Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
This past week was not for the ‘faint of heart’. All of the asset classes witnessed wildly volatile moves, which culminated in an 11% move of crude oil. The U.S. equity markets survived a scare on Friday, February 12th, 2016 and moved up sharply. Gold returned as a safe haven for investments. The uncertainty of further rate hikes, by the FED, has turned the U.S. dollar into a range-bound trade.
Crude Oil surges by 11% on Friday, Februthy, 12th, 2016
Crude oil proved to be last week’s last, after dropping to a new 52-week low, Friday, February 12th, 2016, saw the energy markets move up by 11%. This rise was brought about by the expectations of a production cut by the OPEC nations. If we witness follow up buying, in the coming week, it will be the first indication of a “bottoming process”, although it is still in its early stages. When the models confirm a ‘bottom’, I will enter into long positions and enjoy the bull ride.
SPX confirming a short-term double bottom:
The SPX clearly shows an attempt to form a double bottom at 1810 levels with three critical cycles bottoming at the same time. The RSI is also showing positive divergence which is similar to that of the energy markets. When the SPY goes above 188.70, its’ next target is 195.00.
The stock markets also took comfort from the Federal Reserve Chairperson, Dr. Janet Yellen’s, testimony when she did not rule out a rate cut, if the situation were to worsen further, but she stated that it is a “not so likely scenario”. She also agreed that the risks to the economy have increased with the sharp fall in crude oil prices, a strong dollar, a weakening Chinese economy and the junk bond defaults.
Although she maintained that a gradual rate hike plan be implemented, she was also quick to state that it was not ‘pre-set.’ It will change, as and when the situation demands. She also kept the option open of using the negative interest rates, seen as a few developed countries have been using it with success. The initial fear of the FED experts, is that negative rates will lead to cash hoarding by individuals, which will in turn weaken the financial system. However, the experiment in Denmark, Japan, Sweden, Switzerland and the Euro-zone has elevated their fears. These events have led to a strong surge in safe-haven assets, led by Gold, while the U.S. dollar gave up some of its gains.
Gold is confirming that a bottom is likely in place:
During the recent decline in Gold, many have started questioning its’ status, as the safe haven in this current deflationary environment. All of the “naysayers” were given a befitting reply when Gold surged more than $50 an ounce and settled at its’ highest level, in almost a year, on Thursday, February 11th, 2016, while investors tried to escape the global market route, by investing in safe haven assets.
Gold has been the best performing asset class in 2016, while the World and the U.S. equity markets have had their worst 6 weeks. The Chinese economic slowdown and other uncertain economic situations globally have led investors into Gold. An existing negative interest rate scenario globally, led by Japan, the ECB and possibly the FED, is also contributing to making the market participants nervous.
In the current rise, Gold has broken out its’ of critical resistance level, which earlier had put a cap on the move up (these points are marked with arrows on the above chart). However, the buyers have become over enthusiastic and have pushed the RSI into overbought territory, which will cause a retracement in Gold. Find out where and why gold is about to correct and when you should invest for the long hual. The U.S. bond markets have also saw buying as being another safe asset class and the rise in value confirms rates will continue to decline as explain by this bond trader.
The US dollar is experiencing profit booking:
The US dollar, which is also a safe haven, at times, is experiencing profit booking, by the bulls. The index will turn bearish once the U.S. dollar index declines, and stays below 93. Currently, the Euro and the Japanese Yen have turned bullish and are most likely to lead the way, signaling that the dollar will follow suit and drop even lower.
Conclusion:
In the short-term, Gold and the U.S. bonds will surprise to investors on the downside, whereas crude oil and SPX will cause surprise on the upside as explain in a recent interview with an technical analyst of the stock market. However, due to the testimony by the ECB President, Mario Draghi, to the Economic and Monetary Affairs Committee, all the markets will remain “volatile”. Draghi is known to surprise markets with large-scale announcements. Stay nimble and follow my lead at: www.TheGoldAndOilGuy.com
Chris Vermeulen
