US dollar: up up up…
The US dollar continues to soar which is wreaking havoc across the globe. Every single loan which is expressed in US dollars has become meaningfully more expensive in just a few days. The Bloomberg Dollar Index is currently at an all time high even. This is probably one reason why the High Yield Corporate ETF (HYG) continues to crash today even though both oil and stocks are currently up.
The strength of the US dollar is a long reaching problem that needs to get fixed because it is killing the financial world right now.
For mining investors this is creating a dilemma. A rising US dollar weighs on the US price of gold. With that said, the higher it goes, the motivation to do something about it goes up as well. I remember Jim Willy airing thoughts like “The dollar will go up and up, until it disappears”. The theory is, if I understand it correctly, is that the dollar will rise and rise and create more and more problems. This will feed on itself and causing even more dollar strength. At the end of the road, he believes that the US dollar will be “killed” and revert to being a local US currency like any other currency out there. Regardless if it will happen like this, the “powers that be” WILL have to do something to reign in the dollar…
If that is through revaluing gold, printing a LOT more money or something else is something I don’t know.
Shut down of miners
With the Corona pandemic getting worse and worse, I think one should be ready for the shut down of mines here and there.
So, what companies to pick?
Cash poor producers would probably have the hardest time given that there are a lot of fixed costs involved in mining. An explorer could simple just shut down operations and pause most if not all expenses. A miner with a large work force and major infrastructure has a much harder time to do that. One question I have is if this is pretty much already priced into the mining shares given how extremely cheap they are. Will it be a “buy the news” event?
Anyway, I have been diversifying my portfolio a bit, jurisdiction wise primarily. I also do not want to hold mining companies who needs to raise cash within say 6-12 months (preferably 12+ months)
Grass root explorers right now. Risky if we get a spike?
One argument I have against grass root explorers is that I hate the risk of going into a potentially major gold bull, including a sudden gold spike, and owning a company that might not even have any gold at the end of the day. Therefore I personally stick to companies that at least have some gold on the books. Also, I have climbed up the company cycle ladder. What I mean by this is that I think that producers are the cheapest perhaps ever and developers/advanced explorers are really cheap as well. Again, this is a double edged sword since it’s harder for producers to preserve cash like some explorers are doing for example.
Oh, and I really like to see recent insider buying in a producers I pick up since it is a clue that management thinks they can weather the storm.
Relative Strength of Gold
I know I know, gold is down from $1,700. But think about what we saw yesterday for example:
Dollar soaring, markets and oil crashing with rates going up…. Gold ONLY down 1.5%
That is actually showing that gold is very strong ATM. If this was 2017, then I would assume gold would be down 6%-9% in that scenario. It wasn’t.
There seems to be problems with JNUG, NUGT and therefore also with GDX and GDXJ. The 3X levered bull ETFs have been completely massacred lately. No doubt there have been some big margin calls. The price to NAV has even differed up to 10%. Personally I see this as “artificial” puke selling in the miners. When the margin calls and other motivated buyers have been gobbled up, I would expect the sun to shine again. We just need to absorb that selling first.
Dried up (Stock Picker) Volume
I have been looking closely at the trading of Novo Resources lately. Usually, Novo has a life of its own and can often trade counter to what GDXJ is doing (Novo is part of the GDXJ fund). Lately it seems to be following GDXJ rather closely however. To me this looks like we have seen mass capitulation of many “stock pickers”. I assume this is not limited to Novo Resources either. Basically GDXJ seems to be running the show and there is less retail buying and selling in specific companies.
Note: This is not investment advice. This article is speculative!