Why these 2,313% gains could be about to repeat

Friday, 12 July 2019
Adelaide, Australia
By Bernd Struben

Earnings? Who cares about earnings?

If the market had a voice, I imagine this is what it would be chanting at the moment.

Gone — for now — are the days when mainstream investors kept a keen eye on company earnings reports.

Granted, sooner or later earnings…or lack thereof…will be coming home to roost.

But for now markets remain obsessed with interest rates and trade disputes.

Interest rates —as they move ever lower — have the power to send stocks higher than they have any fundamental right to be.

Trade disputes — when they take a turn for the worse — have the power to pull share prices back down.

We see this in action again this week.

US markets are still enjoying the sugar hit delivered by dovish comments from US Fed Chair Jerome Powell. And Powell has plenty of company. Further easing is expected from the ECB, PBOC, BoJ, RBA…and most any other major central bank you care to name.

On the flip side, stocks are facing headwinds from renewed doubts over just how bad the US trade war with China might get. Those doubts were rekindled courtesy of Donald Trump.

You can see his tweet (sent overnight our time) below:

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Source: Twitter
Click to enlarge

US markets dipped following Trump’s tweet. But in the tug of war with lower interest rates, the rates won this round, with both the Dow Jones and S&P 500 closing up.

Meanwhile gold slipped about 1.3% to US$1,408 per ounce, or AU$2,018. That’s still near its six-year high in US dollars though, and close to its record high in Aussie dollars.

And according to Port Phillip Publishing’s head of research, Greg Canavan, gold has a lot further to run. Greg’s research indicates gold should surpass US$1,700 per ounce in 2020. (Find out why here.)

That’s still below gold’s record high of US$1,920 high reached in 2011. But a 21% rise in the gold price could see the share price of some gold stocks — particularly the juniors — rocket much further.

How much?

Have a look at the table below:

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Source: Casey Research
Click to enlarge

The average gain of the gold juniors from 1979–1980 listed above works out to 2,313.7%.

That’s the average.

Now bear in mind that the gold price during this period went nuts. Bullion rocketed from US$220 per ounce in January 1979 to US$680 by February 1980, a gain of some 209%.

Now Greg is forecasting gold to rise ‘only’ 21% for the year ahead. Still, going by the figures above, that could see junior mining stocks gain over 200%. Or three times your money.

So why is it gold stocks can rise 10 times or more than the value of the metal they mine?

I’m glad you asked.

Gold miners, as you’ve likely heard, are ‘leveraged’ to the price of gold. In this case that has nothing to do with debt.

Here’s an example of what that means.

Let’s say the gold price goes from US$1,400 to US$1,500.

That’s a gain of 7.1%. But a gold miner’s profits will generally go up far more than that. How much depends on what it costs the miner to get the gold to market.

Let’s say they’re working a difficult target and it’s costing $1,300 per ounce to get the gold out of the ground and to the buyers. At $1,400 per ounce they were earning a profit of $100 per ounce. But at $1,500 per ounce that profit doubles to $200.

In this case a 7.1% rise in the gold price saw the company’s profits soar by 100%.

Of course this won’t be the case for every gold stock.

That’s where Greg comes in.

He’s narrowed his focus to four ASX listed gold juniors he’s convinced stand the best chance of seeing their share prices rocket as gold climbs higher.

If you haven’t already, you can get all the details here.

Now a look at the markets…


Overnight, the Dow Jones Industrial Average closed up 227.88 points, or 0.85%.

The S&P 500 closed up 6.84 points, or 0.23%, setting a new record high.

In Europe the Euro Stoxx 50 index finished down 4.79 points, or 0.14%. Meanwhile, the FTSE 100 lost 0.28%, and Germany’s DAX closed down 41.29 points, or 0.33%.

In Asian markets Japan’s Nikkei 225 is up 25.53 points, or 0.12%. China’s CSI 300 is up 0.54%.

In Australia, the S&P/ASX 200 is down 17.94 points, or 0.27%.

On the commodities markets, West Texas Intermediate crude oil is US$60.41 per barrel. Brent crude is US$66.74. per barrel.

Both crude benchmarks slipped a few cents per barrel overnight. WTI is still a hair above the US$50–60 range I forecast for 2019. But frankly I’m surprised oil isn’t trading higher. We’ll get back to that shortly…

Turning to gold, the yellow metal is trading for US$1,408.13 (AU$2,018.54) per troy ounce. Silver is US$15.13 (AU$21.69) per troy ounce. (More on gold below…)

One bitcoin is worth US$11,290.57. That’s down 6.4% over the past 24 hours. Time to buy the dip…or does bitcoin have further to fall? To stay atop all the latest crypto investing advice go here.

The Aussie dollar is worth 69.76 US cents.

What’s keeping a lid on oil prices?

As mentioned above, a number of factors have come together that normally would see crude trading far higher.

First, there are concerns about a tropical storm that could ramp up into a hurricane in the Gulf of Mexico. This has the potential to cripple production in the oil rich region.

Second, there’s the latest report from the US Department of Energy. The DOE indicated US crude stockpiles fell 9.5 million barrels last week. Far more than consensus forecasts.

Then there’s OPEC+, which only last week agreed to extend production cuts for nine months.

And let’s not brush over the dangerous brinkmanship playing out in the Persian Gulf.

Iran upped the ante yesterday when its patrol boats ‘allegedly’ tried to intercept a British tanker in the Strait of Hormuz. Unfortunately for the Iranians, a British frigate was in the neighbourhood and drove them off.

With all this I’d expect oil to be trading 15–20% above current levels. Which would have offered another good shorting opportunity.

So what’s going on?

First, there’s the demand side.

Demand for crude has consistently been lower than forecast this year. As the Australian Financial Review sums up:

The US Energy Information Administration [EIA] has pared its 2019 forecast for global demand for oil by 200,000 barrels a day, the sixth consecutive month it has lowered that forecast.

The downward revision “reflects lower-than-expected oil consumption so far this year, in addition to slowing economic growth in many of the world’s largest oil-consuming countries”, the US government agency said in its July market report.

The rest of our answer on what’s keeping a lid on crude prices rests on the supply side of the equation.

OPEC may be temporarily pulling some supply from the markets. But US producers are doing no such thing. And they’re profiting handsomely from OPEC’s artificially inflated prices.

Just have a look at the graph below. It shows you US crude production over the past 10 years. Oil bulls, take note:

chart image
Source: MacroTrends
Click to enlarge

The left-hand axis is in thousands of barrels per day (bpd). Meaning US crude oil production currently stands at 12.3 million bpd.

And the output growth isn’t over yet. The EIA estimates US producers will exceed 14 million bpd by 2022 before levelling out over the next decade.

To put that in some kind of perspective, the EIA forecasts that all OPEC nations combined will produce an average of 30.2 million bpd in the second half of this year.

Of course, OPEC members could easily up that amount.

Indeed, when the cartel meets again next March the Saudis will have a hard time selling the case for another extension of the production cuts. Not when US producers are the ones reaping the biggest gains.

It’s also quite possible that the economically battered Iranian regime will return to the nuclear negotiating table. Not to mention a change of leadership in Venezuela.

Adding it up, crude could certainly spike short term from here. But I expect 2020 will see prices 20% or more below today’s levels.

That’s all for today. I’ll be back with you on Tuesday.

Be sure to tune in on Monday for the latest from Alpha Wave Trader’s Murray Dawes.