Small gains in the battered TSX Venture in the last couple of weeks might
tempt some to declare an end to the downward drift that has seen the index
lose more than 60% of it value since its March 2011 high of 2464. More
seasoned participants might attribute the bounce from July’s multi-year low
of 859 to a variety of factors and remain skeptical that the fall from grace
may end anytime soon. I find myself firmly in the latter camp and for these
reasons:
1) July and especially August is when residents of the northern hemisphere
prioritize vacation time, and so selling pressure tends to ease up in these
months. Fund managers will return, in my opinion, and assess the landscape.
Those still holding resource stocks will take advantage of the summer bounce
to liquidate further.
2) A good number of industry insiders think that the bargains to be had at
these prices among premium resource juniors are just too good to pass up, and
have started to accumulate. But will that see investment funds revising their
bearish posture and freeing up purse strings? No, it won’t.
3) Technically speaking, the chart tells the tale of a pattern of small
recoveries that rapidly transform into further declines. Why should that
pattern change?
In fact, ask yourself this simple question: What has changed in the world
financial macro-economic picture to justify the idea that demand for metals
could/should rise?
I look around right now, and the only thing I see is incrementally
amplifying misery.
Precious metals continue to suffer the darts and arrows of the futures
market’s relentless downward pressure from the limitless supply of paper gold
shorts.
Steel and copper prices continue to limp downward weakly as China’s deluge
of notoriously kinky data nonetheless points to continued deterioration of
industrial growth for the world’s number 1 consumer of industrial metals.
Potash prices are expected to collapse gradually thanks to the demise of
the Russian cartel that has been a key component of the world’s potash
producers colluding to keep the price high.
Uranium, while indicating technically that supplies impacted by the end of
the Russian post-nuclear warhead recycling program must result in demand for
new supplies, is offset by the fact that Fukushima continues to exhaust
several hundred tonnes of radioactive water daily into the ocean. Nuclear
power facilities are being cancelled across the globe, including in China, as
the world comes to grip with the impossible liability that accompanies every
new plant into existence. There is not a single nuclear power generating
plant in the world that is not backstopped public liability-wise by
government.
The European debt crisis shows every sign of reigniting as Draghi’s famous
“do whatever it takes” statement fails to do what it takes to balance the books
throughout the Euro zone, and persistent economic weakness dominates data.
And finally the United States, now having replaced China’s real demand
with its fabricated $85 billion per month in demand, is in the difficult
position of having to taper its own counterfeiting measures, as “me-too”
policies in Japan, China, the UK and various other countries threaten to send
the already mightily increasing inflation positively parabolic. If it does
so, the false exuberance in the housing sector will reveal itself as the
ersatz result of $45 billion a month in Fed welfare. Despite record stock
market closings, no real economic growth has materialized in the U.S. since
2007, economic indicators notwithstanding.
One final note…having had ringside seats to the failure of multiple
financing attempts by TSX Venture resource deals wallowing around the $0.05
mark, its clear that the model of discounted financings with warrants for
company equity is no longer attractive to investors, especially since the $85
billion in juice going into U.S. markets acts as a kind of guarantee that the
markets will continue to rise there.
Markets will recover in Canada one day, but not until something happens –
like a resumption of the gold bull market should the futures market be
brought under control in the U.S. – to justify a return to risky resource
investing.
In the meantime, try not to catch the falling knife that these little
‘recoveries’ embody.
