Morning Report / Has Gold et al become simply too hard? (TSLA US, RRL, NCM, EVN, NST)

By Market Matters 13 January 21

Has Gold et al become simply too hard? (TSLA US, RRL, NCM, EVN, NST)

Market Matters Morning Report 13th January 2021

The “Risk Trade” has struggled this week as equities followed Bitcoin lower, a relationship many struggle to comprehend but when it comes to the tape simply don’t fight it, over recent times equities have very much followed in the footsteps of the crypto currency hence until further notice Bitcoin in particular should be monitored carefully. Interestingly this time it’s been the usual market tailwind of huge stimulus which appeared to slow down the bull market juggernaut. With financial markets it’s so often the case that one hand of central banks / governments giveth while the other taketh away:

1 – Markets are building in a huge US stimulus package following the Georgia election victory for Joe Biden, touted to be worth trillions of $US, this should aggressively kickstart their floundering economy in the soon to be post-Trump era.

2 – The issue is with stimulus comes both growth and by definition inflation which has kicked bond yields higher, remember this is the very phenomenon MM believes will eventually derail the more than decade old bull market for stocks.

This week’s price action couldn’t have illustrated some of our views discussed in the MM Outlook Piece more perfectly i.e. Australian 10-year bond yields scaled levels not seen in over a year leading to value stocks, which theoretically benefit from economic expansion, rising inflation and increasing bond yields outperform while the growth end of town underperformed badly i.e. the Energy & Banking Sector rallying while the previously hot IT Sector weighing on the market. Investing / portfolio construction is never a perfect science, but we are likely to remain cautious towards yield sensitive stocks / sectors throughout 2021, one concern for gold in 2021.

As subscribers know we remain bullish stocks but in anticipation of a volatile year its important readers are familiar with our ideal retracement targets – currently the classic technical pullback target for the ASX200 is ~6400, or around 4% lower. Our cash levels are relatively low due to our underlying bullish view, but we are likely to top up holdings if such a retracement unfolds - my gut feel is it might as the market feels tired at present.

MM remains bullish the ASX200 through 2021.

ASX200 Index Chart

In just two trading days Bitcoin corrected almost 30% to both confirm and reiterate MM’s view that 2021 will be a year characterised by elevated volatility – an exciting prospect for active investors like ourselves. A quick glance at the chart below illustrates that at this stage the sharp move from Fridays high is still no more than a healthy correction, we currently feel any buying of the current weakness will be rewarded in the months ahead.

This sharp reversal/sell-off in Bitcoin we see as clear evidence that parts of markets have scaled heights of being “too hot” and where a short-term washout could weigh on such hyped themes and the overall market.

MM remains bullish Bitcoin.

Bitcoin $US Chart

Tuesday saw US bond yields follow our own higher sending a mirror like effect rippling through the US market i.e. the NASDAQ falling while the S&P500 Banking, Energy and Resources Sectors all rallied. Assuming MM is correct and 2021 will be a volatile / choppy year with an ultimate upward bias for stocks MM is likely to be most active in the growth names like IT & Healthcare when we are selling into strength.

MM is bullish bond yields in the years ahead.

US 10-year Bond Yield Chart

Overseas Indices & markets

Overnight we saw another mixed session from US stocks as touched on earlier, a simple quick glance at the chart of the NASDAQ below shows the current “wobbles” in the growth / IT stocks isn’t registering when compared to the ascent from last year’s major March low. We anticipate both a 10% and 20% pullback for tech this year but there aren’t any signs yet that we should all exit stage left however Bidens and the Democrats recent victory does point to more stimulus plus potential regulatory reforms with the later a clear risk to market goliaths like Facebook and Twitter.

MM remains bullish US stocks / risk assets into 2021.

US NASDAQ Index Chart

Tesla Inc (TSLA) was recently welcomed into the S&P500 which has helped propel the stock higher and in the process Elon Musk to become the world’s richest man, TSLA has actually become the 5th most valuable company on Wall Street. The company may have only made 500,000 vehicles in 2020 but its all about growth and the companies already turning a profit although on some traditional metrics it’s still hard to justify a $US767bn valuation. While Tesla continues to find it easy to raise money from the market ($US15bn last year) the upside momentum is too strong to fight but this is another stock which shows that the upside is likely to become capped and a correction likely when bond markets turn aggressively reducing overall liquidity – not our call at this stage but the phenomenon we will be watching for through 2021.

MM still likes TSLA into pullbacks.

Telsa Inc (TSLA US) Chart

Has Gold et al become simply too hard?

Gold was threatening to recover over recent weeks only to plunge over $US60/oz on Friday, when I reviewed the market on Saturday morning, I felt like I could hear a collective sigh from the gold bulls with an undertone of something like this is all tool hard! Unlike stocks where virtually all indicators are disconcertingly bullish suggesting a correction / rest the precious metal market is if anything the opposite – on Monday we saw the $US and bond yields rally but gold bounced over $US10/oz, an encouraging sign.

Our ideal cyclical roadmap has gold moving into a major top in the next 6-12 months although we strongly believe that this will be a relatively minor interruption of a long-term secular bull market, one which should last for many years. Fundamentally we see rising inflation as the major tailwind for precious metals but a declining $US and rising bond yields as the obvious headwinds, its this tug of war which we see pushing precious metals to fresh post COVID highs but a move which is unlikely to have the momentum / economic backdrop to follow through. Friday did actually feel like a panic washout in the sector with an exhaustive character, which MM sees as a short-term buying opportunity, however we are mindful of the late November pivotal support at $1764, which is the stop loss for our forecast final high into later Q1.

MM remains bullish gold & silver.

Gold ($US/oz) Chart

Silver ($US/oz) Chart

The 4-month correction in gold / silver feels tired and probably over in our opinion but it’s been another great example of market euphoria / optimism going way too far and investors who have the strength and resolve to take some money into such buying often find themselves outperforming the index.

The chart below illustrates very well the levels of optimism / pessimism going too far within the Australian gold sector, RRL usually tracks gold and clearly at present it’s calling the precious metal lower providing some good risk / reward contrarian opportunity in our opinion.

Gold ($US/oz) v Regis Resources (RRL) Chart

We feel the $US has simply fallen too far too fast and although we remain structurally / technically bearish the greenback our preferred scenario remains a few percent bounce similar to what we’ve illustrated below, a move which has looked to be “in play” since early December. Considering the strong correlation across financial markets if this bounce does unfold it might be accompanied by a decent pullback in stocks. Normally a strong move in the $US would concern me towards precious metals but considering golds been retreating since August, while the $US was declining, I’m not too concerned around the correlation short-term.

The $US Index Chart

Today I have revisited 3 of the major Australian gold names to ensure we remain comfortable with our positioning in the sector.

1 Newcrest Mining (NCM) $26.13.

Australia’s largest and best-known gold producer has corrected well over 30% while the underlying precious metal fell less than 15% at its worst. Unfortunately, over the years NCM has been a serial market underperformer, our preferred scenario is a bounce of at least 20% assuming our anticipated roadmap for gold proves correct i.e. NCM won’t be able to emulate gold and break its 2020 high but we are happy to stay long for now.

MM is looking for at least a 20% rally in NCM.

Newcrest Mining (NCM) Chart

2 Evolution Mining (EVN) $4.67.

EVN is a similar story to NCM falling ~30% after becoming too optimistic in 2020. Nothing particularly fresh to add, were looking for a decent bounce but would only be buying EVN as relatively “short-term” investment.

MM likes EVN for a bounce towards $5.50, or 15% higher.

Evolution Mining (EVN) Chart

3 Northern Star (NST) $12.80.

Again, NST is a similar story to NCM falling ~30% after becoming too optimistic in 2020 although this previous outperformer didn’t top out until November, way after gold itself. Again, nothing particularly fresh to add, were looking for a decent bounce towards $14.50.

MM likes NST short-term for a bounce towards $14.50.

Northern Star (NST) Chart

Conclusion

MM believes that gold and silver will make fresh post COVID highs in the months ahead but the underlying Australian gold sector unfortunately now looks likely to lag and we plan to sell / reduce our exposure across our portfolios into strength.

Have a great day,

James & the Market Matters Team

Disclosure

Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday, or after the session when positions are traded.

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