By Chris Berry (@cberry1)
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This note will be shorter than usual as my travel schedule seems to have gotten the best of me. I recently returned from Costa Rica and am off to Europe tomorrow with Zimtu Capital to join them in Frankfurt (Nov 6th), Munich (Nov 8th), Zurich (Nov 10th), and Geneva (Nov 12th) as a keynote speaker on their annual bus tour. If you’d like to attend any of the presentations (numerous TSXV and CSX companies will be presenting as well) please let me know and I can get your name on the invite list.
The recent swoon in the metals markets likely has all of us questioning our faith and resolve. Personally, I see no reason why gold and silver, in particular, can’t go much lower and stay there indefinitely. Ultimately, supply and demand always equilibrate, but it can be painful waiting for this to happen. The perception of increasing economic strength in the US with a recent 3.5% GDP growth print plus continued US Dollar strength are outweighing the continued reports of gold and silver consumption in the Emerging World. It seems even the hint of higher rates in the US has anyone long gold running for the exits. The chart below demonstrates the violent divergence between the USD (white line) and gold (orange line).
Source: Bloomberg
The split here seems particularly notable and while I continue to see various examples of economic strength in my daily life here in New York and other parts of the US, I have to wonder if the recent USD surge is due more to weakness in other parts of the world such as Japan, the Euro Zone, and China. This move higher in the USD could be more than just a cyclical phenomenon and may indeed be structural which would mean more challenging times are ahead for the metals.
As Quantitative Easing ended in the US last week, the Bank of Japan surprised just about everyone with its own burst of QE-type stimulus, giving a boost to already-stretched equity indices all over the world and essentially allowing the Japanese Yen to collapse (see below). With the US economy not as dependent on exports as that of Japan, the Euro Zone, or China, this move wasn’t at all surprising in hindsight.
Source: Bloomberg
Given Japan’s demographic time bomb and multi-decade struggle with deflation, it appears that Prime Minister Shinzo Abe has fired the final arrow in his “Three Arrows” Policy to re-ignite economic growth. “Race to the bottom” and beggar-thy-neighbor currency policies are seemingly here to stay. This raises a number of questions, but one in particular that I think is more important than any other.
The primary question we need to consider isn’t “Have we bottomed?” It’s “Once we’ve bottomed, how long will we stay here and how, as investors, do you position your portfolio for optimal gains?”
I’ll be offering my answer to this question specifically while in Europe.
With the threat of deflation looming ever-larger over the global economy, many would be encouraged to shun commodities altogether. I’ve said this before, but viewing the commodity complex this way is akin to “throwing out the baby with the bathwater” and you run the risk of overlooking opportunities that are cheap on both a relative and absolute basis. In the current market environment of excess supply and muted demand, searching out disruptive and sustainable opportunities is a part of the strategy.
When I return, I plan to offer an update on some of these opportunities including Argex Titanium (RGX:TSX, ARGEF:OTCBB), Lithium Americas (LAC:TSX), and EMC Metals (EMC:TSX, EMMCF: OTCBB) as well as an overview of my trip and the sentiment in Europe.
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