New Fed Chair Prematurely Ushers in the PDAC Curse
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Next week,the annual Prospectors and Developers Association of Canada (PDAC) convention inToronto will be attended by over 25,000 people from 130 countries, who will bevisiting with nearly 1,000 exhibiting organizations. PDAC is the world’sbiggest mining industry conference and is also a massive, non-stop, four-dayparty. Between the hospitality suites at the Royal York, InterContinental andsurrounding establishments, there will be numerous client receptions afterconference days are concluded.
Thecompanies in attendance usually make sure to send out press releases during theweek leading into PDAC, so they have a recent topic of discussion while tryingto lure investors into making an investment in their stock. This flurry of newsreleases into and around the convention leads to an inevitable news droughtfollowing it. When combined with seasonal weakness that is common in the gold sectorin Q2, we get what has been regularly referred to as the “PDAC Curse”.
This year,with the mining sector mired in what has become a 19-month consolidation, thecurse may have come early. Earlier this week, newly appointed Federal ReserveChair Jerome Powell testified before the U.S. House of Representatives'Financial Services Committee and acknowledged the economy had strengthenedrecently. Gold was relatively unfazed, until the question and answer periodwhich took a hawkish tone and prompted investors to increase bets on a fourthFed rate increase in 2018. The reaction torpedoed the mining sector asinvestors began to focus on a revised Fed Dot Plot and the U.S. dollar zoomedto a 3-week high.
Theso-called “Dot Plot” charts the rates by the Federal Reserve Open MarketCommittee (FOMC) participants in order to determine where the central bankbelieves rates are going, including its longer-term neutral rate. The Fed isexpected to approve its first rate increase of 2018 at its next policy meeting onMarch 21st and it may also provide an updated Dot Plot. After theconcluded meeting speech, Powell will hold his first news conference as the newFed chair.
The chartfor this year is currently showing three interest rate hikes, and the fed fundsfutures market is also reflecting the potential for three rate hikes. However, equityinvestors have become anxious about the idea that there could be another rateincrease and considering Powell’s hawkish comments on February 27th, the oddsof a fourth hike have risen considerably.
JP Morgan'schief U.S. economist Michael Feroli had been expecting four rate hikes thisyear, and Powell's comments served to reinforce his view. "Today's (Tuesday’s)comments appear to open the door for others on the Committee to revise theirforecast as they see fit, and that Powell himself may be inclined to look forfour hikes this year," he wrote in a note. "...We now think the oddsare tilted slightly in favor of the median participant revising up theiroutlook to look for four hikes this year and another three hikes nextyear."
In the lightof this recent reaction in the gold sector, the possibility of the $1300 level beingbreached has returned, while we head into the March 21st, FOMC meeting. The continued lag of the miners in relation to the gold price isanother reason to expect further weakness into the Fed policy meeting and topossibly see the next level of support at the $1270 - $1280 region before theend of Q1.
As mentionedin this column last week, there is a possibility of criticalsupport at the $21 level on the GDX being broken and the action this weekraises the odds of this taking place. The continued sell-off after the Powelltestimony had the major miner ETF test this region yesterday for the sixth timein the past year. If the $1300 level in gold is indeed breached intoquarter-end, then I would expect this support to be broken and the $18 levelmay come into play quickly on a stop-run.
However,there are a few bright spots in all this precious metal gloom and doom. TheU.S. stock market began a sharp reversal after Powell’s remarks and continuedmuch lower with rising volatility on Trump tariff talk into yesterday’s close.Meanwhile, during the last few hours of trade, the gold sector began tode-couple from U.S. equities and the GDX ended the session with an upsidereversal from $21 while the DJIA was down over 1.5%.
Furthermore,the silver futures Commitment of Traders (CoT) report issued last Friday showedthe net spec position being below 10%, which is comparable to previous silverbottoms in July and December of 2017. The silver price began a two-monthuptrend after these previous two net spec positions were reported as beingbelow 10% and a strong silver bounce could lead gold higher in the short-term. Wewill find out later this afternoon if this figure has improved when the latestprecious metal CoT reports are released at 3:30pm EST.
Nevertheless,I have built a 10% cash position in my junior resource stock portfolio in anticipationof a possible gold stock wash-out move happening into Q2. One of the best timesto take a low-risk position in a quality junior is when a long-term sector consolidationends with an over-sold capitulation move lower, so it is wise to be prepared ifthis scenario presents itself.
If yourequire assistance in choosing the best quality junior resource stocks toinvest, please stop by my website and check out the subscription serviceat http://juniorminerjunky.com/
By David ErfleContributing tokitco.com
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newsfeedback@kitco.comwww.juniorminerjunky.com Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.