The Maven Letter: June 21, 2016
Maven Mondays
Janet Yellen did not raise rates. Gold jumped, then settled, popped, slumped, and recovered – though those are sort of strong words to use for price moves of 2% or less.
Last week’s editorial (below) was penned the day of the Federal Reserve announcement. Gold equities have been pretty even since. And so I generally expect for the rest of summer: gold demonstrating its strength and resilience whatever challenges may come its way (Brexit, Fed decisions, US elections, terror attacks) and miners leveraging gold’s slight gains into slow but sustained movement up.
With that as my foundation, I continue to scour the sector for stocks to add to the portfolio. Right now I’m assessing two gold mine restart stocks, of very different sizes and in very different parts of the world. Subscribers will hear about at least one of them soon! If you’d like to try the Maven Letter on for size, sign up for a free trial subscription.
————————————————————-
On The Macro: No Raise
The wait is finally over! The Federal Reserve maintained the federal funds rate at ¼ to ½ percent. Janet Yellen said slowing gains in the labour market, soft fixed business investment, and weak inflation countered increasing economic activity, increased household spending, a strengthening housing sector, and improved exports to convince the committee now was not the time to tighten.
“The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.”
In other words, don’t expect much from us this year. And in her press conference Yellen was keen to draw attention to other threats that factored in to the decision to keep rates unchanged, in particular the threat of a Yes vote in next week’s Brexit referendum.
Given that hiking rates close to the presidential election is akin to playing with fire, not raising today has given the Fed little room to maneuver in the coming months.
That being said, the “Dot Plot” that lays out what each member of the Federal Reserve Open Market Committee sees as the “appropriate target range” for each year still suggests policymakers want a hike this year.
This time around, I am tempted to dismiss the Dot Plot. Sure, policymakers would like the funds rate to be 0.8% or so by the end of 2016 – but what we want doesn’t always match up with what is.
And what is is a short window before the election that is unlikely to generate enough positive data to change the situation.
So even though Yellen made sure to state that a rate hike in July is “not impossible” if data showed that the recent plunge in US jobs was an “aberration”, she also said policymakers won’t move unless the data show real momentum. And momentum does not develop in a month.
Over the longer term, in March the Dot Plot showed policymakers expected four rate hikes a year in 2017 and 2018. That has fallen to an expectation of three hikes a year in 2017 and 2018. Also down: growth expectations over the next two years. The Fed now expects the US economy to grow by 2% this year, down from a projection of 2.2% in March and 2.4% in December.
As soon as Yellen uttered the words “…maintain the target range for federal funds rate…” gold started to move. The lift, while sharp, was not huge, as investors had been pricing in a no-rate-raise reaction since that weak jobs report two weeks ago. Still, the move brought gold back within a few dollars of US$1,300 per oz. for the rest of the trading day, a level it then printed in after-hours trading.
With the rate question now behind us, what matters next?
Next week we have that Brexit vote. The Leave campaign has the momentum at the moment, but I’m not making any predictions other than to say a Leave result would hurt the pound and help gold.
Then there is the buildup of troops in the Black Sea region, where NATO is strengthening its eastern flank (Poland and the Baltics) despite Russia having explicitly warned against such actions. There is the US presidential election, looming ever larger and now a contest between two people who both have legions of haters.
And there are the US markets, which jumped ever so briefly on the rates news before losing those gains and more. US stocks remain near their bull-market highs, but they have been there for so long that staying power remains constantly in question.
Amidst all that uncertainty, investment in gold continues.
Investors have continued to pile into GLD, the gold-backed ETF, and in response GLD just keeps buying gold.
At this rate, GLD inflows in 2016 are comparing very well to those of the last decade.
I will note (thanks to Simple Digressions for pointing this out) that 99% of the gold that flowed into GLD in 2009 happened in the first half of the year. That instance suggests the huge inflows so far this year might not continue in H2. Then again, this is not 2009 – we are not in a sharp rebound from a sudden economic shock but in the early stages of a new bull market following a long bear.
And by the way, gold equities are once again demonstrating greater leverage to gold’s gains than its losses. During gold’s May correction, gold lost 7% and the GDX lost about twice that.
Since gold turned around at the start of June, it has gained 6% and the GDX is up 18%. Two-fold on the way down and three-fold on the way up is bull market mentality in action.
The credibility hit from this Fed non-move only adds to the shift: central banks are no longer driving the bus, at least not in the exclusive manner they had been following the financial crisis. Instead, economic realities are starting to make waves. The fact that the greatest experiment in accommodative central bank policy ever has still, six year later, not supported the US economy enough to enable a tiny little 25-basis point raise is fundamentally problematic.
More and more investors are seeing this problem. And increasing numbers of them are turning to gold as an answer.
I don’t think we’re going to see a sleepy summer for the yellow metal. And that would fit the pattern: the Venture Exchange goes through summer doldrums every year except at the start of a new gold bull market. This is that summer.
So buy or add to your positions on down days, but I wouldn’t wait for the doldrums or another correction to create better entry points. I would get in now.
——————————————
In The News
Mo Money for Waterton
Waterton Global Resource Management LP just raised another US$725 million for mining acquisitions – and the Toronto-based firm said they could easily have raised more but kept it to a level they thought they could invest in reasonably short order.
The size of the raise reinforces that investors are angling to establish significant positions in mining equities.
And Waterton’s investors are not exactly high-risk rollers: the biggest chunks of cash came from sovereign wealth funds, large university endowments, and foundations.
Since 2009 Waterton has invested in or acquired dozens of mining companies, mostly aimed at projects in North America in or close to production. To date the fund has focused on gold and silver, but this latest raise is apparently earmarked for base metal acquisitions.
Good to see more money available to fund asset advancement. Companies should be wary of Waterton, as the fund is very good at negotiating terms to its advantage, but so goes the game.
Golden Triangle Deals Abound
The Golden Triangle, the area of northwest British Columbia garnering increasing attention for its gold potential, has seen a flurry of deals of late – in an area that is getting blanketed with projects.
The flagship projects are Pretium’s under-development Brucejack mine (the big salmon/pink property), Seabridge Gold’s KSM project (orange), Teck Resource and NovaGold Resources’ Galore Creek project (big red block), and Imperial Mines’ Red Chris mine (just off the top of the map). IDM Mining’s Red Mountain project is also very active these days (lower yellow chunk) and Alloycorp’s Kitsault molybdenum mine was permitted for development within the last few years.
(Thanks to CEO.ca for the map)
Newcomers have piled into the area of late. Within the last week, we saw Garibaldi Resources ink a deal to buy the Nickel Mountain property, home to an historic nickel-copper-gold deposit, in a move that boosts Garibaldi’s holdings in the district to 150 sq. km. while Goldrea Resources finalized its deal to buy the Cannonball property and Auryn Resources moved to take over Homestake Resource in an all-share deal valued to $8.9 million.
Homestake’s property is in bright purple, near the bottom of the map. I sat down with Auryn’s top geologist, Michael Henrichsen, this morning to ask him about the move.
“We tried to kill the project, we really did,” he said. “But a million ounces of high-grade gold in the Golden Triangle? We had to.”
The Golden Triangle is richly mineralized. Pretium’s mine at Brucejack will tap into a 6.9-million oz. deposit averaging 15.9 g/t gold. Yes, those numbers are correct, and yes they are insane. Seabridge’s KSM property host 38 million oz. gold and 10 billion lbs. copper in reserve. The deposit IDM plans to mine at Red Mountain averages better than 7 g/t gold.
By buying Homestake, Auryn got its hand on Homestake Ridge and its numerous precious metal epithermal occurences. One of those occurrences hosts 549,000 indicated tonnes grading 6.8 g/t gold, 52 g/t silver, and 0.2% copper plus 5.6 million inferred tonnes averaging 4.7 g/t gold, 105 g/t silver, and 0.11% copper. Combining categories that’s 966,000 oz. gold, 20 million oz. silver, and some copper – on a project that Henrichsen sees as poorly explored.
Henrichsen speaks from experience. As global structural geologist for Newmont, he assessed potential projects around the world and then guided exploration for those Newmont took on. He and the Newmont-derived team he has assembled at Auryn think previous operators at Homestake Ridge did not have the right approach. With the right approach, he thinks doubling the gold count is an easy first goal.
Despite all the Golden Triangle interest, Auryn was able to acquire Homestake for 3.3 million shares, which will represent less than 6% of AUG’s outstanding count post deal. It’s a good example of using share capital: Auryn shares have jumped from just over $1 at the start of the year to $2.80 today, giving Ivan Bebek and Shawn Wallace valuable paper with which to deal.
