This is how it starts

Thursday, 15 August 2019
Adelaide, Australia
By Bernd Struben

  • Gold miners snap back
  • In the mailbag

Well that was good timing.

Yesterday, colleague Greg Canavan stepped in to bring you Port Phillip Insider when I was unexpectedly called away.

This was on a day where all the major global indices we regularly track here closed well into the black.

The ASX 200, for example, closed up 0.4%. US stocks had an even stronger day, with the S&P 500 gaining 1.5%. Gold headed lower. As did most gold stocks.

The market rally, once more, had Donald Trump’s tweets to thank for it. Trump, as you likely read, decided to delay the new round of tariffs he’d threatened to place on the remainder of Chinese imports on 1 September.

Putting on his Santa hat, Trump said he didn’t want the tariffs to impact US consumers ahead of Christmas.

Ho-ho-ho.

But the good times ran their course quickly. Just 24 hours later, investors are running scared.

As you’ll see in the market section below, all the indices we track here suffered heavy losses. The Dow’s 600 point overnight rout is its biggest in more than 10 years. And fully 98% of the stocks in the S&P 500 lost ground. As for the ASX 200, it’s down 2.7% at time of writing.

Gold, on the other hand, gained 1.3%.

Why?

Choose your poison.

First, 10-year US Treasury notes now yield less than 2-year Treasury notes. This ‘inverted yield curve’ that’s blanketing the financial news headlines has historically proven a reliable indicator of a pending recession. It indicates investors think short term rates are going sharply lower, meaning trouble is on the horizon.

Though you should take this with a grain of salt. Don’t forget that global interest rates are far lower today than ever before when this indicator flashed recession warnings. Also, the recession which follows sometimes doesn’t make an appearance for more than 18 months.

Nonetheless, the yield curve is closely watched by retail and institutional investors alike. And they’re not liking what they’re seeing.

If that wasn’t enough to send markets spiralling, the world’s number two and number four economies released shaky economic data. Chinese industrial production growth has fallen to its lowest rate in 17 years. And Germany’s economy contracted by 0.1% in the second quarter.

So what was all that about good timing?

Well, as investors piled back into blue chips yesterday and sold gold stocks, Greg Canavan urged caution.

He showed you three charts explaining why the bear market is back. And he offered you three ways to help protect your portfolio. That includes tightening your stop losses. This may see you stopped out, but it could prevent far heavier losses if the selling escalates.

Greg also, as regular readers will know, forecasts a powerful new bull run for gold. This should drive quality gold stocks far higher. And it could see a select group of junior Aussie miners deliver 10-bagger gains. (Details here.)

More, after the markets. Brace yourself!

Markets

Overnight, the Dow Jones Industrial Average closed down 800.49 points, or 3.05%.

The S&P 500 closed down 85.72 points, or 2.93%.

In Europe the Euro Stoxx 50 index finished down 68.46 points, or 2.04%. Meanwhile, the FTSE 100 lost 1.42%, and Germany’s DAX closed down 257.47 points, or 2.19%.

In Asian markets Japan’s Nikkei 225 is down 289.09 points, or 1.40%. China’s CSI 300 is down 0.78%.

In Australia, the S&P/ASX 200 is down 180.10 points, or 2.73%.

West Texas Intermediate crude oil is US$54.99 per barrel. Brent crude is US$59.11 per barrel.

Short of a hot war with Iran shutting down crude shipments in the Gulf — an alarmingly likely possibility — crude looks set to remain in my forecast range for 2019. As a reminder that’s US$50–$60 per barrel for WTI, with a roughly 15% premium for Brent.

The reason remains the same. The world has more crude at its direct disposal than we’ll need for the next many years. And the US shale revolution — where most producers are profitable above US$50 per barrel — continues apace.

Just have a look at the chart below:



chart image
Sources: EIA / Bloomberg
Click to enlarge

Following seven weeks of drawdowns — which had little impact on crude prices — US inventories have grown for two weeks running. According to the US Energy Information Administration (EIA) crude stockpiles grew by 1.58 million barrels.

Crude investors should expect more of the same in the months ahead. Unless someone gets trigger happy in the Strait of Hormuz. If that happens prices could double within days…

Turning to gold, the yellow metal is trading for US$1,521.73 (AU$2,251.75) per troy ounce. Silver is US$17.37 (AU$25.70) per troy ounce.

While gold gained overnight, living up to its haven asset status, bitcoin joined the wider selloff. One bitcoin is worth US$10,035.21, down 5.9% since this time yesterday.

The Aussie dollar is worth 67.58 US cents.

Gold miners snap back

Fickle!

That’s the word that came to mind when I saw that gold stocks largely sold off yesterday.

And all — well mostly — because investors shed their fear on the thinnest of hopes that the US–China trade war might deescalate.

Today, as covered above, the fear is back. In spades.

As for the gold miners…

St Barbara Ltd [ASX:SBM] is up 1.5% in intraday trading.

Newcrest Mining Limited [ASX:NCM] is up 0.6%.

And Northern Star Resources Ltd [ASX:NST] is up 1.5%.

And this with the All Ords down 2.7% for the day.

Casting back a bit further in time, bullion is now up 19.2% since 1 May.

Newcrest’s share price is up 46.8% over that same time. St Barbara stock is up 21.5%. and Northern Star has gained 51.8%. All in less three and a half months.

If gold continues its bull run past US$2,000 per ounce, as Greg Canavan forecasts, the big miners and producers could well put in a repeat performance.

But Greg is convinced the really big gains — the kind that can turn $1,000 into $10,000…or more — lie with the junior miners. These smaller stocks are riskier. But with Greg’s research unearthing a likely supply crunch hitting the gold markets, those smaller players with promising targets could see demand for their shares surge.

With that in mind he recommended four ASX listed gold juniors in a special report released on 8 July. As of yesterday (before today’s tailwind for gold stocks) his top pick was up 52.2%. And the average gain for all four stocks, had you invested the same amount in each one, was 31.8%.

With Greg expecting far more from these stocks in the months ahead, all four remain active buy recommendations.

You can find all of that here.

In the mailbag

As we’re on the topic of potential market turmoil…

In Tuesday’s Port Phillip Insider I cautioned you to ‘get ready for China’s Hong Kong “incident”’. The incident here referring to the June 1989 Tiananmen Square Massacre. Or what the Chinese government prefers to label the ‘June 4 Incident’.

You can review that in your inbox or our website archives.

In a nutshell I believe the markets and financial analysts are greatly downplaying the odds of China making a strongarm move into Hong Kong to crush the democracy protest movement.

Today that dire possibility is looking even more likely. From The Australian:

Beijing has given Hong Kong protesters its most explicit warning yet, with military commanders warning: “It takes 10 minutes from Shenzhen … to Hong Kong airport.” …

Overnight, satellite images were published showing dozens of armoured vehicles gathered inside a stadium in the southern Chinese city of Shenzhen, across the harbour from Hong Kong in a possible sign Beijing is poised to use force against pro-democracy protesters.

The government also tagged protestors as ‘terrorists’. A convenient label before you put someone in the crosshairs.

In another worrying sign, the Chinese government has denied two US navy ships permission to enter Hong Kong’s port over the coming weeks. Whether they send in the People’s Liberation Army (PLA) or the People’s Armed Police (PAP), having US troops in the harbour would prove awkward.

A number of readers wrote in about the Hong Kong protests, and the likely fallout.

This one from Garry:

I have to agree with Bernd,

This is not looking good.

The sit in at HK Airport has given Beijing the ideal excuse to FINAALLY take over the colony.’

Reader John also doesn’t see this ending well. Here’s his letter:

Dear Bernd,

Many thanks for your erudite elucidation of the “Tiananmen” incident.

I feel that the impending actions in Hong Kong, by the Government of China will be a repeat of Tiananmen. 

The only way the world will be aware of these forthcoming atrocities will be similar to the way the world knew of the atrocities in the Dilli cemetery when a very brave photographer took the film, smuggled it out and presented it to the United Nations in New York.

The world was then made aware of the atrocities being committed by the Indonesian Army against East Timorese civilians.

It is abundantly clear what China is going to do.  It is also abundantly clear what the United Nations should do.

The question is “Has it the ‘guts’ to step in and prevent a massacre?”

Thanks for that.

I don’t think waiting for the UN to be proactive — rather than their preferred reactive — is going to pay off. The US is upping the pressure, with Trump tying any trade deal to a peaceful resolution with the protestors. But as I wrote on Tuesday, the Communist leaders may well be willing to accept two or so years of pariah status — even at the cost of a tanking economy — to settle this matter before it spreads to the mainland.

I’ll keep hoping I’m wrong though.

In the meantime, I suggest you check out the actions our friends Shae Russell and Jim Rickards are recommending.

It comes in a new report titled, ‘SELL AUSTRALIA! How To Get Your Money ‘Off-Grid’ Ahead of the Greatest Australian Financial Crisis Since the 1930s’.

Find out more here.

Cheers,
Bernd