The Chinese are in, investors love BitGold… signs of summer momentum?
Chinese deals and BitGold mania matter to the mining sector, especially in May when the doldrums regularly set in…unless a new bull market is building.
Sell In May and Go Away has become a hallmark of the mining sector. The summer doldrums are incredibly reliable – whether the overall picture is raging bull, sleeping bear, frenzied top, or exhausted bottom, mining markets lose ground in the summer.
Unless a new bull market is setting up.
Below I’ll show the graphs that prove this point, but for now take me at my word: the only positive summers in the last 25 years prefaced bull markets.
Which means a positive move over the next few months could represent the beginning of the next up cycle.
At the moment the TSX Venture Index is not moving up. Neither is it moving down, however; it is simply trading sideways within the same narrow range (665 – 710) that is has lived since January.
So no trend there to get excited or depressed about. Looking elsewhere, though, gives me reason to believe this summer could kick the doldrums habit and move up, ending this interminable bear.
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Reason One: China
China has money. China also needs resources. It takes a lot of copper and steel to support millions of new urban dwellers.
However, China’s need is not so dire that it is willing to overpay. Not again, at least.
China let itself get swept up in the last resource bull market. Chinese firms signed a lot of big cheques to buy projects near the top of the market, just like the world’s biggest mining companies (which as we all know love to spend as much as possible on acquisitions).
But unlike majors, China doesn’t often repeat its mistakes. In recent years Chinese dealmaking in the metals markets has slowed. Most companies negotiating with Chinese partners or investors say the same thing: the Chinese have been moving very slowly on deals, intentionally, because the longer it takes the cheaper it will be.
Or so it has been. That is now changing – and the Chinese know it.
Zijin Mining Group announced two deals on Tuesday worth $710 million. The Chinese mining major is shelling out $298 million for half of Barrick’s Porgera gold mine in Papua New Guinea and $412 million for 49.5% of Ivanhoe Mines’ Kamoa copper project in Congo.
Not only is that $710 million worth of new mining investment, it is confirmation that this is the bottom, at least in China’s eyes. And China’s eyes matter a lot.
Those stressing about China’s economic slowdown tend to focus on how 7.4% GDP growth is oh-so small compared to previous years. But that perspective ignores a key factor: that growth is coming off of a much larger base.
Slower growth now generates as much additional demand as did China’s crazy fast expansion a few years ago. Last year’s 7.4% added 4.8 trillion yuan to the country’s GDP, which is exactly how much the economy grew in 2007 when expansion hit 14.2%.
And the base keeps getting bigger. China’s 7.4% in 2014 marked its slowest expansion in 24 years but it lifted China’s economy up into an exclusive group: the $10-trillion club. Yes, in 2014 China’s economic output reached $10.3 trillion. That is five times its output a decade ago and makes China the second country to ever reach such a size (the US hit the $10-trillion output mark in 2000).
So while the International Monetary Fund ‘only’ expects China to grow by 6.8% in 2015, its slowest rate in 25 years, it is worth remembering that China is 25 times larger that it was 25 years ago.
I say all this to emphasize that China still very much needs metals. That is the fundamental reason that China’s eyes matter. Add to that: China has money and knows it can get a huge amount of metallic bang for its buck right now.
The double Zijin deals suggest China is ready to start closing deals, a new influx of cash that should help resuscitate these bedraggled mining markets.
Reason Two: BitGold
Another source of macro optimism came from a new listing, of a little $30-million market cap Canadian company…that rocketed skyward in its first week to touch a valuation of $293 million.
Investors just couldn’t get enough of BitGold – proving gold may be down but it is far from out.
Gold companies continue to trade near historic lows. Gold is still down 35% from its 2011 high. A huge number of gold exploration companies are in hibernation. It feels like interest in gold is about as common as interest in bonsai trees or typewriter restoration – a dedicated but small crowd.
Then BitGold happened. The online service allows users to buy gold and use it to pay for goods and services. It turns gold into a simple currency: you can buy a coffee with a debit card backed not by dollars but by gold.
I heard about BitGold at PDAC in early March. I spent a solid hour talking with BitGold co-founder Josh Crumb at a reception and was very intrigued. But I assumed my level of interest was somewhat unique – I love gold but, given the seeming general disinterest in gold, I did not think average investors would share my interest in the creation of gold-backed bank accounts.
But they did. Investors piled in. BitGold shares ran from US$0.90 as high as US$8 in days.
Gold may be down in price and hurting for praise, but underneath the yellow metal holds an allure that endures. As we all struggle to understand today’s uncharted financial world of ultralow interest rates, bond bubbles, and endless quantitative easing, gold is once again earning respect and attention as a steady store of value.
BitGold’s success is proof.
Timing is Everything
Chinese deals and BitGold mania are positive. That they happened in May matters.
Sell in May and Go Away is a very real thing. Even during bull runs, mining markets lose ground over the summer. The one exception: bull runs start with a positive summer.
These two charts show the TSX Venture Index from 1991 to 2012. All of the orange boxes surround summer losses. The consistency of summer doldrums is remarkable – especially because markets fall over the summer whether the overall picture is bull, bear, topping, or bottoming.
Down summers in years like 1998, 2008, or 2011 are no surprise – the markets were in freefalls that simply continued through the summer months. But summer declines happen during bottoms (1992, 1999-2002), during tops (1996, 2006, 2007) and, most surprising of all, are even consistent during bull runs: the Venture declined every summer during the great run of 2003 to 2007.
Well, every summer except one: the Venture gained in summer 2003, when the bull market was just getting underway. 2009 was another gainer summer and it kicked off another couple of good years. Similarly the good summers of 1993 and 1995 prefaced stronger markets to come.
(To finish the story: 2012 was an anomaly, notching a summer gain during a bear/bottom market. It was a year marked by central bank machinations: Operation Twist lasted through the summer and led into the (very expected) announcement of QE3. An anomalous market amidst such unusual economics is not surprising.)
The point of all this is: if the Venture index gains this summer it will truly be time to buckle your seatbelts.
I don’t know that it will – but the Zijin deals and BitGold’s success give me hope. So too do other signs I have discussed before in these pages, such as companies getting rewarded in the market for positive news, gold producers as tracked by the GDX defining an upwards trend whether gold rises or falls, and tightening supply-demand scenarios for several metals including copper.
Whether the summer rises or not, establishing positions in undervalued explorers, developers, and producers now carries very little risk. This is the bottom. Whether the next upcycle starts this summer or a bit farther down the road is only a matter of patience.
However, if the summer does heat up, not buying now – after years of value erosion – will leave you feeling a fool.
That’s why I recommended a major gold miner, a mid-tier gold producer, and a small but revamped gold miner to subscribers in this week's Maven letter. For a free trial subscription, click here.
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