Gold: Not Quite Time

By SA Marketplace :

2018 seems to be ending on the wrong note in the markets. December is setting the wrong kind of records, and Q4 has been a bumpy one in general. This is what happens in the stock market sometimes, but it's been easy to forget over the decade-long bull market.

We're using the end of the year as a chance to lift our heads, survey the market, and see what might be coming ahead. To do so, we're inviting our Marketplace authors to do a series of roundtables. 2018 was another steady growth year for the platform, and we have a lot of great voices on the Marketplace, so we wanted to share their perspective with you.

Our Year End Marketplace Roundtable series will run through the first full market week in January. We'll feature ten different roundtable discussions, with expert panels chiming in on Tech, Energy, Dividends, Other Income strategies, Gold, Value Investing, Small-Caps, Alternative investing strategies, Biotech, and the Macro outlook.

This roundtable looks at gold, metals, and miners, a part of the market that would seem poised to shine given recent action. Is the yellow metal due for the spotlight in 2019? Will miners catch up? Are there other commodities or currencies we should be aware of? Our panel discusses:

Seeking Alpha: 2018 has been the first sustained rising rate year in the US since before the financial crisis. Gold appears to be down even in that environment. How would you assess the metal's performance? (Note: Questions sent out on December 11th)

Geoffrey Caveney: In the spring and summer of 2018, the gold price was weak when the Fed rate hikes and US outperformance of the rest of the world were driving up the US dollar, and the US stock market was performing relatively well. But with the US stock market decline in fall 2018, the gold price has been recovering well. I think gold is actually ending 2018 in a strong position, where it has two different paths to go higher in 2019: either (1) the Fed pauses its rate hikes, or (2) US and global economic and stock market weakness raise the value of gold as a safe haven asset.

The Critical Investor: First and foremost I don't believe in gold fundamentals as the gold price is pure speculation on an ever-changing dynamic of sentiment and half-baked "fundamentals" which are no other than sentiment drivers at best. Talking about rates as a sentiment driver, one could argue that the gold price should go down, as rising rates increase the strength of the USD. But as we have seen many run-ups on rate hikes as well at the time of negative real interest rates, there is really nothing one can say with conviction.

Simple Digressions: I would not put too much emphasis on the correlation between Federal funds rates and gold prices . For example, between June 2004 and August 2006 the FED rates and gold prices were going up in tandem. In my opinion, real interest rates are more important. And this year real interest rates have gone from 0.44% to 1.01%, having a negative impact on gold prices. However, most recently the gold has been holding pretty well. For example, despite a strengthening US dollar and rising real interest rates, since middle August the gold price has gone up 6.1%. As a result, I am getting optimistic about gold next year.

Itinerant: In my view, Gold has been in a sideways market for the past three years. It has been a choppy ride, and bulls and bears alike look worse for wear as both have experienced their fair share of traps along the way. I am positioned for more of the same in 2019 and will be pleasantly surprised if the sideways range eventually breaks.

jsIRA: Historically, gold price always has a positive correlation to the Fed Fund interest rate. But it is not the case this year. The deciding factor which influenced the gold price direction in 2018 is the strength of the US dollar. In my January article , I predicted that:

  1. the gold price will be topped at 1,380 in 2018
  2. gold price recent strength was directly related to the US dollar's weakness
  3. US dollar has entered its long-term upcycle.

The following development confirmed my view: after the consolidation phase, the US dollar made a 4-month breakout run to $97.00, and gold price dropped from 1,365 to 1,168 during the same period. Gold price started its run from its bottom when the US dollar stopped moving higher. From its mid-August low to the recent high of $1,250, gold price has gained 7.02% and the US dollar tried to break out its $97.50 resistance four times but all failed.

SA: What's either a currency, a metal, or a commodity that had your attention this year, and why?

Geoffrey Caveney: The striking weakness of the copper price. Everyone sees very bullish fundamentals for copper - tighter supply, rising global demand - but the copper price couldn't get or stay above $3.00 per pound in 2018. I now see the copper price weakness as a big clue and indicator of just how much global economic weakness there is, including in China. In the long term, the fundamentals will eventually be bullish for copper. But in 2019 and 2020, more global economic weakness and recession could hold down global demand for copper and keep the copper price weak.

The Critical Investor: Lithium, as spot prices broke down completely and apparently determined lithium stock sentiment with it (and probably amplified by negative mining sentiment), although long-term contract pricing rose to all-time highs during 2018 and still sits there. A strange disconnect between the markets and the commodity. Not even uranium, the only other commodity without transparent market pricing and with a noticeable difference between spot and contract pricing and quite volatile as well, has ever seen this development. Investments in battery giga factories are gearing up even more recently, so I am not sure what to make of it. Lots of contradictory events in the lithium space at the moment. Related stocks are very cheap again, but as these are very sentiment-related, I wouldn't enter again before lithium/general sentiment turns significantly, as it can go much lower, especially if a major correction happens on the US stock markets.

Simple Digressions: Definitely, vanadium. Between January and November 2018 the price of vanadium went up 170%, beating most of metals. This huge rally is supported by an electric vehicles industry boom. I hope that copper, another key component of electric cars, will join the vanadium rally next year.

Itinerant: Quite frankly, none of the metals I follow stood out in 2018. With price action choppy across my field of vision I have focused on stories that can return profits even in such a challenging environment, rather than trying to ride trends that simply didn't take hold in 2018.

jsIRA: The US dollar, gold, and crude oil prices had my attention throughout the year. The successful prediction of the gold and oil price directions will help me to make the correct investment decision on gold miner and energy stocks. Most of my predictions on the gold and oil have been correct including gold 1,380 top, 1,168 bottom and Crude Oil $78 top. The only miss I made is where the oil will be bottomed from its high. My bottom target was $60-$65. But the oil dropped all the way down to below $50 and more to come.

SA: Miners continue to lag Gold, at least using the ETFs GDX and GDXJ as a proxy. What do you make of this underperformance (in the 1-year, 5-year, and 10-year time frame), and how should investors adjust going forward?

Geoffrey Caveney: Gold miners' performance has been a complicated series of ups and downs: Crash in 2008, huge rally in 2009-2011, crushing bear market from 2011 through 2015, massive but brief rally in the first half of 2016, and another big downturn from 2016 through 2018. Personally, I believe gold miner stocks right now offer extraordinary value, similar to the situation at the end of 2015, right before the +200% rally in early 2016. I find the very best values in junior gold exploration stocks making and developing new gold discoveries, mostly listed on the Canadian TSX Venture Exchange (and the U.S. Over The Counter OTC Exchanges). When sentiment is most negative across the board, as it is toward gold miners right now, that often proves to be the very best time to buy.

The Critical Investor: I don't follow these proxies closely, but I can't imagine that miners underperformed gold in 2016 and 2017. Stocks are suffering from negative commodity/mining stock sentiment all year, which simply outscored their leverage on gold. A likewise development could be observed during 2008.

Simple Digressions: Actually, in the 3-year perspective GDX outperforms the gold. However, generally that is true - due to high costs of production and managerial mistakes the gold mining sector lags the gold most of the time. How to adjust to this pattern? My advice is pretty simple: focus on low-cost, low-debt producers operating in safe jurisdictions. Lastly, gold and silver bullion (or gold/silver funds holding physical metals as, for example, CEF) should account for a large part of any precious metal's portfolio.

Itinerant: Many gold miners looked for production growth rather than cash flow in the bull market up to 2011. Mining marginal ounces and paying for the development of these ounces with debt was the order of the day, rather than maximizing cash flow. When the bear market set in late in 2011 this attitude came back to bite these miners, with devastating effects for investors. Painful as this lesson has been, it seems to me that some miners are already starting to forget them. The answer is simple: separate the chaff from the wheat and invest in a few selected quality companies instead of spreading yourself too thin with an under-performing ETF.

SA: What was the big story or lesson learned for you in 2018?

Geoffrey Caveney: Flexibility. It is absolutely necessary to shift perspective and focus from sector to sector, as circumstances change. I was bullish on gold miners in 2016, I turned bearish in 2017 and shifted my focus to other sectors, I was bullish on copper in early 2018, but in this summer of 2018, I recognized that spreading global economic and market weakness was bearish for the stock market and for copper. So I have shifted back to a bullish perspective on undervalued gold miners once again. This kind of flexibility allows one to sidestep much of the losses in bearish periods, and then be ready to step back in at better valuations closer to the bottom in preparation for the ensuing upturn.

The Critical Investor: Never ever follow newsletter writer recommendations on binary exploration plays with anything other than a small speculative amount of money, no matter how strong of a reputation they have. I did this once on GT Gold ( GTGDF ) as "it felt good" but totally against my principles, and immediately paid the price, unfortunately.

Simple Digressions: Financial markets revert to the mean. I think that a bull market in US stocks is over - as a result, stock prices are supposed to go much lower than everybody thinks. Interestingly, I guess nobody takes such a thesis seriously, even the FED.

Itinerant: I had a chance to visit several exploration and development stage projects in Nevada and Idaho and pick the brains of some of the finest exploration geologists in the process. I learned a great deal on this trip, and I finally understood what constitutes a Carlin-style deposit. Not a small feat for an engineer I have been told, and I'd happily nominate this as my personal big lesson learned in 2018.

jsIRA: The big lesson I learned: Many lessons learned. The following is one of them: Become a disciplined investor all the time and never become overconfident (or fall in love) on any of our picks. One of our profit protection rules is that if our pick gained more than 7% after our buy, we should not let it turn from a winner into a loser. The failure to follow this rule on quite a few of our over-confident picks cost us at least 10% of our Core Portfolio's 2018 performance. And we should not let it happen again in 2019.

SA: Does 2018 mark a shift in the market for Gold and the precious metals complex in your view? Why or why not?

Geoffrey Caveney: In my view, 2018 marks another bottom for gold and precious metals and miners, very similar to 2015. In fact, the years 2015 and 2018 have been similar in financial markets in many ways. Both have been "years when nothing worked", when just about every asset class performed poorly, and the best assets were cash and the US dollar. Both have been years of global economic weakness and commodity price declines.

The Critical Investor: Not really as the price of gold more or less keeps trading sideways. In my view, 2019 will be more interesting as the markets are getting increasingly nervous. We will see to what degree gold will function as a safe haven in case of a solid correction.

Simple Digressions: I am not sure. To "read" the precious metals market, I very often use the Commitments of Traders reports. And it looks like both gold and silver are getting out of extreme pessimism now. However, to go strongly up the buyers have to enter the market en masse. It is not the case now.

Itinerant: No, it was just another year of sideways trading in my view.

SA: What are you preparing for in 2019? Any big themes to watch out for?

Geoffrey Caveney: Just as 2018 has been very similar to 2015, I expect 2019 to be similar to 2016 - at least for gold and gold miners. US and global economic numbers and financial markets will continue to weaken. The Fed and other central banks have a choice: either stop tightening or continue to tighten into a global recession (which is coming faster and harder than a US recession). Like or it not, the Fed cannot ignore global economic and financial weakness, because US rates and the US dollar have a huge effect on the global economy and financial markets. So there are two possible outcomes: either lower real interest rates again, or extreme global economic and financial weakness. Both scenarios are bullish for gold.

The Critical Investor: The big correction. Mostly cash at the moment, just playing a few near-term catalyst stories and 2 long-term holdings.

Simple Digressions: I am betting on the copper sector. Although the metal holds pretty well, the copper mining sector is totally depressed. I think that Mr. Market is wrong. As a result, most of copper plays are trading at bargain prices.

Itinerant: I am expecting more sideways action in gold and I am positioned accordingly. Other than that I am looking for copper to reach new highs, and I am watching nickel very closely.

jsIRA: Now the market is clearly in a downtrend. Preparing for a possible 2019 market crash will be the ultra-important job for me and I have to have a good investment strategy to deal with it.

Big themes to watch for:

  • Gold will shine in 2019. We may see 1,400+ even the US dollar will stay strong.
  • Crude Oil will continue its sliding and may test $30-$40 per barrel before trend reversal
  • Picking high-growth stocks will be difficult but are still doable.

SA: What is one of your best ideas for 2019, and what is the story?

Geoffrey Caveney: Pan American Silver Corp. ( PAAS ) is extremely undervalued, and it is a good way to play a recovery in silver and precious metals in 2019. Pan American acquired troubled Tahoe Resources ( TAHO ) and its assets in mid-November in an absolute steal of a deal. The market misjudged this acquisition, as it often does, and the PAAS stock price initially declined on the news. This is the kind of situation that generates an extremely attractive value proposition for stock buyers. For even higher potential rewards and triple-digit upside, one has to look to the junior gold exploration and discovery stocks on the Canadian TSX Venture Exchange (and the U.S. Over The Counter OTC Exchanges), as I wrote above.

The Critical Investor: I am a big fan of several Peru base metal plays, and I would like to highlight two of those: Tinka Resources (TK.V) ( TKRFF ) and Regulus Resources (REG.V). Tinka has the 55Mt ZnEq Ayawilca zinc deposit with additional tin credits and is working on a PEA. This study is scheduled for Q2 2019, and promises to be excellent. Regulus is delineating the 295Mt Antakori copper/gold deposit, and they are looking to do a resource update early in 2019. Both companies are well financed and have straightforward and very capable management.

Simple Digressions: As mentioned above - the copper sector (for example, Amerigo Resources ( ARREF )). As for the precious metals segment, I like Sandstorm Gold ( SAND ), a medium-sized streaming/royalty company. In my opinion, Sandstorm is run by one of the best managers in the entire industry. In Q1 2019 the company will get a boost from a silver stream on Cerro Moro, a mine owned by Yamana. Additionally, I expect the positive news on the Hod Maden gold project in Turkey plus…a number of other developments (as, for example, a share buy-back program or new acquisitions).

Itinerant: Integra Resources ( IRRZF ) and Pure Gold Mining ( LRTNF ) are both gold development stories on solid projects, driven by the right teams and with sufficient access to funding. I have great expectations for both in 2019.

jsIRA: The stock market is in a clear downtrend now and may go much lower in 2019. But this will create many future 10-fold/20-fold stocks once the storm is over. Becoming a Millionaire will not be a dream if one can survive this round of market downturn and then invest into the future multi-baggers.

Survival Kits - Investment Strategy in 2019:

  • Holding cash
  • Play defensive
  • Using 3xbear ETF to hedge
  • Identify fundamentally strong and short-term oversold stocks to trade for profit which is what I did during a 2008-2009 market crash.


Thanks to our guests for digging into the gold mines for these questions. If you'd like to check out our panelists' work, here are the links to their profiles and Marketplace services:

Stay tuned to this account for the continuation of the Year-end series. We will be moving to discussions market approaches (dividend investing, value, etc.) next week, before compiling our top ideas in a final article.

See also Yields Falling, Who Could Be Buying Without QEs? on seekingalpha.com

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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