A Melman Minute
| By | Leonard Melman |
|---|
It seems that we are at a particularly important juncture in our analysis of precious and base metals prices going forward. For the moment at least, the relentless declines in gold and silver have abated somewhat and the US Dollar has begun to move sideways instead of relentlessly higher.
The important question, therefore, is whether these adjustments are the start of a major reversal to the upside for the PMs or just an interruption within continuing downtrends.
For example, gold continued its decline until it bottomed at $1,209 very early Monday and then soared 'quick-time' back up to $1,238 before encountering some selling and by late Tuesday the yellow metal was trading in the mid-$1,220 range.
It is difficult to read anything more into this bounce than a temporary rally from an oversold condition and, as may be clearly observed, there have been a plethora of such rallies during the past several months. Unfortunately, each of these rallies quickly rolled over and returned to the downside, falling to ever-lower comparative levels. So far, nothing has happened to indicate that this particular rebound will develop exceptional strength in the current time frame.
There are several fundamental indications that would appear to support this thesis including a continuing rally in the US Dollar Index and steep declines in several commodity items, particularly including the widely-consumed grains and the most important petroleum complex sectors. As long as the Greenback remains strong and commodities continue to decline, it is difficult to justify belief in an imminent, strong precious metals rally.
There is also another contra-indicator to an immediate strong PM rally, discussed below.
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During Monday's Melman Minute, I wrote that today I would comment on recent action in the world's two most important commodity-related currencies, the C-Dollar and the Australian - or "Aussie" currency. These two currencies appear to me to be important in our overall analysis since both countries have vast mineral and agricultural reserves which would appear likely to be responsive to world economic developments; rising when economic activity - and therefore demand for raw materials - was strengthening and falling when economic contraction appeared to be a serious concern.
Judging by the appearance of each chart, some degree of current pessimism appears to be quite evident.
The five-year chart of the C$ clearly shows that coincident with the precious metals peaks of mid-2011, that currency has been in a period of general decline which does make sense because the prices of many commodities such as metals, grains and petroleum have been in general declines themselves - and Canada has abundant production and reserves in all of these items. It stands to reason - in our opinion - that if the outlook truly was for advancing economic activity on a world-wide basis, the C$ would have been performing in an entirely different and more positive manner.
It is quite possible that Australia is even more vulnerable to a commodity price decline than Canada since not only is it a major producer of most precious and base metals, but it is also a major exporting center for transhipment into China and Japan and is therefore doubly vulnerable to an important international economic contraction.
Like the C$, the "Aussie" remains far below the levels of mid-2011 but we notice one potential ray of light in the five year chart of that currency. Please note that an important "head-and-shoulders" bottom could be in the process of completion at this time with the "left shoulder" having been set in during fall 2013 near 88 cents; the "head" being developed in January 2014 with the decline to near 86 cents and the "right shoulder" now being formed, again near 88 cents with the current decline.
Should the A$ break out above congestion between 93 and 94 cents, that could easily be interpreted as a sign that this pattern had been completed and also that economics were indeed improving - which is what precious metals observers would also welcome.
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As if to dash such hopes, the G-20 meeting of finance ministers and central bank chiefs recently expressed concerns about the lack of economic vitality in the giant European economic body where growth rates have stagnated and unemployment remains very high. In an interview with the Canadian Globe & Mail newspaper, Canada's Finance minister Joe Oliver declared that, "…what we do not want, of course, is to see Europe enter into deflationary spiral. It must be avoided for the good of Europe and the good of the global economy."
And, as we might ask, what appears to be the preferred 'remedy' now being advocated by the various ministers and bankers? The article states bluntly that the desired approach favoured by most finance ministers is for, "…their European counterparts to temporarily open their government spigots to get their economies moving again."
Australia's Treasurer Joe Hockey added, "…It is critical that we take concrete steps to boost growth and create jobs."
Would it be unkind for us to ask, "Isn't that exactly what they and their counterparts have been doing for the past six or seven years?"
I believe it was Albert Einstein who was reported to have declared, "One definition of insanity is to keep doing the same thing over and over again yet expect different results."
In the meantime, the situation is clearly in an uncertain period and we await decisive action over the next few trading sessions.
EARLY WEDNESDAY DATA
Dow Industrials, 17,055, - 116 points (Tuesday close)
TSX Index, 15,125, - 3 points (Tuesday close)
Gold, $1,224, + $3 (early overnight trading)
Silver, $17.78, unchanged (early overnight trading)
Base metals, (average) + 0.3% (early overnight trading)
Mining share indexes (avg.), + 1.7% (Tuesday close)
US Dollar Index, 84.78, - 04 basis points (early overnight trading)
TYX Index (30-year bond rates), 3.252%, - 37 basis points (Tuesday close)
Crude Oil - $91.69, + $0.13 (early overnight trading)