Market Alert - Buying a 5% Position in Gold Miners ETF

A brief note to let you know that I am taking a 5% position in the Gold Miners ETF in the Active Asset Allocator strategy.

During the 2011-2016 correction in the gold market, the miners dropped sharply. Gold bottomed in 2016 and then rallied $300 from $1,100 to $1,400. During that time, the miners almost tripled in price. Both metals and miners have consolidate those gains over the last 18 months and I am expecting the next move up in both metals and miners to start shortly. I think the miners could be explosive on the upside once again. Note that the gold miners have not declined this year despite the recent drop in the USD price of gold. This is an early indicator of strength in the sector.

 
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At Secure Investments, I advise individual clients on their pension and non-pension fund investment portfolios. To learn more about my Active Asset Allocator and Gold Trader  investment strategies, please get in touch at brian@secureinvestments.ie or 086 821 5911. If you are reading this via LinkedIn, why not visit Secure Investments and subscribe to get exclusive content for free. No spam, ever. Just great stuff.

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Market Alert - Lowering Equity Allocation in Active Asset Allocator from 20% to 0%

Global stock markets have had one hell of a run, but I am seeing signs now that this run has come to a close. Stocks look like they are setting up for a failing rally, a lower high following the surge to new all time highs in January. This is a potentially concerning development, particularly in the face of strong investor complacency, a sharply falling USD and rising deficits and bond yields in the US. Add to the mix, record company valuations and you get quite a dangerous environment for investors. 

I am therefore cutting the equity allocation in the Active Asset Allocator from 20% to 0% today and moving to full defensive position. The revised asset mix moves to 0% equities / 20% EU government bonds / 15% inflation linked bonds / 5% EU aggregate bonds / 30% precious metals / 30% cash. I will provide a more detailed rationale for this decision in the next Investor Update.

Sprott Physical Gold and Silver Trust Starts Trading

Following the acquisition of Central Fund of Canada by Sprott Asset Management in October 2017, the Fund began trading this week and has been renamed Sprott Physical Gold and Silver Trust. This Fund trades on the New York Stock Exchange (Symbol: CEF) in US dollars and on the Toronto Stock Exchange (Symbol: CEF) in Canadian dollars.

The launch of Sprott Physical Gold and Silver Trust marks the completion of Sprott’s acquisition of the common shares of Central Fund of Canada. Sprott will administer and manage the Central Fund of Canada’s assets and Central Fund of Canada’s class A shareholders are now unit holders of the Sprott Physical Gold and Silver Trust.

Some of the advantages of holding Sprott Physical Gold and Silver Trust include:

  • fully allocated precious metals
  • redeemable for physical metals
  • trustworthy storage
  • easy to buy, sell, and own
  • liquidity

For more information on the Sprott Physical Gold and Silver Trust, please follow this link.

Sprott Acquires Management of Central Fund of Canada

Transaction Highlights:

  • Sprott Asset Management (“SAM”) to acquire common shares of Central Fund of Canada Limited (CFCL) and right to administer and manage CFCL’s assets for C$120 million in cash and stock.
  • Upon completion of the transaction, all CFCL Class A shares to be exchanged for units in a new Sprott Physical Gold and Silver Trust.
  • US$300 million in value expected to be realized for CFCL class A shareholders, relative to 9% pre-announcement net asset value (“NAV”) discount.
  • C$4.3 billion in Assets Under Management (“AUM”), and solidifies Sprott’s position as a global leader in precious metals investments
  • Highly synergistic with Sprott’s current physical bullion product suite.
  • Expands Sprott’s client base by approximately 90,000 investors.

TORONTO, October 2, 2017 – Sprott Inc. (TSX:SII) (“Sprott” or the “Company”), a global leader in precious metal and real asset investments, announced today that it has entered into an agreement with Central Fund of Canada Limited (NYSE: CEF, TSX:CEF.A) (“CFCL”), CFCL’s administrator (the “Administrator”), and the controlling shareholders of CFCL and the Administrator, to acquire the common shares of CFCL and the right to administer and manage CFCL’s assets, and move CFCL’s class A shareholders to a new Sprott-managed trust. The transaction is expected to drive long-term revenue and earnings growth for Sprott and unlock significant value for the class A shareholders of CFCL.

This transaction reinforces Sprott’s global leadership in precious metals, doubling our physical bullion holdings to more than C$8.5 billion and building our total AUM to approximately C$11.5 billion. Importantly, it demonstrates how we’re executing on our strategy of increasing our precious metal sand real assets to meet growing investor interest in the sector.
— Peter Grosskopf, CEO of Sprott

Under the agreement, (i) CFCL’s class A shares will, effectively, be exchanged for units of a newly-established trust (the “New Sprott Trust”), on a net asset value to net asset value basis, which will acquire substantially all of the existing assets and liabilities of CFCL and be managed by SAM and (ii) Sprott will acquire the common shares of CFCL and the right to administer and manage CFCL’s assets for an aggregate amount of C$105 million in cash and C$15 million of Sprott common shares. The controlling shareholders of the Administrator will also receive a one-time, performance-based cash payment of at least C$5.0 million on the first anniversary of the closing of the transaction.

With this transaction, we will add another best-in- class precious metals vehicle to our product lineup, also featuring our industry-leading physical redemption feature, while materially increasing our revenue from this business line. Based on the historical trading of SAM-managed physical bullion trusts at or near the value of the metal that underlies them, we expect to unlock approximately US$300 million in value for CFCL’s class A shareholders.
— John Ciampaglia, Senior Managing Director of Sprott and CEO of SAM.

The New Sprott Trust will be substantially similar to the existing SAM-managed physical bullion trusts, Sprott Physical Gold Trust (NYSE Arca:PHYS, TSX:PHYS) and Sprott Physical Silver Trust (NYSE Arca:PSLV, TSX:PSLV), including SAM’s best-in- class physical bullion redemption feature. The New Sprott Trust’s management fee will be 40 bps of NAV, which is comparable with Sprott Physical Gold Trust and Sprott Physical Silver Trust.

Transaction Summary

The transaction will be implemented pursuant to a plan of arrangement under the Business Corporations Act (Alberta) and is expected to close in the first quarter of 2018, subject to the satisfaction of customary conditions, including receipt of regulatory, securities commission and stock exchange approvals, Alberta court approval and approval by the class A and common shareholders of CFCL. Holders of approximately 85% of CFCL’s common shares have entered into agreements with Sprott agreeing to vote all of their common shares in favour of the transaction. Sprott’s cash on hand will be used to finance the cash portion of the purchase price and the approval of Sprott shareholders is not required.

Market Alert - Buying 10% Allocation to Inflation Linked Bonds

I have added a 5% allocation to US inflation linked bonds and a 5% allocation to UK index linked gilts in the Active Asset Allocator, funding both positions from cash. The cash weighting moves from 20% to 10% as a result. The bond market is pricing in almost no inflation in our future and I believe that is a mistake. Printing money always leads to inflation, eventually. We have experienced 7 years of asset price inflation (rising equity and property prices) and are starting to see increasing signs of wage inflation this year. In the United States, while inflation linked bonds continue to underperform Treasuries, technical signs of a change in trend are at hand. Relative strength (RSI) and momentum (MACD) indicators are improving in favour of inflation-linked bonds and price should follow suit later this year.

 
 

Inflation linked bonds are also rallying in the United Kingdom and the recent 15% drop in GBP should accelerate this trend. Falling unemployment, wage inflation and continued loose monetary policy by the Bank of England should provide an additional tailwind.

 
 

Central banks have already driven government bonds yields to zero or below and are now examining alternative ways to distribute a continuing flow of newly printed money. Accelerated fiscal spending and/or direct payouts to the public (helicopter money) are potentially on the cards. I expect the bond market to start pricing in a more inflationary outlook and inflation linked bonds should be a beneficiary. The Active Asset Allocator continues to hold a 20% allocation to fixed interest rate bonds, but the clock is ticking on this trade. The 35+year bull market in fixed interest rate bonds is in its final innings and I have one eye on the exit door. 

To learn more about the full range of investment services available at Secure Investments, please contact Brian by email at brian.delaney@secureinvest.ie or at 086 821 5911.

Market Alert - Selling Bonds, Buying Gold

Following a strong performance from bonds this year, the time has come to start reducing the interest rate sensitivity of the bonds we hold in the Active Asset Allocation model. As a result and as noted in our December 2014 Investor Update posted last week, we are making the following changes to the model portfolio:

  • Reducing the allocation to 5+ Year EU government bonds from 30% to 20%
  • Adding 5% allocation to EU aggregate bonds
  • Adding 5% allocation to EU inflation linked bonds

We are also reducing the allocation to  absolute return bonds from 30% to 20% and increasing the allocation to gold from 20% to 30% ahead of what we expect will be a strong period for precious metals in the months ahead. Our Active Asset Allocator is now positioned 20% equities / 50% bonds* / 30% gold. (Bonds now include euro government, corporate, inflation linked and absolute return bonds).

 
 

To learn more about the full range of investment services available at Secure Investments, please contact Brian by email at brian.delaney@secureinvest.ie or at 086 821 5911.

Market Alert - Reducing Allocation to EU Bonds from 50% to 30% & Introducing Allocation to Absolute Return Bonds

Our model portfolio overweight position in EU bonds has worked well this year but the time has come to bank some profits and shorten the duration of the bonds we hold. The end of this multi-decade bull market in bonds is finally coming into view. German 10 year yields have reached 0.89%, while Dutch 10-year yields are trading at 500 year lows. There simply is little room left for yields to fall and therefore limited upside for bond prices. As a result, we are making the first change to our model portfolio in quite some time, introducing a 30% allocation to absolute return bonds. To fund this position, we are reducing our existing bond allocation by 20% and also investing 10% from cash. The model portfolio is now invested 20% equities / 30% 5+ year Eurozone government bonds / 30% absolute return bonds. / 20% gold.

 

German 10 year yields broke below 1% in August for the first time in decades. In the last couple of weeks, yields have started to move higher, particularly in the US, where the Federal Reserve has backed off sharply on their money printing / QE strategy. The Fed has been printing money and buying bonds for years, driving yields sharply lower in the process. Now that QE is ending (for the time being), bond yields have started to rally.

We should expect a similar though less dramatic rise in yields in the Euro zone in the months ahead as global bond markets normalize and government bond yields start to adjust to reflect improved economic growth conditions and the potential threat of rising inflation in future.

 

Market Alert - Reducing Model Equity Weight from 50% to 20%

I am reducing the allocation to equities in the Active Asset Allocator model from 50% to 20% at close of business Thursday 20th June and investing 20% of the proceeds in 5+ Year Eurozone government bonds and 10% in cash. Following this change, the model portfolio will hold an allocation of 20% equities / 50% bonds / 20% gold / 10% cash. Please visit the 'Strategies' section of the website for a performance track record of the Active Asset Allocator model.

Following an epic run in the stock market over the past 24 months, equities are now showing signs of technical damage and deterioration. The S&P 500 broke below the 50 day moving average on Thursday 19th June, which generally doesn't happen in healthy bull market advances. Previous breaks of the 50DMA have occurred just prior to the big stock market declines in May 2010, July 2011, May 2012 and October 2012. Stock markets are pricing in an awful lot of good news today and long term support for equities is 20-30% below current levels. 

I have been commenting for a while now in my monthly Investor Letters that stock markets are quite overvalued while investor sentiment is back to an optimistic extreme, last seen in 2007; a dangerous combination. Stock markets are trading at levels that are simply not justified by the relatively weak economic fundamentals across the developed market economies. I will be discussing my current views in more detail in my June Investor Letter which will be out shortly. Please contact me at brian.delaney@secureinvest.ie for more information.

 

Market Alert - Reducing Model Equity Weight -10% to 50%

The Active Asset Allocator model has held a weighting of 60% equities, 20% bonds and 20% gold since June 2012. We have begun to see the first sign of cracks in the stock market's bullish trend, signalling that equities may be approaching a medium-term peak. We are reducing the model portfolio's equity weight by -10% to 50% equities, investing the proceeds into short-dated government bonds and maintaining the 20% allocation to gold. Subject to a continuing deterioration in the technical outlook for stocks, we may move to a fully defensive position (20% equities/60% bonds/20% gold) later this year.

The S&P 500 has rallied +150% since the March 2009 lows. This bull market in stocks in now entering its 5th year (the average bull market lasts 3.8 years) and is maturing.

The S&P 500 declined -2% on Wednesday 22nd May following the release of the FOMC minutes at the Federal Reserve. Fed Chairman Bernanke suggested that "certain financial markets were becoming too buoyant" and the Fed may cut back on their QE programme. The rally following that decline has been rather lacklustre to date. We are experiencing a subtle change in the character of the stock market where good news is now being sold. This is happening at a time when investor sentiment is at a bullish extreme (next chart), the S&P 500 is stretched 26% above its 200-week moving average and the cyclically-adjusted P/E (CAPE) on stocks is a lofty 23 times. Also, corporate profit margins in the US have reached 15.1%, almost double the 30-year average of 8.1%. When margins trend back towards their long-term mean (they always do), the valuation argument for buying stocks will become more difficult to make.

Equities overvalued relative to bonds

In addition to the stock market being overvalued, overbought and stock sentiment being overly bullish, investors are also facing the prospect of rising interest rates across developed world markets. US 10-year treasury yields have increased from 1.6% on 3rd May to 2.1% today, a 31% increase in less than a month. German 10-year yields have rallied 36% from 1.1% to 1.5% over the same time period. 

 

US 10-year treasury yields have rallied 31% from 1.6% on 3rd May to 2.1% today.

Central bank intervention is no panacea, as the Japanese are now finding out. In our view, the above risks have yet to be fully priced in to equity markets, hence our recommendation to move to a more defensive position.

Market Alert - Japan Cracks

The Japanese stock market cracked on Wednesday, plunging -7% in one session. Money printing is not a risk-free solution to unsustainable government debts and deficits. The Nikkei 225 Index of Japanese stocks rallied over 80% in local currency terms in the space of 6 months and ended in a parabolic upside move that broke down and mini-crashed this week. Accelerations higher (or lower) are typically ending patterns in stock markets.

Nikkei surged 80% higher in 6 months following the Bank of Japan's announcement to start printing money at lite speed.

The JPY/USD currency rate has also had an enormous move, in the opposite direction. The JPY has plunged by over 30% versus the USD over the same 6 month time frame. These are historic moves and a sign of things to come for capital market investors.

The Japanese Yen has plummeted by 30% versus the USD since November 2012.

Japan's gross government debt/GDP is over 230% and rising. Efforts made by the Bank of Japan to create enough inflation (targeting 2% p.a.) in order to reduce the nominal value of the debt they are carrying could have disastrous consequences if Japanese government bond yields rise above the 2% level. Above 2%, the tax revenues collected by the Japanese government would be insufficient to meet the interest payments on Japanese government bonds as they fall due. Yields have spiked from 0.30% to 1.00% over the past six weeks. If this upward trend continues, we may see fireworks across a whole range of global equity and bond markets. In the end, money printing is no panacea for fiscal irresponsibility and creates many more problems than it solves.

Japanese government bond yields have surged from 0.30% to 1.00% in 6 weeks. A rise above 2% bankrupts Japan.

Market Alert - Gold

Record Net Short Position and Record Bearish Sentiment Fuel For Next Rally

The latest Commitment of Traders report shows that the small speculators in the gold market are now all crowding together on the short side of the market. They have now established a record short position against gold. These dramatic events often occur at major trend changes and provide the fuel for major rallies. If gold starts to move higher from here, and I expect that it will, a lot of short sellers will be trapped on the wrong side of the market and we could see fireworks as they all try to unwind at once.

Meanwhile, the 'smart money' commercial traders (the bullion banks), who usually short gold as a hedge against their clients' (mining companies) long positions, have closed almost their entire short position. The commercial traders recognise the gold market has been completely sold out and the next move is likely higher.

 

Gold commercial traders are almost flat now while the small gold speculators have a record net short position in place. 

Public opinion on gold is now at a record bearish extreme.

Market Alert - US Dollar

USD Sentiment Stretched at 77% Bullish Extreme

Public opinion has now reached a bullish level of 77% on the US dollar, coincident with prior peaks in the currency over the last ten years. Any sustained decline in the USD in the coming weeks could provide the necessary fuel to awaken the commodity sector, which has been under constant pressure for the past two years.

Public opinion on the US dollar is reaching a bullish extreme and consistent with prior levels where the dollar topped out.

Market Alert - Stocks or Bonds?

The persistent uptrend in equity markets in 2013 has been a sight to behold. Equities are now accelerating higher and due at least a short-term pause. Accelerations are typically ending patterns in stock markets. The S&P 500 closed today (Tuesday 21st May) at 1,669, a full 26% above its long-term 200-week moving average. Equities are heavily overbought in the near-term and quite overvalued relative to bonds, as the following chart shows. Be patient about adding to your stock portfolio at the present time.

Equities are now quite overvalued relative to bonds. The S&P 500 is trading 26% above its long-term moving average and pricing in an awful lot of good news here. 

Market Alert - Precious Metals

The action in the precious metals markets over the last couple of days is suggesting a turn may be just around the corner. On Sunday night, the silver market opened and silver was clocked for -10% in about 5 minutes. Usually when this happens (silver is a small market and can be pushed around by aggressive pit traders) the weakness follows through into the next day's session and the rout typically spreads to the silver miners and across the precious metals sector in general. 

This time however, silver retraced the entire decline and closed +3% on the day and the mining stocks followed suit with across the board gains (Monday 20th May). If this rally sticks over the next few days it could signal that the painful 2+ year correction in the sector is finally at an end. The next leg in the bull market in precious metals could be about to kick off.

The 2-year bear market in silver could be over, which means the next leg of the bull market is about to start and a test of the $50 area is likely.

The 2-year bear market in precious metals is close to ending, which means a challenge of the 2011 all time highs could lie ahead later this year or in 2014.

Market Alert - Precious Metals

The Hulbert Financial Digest recently reported that newsletter writers focused on the precious metals sector are now recommending that investors take a 44% net short position in gold, an all time low. Jason Goepfert at Sentimentrader tracks the data and has posted the following chart this week.

Gold sentiment has reached an all time low

Market Alert - Equities

Newsletter writers are now recommending a 71% net long position in stocks, the highest since 2002

Mark Hulbert of the Hulbert Financial Digest tracks stock market recommendations of multiple newsletter writers. Hulbert recently reported that newsletter writers are now recommending a net long position in stocks of 71%, the highest level since January 2002 and the 10th highest level ever since 1997. 

Hulbert Stock Sentiment approaching highest level since January 2002

Market Alert - Equities

Stock market breadth remains healthy though stretched

The advance/decline line (ADL) is recognised by many investors as an accurate measure of the health of the stock market. The ADL simply measures the number of rising and falling stocks on the NYSE. When the ADL is rising, the majority of stocks on the exchange are in an uptrend; when the ADL is falling, the opposite is true. Usually, the ADL forms a peak ahead of the stock market. As fewer and fewer stocks participate in the rally, the trend in the ADL reverses and starts heading lower, usually weeks or months before the stock market tops out and prices reverse lower. Today, the ADL is making new all time highs suggesting that the strong momentum move higher will continue in the months ahead.

Market Alert - Precious Metals

Investors are betting against the precious metals for first time since 1990

Sentiment levels against the precious metals has reached a historic extreme. Small speculators, for example, are throwing in the towel en masse. For the first time since 1990, small speculators in the futures market are now betting against the precious metals. Small specs have moved from holding a net long position of 85,000  contracts in October 2012 to a net short position today.

Small speculators betting against the precious metals for the first time since 1990.