A Melman Minute
| By | Leonard Melman |
|---|
Welcome to the New Year of 2014. As the emergence of a new twelve-month is an ideal time to indulge in both retrospection and projecting into the future, I plan to do both in this morning's Melman Minute.
First, a look backward at the 2013 record of some of our important indicators.
GOLD - For the most part, 2013 was a rather dismal year for gold advocates and gold miners, whether major producers or those juniors involved in exploration and development. Gold dropped sharply for most of the year with the exception of a strong rally from late June through mid-September which saw an increase of $250 from $1,180 to $1,430. Regrettably, that rally faded and renewed selling brought the price back down to near the levels of the June low by year-end.
SILVER - The white metal traced out patterns very similar to gold during 2013, dropping sharply to under $19.00 per ounce by late June; rallying strongly into mid-September to about $25.00 before renewed selling drove the price back toward the late June levels by year-end.
US DOLLAR INDEX - For the most part, the historic contra-relationship between the US Dollar Index and Gold held true for most of 2013. The Greenback was generally stronger during gold's first-half decline; then fell during gold's July-September rally and then held firm or rose during the precious metals' last quarter swoon. Overall, the US Dollar closed 2013 at almost exactly the same point as year-end 2012.
LONG-TERM INTEREST RATES - After falling slightly on balance for the first four months of 2013, interest rates on 30-year US Treasury bonds began to rise steadily for the rest of the year, ultimately pressing up against the 4% mark by the end of December which was a significant increase over the yearly low of 2.8% set in early May.
DOW JONES INDUSTRIAL AVERAGE - Our last chart reveals the largest financial headline maker of the year, the almost relentless rise in the American securities markets to all-time high levels. As indicated by the Dow's chart, that index rose by more than 3,000 points during the year, a truly noteworthy feat considering the number of serious problems which received wide-spread publicity during the year such as relatively high unemployment, government shutdowns, difficulties associated with ObamaCare and increasing long-term interest rates.
LOOKING FORWARD
When we look forward into 2014, we note several factors which would normally mitigate toward increasing precious metals prices. They are worthy of separate discussion.
INFLATION - It is our opinion that perhaps the greatest single difficulty for gold to overcome in 2014 is the perception that inflation is under control. That perception may undergo a significant change before the end of the year because of the following factors:
Economic strength appears to be growing. If this proves true, there should be a steady increase in raw materials demand as well as rising consumer demand with each factor capable of placing upward pressure on general price levels - to the benefit of the PMs.
As a somewhat separate category, upward pressure on wage rates could increase significantly during 2014. First, there are widespread calls for dramatic increases in "minimum wage rates" and these will be difficult to withstand during an important political year. In addition, should the economy continue to expand, we believe there will likely be a commensurate increase in demand for highly-skilled technical and trades people with resultant upward pressure on wage rates.
INTEREST RATES
We look for additional increases in long-term rates during 2014. While many investors still act in accordance with the "high rates hurt gold" philosophy, we believe that if rates rise significantly, they could produce some very clear negative impacts on the economic society including higher mortgage rates which could curtail any real estate expansion; limit auto purchases and also increase the general costs of operating or expanding business operations. If these difficulties garner extensive publicity, a consensus could emerge that governments would be forced to adopt new and extensive 'stimulation' measures which could result in significant questions relating to future US Dollar strength.
There are also other considerations, particularly those of a political nature given that 2014 is a Congressional election year. Given the present precarious balance of power in America, the anticipation of those November results could increase general levels of uncertainty.
Putting everything together, we would offer the following predictions:
Based on what we believe will be a pattern of improving fundamental forces through 2014, we forecast gold to reach $1,450 by year-end 2014 and silver to trade near $26.00 per ounce. I also believe that if this forecast is achieved, 2015 could see truly significant gains in precious metals prices.
However, we do have a caveat and it is of a technical nature.
If gold breaks decisively below the present chart support near $1,180 early in 2014, it is quite possible that it would take much of 2014 for a new rally to become established and, if that breakdown occurred, we would expect price levels for gold and silver to end 2014 near their 2013 year-end levels.
Sorry for the split predictions, but there are huge numbers of 'chartists' out there in the investment community, and it is difficult to believe that if prices drop sharply below $1,180, thereby suggesting a potent 'sell' signal, that many such 'technicians' would fail to either get out of the precious metals markets entirely or actually 'short' them, thereby pressuring precious metals prices to the downside.
EARLY INDICATIONS
The first two trading days of 2014 have provided some basis for optimism regarding the metals. Gold has rallied by $53 from a Friday low just above $1,183 to a current quote near $1,236 while silver has gained $1.48 from $18.70 to a present $20.18 during the same time frame. These are pleasant gains to contemplate and give us some confidence that the precious metals will indeed hold above their mid-2013 lows.
It is also worth noting that mining shares have rallied strongly so far during these two days with the GDX gold miners ETF rallying from a Friday low of 20.52 to a current quote of 22.17 - a gain of 1.65 points or about 8% in just two days. However, two days do not make a year and these results can only be regarded as a preliminary indication.
The year 2014 is shaping up to be a most interesting one indeed.
As of :30 AM PST, financial markets in Canada and the USA have retreated from earlier rallies with the Dow Industrials up by about 35 points while the TSX Index is down by a similar amount. Gold and silver remain strong with the yellow metal ahead by $13 to $1,236 while silver is up by 16 cents to $20.18. Base metals are trading sharply lower with declines of 1-2% across the board while mining share indexes are now little changed on the session.
In other markets, the US Dollar Index is up by 11 basis points to 80.89; Crude Oil is continuing its recent retreat from the $100 level and is off by 98 cents to $94.49 while the TYX Index of rates on 30-year US Treasury bonds is up by 24 basis points to 3.943%.