Last week’s Maven Letter was a jam-packed issue. We may be in the midst of summer doldrums but there’s still lots to discuss if you’re paying attention!
I started with a look at Aben Resources (TSXV: ABN), which reported a stellar first hole from its 2018 program at Forrest Kerr, in BC’s Golden Triangle. The market swooned. Maven subscribers bought into Aben a year ago and already took capital off the table when the share price jumped last summer, so I looked at what to do with this market opportunity.
Then it was time to look at gold, base metals, Turkey, the dollar, and all that jazz.
Both of those articles are included here today for your interest.
The rest of the Letter comprised two interesting articles, one on how green technology is set to impact silver demand and another on what role blockchain might play in the mining sector. Summer is a good time to delve into these interesting but not mainstream topics. I also reported back on market sentiment and ideas from the big Diggers & Dealers conference in Western Australia.
Then I went through the newest stock in the Maven portfolio. It’s a company that is pulling some of the best copper-gold intercepts in the exploration world these days, but a need to financing has combined with summer malaise to mute market reaction. I see both issues clearing up soon and so am taking advantage of the opportunity and buying.
Thanks always for your interest!
From The Maven Letter: August 15, 2018…
Aben’s Hot Hit
I’ll start with a quick note on Aben Resources (TSXV: ABN). I look at the drill results properly in Portfolio Updates, but here I want to comment on what to do with the stock – buy more, sell, or hold – now that it’s up 100% in a week.
I really like owning this stock at $0.20. I like it even better at a zero cost base, which is where I sit after selling half of my position into strength that took the price to almost $0.40 last summer.
This is exploration, after all, and more than that this is exploration for high-grade gold in a vein system. There is zero guarantee the next holes will be as good…but Aben will do its very best. If we use GT Gold’s performance from last year as an example, the first few sets of good holes generated great market response.
It wasn’t until several sets in that the market started to look at the developing deposit more critically and worry about things like continuity. That’s when the price gains abated.
So if Aben can generate more hits in the next few holes, I would guess the market will respond similarly, keeping ABN shares rising like GTT’s shares did last summer. If that all pans out, you will wish you had bought more today. However, that will require hits as good as the first, which was simply stellar.I put the odds of that at less than 50%. Almost-as-good results, which are more likely, will probably keep the price largely sideways.
And today we got news that Aben is taking advantage of its share price strength to raise $4 million. That makes sense – it takes money to explore and raising on strength is the way to do it – but even better was the news that Eric Sprott is coming in for half the amount.
Eric is a legendary gold investor. In recent years, since leaving the bank that bears his name and investing on his own, the market has started to watch his buys very closely. It’s an interesting phenomenon, in that Eric buying can create disproportionate momentum for a stock (see Garabaldi Resources last summer).
That doesn’t seem to be the case this time: the financing is priced at $0.30 versus a share price of $0.37, down a few pennies on the day. That said, Eric’s endorsement and the follow-on investors it brings could well help Aben at least retain its strength as the next few sets of results come out.
I am not buying more, but am very content to continue holding and to ride my zero cost base shares wherever this story may go!
Turkish Not-So Delight
It was a dark start to the week for gold. As the Turkish lira collapsed the US dollar surged and gold drifted lower, falling through US$1,200 per oz. like it wasn’t there. Gold stocks got a double whammy, reacting to gold’s slide first and then getting pulled down by generally falling markets.
Let’s look quickly at Turkey to start. The Turkish lira collapsed late last week and through the weekend, bringing its recent slide to 50%. That sent tremors through the markets.
Why? Because investors are worried Turkey’s situation is not unique. The phrase you’ll see everywhere to describe what has investors worried is “emerging markets contagion.”
And that’s the real question: is this lira collapse an isolated event or is it the first domino in a larger emerging markets slide? The concern is real, in that Turkey’s situation is pretty much identical to what happened in the Asian Currency Crisis of the 1990s, where too much USD borrowing followed by a currency collapse rendered debts impossible to service.
Sharp selloffs in the South African rand, the Russian ruble, and the Mexican peso highlight these concerns that Turkey’s circumstances are not unique. (That said, none of those other countries have the kind of strong growth, very high interest rates, rampant inflation, and dictatorial concerns that exist in Turkey.)
The Euro has been getting hit as well, dropping 1.5% in the last week. Declines in all these other currencies have pushed the USD over 96 for the first time in a year.
US dollar bulls have been waiting for a break above 96, though for it to happen because other currencies are crashing – rather than because the US dollar is surging on its own – is not ideal.
At this point the dollar’s near-term outlook likely depends on what happens with Turkey and all this contagion concern.
Adding to the story, this morning Turkey reduced the limits for its banks to execute foreign currency swaps. What does that mean? It means a bank’s total foreign currency – lira swap transactions cannot exceed 25% of its shareholder equity. The short version is that reducing the limit makes short selling and capital flight more difficult in Turkey.
As analysts point out, this could well be the first step to imposing full foreign currency controls. If folks think that is pending, the rush will really be on to get money out of Turkey.
Balancing that risk was news that Qatar is providing Turkey with $15 billion in loans. The loans reduce the chance Turkey will have to ask the International Monetary Fund for emergency funding, which is the kind of move that would have increased the risk of contagion.
OK, so Turkey is screwed up. Interest rates are 17%, inflation is insane, the currency is down 50% in six months, and relations with the West are dismal. The global financial system holds some $500 billion in Turkish credit exposure. If things continue to slide and Turkey has to default, it would be the largest emerging markets default of all time and would create a very large hole in a global financial system that is still highly leveraged.
There are real reasons to be worried about Turkey. That said, a Turkish default or similar crisis would almost certainly support gold. That isn’t happening yet, but it would. It’s not my desired outcome – any degree of global financial crisis would help gold but hinder base metals and I still see potential for all to perform for several years – but it would lift gold.
Moving on from Turkey, sentiment around gold is about as bearish as it can be. It doesn’t help that trade war-fuelled growth concerns mean investors are similarly negative for other metals.
For those base metals, price slides remain solidly at odds with pretty tight – i.e. strong – physical markets. Copper premia are rising while treatment charges and inventories have been declining of late. Zinc inventories remain historically low. And medium-term outlooks for both metals are solidly bullish. As I’ve been saying for some time now, these trade war-induced price slides are likely more of a pause in a strong situation than a true change of course.
Back to gold: the other forces working against the yellow metal are the US dollar and yields. The dollar gets most of the blame when people are looking to rationalize gold’s weakness, but rising Treasury yields also deserve credit. The 10-year Treasury got above 3% again recently, a level investors watch.
Treasuries that pay more than 3%. Real rates that remain positive because inflation is not rising fast enough to pull them negative. A strong US dollar. Summer weakness.
All told, gold is simply out of favour. Like, really out of favour. That, it turns out, is the only time sentiment is really helpful: at the extremes. Markets that are truly unbalanced will always reverse and head back to average territory. And an extreme is certainly where we are now. In the last 12 years speculators have never been as short gold as they are today, and that goes for both large specs and hedge funds.
And such extreme short spec positions always reverse with a nice gold rally. In fact, the last time specs were this short on gold was in late 2015, right before gold’s strong move in the first half of 2016.
The only question is: what will kick off a run? Sentiment and speculation are perfectly bearish, but what’s needed is a catalyst, something to launch this market upwards.
Turkey is one option. Aside from that, the options US dollar weakness, US market weakness, a surge in inflation, or a series of weak economic data points, but none of those are particularly likely right now.
Straight seasonality is the most likely candidate. As I’ve said before, traders returning from summer holidays take a fresh look at opportunities. They’re going to look at how gold is $40 to $100 cheaper per ounce than it has been at these US dollar levels in years, at how short specs are, and at how the yellow metal usually jumps in September…and if even a few decide to jump on board, the price would move up enough to send shorts scrambling to cover and gold up nicely.
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