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Chris Temple “ARE SOME BELEAGUERED COMMODITIES READY TO TURN?”

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Chris Temple “ARE SOME BELEAGUERED COMMODITIES READY TO TURN?”

 

 

 

 

 

I know I sound like a broken record to a few of you…but whether we’re talking about energy, precious metals or any number of other assets of late, it’s all been about the dollar. That and–where the especially economically-sensitive commodities like oil and industrial metals are concerned–fears of flagging economic activity in most of the world.

 

 

Recent days, though, have brought signs that SOME folks think these moves are about over.

 

 

GOLD SNAPS BACK

 

 

 

 

While my gut is still telling me that it’s not yet quite safe enough to back up the truck anew in the precious metals area, it’s heartening that gold has managed to, now, put in two successive Fridays when it has successfully fought to regain some lost technical ground. On Friday the 7th, as you see nearby, the yellow metal staged a sharp “outside” day. This, as you may now remember, is when trading first moves the price lower than the previous day’s low, but then closes above the previous day’s high.

 

 

And as I write this on Friday the 14th, gold has surged higher again; this time–unlike last Friday, and its first rally attempt of this morning–getting back above the key $1,180 level it broke down at. The rally seemingly was caused by two things today: first, the euro’s own sharp rebound against the dollar and, second, more serious chatter that the upcoming Swiss referendum might actually have a chance of passing. (I’m dubious at the moment, though, about whether either will endure in the near term as reasons for traders to pile back into gold.)

 

 

Two different characteristics of the latest gold decline–as I have often told you directly, and offered on shows like the Korelin Economics Report (I’m on almost daily, at http://www.kereport.com/)- -stand out to me. First, gold’s declines have at times almost appeared grudging. People have not first made decisions to sell the metal; instead, gold has been sold/shorted as a byproduct of long dollar trades on the part of hedge funds and the like. Second, physical demand for gold (and silver especially; more on it later) has been surging as prices have fallen. Almost everywhere you look–China, Russia, India, coin shops in America–folks can’t buy enough.

 

 

We can never say “never” about anything…or any possibility. But I continue to believe the most dire, bearish predictions for gold are hooey. In order for gold to plunge to below $1,000, $800 or wherever, 1. the Fed will have to raise interest rates more aggressively than is commonly expected (and faster than it has suggested itself,) 2. the U.S. dollar’s rise will have to go MUCH higher, unchecked, 3. That dollar rise CAN’T come from a crisis of some sort that would ALSO support gold, 4. the U.S. economy really is going to continue growing at 3%+, etc. I’m not holding my breath for all of this to come together.

 

 

Best of all, in looking for a lasting turn in gold, is the fact that sentiment of late has again been horrible. This latest period reminds me most of the late 2008 time frame; after failing yet again to vault the $1,000 per ounce level, gold tumbled with everything else. In the end, it was back under $700; and how many were saying the “bubble” was history? But once the directional traders recognized gold’s relative value and started to generate some momentum, it took a mere three years for gold to TRIPLE.

 

 

Yet again, a lot of the recent chatter surrounding gold is reminiscent of the kind of headline back in 1982 at the stock market’s bottom that put an exclamation point to the then-pervasive bearishness. Some of you already know I’m referring to the famous “The Death of Equities” headline from Business Week. It proved a pretty darn good contrarian indicator, too!

 

 

HAMM AND HALLIBURTON CALLING AN OIL BOTTOM?

 

 

Continental Resources’ (NYSE-CLR) C.E.O. Harold Hamm this past week boldly told his shareholders and analysts that he oversaw his company cashing in all their oil hedges out to 2017. This, based on his belief that prices won’t go much lower; and that he wants exposure to them when they recover.

 

 

Also quite interesting just Thursday afternoon was a development that had to happen at some point, given the beating that virtually all energy-related equities have taken. And that is, a high-profile potential merger. The markets gasped late in the day when news broke that energy service giant Halliburton (NYSE-HAL) was in talks to acquire Baker Hughes, Inc. (NYSE-BHI). After a trading halt, BHI surged from below $50 to over $60 per share. And quickly, analysts started to get a lot more serious about re-examining shopping lists; many energy names rallied along with BHI. (NOTE: Late Friday, the news was taking on the flavor of Halliburton’s coming bid being a hostile one.)

 

 

 

I’m finally starting to hear others echo what I have been warning about for weeks: and that is, part of the downside of plunging crude oil prices is the increasing possibility of trouble for the bond market. The majority of the weakness in junk bonds of late (which, in a development that has some technicians worried, is not confirming stocks’ strength) is due to energy companies.

 

Many names have seen their bond prices drop 10-20%in the recent past. It’s becoming more widely understood that, below $80, stress is especially hitting some of the more leveraged shale companies.

 

 

Again, we can never say “never” about anything. Currency and commodity traders are capable of stretching things even farther than what we’ve seen. But at least with these two high-profile examples, we have heavyweights in the industry that are willing to put a lot of money where their mouths are, in effectively calling a looming bottom for oil’s price, believing they can’t go much lower.

 

EVEN “DR. COPPER” AND MORE?

 

 

* I was listening to CNBC in my car on October 27 while I was en route to visit my Dad and siblings in upstate New York, when I heard Kate Kelly report on the story of a big London-based hedge fund acquiring a massive copper position. The key “red metal” has been fluttering more often than not around the $3 per pound area, but seems to want to firm up (and would if, again, not for the U.S. dollar’s strength.) You can listen to the story at http://video.cnbc.com/gallery/?video=3000325120; apparently, this fund thinks copper is bottoming.

 

 

* The following week, Citi Research put out a report that China was becoming a bigger net buyer of copper again as well, planning to add to its stockpiles further in the fourth quarter. This follows: simultaneously, it was announced that China had approved some $113 billion in new infrastructure projects. Apparently–in addition to wanting to make up for a badly flagging real estate sector–China perhaps figures that $3 will hold, and it’s time to start buying again.

Projects to be built reportedly include 16 railways and five new airports (after all, you need a LOT more transportation to move around all those non-existent people in the country’s various “Ghost Cities!”) Additionally, China is keen to put a highly modern touch on rebuilding the old “Silk Road” throughout Asia, in order–President Xi Jinping reportedly said in announcing the big new project—to “Break the connectivity bottleneck” in Asia.

 

 

* Some of you remember that, back in early 2010, I was up in Minnesota’s Arrowhead in “Iron Range” country, visiting an old recommendation, PolyMet Mining (TSX-POM, NYSE Arca-PLM) and a prospective new one, Duluth Metals (TSXV-DM; OTC-DULMF.) PolyMet was a past “10-bagger” recommendation; and though I stopped in, I wasn’t necessarily looking at that company anew. Duluth Metals intrigued me, though; among other things, its ore bodies (also containing base, precious and platinum group metals) are considerably richer than PolyMet’s North Met project (which is now close to becoming a mine, but not after a LOT of time, money, lawyers and such!)

 

 

I passed on Duluth Metals due to its much closer proximity to the fabled BoundaryWaters Canoe Area, and the prospect that–after getting licked in trying to stop NorthMet–environmentalists would redouble their efforts to stop Duluth. Between that and my concern over the economics of trying to mine that particular body underground (in part, a company decision at the time it hoped would defuse environmental worries) I was glad I passed on Duluth. But it caught my eye several days ago when the company’s former big brother Antofagasta, plc–the big Chilean miner who had not that long before refused to go along with its J.V. deal on the property–announced it was buying Duluth Metals lock, stock and barrel.

 

 

Now, this is not a huge deal; Antofagasta’s investment company arm will spend about C$70 million buying Duluth. Not a few long-time Duluth shareholders are crying foul, too, given that Antofagasta first backed out of its joint venture deal–sending DM shares reeling to their lowest levels pretty much ever– and then came back to buy the company on the cheap. I wasn’t a fly on the wall; so I don’t know any more about the motivation and timing beyond what’s been publicly made available. But I do believe this; that even though the purchase price won’t exactly break a company like Antofagasta, I’m impressed that such a company wants a property 1. in a currently weak metals price environment and 2. in an area where it will take them MUCH longer to bring a mine to life than most anywhere else they operate.

 

* Big Brazilian miner Vale has decided to spend some $1.4 billion to open a port terminal in Malaysia which should result in lowered shipping costs for iron ore to China, the world’s biggest customer (and perhaps a hungrier one for a while, too, in light of the above infrastructure announcements.) Presently, the company has a disadvantage compared to its main rivals, BHP Billiton and Rio Tinto, whose big mines are located in much closer proximity to the Chinese mainland. The hope in the end is that Vale will not only maintain its market share (China buys about 25%of its iron ore from Vale) but also reduce costs by being able to “blend” its higher-grade ore it ships from Brazil with lowergrade iron ore available locally.

 

 

So in the end, it looks as if not quite everyone is as downcast about many commodities as some claim! But as for us, we’ll be treading slowly…and I’ll also be continuing my own vast homework on those companies and, in some cases, sector ETF’s that will provide us the most attractive trades at some point soon. (And now, if we could only hear of a boffo new merger in the gold space, or takeover battle such at that for Osisko!)

Posted November 21, 2014

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