Keeping Conviction in Todays Mining Market
By John Newell
September 15, 2019, 2019
Fieldhouse Capital Management
As we enter the final quarter of 2019, we are optimistic that the historical seasonal patterns and trends will kick in, and we should have a strong finish in the precious metal’s markets into the year end. Year to date, Gold is up ~16% and the precious metal indices that were up earlier this summer to over 40%, have come off their highs and currently up in a range of plus 20%-26%. The TSX Venture has lagged since reaching a high earlier this year but our work suggests the lows are in, and we have an established uptrend from the 2016 lows and the late 2018 bottom and again since the mid-August lows. We feel that like the first quarter of 2019 when we saw a +20% gain in the TSX Venture exchange, could repeat itself in the final quarter as uncertainty in overall markets and seasonality come into play.
Helping us keep the conviction is the fundamentals and sentiment that fueled the upward trending moves we have witnessed so far in 2019, in the broader precious metal space.
We are still facing the threats of a trade wars, sanctions, and continuing tariff actions, giving emerging markets added incentive to add gold to their foreign reserves.
The Federal Reserve looks like its next move this week (September 18th) and could be lowering interest rates again, moving closer to a near zero interest rate policy. This is a global move by all central bankers back to monetary easing and leaving them with the inflexible nature of excessive debt levels, suggesting we are in the early stages of a credit easing cycle in interest rates, to offset recessionary forces that may be on the horizon.
When interest rates decline, so does the opportunity cost of holding gold, the interest rate you could have earned on a deposit vs. the zero-interest rate offered by gold. This environment usually leverages gold prices higher.
Another factor increasing gold demand is Central banks continue to purchase gold at almost record pace ignoring higher prices, with top buyers being China, Russia, Turkey, India, and Poland.
Gold in almost every major currency around the world is hitting all time highs that leaves little doubt that investors are also using precious metals as a hedge against currency debasement and global economic uncertainties.
Looking at precious metals as an investment in the environment laid out above, we believe that the playing field for precious metals and well-run companies in the space are an attractive place to allocate funds. We still believe we are in the early stages of a bull market that started in January 2016 that saw + 160% returns followed by a 3 year sideways to down move that ended late this past spring. This causes us to believe investors in this sector, best years lie ahead.
However, investments do not go up in a straight line and in early August we warned that short term technicals were deteriorating and traders (which we tend not to be) should prepare themselves for some short term sideways to down action. This has occurred and now we believe we are close to corrective lows or at least in the last two digits of a “postal code” low and this short sharp correction has seen most of the short-term damage. (See Chart 1)
This leads us to one of our favorite sectors of the metals markets the “Explorers and Developers”. In Canada we are blessed with an abundance of rich resources that are for the most part, hunted for by smart, hard working men and women that are working 12-16 hour days in the short season they have to work with, constantly training to better understand the districts they are working in. Here in British Columbia the operating season to work the ground is more than half over and soon we will begin to hear assays on the work they have done. It is an exciting time, beyond the day to day trading of their shares, these teams’ highest goal is looking for mines, that if successful will one day fill the depleting resources that is a fact of life for companies in the extraction business.
Of interest to this writer is the soon to be released results from British Columbia’s Golden Triangle where glacier recession and new geological theories are helping geologists tap into the most fertile ground, in this vast mineral rich land position.
In conclusion investors are reminded that patience is often required to reap the rewards of the effort to find, develop, and bring a mine into production.