​Sell Stocks in May and Go Away

Precious Metals Commentary

Gold drifted lower this week before catching a bid Thursday night on the back of US stock markets selling off. We remain at the USD$1,280 level as per last week, with silver trading not too far off multi-year lows at USD$14.60.

Some further weakness in the beaten up AUD sees gold for local investors trading higher at $1,868 and silver at $21.20.

With valuations in the tech sector in the US recently trading at irrationally exuberant levels, May has been a terrible month for US equities, with the recent correction extending last night. If current losses hold over the next few trading days, we could see May at over -4% for the Nasdaq.

Still nothing compared to the sell-off in later 2018, but it is starting to look like a potential double top in US stocks could be on the cards. If the top of the market occurred recently, it would only make perfect sense to coincide with the highly questionable IPOs of Lyft and Uber, both of which have significant cash burn, yet have gone public at rather incredible market capitalizations.

The Nasdaq chart can be seen below and the historical seasonality advice of “sell in May and go away” has held true so far. The ASX has been on a post-election high so has shrugged off the US stock market correction so far, but we will be interested to see if the correction has further legs in coming weeks.
 

Free Gold

Money may not grow on trees, but free gold can still be found in the ground for those determined or lucky enough. This week, a man unearthed a 1.4 kilogram gold nugget in the Goldfield’s area of Western Australia with a metal detector. It was buried around 45cm below ground.
 

Source: Finders Keepers Gold Prospecting / Facebook

That is one nice chunk of gold, which the media were reporting was worth about $99,000. That figure seemed low to us and sure enough, the media made two mistakes. First, they converted the 1.4kg into normal ounces, not troy ounces as is used in the gold market. Second, they just multiplied that overstated ounce figure by the gold price, ignoring the significant premiums such natural nuggets can command.

How much collectors may bid up the nugget is hard to determine but its value would be closer to $200,000 than $100,000.

The find follows one made on Mother’s Day by a family walking their dog (named Lucky, by coincidence) on the outskirts of Bendigo. One of their daughters kicked something hard lying on the ground, which turned out to be a 624 gram gold nugget.

Free gold and silver of a different kind will be available to Canadians from 1st June with the launch of GoldHunt. A private company that is “staying anonymous for safety reasons” has buried three treasure chests of $100,000 worth of gold and silver in Calgary, Edmonton and Vancouver. Below is a picture of said treasure chest from their promotional video.

 
Is there a catch, we wondered? Well, sort of, in that you must pay $25 to buy a treasure map and poem with clues in it or $45 for the map plus an additional five clues. Only people with a registered receipt of payment will be able to claim the treasure.

Still, $45 investment for a $100,000 return is attractive, although how many people you may have to compete against is unknown at this time. The organisers say they we will stop selling maps when they either reach 1% of the city’s population, or two weeks after the hunt begins.

If most people stump up for the $45, the organisers need around 2,500 people to make a profit. This means there is a chance the organisers could lose money if not enough people buy the maps, so participants are gambling not just on their clue solving smarts but that the organisers will make good on the treasure.

Someone who gambled and lost their gold and silver is Jeffrey Sullender, who was taken to court by the US Internal Revenue Service (IRS) for failing to pay his taxes since 2000. According to Fox Business, in addition to failing to pay taxes, Sullender was accused of “using various methods to attempt to shield his properties from tax liabilities, including selling them to himself in exchange for coins”.

It sounds to us like he listened to the dubious advice we have seen on discussion forums claiming that one can avoid taxes by transacting (based on metal value) using legal tender precious metal coins but reporting the transaction based on the (much lower) face value of the coin.

This week the IRS will auction off gold and silver coins seized from Sullender. If you are curious what sort of “stack” a board certified clinical nutritionist had, download the PDF catalog of the items with pictures here.

Bitcoin the Best Option?

Kitco interviewed Max Keiser late last week about the #dropgold campaign we reported on a few weeks ago. Max is not an either/or on the issue, saying he “owns bitcoin, gold and a tonne of silver”.

He said gold should be at $2,900 based on US debt accumulation but that “gold is unreliable due to manipulation, the best option is bitcoin”, which he is forecasting to be worth $100,000.

We would say that if manipulation is a reason for not investing in gold, then bitcoin would not be an option either. We noted last week the sudden drop in the price of bitcoin, and crypto commentator David Gerard revealed that the drop was due to a single sale of 5,000 BTC on Bitstamp, causing the price to bottom out at $6,178.
 

Source: David Gerard

David notes that the price drop caused “about $250 million of long positions on BitMEX to be liquidated” and as BitMEX takes its BTC/USD rates from Coinbase and Bitstamp, there is “a huge and obvious incentive to manipulate the price on those two exchanges … to win margin bets on BitMEX”.

Technical Report

Our Global GM Nick Frappell released his monthly technical report this week. He sees gold consolidating with a bullish trend on the weekly chart and the medium-term outlook remains positive.

Support remains at US$1,263 although he noted that there are some stranded longs at US$1,289, which will weigh on the price in the short term. However, Nick says a significant amount of new investor interest has emerged on the long side in the last week or so, indicating that gold is moving back into favour with large investor groups.

Election Effect

With political uncertainty out of the way following the election, the market consensus is that the RBA will cut rates down to 1.0% this year. In a speech this week, RBA Governor Philip Lowe noted that household disposable income was only growing at 2.75% (compared to a decade average of 6%) so “people have decided to adjust their spending plans” downwards. The result is that the RBA will “consider the case for lower interest rates” at their next meeting.

Commentators see the combination of rate cuts, the Housing Deposit scheme and APRA’s proposal to relax its mortgage serviceability guidelines as providing support to the housing market. Christopher Joye (Coolabah Capital Investments) says that they “will lift Aussie house prices by 5% to 10% in the 12 months after they are implemented”.

Shane Oliver (AMP Capital) noted that the combination of iron ore prices around US$100 and a falling Australian dollar means “a huge windfall for miners & Canberra” and will give the government more fiscal stimulus spending power.

Silver Giveaway

Analyst Steve St. Angelo claims that the top primary silver miners are giving away silver, losing $2 per ounce on average during the first quarter of this year.

Jeff Clark, Senior Analyst at GoldSilver, agrees and adds that there is a “dearth of new silver mines scheduled to come online anytime soon”. The US government is also looking at imposing significant royalty fees, which will put additional pressure on mine supply.

While it is true that primary mines only contribute 26% of total silver mine supply, price is formed at the margin so constrained or falling primary mine production is supportive of silver prices.

We also note that 61% of silver comes as a by-product of lead/zinc and copper mining, which means that the silver price is directly affected by prices of those commodities. Steve says that in a global recession/depression scenario, base metal prices will collapse. This will result in production cut backs that will reduce by-product silver supply at a time when silver and gold will see increased investor demand.
 

We agree that silver industrial demand, which is a significant part of the market (see chart above), would also fall in such a recession/depression environment. However, the increase in investment demand is likely to make up for most of the drop in industrial usage. When combined with the supply issued discussed above, it could provide the catalyst for a dramatic move up in silver prices.

This would fit in with what the gold:silver ratio is saying, which reached new highs and seems to be aiming for 90 ounces of silver per 1 ounce of gold. Historically, ratios at these levels generally precede falls in the ratio, which means that silver will outperform gold.

The only caveat we would put on this analysis is that there are not any constraints on silver investment demand. During the bull market up to 2011, and even in the subsequent years, the US Mint often ran out of silver coins and/or put wholesalers on rationing, as did other mints.

For our part, ABC Bullion is prepared. Our refinery has been expanding its silver refining capacity and has also just installed the world's first fully automated bullion bar machine. The picture below shows some fresh gold and silver bars coming off the line, and check out this cool video from the manufacturer of how it all works.
 

Of course, it makes sense to buy insurance before your house burns down, so it could be prudent to accumulate a bit of silver now while demand and prices are modest.

Until next time,
 
John Feeney and Bron Suchecki
ABC Bullion

If you have any questions or feedback about this week’s report, we would love to hear from you. You can contact John Feeney (@JohnFeeney10) and Bron Suchecki (@bronsuchecki) directly on Twitter, otherwise please feel free to send us an email at [email protected], or call us during trading hours on 1300 361 261.

Disclaimer
This publication is for educational purposes only and should not be considered either general or personal advice. It does not consider any particular person’s investment objectives, financial situation or needs. Accordingly, no recommendation (expressed or implied) or other information contained in this report should be acted upon without the appropriateness of that information having regard to those factors. You should assess whether or not the information contained herein is appropriate to your individual financial circumstances and goals before making an investment decision, or seek the help the of a licensed financial adviser. Performance is historical, performance may vary, and past performance is not necessarily indicative of future performance. Any prices, quotes, or statistics included have been obtained from sources deemed to be reliable, but we do not guarantee their accuracy or completeness.