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Gold outlook, Commodity bull market questioned
(Excerpts from the June, 2006 Issue of EGS Dated June 29, 2006)
Commodity Bull Market Questioned
Gold outlook
After falling precipitously since peaking in mid May, gold found support around $565 on the August contract and is retracing some of its losses, closing in on $600 now. Maybe, this is the "B Wave" of an A-B-C correction. A 50% retracement of the losses since the May highs would bring the price back to around $630 and then Wave C would start. Looking at a five-year chart, gold appears to have further downside. While there seems to be support on the top channel line where the price bounced, it has broken below a shorter term upward sloping line.
Gold also has this amazing habit of revisiting the lower channel line and stopping right at the 69-week moving average at each seasonal low. Which gives it a good $50 to $100 further downside from here. So I am in no rush to deploy cash back into the gold stocks just yet.
The good news is that gold chart may now be moving back into sync with the seasonal cycle. It went way off kilter by not peaking until May this year, which really throws off our timing strategy! But with seasonal weakness expected to continue to the end of August and given the current trajectory, it appears to be falling back into line.
Commodity bull questioned
The whole commodity secular bull market has come under question since the market break, in May. That high is turning out to be an important, almost watershed event in terms of a big shift in market sentiment, from seeking high returns to avoiding risk. The commodity bull is questioned because of the growing concern over a global synchronized credit tightening (raising of interest rates) by the four major world central banks and what this is going to do to economic growth and hence demand for commodities sooner or later.
What are others saying?
There's still a split decision among well-known analysts. Dennis Gartman and Nick Majendie are unapologetic bears. Even Don Coxe sounds as if he's beginning to lose his nerve. Others like Jim Rogers and Ron Meisels are sticking to their bullish scenarios. When asked if he thought the commodity boom might be over, Eric Sprott responded: "We almost share this view." (Q&A in the National Post). He's staying away from economically sensitive base metals, but he still believes in the Peak oil theory and is a bear on the U.S. Dollar so he likes energy, especially uranium and precious metals. This is pretty much in line with where we are today.
Vancouver Conference panel faces off on commodities
There was an interesting debate about this during the closing panel at the Vancouver Resource Investment conference on June 11/12. The panel started off in agreement that the U.S. housing market was toast. Where they differed was on how this might impact non-precious metal commodities. Ian Gordon, the Long Wave Analyst (K-Wave) proclaimed that the U.S. housing bubble would impact China severely enough to end the commodity boom (excepting gold of course). The rest of the panel disagreed, claiming China and India's own internal domestic demand would make up for any drop in demand in exports to the U.S. Most had been to China and they just couldn't believe it would slow down.
What do I think?
I've done my own soul searching since last issue about this and have arrived at the following conclusions:
Too many early Stage 4 charts
Global economics aside, what's really bugging me these days and why it's hard to get enthused about investing right now, for one, there are just way too many, what I refer to as: late Stage-3/early Stage-4 charts out there. That is, charts of major Canadian companies or indexes that have already had huge, multi-year bull runs, have spent some time forming what certainly appear to be large tops, that are now rolling over and showing all of the classic signs of breaking down (lower lows and lower highs for the first time in many years).
Bull & Bear Market Stages:
Stage 1: Basing
Stage 2: Rising
Stage 3: Topping
Stage 4: Falling
I hate that! That's not the pattern this newsletter looks for. Just pull up a 5 or 10 year chart of Suncor, the TSX-Energy Index, the Materials Index, or the Composite itself to see what I mean. They're all the same.
The next biggest problem I have with overweighting commodities is that the ideal time to buy commodities is when they sell at close to their cost of production. Many commodities are currently selling at multiples of their cost of production. That's not "ideal" at all.
Other thoughts going forward include:
- The secular bull market in commodities may still be in place, but for several reasons, it won't be as easy going forward. We'll have to be even more cagey about when we buy and sell, as ever, we'll have to be aware of, and play the Cyclical bull and bear cycles within the secular cycle or we can expect poor results
- The TSX Composite has had three consecutive years of high, double digit annual returns and that's not sustainable. The historical average is more like 7% per year so prepare for a reversion to the mean - I'd suggest you lower your expectations
- We are in no rush to invest since we are just as negative on Wall Street going forward - but one thing that actually does look interesting, is Health Care.
Now that's what we look for!
Take the 5-year chart of the TSX Health Care Index shown above. This is the pattern we look for. This is what I call a late Stage-4 chart - something that has been falling in price and in sentiment for a long time. But now a few positive signs are showing up. While the price is still near its five-year lows, the chart hasn't made any new lows in over a year and may be tracing out a huge multi-year Stage 1 basing pattern.
Meanwhile, we have obvious reasons (demographics) to believe that growth in demand for Health Care should escalate going forward and therefore one would expect the fundamentals to be positive. This chart pattern looks far more appealing than any of the charts in the commodity sector. (With, as I always add, the possible exception of gold, which may just do it's own thing separate from commodities in general).
So, for this reason, I am looking at a few ways we can participate in this sector for future Issues - possibly via the Income Trust route, but also with speculative biotechs.
Looking at diversifying into health care is one of the steps I am suggesting we do now in response to the changes in the market. Others include to:
- Diversify some out of commodities: For now into cash because of the poor overall market outlook, but also other sectors of the economy and income situations as opposed to all capital gains.
- Be risk adverse: Stocks are not going to rise on straight promotion or with the seasons as easily any more in this risk adverse market.
- Hold more of a balanced portfolio approach: Until recently, I for one was extremely, irresponsibly, leveraged to the gold sector. While that has been well and good and worked out fine to date, the easy gains are gone. A more diversified portfolio approach spread across several asset classes is likely more appropriate than trying to choose just one. I'm thinking something like 20% Gold 20% Energy 20% Health Care/Etc., and 40% Cash.
NEW PICKS Exploration Hot Spots: Ecuador
Aurelian Resources's (ARU, $18.00) success in southern Ecuador could spark an area play which boosts share prices of companies nearby. That's the good news. The bad news is that it can also attract P&D (Pump and Dump) artists who take advantage of speculators' keen desire for big profits. This Issue we include one of each - one long candidate priced at $0.18 on the Venture exchange that's about to drill a never before drilled historic gold-silver prospect in Southern Ecuador and another to sell short or at least, for European and American speculators to avoid like the plague which trades on the OTCBB and in Frankfurt for several dollars/euros. You can obtain the complete Issue for U.S.$11 by visiting www.emerginggrowthstocks.ca and taking the single-issue option.
Louis Paquette,
Publisher
www.EmergingGrowthStocks.ca
EGS Copyright 2006
DISCLAIMER -Louis Paquette`s Emerging Growth Stocks is an independent publication committed to providing an objective analysis of the markets, focusing on the TSX-Venture Exchange and individual companies with substantial upside potential over the next six to twelve months. The information contained herein is believed to be accurate but this cannot be guaranteed. The analysis does not purport to be a complete study of securities mentioned herein, and readers are advised to discuss any related purchase or sale decisions with a registered securities broker. Companies featured in EGS are often at very early stages of development and can therefore subject to business failure, and are to be considered speculative and high risk in nature. Reports herein are for information purposes and are not solicitations to buy or sell any of the securities mentioned. The author may or may not hold a position (long or short) in the securities mentioned herein. This publication may not be reproduced without the expressed prior consent of the author. The author is not a registered securities advisor, and opinions expressed should not be considered as investment advice to buy or sell securities, but rather the author's opinion only.
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