance. Hancock is an iron ore behemoth in Australia and wants Atlas for its rights to develop new port facilities at Port Hedland.

Newmont buying 50% of Galore? The rationale is less obvious there. Galore is big, no doubt, home to 8 million oz. gold and 9 billion lbs. copper in 528 million proven and probable tonnes grading 0.59% copper, 0.32 g/t gold, and 6 g/t silver. And it is permitted for development…but the first attempt to build a Galore Creek mine ended in massive cost overruns (like $5.2 billion instead of the initial $2- billion estimate), enough that partners NovaGold and Teck shut down the build in 2007.

 

The challenge is location: Galore Creek is 150 km northeast of Stewart, a town that is already remote by BC standards. It requires a long, complicated road (the purple line on the map) through steep, very snowy and avalancheprone terrain. Yes, it’s a fantastic deposit. But all I can say is that this is a long-dated option. Newmont will prep a prefeasibility study – the project’s third – over the next 3-4 years (i.e. through the rest of this bull market!), after which would still stand years of feasibility study and permitting before a development decision. It seems Newmont thinks it makes sense to spend $275 million cash now to get half of a project it might decide to build in a decade.

If I step back from cynically scrutinizing Newmont, the move can certainly also be viewed as a crazy strong endorsement that there just aren’t many world-class projects out there these days. Galore is one, despite its location.

Along with responding to commodities (when they recover from their summer- and tariffinduced slumber) gold will also just act seasonally, which means a few things. First, it usually starts to strengthen as August rolls to a close. Second, gold usually changes direction when speculative positioning is peaking – and right now specs are short at levels not since 2015…right before gold’s last big rally.

On a completely different note, the depreciation of the Chinese yuan deserves comment. It was back in March that Trump stepped up his trade war rhetoric…and immediately the renminbi, which had been rising, turned down.

The Chinese have let the renminbi trade more freely in recent years but let’s not pretend there isn’t central oversight. As such, a weakening of this scale in just a few months sure looks like government retaliation against the US. China imports so few American goods that it can’t retaliate against Trump tariff for tariff. Cheapening its currency – that it can do. A weaker yuan means Chinese good cost less in the US (dampening the effect of tariffs) and it makes US goods more expensive in China. That’s the renminbi. The other currency deserving comment is of course the US dollar. Four times now it has been turned back down right around 95.

That’s pretty serious resistance, though will only be confirmed if it heads down notably. Of course its most notable move in the last two weeks came when Trump said in an interview that he was very unhappy with the Federal Reserve for raising rates. He thinks the hikes are making the US dollar too strong, which is hampering US economic growth.

 

Powell is unlikely to care what Trump says or thinks. As my friend Eric Coffin pointed out recently, the last president who leaned on the Fed was Nixon, telling them to cut rates to help him win the 1972 election. Long story short: disaster, and the Fed was widely blamed for helping create the stagflation that dogged the 1970s.

Future traders aren’t giving Trump’s comments any credit. They are short 5-year and longer-dated Treasury notes (expecting treasury prices to go down as rates go up) and most are very long the USD. They see more hikes.

And so the situation remains normal. Hiking continues. US earning and growth remain strong. Everyone is on summer vacation. Summer and tariff talk have hurt commodities, but I don’t think the hurt will last through the fall.

So hold on, or just head to the lake and forget about the markets for a few weeks, like everyone else!

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