It's a mugs game calling gold and two years of falling prices means that even the diehard bulls have recently warned of another selloff to $1150 per ounce. For most of 2013 the bears have been out in full and analyst forecasts now range between $1050-$1250 for 2014. Not that analyst forecasts mean anything anymore as this same group had a mean forecast of $1950 for 2012 when gold peaked on the 6th of September 2011 at $1,895 per ounce. What is really interesting is that it is now consensus that gold will break below $1200 as the economic news continues to improve in the US and tapering begins. Weirdly the strong employment numbers last Friday saw gold actually trade up and continue to do so on Monday and aggressively on Tuesday. Tapering seems well and truly in the price and now somewhat irrelevant. For equity investors we talk to however it's all 'too hard' to buy the gold miners and with 10 more trading days left in the year it's difficult to find anyone prepared to nibble on the long side. But the signs are there that we won't retest $1200 and if anything gold could close well above $1300 before New Year's. A recent broker note on why Newcrest (NCM AU) should do an emergency rights issue before gold truly falls out of bed could be the classic sign that we are going up. I am not saying make a huge bet on this high cost indebted falling knife (the kind of stock you want to own at turning points) but isn't this 'rights issue' already well and truly in the price. Reassuringly Goldman's 'slam dunk sell gold' call is also proving elusive and it seems just about every broker has been falling over themselves to be the most bearish on gold - we at Reorient like to take the other side.
In short the stars are aligning for a potentially powerful move in gold miners. Short covering alone should see many of these names move 20% before real money even thinks about this trade in 2014. It could also be a long time before the pension funds come back to gold miners after so much pain has been inflicted during the 26 month selloff. However, for the early birds perhaps the equity markets are beginning to wake up to the fact that gold is now trading at a 23-25% premium in Indian Jewellery shops. Or perhaps it's watching Chinese gold imports which are now consuming between 70-100% of annual global mine supply (ex-Chinese output) depending which month you look at. Or perhaps the market is just bored of being bearish gold - 26 months is a long time.
Our bullish call on the miners we initiated on December 2nd has not yet worked but there are certainly more and more signs that it will. Copper is quietly creeping up and a close above $3.30 will be a strong signal to close your shorts and go long names like KAZ LN, 1208 HK and 805 HK. The capesize shipping rates were up another 5% today or 107% in the last two weeks. Investors malaise about the jump in Chinese coal prices as just seasonal is also a good sign. What we like most is that UK fund managers are significantly underweight the miners and are usually the first to react. The day you walk into the office in Asia and find RIO LN up 4% it's game on and that day is getting closer.
Two gold names that could see significant short covering during a gold move above $1,300 are NCM AU and 1818 HK. Don't be short the miners - you make 90% of your money in these names in 10% of the time.
Thanks, Jeremy Gray
From: REORIENT - Research
Subject: Morning note: Brownian Motion and Decoupling
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