PDAC Attendees Much More Cautious This Year
Earlier thisweek, I attended the annual Prospectors & Developers Association of Canada(PDAC) conference in Toronto. It is the premier destination for miningcompanies to mingle with suppliers, customers, potential investors,consultants, and analysts. Not only is this a must-attend event for professionalmining investors such as myself, PDAC can also be a very good gauge of sentimentin the gold space. After speaking with many of the best minds in the sector, Ican usually paint a much clearer picture about how to craft my investment strategyinto Q3.
During last year's event, I witnessed a very jovial crowdwhich was very eager to put more money to work in the sector. However, theevent this year had a cloud of confusion hanging over the Metro TorontoConvention Centre as the miners continue to underperform with gold firmly above$1300. While speaking with many of my acquaintances in the mining space, theenthusiasm of last year had been replaced with a feeling of being hesitant tocommit more capital until they see some clarity in the sector.
On the dealside, many junior developer and exploration CEO's I spoke with informed me thatmost global miners, while still being interested in high-margin projects, havebecome more tepid in their interest. I came away with the feeling of fewerConfidentiality Agreements (CA's) being signed between juniors and the majorsthis year as well. So, it appears the underperformance of the miners inrelation to the metals prices has also affected the interest in the deal space,as well as the investment space.
Another signof tepidness in the deal space is we saw just one high-profile financebeing announced inthe mining sector while the conference was taking place this year. The fact ofglobal miners having to replace high-grade ounces has yet to cross over intomore mergers and acquisitions in the mining space as well. While beingconvinced of M&A heating up later this year, I am content to hold mycurrent positions until confirmation of a solid bottom in the mining sector hasbeen seen before committing more capital to precious metal stocks.
I believethe $21 level in the GDX has become synonymous with the $1300 region in gold.This critical support level in the major miner ETF has twice been breached verybriefly over the past month of trade, with the gold price having remained above$1300. We witnessed intra-day, up-side, short-cover reversals on both of thebreaching's of $21, while the bears were unable to push gold below the strongsupport level of $1300.
As we headinto the new Federal Reserve Chair, Jerome Powell's first FOMC meeting speechon March 21st at 2pm EST, these levels may be broken into Q2 as theU. S. dollar is showing signs of rising further after the White House indicatedthat key trading partners could be exempt from the steel and aluminum import tariffsit proposed last week. The dollar is back above 90 on the Cash Settle Index andthe buck has been the key driver of gold prices recently.
Moreover, the U.S. Non-Farms Payroll Report (NFP)for February released this morning added 313,000 new jobs, the biggest increase in a yearand a half and more evidence of an economy firing on all cylinders. Despite thebig increase in hiring, wage growth moderated after the early-year scare aboutinflation and the strong report makes it a virtual lock that the FederalReserve will increase interest rates when senior officials meet later thismonth.
Furthermore,the U.S. equity market has the appearance of stabilizing while possiblycreating a bullish ascending triangle in the daily chart of the S&P500 index. Consolidation triangles in bull markets often break out to theupside and Powell would have more leverage to aggressively raise interest ratesif the stock market continues to rise. If this is indeed the case, the goldsector could experience more short-term pain.
Inanticipation of this possibly short-term gold bearish scenario, it is notadvised to sell quality miners and juniors due to the continuation of extreme under-valuationin relation to the gold price. However, I strongly advise miner investors toremain cautious and patient with some cash until we see signs of stability inthe gold space.
By David ErfleContributing tokitco.com
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