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Did we tell you or did we tell you?
It’s a bit premature to claim bragging rights but the Junior market has
been trading exactly how we hoped it would. Ben Bernanke delivered the early Christmas
presents gold bugs were dreaming of and the market tenor looks better than it
has for a year.
The operative word is still
“better”, not “great”. The increase in volume in the
Juniors is gratifying but still not enough. It will take higher volumes still
to keep a rally alive through to year end.
In keeping with that note of cautious
optimism we are sticking with discovery stories that are already working and
later stage stories that were under loved until the gold price took off. A
number of these are trading impressively well. So far discoveries and
undervalued developers/small producers represent most all of the positive
volume. They are riding the wave but the tide has not come in for the rest of
the companies in the sector.
We still think the market may strengthen
further in October but until that happens we decided to add a company to the
list with built in protection in the form of a healthy back account. This
company is not beholden to the market and should have news flow going
forward. Like many companies, it still needs discovery news as a spark for a
bigger move however.
After months of nothing but ugly, the
market for resource stocks finally took a meaningful turn for the better. We
all know the reason for that. US Fed chief Bernanke delivered on QE3 and the
gold market responded.
The chart below shows how impressive the
rally that kicked off in August has been. Bernanke telegraphed his move and
the markets were already cheering a push by the ECB for its own money
printing. By the time the Fed announcement of $40 billion a month in mortgage
backed bond purchases was announced a lot of the gain was in. Since the
announcement there has been another up-leg in price but that move appears to
be stalled out in the $1770-1780 range. Where do we go from here?
The Fed’s actions have weakened the
Dollar but for the trend to continue there needs to be more “risk
on” trading. Even better would be progress by Europe or other currency
blocks that leads to traders exiting the greenback to go long Euros or other
currencies.
QE3 has certainly taken care of the risk-on
part of the equation. That was probably the Fed’s main aim, in fact.
Yes the buying will lower long term yields a little more but it also goosed
the major market indices which we suspect was the major reason for doing it.
Notwithstanding anemic economic stats
consumer confidence has been rising steadily in the US. This has much to do
with gains in the stock market. Equities are a bigger part of the personal
balance sheet for Americans than others. Seeing their 401Ks growing (those
with jobs, that is) is making Americans more confident. So too is increasing
evidence that the housing market is finally bottoming after five years of
pain.
This confidence is not showing up in
spending numbers yet. Other concerns like the Fiscal Cliff have been holding
back hiring. The US economy needs to see some follow through for consumers to
start spending. It will be tough to maintain momentum unless that happens.
In Europe, the ECB has a more complicated
monetary equation to solve. Announcements of “unlimited” bond
buying have helped European bourses but shareholdings are less widespread and
those gains don’t impact confidence the way they do in the US.
 
In the case of ECB head Draghi,
it’s the bond market’s confidence levels that are the main
concern. As the 3 year yield chart above for Spanish and Italian bonds shows Draghi too has had some success.
Rates started falling as soon as Draghi decided to call the bluff of Euro area politicians
in August. They fell farther as the plan to buy bonds was outlined early this
month but doubts have begun to creep in. “Unlimited buying” made
for good headlines but the latest European plan is as opaque as its many
predecessors.
In order to appease creditor countries the
ECB plan calls for countries that need ECB backstopping their sovereign bonds
to ask for help and to be willing to submit to further conditions. Three is
no indication what those conditions would be.
That was enough to spook both Spain and
Italy which insist they don’t need the help. Until debtor countries ask
for help ECB bond purchases will be extremely limited. Most traders think
Spain at least will have no choice. Spain recently published bank stress test
results that indicate its major banks need to raise $60 billion in capital,
$40 billion less than the amount expected and offered by the ECB during the
summer.
Even so, Spain needs to issue about
€300 billion in debt this year to cover its budget shortfall and
maturing debt. The odds of Draghi turning on the
printing press still look good.
In Japan, the government seems powerless to
defend the Yen from buyers, even though its export economy desperately needs
a cheaper currency. The Bank of Japan has added $200 billion to its liquidity
funds. Japan can least afford to pile up debt but its
cornered in a classis liquidity trap and here too the printing press will hum.
With both risk-on trades and a known
minimum amount of new money getting printed the path of least resistance for
the Dollar is down. Even if the ECB starts printing too that might not
change. ECB bond buying could actually strengthen the Euro in the short term
as it would be considered a positive development in their debt crisis. Either
way, the Dollar should be capped and gold and silver should see more gains in
coming weeks and months.
Base metals and materials need stronger
economic stats. Most major economies published manufacturing indices in the
past few days. While most readings improved marginally all of them except the
US are still showing contraction.
If Europe can complete negotiations on
banking oversight and the US consumer continues to cheer up the Euro zone may
also move out of contraction. China’s leadership starts its party
congress on November 9th. Beijing hasn’t added any stimulus since early
summer. If that is going to happen it will probably start in about a month.
The chart below shows the turn around to
date in the Venture Index. It’s still at depressing levels but the
rally, such as it is, is the longest we’ve
seen since the market turned down in March. Here too, confidence is needed.
There have been early adopters buying (like HRA) but most are still on the
sidelines. Higher volumes are the clearest sign more are joining the party so
watch those. We expect the rally to run to year end. How far it climbs
depends on who wins the confidence game.
Ω
2012 hasn’t been an easy year for
explorers but HRA has been calling for a fall rally since early in the
summer. Thanks to a surging gold price that rally appears to have arrived.
It’s not a broad rally yet. Traders are looking for companies with
discoveries and management that knows how to add shareholder value. HRA is your key
to uncovering and profiting from extraordinary resource shares by getting
ahead of the crowd. At HRA, we look for companies with
the potential to at least double over one or two years based on asset growth
and development of metals deposits for production or take over by larger
companies.
Eric Coffin
To
download our latest HRA Journal for free--which
includes a recent new recommendation that is making gains--click here now!
The HRA – Journal, HRA-Dispatch and HRA-
Special Delivery are independent publications produced and distributed by Stockwork Consulting Ltd, which is committed to providing
timely and factual analysis of junior mining, resource, and other venture
capital companies. Companies are chosen on the basis of a speculative
potential for significant upside gains resulting from asset-based expansion.
These are generally high-risk securities, and opinions contained herein are
time and market sensitive. No statement or expression of opinion, or any
other matter herein, directly or indirectly, is an offer, solicitation or
recommendation to buy or sell any securities mentioned. While we believe all
sources of information to be factual and reliable we in
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made herein. We do not receive or request compensation in any form in order
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securities and/or options to acquire securities of the companies mentioned herein.
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©2010 Stockwork Consulting Ltd. All Rights Reserved.
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