A Melman Minute
| By | Leonard Melman |
|---|
As reported in our "Melman Minute" of January 20 which was written following the first day of the Cambridge House "Vancouver Resource Investment Conference", the high level of participation Sunday provided us with the sense that numerous investors and miners could have reached the belief that the metals markets were near a bottom and it was time to do a little bargain hunting. Well, Monday's crowds continued at high levels, re-enforcing that perception.
Regrettably, the metals markets themselves have not immediately followed through to the upside, as evidenced by the short-term chart on gold which dropped by almost $20 early Tuesday morning before beginning a sideways drift.
POSITIVE ACTION IN MINING SHARE INDEXES
One of our most valuable historic indicators of future precious metals price action has been the relationship between metals prices themselves and the performance of mining share indexes. The generally accepted theory is that current commodity prices are primarily based on considerations-of-the-moment, but activity in the mining shares frequently mirrors anticipated long-term prospects for the metals which, presumably, would then be reflected in the performance of for mining shares.
If the generally accepted outlook was for higher future metals prices, investors could be expected to be loading up on mining shares with a resultant positive impact on important mining share indexes - and vice versa.
The expectation, then, is that if mining share indexes outperform the underlying metal, the outlook for the metal itself could be interpreted as positive while if the shares underperform the underlying metal, the outlook for the metal itself could be interpreted as negative.
With that in mind, please note the relative performance of gold and the GDX ETF since the lows recorded in late December.
Since its late December low of $1,183, gold has rallied by approximately $70 to its recent peak just above $1,250, a gain of about four percent. In the same interval, as noted on the accompanying chart, the GDX ETF has rallied by about three points from near 20.5 to close to 23.5 at present - a gain of approximately fourteen percent!
In our opinion, this comparatively positive action in the GDX ETF - closely matched by other closely-watched indexes such as XAU and HUI - could be an indication of positive future action in gold itself.
CHANGE IN IEA OIL DEMAND FORECAST
Few commodities have as direct an impact on consumer inflation as the petroleum complex. Products derived directly from petroleum include gasoline, heating oil, plastics, medicines, lubricants, diesel fuel and so forth - all of them in wide demand and all of them having few genuine alternatives in our modern industrial world. Therefore, changes in the underlying price of Crude Oil can have near-immediate impact on consumer and producer price indexes.
From a fundamental point of view, demand forecasts issued by major international agencies can result in commodity price changes and, therefore, we take more than mild interest in a revised demand forecast just published by the International Energy Agency (IEA).
As reported in a Los Angeles Times article, the IEA just revised their demand forecast which notes, "...Worldwide demand for oil will increase 1.4% this year as developed economies strengthen...Global oil demand appears to have gradually gained momentum in the last 18 months, driven by economic recovery in the developed world...Growth will continue into 2014 with demand expected to increase to 92.5 million barrels a day.
In our opinion, the release of this report could have been an important reason for the sharp advance in Crude Oil over the past two trading days.
NEW IMF ECONOMIC FORECAST
The IEA forecast neatly dovetails with a revised economic growth outlook for the coming year just published by the International Monetary Fund (IMF), and reported in yesterday's Wall Street Journal. Among the most relevant information, we find these nuggets:
"...expansion to be fuelled by U.S., Euro-zone and Japanese growth."
"The recovery is strengthening..."
"The IMF raised its 2014 global growth forecast to 3.7%, up 0.1% from its last outlook in October."
The LAT article also noted a general comment offered by IMF Chief Economist Oliver Blanchard which suggested, `...the financial system is slowly healing, uncertainty among investors is abating and the drag from budget belt-tightening around the globe is decreasing.
Specific forecasts for economic growth in the coming year among developed nations included 2.8% for the USA; 1.7% for Japan and a still-strong 7.5% for China. The report did, however, include this negative comment: "...Southern Europe continues to be the more worrisome part of the world economy."
We would suggest that the overall positive tenor of the IMF forecast would appear to add some level of credence to the perception that future economic developments could add to inflationary pressures and thereby abet the case for higher precious metals prices.
However, in good conscience, I must also point out that from a charting (or "technical") point of view, I am still concerned about a potential break of important gold chart support in the $1,175 to $1,180 zone as a drop below that level could predict yet another sharp decline may indeed lay ahead.
As of 8:45 AM PST, financial markets in America and Canada are diverting somewhat with the Dow Industrials down by almost 70 points while Canada's TSX Index has gained about 10. Precious metals are drifting sideways at the moment with gold and silver both trading close to unchanged so far today at $1,240 and $19.87 respectively. Base metals are slightly lower on balance while mining share indexes, perhaps belatedly reacting to Tuesday's sharp metals selling wave, are down by about 1.5%.
In other markets, the US Dollar Index is ahead by 14 basis points to 81.20; Crude Oil continues to move higher and is now up by $1.68 to $96.64 per barrel and the TYX Index of rates on US Treasury 30-year bonds is up by a single basis point to 3.740%.
All quotes US$ unless otherwise indicated.
Next "Melman Minute" scheduled for Friday, January 24, 2014 when we plan to look at ramifications suggested by the continuing steep drop in the Canadian Dollar.