Look back at the timing of this article!!!This article came out in June
Growth Stocks Weekly
Publisher: Diversified Financial Solutions ~ Since: May, 1995 ~ Editor: Richard Reinhard ~ E-Mail: rreinhard@shaw.ca
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Performance: Year ended April 1996 116.9%; 1997 28.1%; 1998 36.4%; 1999 39.4%; 2000 180.9%; 2001 -50.5%; 2002 18.7%; 2003 28.8%; 2004 166.7%
Junior Gold and Natural Resource Sector Analysis
(A supplementary report to the Growth Stocks Weekly newsletter)
June 20, 2004
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UPDATE
Endeavour Mining Capital (EDV-TSX)
Weekly chart, Semi-log scale, High C$4.88, Low C$1.53, Last Trade C$2.56 (June 18 close)
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Please see important disclaimers at the end of this report.
Endeavour Mining
Our initial report on Endeavour was issued May 8, 2004 just as the price of gold re-tested the US$378 “support area”. Endeavour had suffered a dramatic falling-over-the-cliff sell-off as many junior-sector resource stocks experienced lower liquidity, sporadic panic selling and apparent capitulation of late-comer investors suffering rapid and severe losses. Endeavour’s share price was $2.53 then, and is there again now ($2.56) after having worked its way back to the $3.00 area where significant technical resistance was encountered.
So what are the prospects going forward for the sector, and Endeavour particularly?
Endeavour has an aggressive business strategy which, combined with the nature of the mining equity market, results in short-term earnings volatility. Because of the diversified nature of its portfolio of merchant banking investments, which includes a mix of resource commodities and a combination of debt and equity instruments, it provides a useful proxy for the junior resource market.
Also, it should be noted that Endeavour’s investment strategy is focused on high quality assets with strong management teams, and with clear potential for high returns through their structured investments. When Endeavour finances mining companies to fund their project development, strategic initiatives and growth, we can benefit from a management team that has done their homework and structured its investment exposure appropriately. This generally means a compelling and timely entry price (downside protection), and better than average upside potential.
Given we accept the premise that Endeavour offers us the built-in advantages of diversification, cream-of-the-crop selection, sophisticated professional management, exceptional deal-flow and access to global institutional and industry contacts, we really need only concern ourselves with the timeliness of such specific exposure to the resource and precious metals sectors. Likely, it would be hard to match Endeavour’s ability to select winners and realize on their potential.
The US Dollar
It is commonly expected that the US Federal Reserve is preparing to raise interest rates from their nearly half-century lows. Inflation is on the rise as the massive excess liquidity pumped into the economy by the Fed bids up prices on nearly everything. Wall Street believes higher rates are going to be very bullish for the dollar and attract new foreign investment into the US stock markets. A rising dollar makes the importation of goods cheaper for Americans, and commodities likewise should be priced lower in US dollar terms.
Interestingly, the technical evidence on the dollar charts is not bullish at all. In fact it is rather bearish. There is a strong divergence between the prevailing dollar sentiment and the actual technical dollar situation. At the moment, at least technically, dollar weakness is dominating the price charts, both short term and long term.
What may be missing from the mainstream perspective is that for higher rates to boost demand for a currency, several core conditions must be in place. Firstly, rising rates on the US currency must be attractive relative to those available in other major currencies. Second, rising rates must move up relatively quicker than those of alternative major currencies to maintain this competitive advantage. Finally, actual real rates of return in the currency must be positive. Currently, not one of these factors is present at this time, so we shouldn’t expect rising rates to significantly boost the dollar’s flagging fortunes any time soon.
From its trough near 85 in mid-February to its peak near 92 in early May, the US Dollar Index did manage a convincing counter-rally to its multi-year bear trend. The dollar behaved well from a technical perspective, grinding higher whilst bouncing within its short-term uptrend channel between its lower support and upper resistance lines.
Towards the end of May, the dollar again started selling off, but this time the support line broke and the US Dollar Index plunged below its recent uptrend line. Even after June’s three attempts to break back above, this former support line now acts as significant overhead resistance. When price trends are changing, it is not uncommon for former support to become new resistance.
The US Dollar’s resistance also coincides exactly with the 50-day and 200-day moving averages of the US Dollar Index. These are important indicators. With this technical breakdown, the short-term dollar chart that was so bullish between January and May has now turned bearish. Former support is now acting as resistance and the short-term trend seems to be worsening. In fact, on a long-term chart the major rally we just witnessed looks like nothing more than a typical bear-market rally within a powerful secular bear market.
The US dollar topped in 2001 after a very powerful six-year secular bull, and has been firmly entrenched in its current secular bear. In previous secular dollar bears the average decline was around 40% and average duration was 6 to 7 years. Typically then we are looking at a potential secular bottom 20% lower from here at around 72 on the US Dollar Index, maybe 3 years hence. Historically speaking, this dollar bear is not only half over in terms of duration, but only half over in terms of depth.
Keep in mind that the US has financed its deficits largely with foreign capital. There is likely nothing more sobering to a foreign investor’s sentiment than watching his so-called low-risk US-dollar denominated 3-year 3% Treasury get revalued to a 4% yield world – an immediate mark-to-market 25% capital loss! The massive US dollar bond portfolios held by foreign investors around the world will be crushed when market rates start climbing higher. As they run for the exits the US dollar’s decline simply accelerates.
Commodity Prices
Gold remains in a bull market, despite its recent decline. Gold is close to popping through its 200-day moving average and taking out $400. The big picture for the gold market remains very positive. In fact, the present time may prove to have been a very opportune buying opportunity for the junior gold stocks as well as gold bullion, assuming that the recent pullback which began about six months ago has now about to end. At the end of this past week, the average gold price for the month of June was $389 compared to its 20-month moving average of $371 and its 40-month moving average of $330.
The oil price keeps bumping up to record highs. Terror and unrest are on the rise. Saudi Arabia is the world's largest oil producer. This makes Saudi Arabia a target and the increasing terrorism there in recent months is no coincidence. There are concerns terrorists could target the oil fields, which is already happening in Iraq. Despite the oil price rise we've already seen, much higher priced oil is not out of the question. And if that happens, it's going to seriously affect inflation and gold, especially since other commodities are rising at double-digit levels too.
China is now the number-one consumer in the world of copper, platinum, zinc, steel and iron. They produce more steel than Japan and the United States combined. There are now more cell phone users in China than in the U.S. Almost every Chinese organization owns businesses and deploys investment capital.
By 2010 India and China will have a combined population of 3 billion people, or 40% of the world's population. With these countries still in the early stages of economic development and growth rates at 8-9%, demand levels for raw materials are being propelled to heights the world has never seen before. In China alone, the number of cars is increasing by 50% each year. So it's easy to imagine what this could do to the oil price, sending it higher than most people expect. The rising middle class is demanding goods and services, further accentuating the demands on limited resources.
The inflation seeds have been sown, which explains why bond yields have been rising sharply, stocks are topping, gold remains bullish and the US dollar is bearish. Iraq is now costing nearly $7 billion a month and heading for an overall cost more than double that of the first Gulf war. As the U.S. intensifies its deficit spending and money supply growth, inflation could surprise to the upside.
Gold’s next rise now seems to be getting re-started after some significant consolidation. If gold closes and stays above $400, it could rise to test the recent $430 highs. And if this is all we get for now, the bull market will still be very solid. If gold breaks clearly above $430 during this rise, then it would be super bullish, confirming that gold would be entering a stronger phase of the bull market.
Summary
The US dollar is undergoing a massive devaluation, which is being misinterpreting as a stock and housing bull market. Costs are rising after a decade of dependence from foreign suppliers was encouraged and exploited through a strong dollar policy. The dependence exists for materials, energy supplies, capital, and labor, all critical to an economy. The advantage of the 1990's is now a giant millstone around the neck of the US Economy.
History is clear. No intentional inflation initiative has ever succeeded without severe economic and financial market damage. There are the enormous debt levels to consider, especially given the 30 to 40% increase across the US economy in the last three years alone.
Exposure to the resource and precious metals sectors from a US dollar perspective seems to be an efficient hedge. Endeavour offers us the advantages of diversification, cream-of-the-crop selection, sophisticated professional management, exceptional deal-flow and access to global institutional and industry contacts. It would be hard to match Endeavour’s ability to select sector winners and to realize on their potential in a timely and programmed manner.
Negative market sentiment has punished Endeavour with a recent 50% price decline, even while the monthly NAV has held relatively steady (see https://www.endeavourminingcapital.com/nav.php ). It seems likely that the market sentiment has got it very wrong.
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