The past few weeks, strong U.S. economic data
from job growth to consumer spending may have
contributed to the market’s expectations of more
rate hikes to come, says Edward Bonner of Sprott Global.
Also added: Carlin East Partner In Nevada *
[I met Edward in Tonopah, Nevada, where we were touring West Vault Mining, Summa Silver and Blackrock Silver. He is knowledgeable, knows his rocks and understand commodities markets.]
Edward, in excerpts from a report to clients:
This U.S. strength may have helped strengthen the dollar and put pressure on demand for dollar-denominated goods such as metals and energy. Of course, there were some exceptions, notably the Saudi oil cuts limiting supply, but the overall sentiment (including my own short-term view) was negative for the price of commodities.
Edward Bonner of Sprott Global Resource Investments at Hasbrouck Gold Project In Nevada. Edward is a geologist. Thom Calandra: Photo
He continues: Alas, sentiment changed last week as expectations shifted ahead of the CPI report and renewed hopes of Chinese stimulus. The CPI came out a touch below 3.1%, at 3%, followed by the PPI, which also came out slightly below expectations. The drop was led by goods inflation, while services inflation remained sticky.
It might take some time (and more rate hikes) before services inflation can come down. Regardless, the odds for two more rate hikes dropped to only one in July (and maybe even a consecutive skip). The dollar tumbled.
Potential pivot in sight, soft landing engaged, recession took a back seat to investor’s enthusiasm and greed and metals took off, consolidating higher for the week.
This jump in commodity prices (especially energy) could create a feedback loop into goods inflation (e.g. higher cost of production and transportation) and could push inflation back up in the coming months. Maybe the Fed is not done yet. Maybe we are in for a surprise re-inflation scenario.
In the interim, higher we may go.Gold, copper, energy, all appear to be well poised for a strong rebound here. Institutional investors and investment banks may be thinking of booking profits in the overblown tech sector and rotating to value stocks.
Perhaps an interesting point to resurface is one published in this week’s note from Sprott’s Senior Portfolio Manager John Hathaway on relative valuation of Gold Miners vs the S&P 500. One can see why it could be an attractive trade to make.
Incidentally, if you missed it, read John Hathaway’s most recent note on the gold miners investment thesis. He does a good job laying out the fundamentals behind recent price action and the risk-reward opportunity. You can find the link at the bottom of this letter.
I think the market has presented us with a strong opportunity for a short-term rally, barring any unexpected market events, and the risk-reward proposition on a short-term trade looks attractive here. But in my case, it’s a marathon, not a race, and I am sure the market will present us with many twists and turns before the primary trend takes hold and a sector rotation occurs in-earnest. So, if you’re a long-term value investor, you may think about using a short-term rally to upgrade your portfolio by selling out of the lesser quality stocks.
Meanwhile, Edward reports, more factors are at play. One event of particular interest to me was the Federal budget posting a 66% increase YoY (calendar-adjusted). This is with the backdrop of net interest payments hitting a nominal dollar record of $475 billion in Fiscal Year 2022. With ongoing rate hikes, and the higher for longer message from the Fed, I would expect that number to keep growing in 2023. The market, perhaps pre-occupied with the ongoing stock market mania, seems to have merely glossed over this one – and higher we go.
A chart to keep in mind, and which I have shared with you before, is the gold price to U.S. debt as shown here. One can also imagine that as U.S. debt and the cost to service it balloon, foreign nations could start to lose confidence in the dollar and begin diversifying into other highly liquid currencies and real assets, such as gold.
Adding to the growing list of tailwinds for metals, here are a few more market events of note, in no particular order:
NATO allies have offered further support to Ukraine. The war effort continues.
China restricted the flow of critical metals such as Germanium and Gallium, primarily used in the production of high-tech stuff such as semiconductors. The power struggle continues.
VIX still hovers around pre-COVID lows. Usually, things don’t stay quiet for long, especially in this environment.
CNN’s fear and greed indicator still shows the needle firmly in Extreme Greed territory. Ripe for a correction back to the mean.
The usual summer doldrums show TSX trading volume down over 30% YoY for the month of June. A sector rotation of any size could have meaningful impacts to mining equity prices.
If you are too busy with work, or other hobbies, or simply wouldn’t know where to start, but wish you could be invested in some of the best mining stock opportunities in the sector, then consider Sprott’s advisory services.
* I rarely ping our TCRs with notice of a looming video, or webinar.
In this case, geo-CEO Chad Peters‘ Ridgeline Minerals RDG RGDMF live-spot about itsCarlin East is worthy for those who want bargain-basement entry into Nevada exploration. Link-in here.
I was at Carlin East, in the news today with a Nevada Gold Mines partnership, about 11 months ago with a large group of wealthy investors, geos and analysts. See that coverage at The Calandra Report/TCR.
Ridgeline’s Carlin-East gold project is on trend of Nevada Gold Mines’ Fallon discovery.
The earn-in for Nevada Gold Mines (Barrick and Newmont combo) is $4.5 million.
This is the crux of it:
Chad just now, “We drilled one deep hole in 2021 that intersected the top of the potential host horizon that runs high-grade at Leeville and the Fallon discovery. We ran out of money though and had to shut the hole down … but what we really needed was to drill 500-700 feet deeper (at avg. cost of $300+/ft.) to fully test the target. With this deal NGM will pick up where we left off.”
That was approx. a $1 million hole, and at the time in 2021, well, let’s just say Ridgeline’s strategy and technicals were spot-on.
— ThomCalandra [I get no compensation for this, TCRs, none at all. This looks like cheap entry — RDG $18 million USD market value — into Nevada, probably the fourth or fifth largest gold (and silver) mining region in the world.]
[I am transmitting parts of Edward’s reports because he makes a case for a (perhaps) short-term shift into metals and miners. I receive no compensation.]
Thom Calandra is a writer and an investor. Research and material are meant as editorial opinion. He is not a professional investment adviser. Please do not consider his reporting as a recommendation to buy or sell securities.
It might take some time (and more rate hikes) before services inflation can come down. Regardless, 
I think the market has presented us with a strong opportunity for a short-term rally, barring any unexpected market events, and the risk-reward proposition on a short-term trade looks attractive here. But in my case, it’s a marathon, not a race, and I am sure the market will present us with many twists and turns before the primary trend takes hold and a sector rotation occurs in-earnest. So, if you’re a long-term value investor, you may think about using a short-term rally to upgrade your portfolio by selling out of the lesser quality stocks.
Adding to the growing list of tailwinds for metals, here are a few more market events of note, in no particular order: