I noted last week that whilst most precious metals experts were saying this was the time to buy gold Jordan Roy-Byrne of TheDailyGold.com was suggesting a correction may be on the cards. Well, gold did indeed slip – as did the gold miner ETFs (so full marks to JRB) and then on Friday it all bounced back again. Was that it?
Well the obvious point to make - since I don’t have a crystal ball - is that I don’t know. But so far gold has pretty much played out the same pattern it followed in the banking crisis: a steep fall then a recovery before going on to make new highs (eventually). The difference is that the action seems to be playing out in double quick time. So maybe that was the correction and the next few weeks will see gold go up again. But Friday's rise seems to have been as much to do with Donald Trump as much as anything, if you believe the financial commentators: the market was worrying what he might have to say about China so stocks fell and only reversed when he finished speaking and hadn’t started a new cold war. By contrast, gold rose and rose through the day and only gave up a little bit when Trump had finished. But Friday’s data show from the US was once again terrible: the Consumer Sentiment survey fell to a 7-year low against expectations of a rise, the Chicago purchasing managers index had been expected to rise from 35 to 40 but collapsed to just 32, the trade deficit climbed over 7% despite personal spending collapsing by a record 14% in April and if that is not a bit of a worry, Fed Chairman Jerome “Buzz Lightyear” Powell (QE “to infinity……and beyond”) told us that his bailout package had crossed a lot of red lines but the Fed would figure it out later. So that’s all right then! My worry remains that people still do not see the damage done by the coronavirus pin because governments are still sending out helicopter money. In the US over 30 million people have already lost their jobs and here in the UK I fear that the scramble for the dole queue has simply been put off by the government furlough scheme. And even with the furlough scheme we are seeing huge numbers of job losses. From an economic perspective, whilst the damage has been done the worst of the effects have hardly started. And in the US, Jerome Powell reckons his printing press has no limit and inflation will never come as a result.
But there is another reason for a bit of optimism: Silver has been on the rise and having been less that one hundredth of the price of gold a few weeks back, gold is now ninety-six time the price of silver. As the second player in the precious metals team, this renewed strength is positive and could signal a broadening of the appeal of the precious metals space. Historically, in a gold bull market, silver tends to outperform gold and at the peak of the post financial crisis bull run the gold-silver price ratio was in the thirties: there is a long way to go! In the futures market, whilst gold futures have tended to sit a little higher than the spot price in recent times, this past week saw that reversed – until Friday. I’m not sure quite what to make of that but clearly some players thought gold was going to reverse and the snap back to a premium seems to suggest that a correction may indeed have played out already. As we head in to June, the play-out of the June futures contract will be a beer and popcorn moment: will my suggestion of a squeeze on shorts - a reversal of the oil futures market when the market was paying people to take the black gold off their hands - come to fruition? If so, as the clock ticks down over the next few weeks, we should see some interesting action. For the record, Jordan Roy-Byrne was saying HERE that on balance he would still hold off buying for now (but don’t sell) as he wouldn’t expect a correction at this stage to play out in just a week. But overall his analysis is that this slippage is textbook stuff and if gold can get past the $1900 level then his measured upside is to $2,750. The technical setup for gold is bullish in the longer term but not quite so strong in the immediate term and he suggests we should take our cues from the gold-mining stocks as he views them as they are a better leading indicator. So from that perspective, the GDX ETF (large gold miners) put in a low point of $32.5 - a whisker above the $32 breakout mark in April - and now sits at $32.33. Meanwhile GDXJ - its so-called junior brother, although these are still pretty big stocks - hasn’t yet quite had a breakout but is once again sitting pretty much bang on the line at $46.08 having bottomed out at $42.92 on Wednesday. The way that gold sold off and then recovered with such spectacular speed as the market was hit by the coronavirus pin leads me to suspect that we could indeed have seen a mini-correction play out already. Without a crystal ball we shall have to wait and see, but I would far sooner be long than short (and I am long!).
As far as individual stocks are concerned, Ariana Resouces (AAU) and Centamin (CEY) are my two picks and I nibbled a few more Centamin as it sold off last week as a short term play, as I hope to see its share price beginning with a two before too long. Meanwhile Ariana offered up its Q1 numbers which were predictably strong, and it was interesting to see that head honcho Kerim Sener held off from silver sales, preferring to wait for better prices. As things stand, that seems to have been a correct call but more to the point it suggests that Ariana is somewhat awash with cash. With gold prices well above Ariana’s average selling price of $1,600 per oz in the first quarter, that bodes really well even if I was surprised by the admission that although the Kiziltepe joint venture has paid off the bank loan for building the plant, there remains a working capital loan of $8.5 million which is due to be settled by October 2021. In the broad scheme of things, whilst disappointing to discover (no doubt if I had studied Ariana’s annual report I would have turned it up), I don’t think it is a big issue but it does affect my confidence a little: how can the JV be largely free of debt with an $8.5 million pile of….er….debt! But since this is working capital, it suggests that it really is temporary cash to grease the machinery so it is not that big a concern. At 4p per share I still see plenty of speculative upside in Ariana, and my hope is that Kerim Sener will deliver the proposed corporate action before long. The latest deadline is the end of June, by which time Ariana will have posted its FY19 results and the AGM will be on the way: a perfect time to seek shareholder approval and offer up a dividend? We shall see – and I’m holding on to my shares tightly with a new target to cash in a slice of the pie at 5p.
Overall, my take on gold remains very positive and logic suggests to me that I am right to be bullish for all manner of fundamental reasons. But I was similarly bullish in the wake of the financial crisis and the old adage of don’t fight the Fed won the day – perhaps temporarily. With the lessons of that (I hope) learnt, and an eye on the lightning speed with which things seem to be moving, I will be looking to cash in some profits certainly before the year is out, and pile back in to the wider stock market. Top of my list right now is oil: whilst demand has fallen off a cliff and I don’t see it recovering any time soon, it will in the end and I believe the survivors will benefit from a contracted production industry causing higher prices…in the end. But we are fair way from that point right now.
Filed under: gold, Tom Winnifrith Shareshow, SP Angel Skinbiotherapeutics, Marshall Motor, Novum
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