A Melman Minute
| By | Leonard Melman |
|---|
Taking new precious metals moves to the upside and recent declines in financial markets into consideration, one can truly state that, to date, the year 2014 has been positive for the metals. Given the news events discussed below, we might indeed be witnessing a turn toward higher gold and silver quotes as the year progresses.
PLAYING CHESS AND GOLD
Ever since my older brother taught me the elementary moves of chess at about age 7, I have been fascinated by that intellectually challenging pastime. Although only a moderate-ranked club player myself, I have always been impressed by the tremendous progress made in chess strategy through the decades by the world's great masters. One of those strategic aims seems relevant to our analysis of factors relating to precious metals.
I am referring to the idea of "accumulating advantages", no matter how small they seem. These tactics might include building pressure on an important square; gradually attacking a vulnerable opponent's piece to the point where defending it becomes impossible; and, of course, creating pressure against the opponent's king, ultimately leading to victory by check-mate. It has always amazed me how many games can suddenly turn when accumulated small advantages lead to decisive breakthroughs - and ultimate victory.
With that in mind, in my opinion it is beginning to appear that we are recently witnessing a gradual build-up of background information which could lead to advantages for the pro-gold (and silver) forces. Recent articles include some of the following concepts:
The economic recovery may not be that strong at all, possibly leading to additional monetary stimulation over time. We note new reports of manufacturing slowdowns in China and diminishing job prospects in Canada, both combined with an important weakening of job creation reports in America and continued high unemployment in Europe.
International terrorism - particularly in the Middle East - is accelerating and this morning we have now learned of more bombings in Cairo and Iraq.
Formerly stable nations in South America are now encountering serious troubles. Argentina has just been forced to de-value their currency amid spreading economic troubles while in nominally Socialist Venezuela their government bonds have just fallen steeply in value as that country has once again devalued their currency, dropping its value in one fell swoop from 6.3 Bolivars to the US Dollar down to 11.36 - thereby driving up the cost of all imported items.
Several financial markets as well as home currencies in emerging countries are now in steep decline, including important nations such as Turkey and South Africa while Russia's Ruble just hit a fresh multi-year low.
By themselves, each of these items may not be of earth-shaking importance, but when taken in combination, they seem to add weight to a growing supposition that the world's economies may not be on a path toward perpetual prosperity, but may in fact be much more troubled than is commonly supposed. If that is the case, then we may anticipate further negative news, a pattern which historically has led to important precious metals bull markets.
GOLD'S TECHNICAL PERFORMANCE TO DATE IN 2014
So far this year, gold's chart has put in a positive performance on two particular counts.
First, the magnitude of gold's rise from the late-2013 low of $1,181 to this morning's intraday high of $1,273 is becoming impressive by itself. Second, for the first time in several months, we have been able to draw a clear short-term uptrend on our daily gold chart. We would also note that gold has been able to rally above some short-term resistance near $1,260.
While the year is only in its earliest stages, we cannot help but be encouraged so far. However, we would ask you to bear in mind the distinct possibility that action in 2014 to date could be nothing more than a short-term rally within an intermediate-term bear market and for that reason, the "double bottom" along the $1,180 line remains a primary focus.
CANADIAN DOLLAR
We wrote recently that the Canadian Dollar was important in our overall analysis because Canada remains one of the world's great commodity-producing nations and therefore, action in the C$ could indeed reflect anticipation regarding overall international economic demand for commodity items. Ergo, if demand was rising, the C$ could be expected to improve.
However, we note that the C$ has not been performing strongly in recent months - and that is truly an understatement - as illustrated by the accompanying chart. Despite a modest rally this morning, the C$ is sharply lower over the past few weeks.
For any important currency, particularly one with a reputation for stability such as the C$, to lose almost nine percent of its value within four months is rare indeed. When we search for explanations, two come immediately to mind.
First, it would appear that some investors simply do not expect a major commodities rally any time in the near future, perhaps based on some of the factors noted above.
Second, there are growing signs of troubles within the Canadian economy itself. The Governor of the Bank of Canada recently commented that actual deflation remains a threat while the latest edition of one of Canada's most widely-circulated general magazines, "Maclean's", carries the cover headline, "How Safe is Your Job?" and the sub-headline, "If the recession is over, why are there still so many factories closing, companies downsizing and people getting laid off?"
Canada's most recent dismal job figures for December seem to validate these concerns.
Whatever the reason, we believe there are two direct impacts on the mining world resulting from Canada's falling currency, one negative and one positive.
The negative impact is a rising price for any imported equipment, particularly items imported from America. The positive fact is that the Canadian Dollar price received by producing mines in Canada has increased substantially, since international commodity quotes are normally priced in US$.
We would also suggest that one additional factor in the weak performance of the C$ is the growing conviction that Canada's important petroleum production industries may be in trouble because of a growing inability to ship excess production to foreign markets - resulting in a build-up of domestic supplies and a resultant lowering of prices received.
As of 8:30 AM PST, financial markets in the US and Canada are falling steeply, with both the Dow Industrials and the TSX Index now down by about 200 points each. It is worth noting that the Dow Industrials appear close to breaking below the 16,000 level. Precious metals continue to hold on to early gains with gold trading near $1,267, up by about three dollars while silver has gained six cents to $20.08. Base metals are down slightly on average while most mining share indexes are off by about one percent.
In other markets, the US Dollar Index is slightly lower at 80.52; Crude Oil has lost 59 cents to $96.58 per barrel and the TYX Index of rates on US Treasury 30-year bonds has continued its recent sharp declines in this morning's trading by falling 31 basis points to 3.650%.
All quotes US$ unless otherwise noted.
Next "Melman Minute" scheduled for Monday, January 27, 2014