Weekly 4th September 2023 - Speculative Investor

9/3/23, 5:25 PM Weekly 4th September 2023 – Speculative Investor
Market Update
– Weekly Market Update for the week commencing 4th September 2023
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True Fundamentals Summary [Notes: 1) The date shown next to the current True
Fundamentals Model (TFM) signal is when the most recent change occurred. 2) Charts of the Gold and
Equity TFMs are included in the “Charts and Indicators” section of the TSI web site]
Market True Fundamentals Model (TFM)
Gold (US$ Price) Neutral (19 May 2023)
US Equity (SPX) Bearish (01 Apr 2022)
Currency (Dollar Index) Bullish (30 Jun 2023)
Commodities (GNX) Neutral (14 Jul 2023)
Last week’s posts at the TSI Blog
Gold and ‘real’ US interest rates
Summary of current thinking/positioning
1) The Dollar Index (DX) has rebounded strongly in response to positive fundamentals and sentiment
since its failed downside breakout in July. It probably will rebound further before setting a multi-month
top.
https://speculative-investor.com/weekly040923/ 1/21
2) The US$ gold price and the gold mining indices commenced cyclical bull markets during September-
November of last year. They corrected from April-May highs to August lows and are probably now in the
early stages of new multi-month rallies.
3) The US stock market (the SPX) has not yet signalled an end to its short-term upward trend, but risk
remains high.
4) The T-Bond price has dropped far enough to test its October-2022 low. We expect that the test will be
successful and that a multi-month rally will begin soon.
5) The oil market commenced an intermediate-term upward trend in May-2023. We expect that the first
leg of this upward trend will end in the $90s within the next few weeks.
6) We have a cash reserve of around 35%.
Monthly Charts Review
Thursday of last week was the final trading day of August-2023, so now we’ll review the monthly charts
for gold, silver, the gold sector (the HUI), the S&P500 Index (SPX), the Dollar Index (DX) the T-Bond and
oil.
Since June, we’ve been anticipating an August-September (most likely August) low for the US$ gold
price and have written that there was the risk of a decline to as low as $1850 prior to an upward reversal.
We have also written that we expected an August or September low to be followed by a multi-month
rally that resulted in a sustained break above the 2020-2023 triple top, but we cautioned that such a
breakout probably would require a stock market decline of sufficient magnitude to end the Fed’s
monetary tightening.
During August the spot gold price got as low as US$1885 before beginning to rebound. This rebound
probably marks the start of a rally that eventually leads to new all-time highs, but be aware that an
upward reversal is yet to be signalled by the monthly price action and that at this stage nothing has
happened to prompt the Fed to end its monetary tightening. Therefore, the most likely time for the US$
gold price to make a sustained break above its 2020-2023 triple top has shifted from Q4-2023 to Q1-
2024.
On the following continuous monthly chart of the US$ gold futures price, the final two bars are based on
the December-2023 contract. This contract bottomed in the low-$1900s.
The 8-month MA (the thin black line on the chart) held on a monthly closing basis over the past three
months and should continue to do so.
The US$ silver price probably completed a 4-month correction during August via a spike down to the
low-$22 area. It stands a good chance of making new multi-year highs in the $30-$40 range within the
next six months.
A plausible path for silver involves this sequence:
1) A move up to around $30 within the next two months to match the 2020-2021 highs and set a triple
top.
2) A 1-2 month correction.
3) A rally that takes the price well into the $30s during the first quarter of next year.
For the gold mining sector as represented by the HUI, our view since around mid-June has been that the
correction from the April-May highs would extend into August-September and test the March-2023 low
(210).
The following monthly chart shows that the HUI got as low as 212 during August before recouping
about half of its monthly loss. Ideally there would have been a spike below 210, as that would have set
the year-to-date low in synch with a reliable 12-month cycle. However, there’s a good chance that the
August low marked the end of the downward move that began during April-May, although a weekly
close above the 12-week MA is still required to confirm an upward reversal.
We expect that the HUI will trade as high as 280-300 within the next three months and exceed its 2020
high (374) during the first half of next year. This outlook for the gold sector is consistent with the US
economy entering a recession late this year and the Fed reacting to evidence of a very weak economy
during the first half of next year.
The first of the following monthly charts shows that there was a decline in the S&P500 Index (SPX)
during August. This decline was not large enough to alter the overall chart pattern.
A month ago we wrote that there currently was not a set-up for a crash, but that we wouldn’t be
surprised if such a set-up developed within the coming month. This was due to the on-going monetary
tightening, the manufacturing sector recession, and the market being very stretched in terms of
momentum and sentiment.
A set-up for a crash has not developed, yet. Instead, the market’s ‘risk-on’ trend has remained intact and
the SPX’s 5% pullback during the first three weeks of August did a good job of resetting both sentiment
and momentum. We continue to be concerned about downside risk, but at this stage there is no
evidence that anything more bearish than a short-term correction is in progress.
As we’ve done in previous monthly chart reviews, we reiterate that the market action since the SPX’s
October-2022 low is not consistent with a new bull market. Our view is that the 2022 decline was either
the first leg of a bear market, in which case we are now dealing with a bear market rally, or an
intermediate-term correction within an aging bull market. We continue to favour the former, but both
scenarios remain plausible.
We also reiterate that from our perspective the SPX/gold ratio is the final arbiter as to whether we are
dealing with a bear market rally or the extension of an old bull market. With reference to the second of
the following monthly charts, a monthly close by the SPX/gold ratio below its 12-month MA (the blue
line) would be a bear-market warning, while a monthly close by the SPX/gold ratio below its March-2023
low would confirm that an equity bear market is underway.
Turning to the Dollar Index (DX), during July there was a failed downside breakout. We noted in our
previous monthly charts review that this price action was bullish and that the fundamentals were still
moving in the DX’s favour, leaving our bullish outlook unchanged. We concluded that a meaningful rally
probably had begun, although it was unlikely that the DX would revisit its September-2022 high.
The market action during August was consistent with our conclusion from a month ago.
For now, there’s no good reason to expect that the DX will do anything other than maintain an upward
bias, mainly because euro fundamentals and sentiment remain decidedly bearish. Note, though, that the
DX has substantial resistance at 104.5-105.5 that probably will limit the upside in the near-term.
Regarding the T-Bond, this is part of what we wrote in the previous monthly charts review:
“We continue to expect that the T-Bond will trade at a much higher price before the end of this year in
response to a plunge in the year-over-year CPI growth rate to 2% or lower, an economic recession, a risk-
off move in the stock market and an about-face by the Fed. However, …further price weakness to a low
during August-September probably will precede the start of a strong rally in the T-Bond.
With reference to the following monthly chart, the T-Bond is about to make a new low for the year but
should hold above last year’s low.”
During August the T-Bond dropped far enough to test last year’s low before reversing course and
recouping more than half of its monthly loss. It probably has set its low for this year and commenced an
upward trend that will proceed for many months, but the bulk of this upward trend’s price gain probably
won’t occur until the first half of next year. The reason is that it probably will be early next year before
the backward-looking inflation statistics have fallen far enough and the evidence of economic weakness
has become obvious enough to prompt a turnaround by the Fed.
During June, when oil was trading in the high-$60s and low-$70s, we began focusing on the potential
for a strong short-term rally and mentioned $85/barrel as a target. At that time the rally was expected to
be a rebound within an intermediate-term downward trend, but by this time last month the scales had
tipped in favour of the rally being the first leg of a new intermediate-term upward trend and our short-
term target had moved from $85 to “the $90s”.
The following monthly chart shows that at this stage the rally has been capped by resistance near $85
(our original target). However, the price action over the past month has increased the probability that we
are dealing with the first leg of a new intermediate-term upward trend.
We suspect that a short-term top (a top that holds for 1-3 months) will be set within the next few weeks.
Commodities
Oil is now short-term ‘overbought’
After rising to the low-to-mid-$80s in early-August, the oil price was expected to experience a 1-3 week
correction before resuming its short-term upward trend. It did all that and ended last week at a new
high for the year.
However, thanks to two big up-days to finish the week it is already short-term overbought. This could
mean that the coming week will involve some consolidation, but additional gains are likely prior to the
top of the initial leg of what we think is a new intermediate-term upward trend.
Uranium is now short-term ‘overbought’
We highlighted the Sprott Physical Uranium Trust (U.U.TO) ten times as a buy during April-July when it
was trading at a discount to net asset value (NAV) in excess of 10% and priced in the US$11-$12 area. It
has since moved up to the high-US$14 area and the discount to NAV has shrunk to 2.5%. Furthermore,
in momentum terms it is now short-term ‘overbought’.
If you didn’t like U.U enough to buy it when it was oversold and trading at a 10%+ discount to NAV, you
definitely shouldn’t like it enough to buy it now.
A new buying opportunity possibly will be created within the next few weeks by a pullback to near the
50-day MA.
It’s time to add some longer-term exposure to natural gas (NG)
We continue to view NG’s price action as a basing pattern, but we have no opinion as to when the
basing will end via an upside breakout. It could end this week or it could end a few months from now.
Therefore, we remain uninterested in NG as a short-term trade. However, it would be reasonable for
those investors/speculators with minimal current exposure to NG to start building up longer-term
exposure, by which we mean start averaging into positions with the aim of holding for at least 12
months.
The main reason to be cautious about NG’s prospects is that global NG fundamentals remain bearish. Of
particular significance, Europe’s NG inventories are 94% full. Note that the goal is for these inventories
to be 90% full near the start of the heating season, that is, at the start of November. Being 94% full at
this time of the year is very unusual and means that in terms of NG storage Europe is as prepared as it
can be for the coming winter.
It’s worth mentioning that the reason for there being so much NG in European storage is the large
decline in industrial demand for the commodity. Europe’s industrial heartland is immersed in a severe
recession, as evidenced by Germany’s Manufacturing PMI (Purchasing Managers’ Index) being around
39 in each of the past two months (below 50 indicates contraction).
The risk is that there is no good reason to expect a manufacturing revival in Europe anytime soon, given
that electricity costs are still high relative to where they were prior to the past two years and the ECB is
still tightening the monetary screws in response to last year’s inflation.
The opportunity is that below-ground storage in the US has dropped back to a normal level relative to
the 5-year range and the current futures prices in the US assume that there will be no unusual weather-
related surges in NG demand over the next several months. This assumption may well be correct, but it
means that there is scope for a bullish (for the US NG price) surprise.
Further to the above, we are adding some NG exposure to the TSI List in the form of Petrus Resources
(PRQ.TO), a company that is producing NG at the rate of around 10,000 boepd (barrels of oil-equivalent
per day) at operations in Canada. PRQ is a former TSI stock. Previously, it was added to the List at C$0.17
in November-2019 and removed at C$2.00 in March-2022, for a gain of more than 1000%.
After being removed from the TSI List in March-2022, the stock traded as high as C$3.40 before
commencing a major correction that took its price down to the C$1.30s in June of this year. It may have
just completed a successful test of the June-2023 low.
PRQ is managed and majority-owned by the Gray family. Don Gray, the co-founder of mid-tier NG
producer Peyto Exploration and Development (PEY.TO), is the chairman and his brother Ken is the CEO.
They have decades of experience in the Canadian O&G industry and have a lot of ‘skin in the game’ by
virtue of their large shareholdings, so we view their involvement as a plus. Another plus is a balance
sheet with net debt of only C$27M.
This time around PRQ is not going to provide us with the sort of return it provided last time, as last time
it was a turnaround story (it had a weak balance sheet during 2019-2020) that benefited from the
combination of the COVID stimulus, Russia’s invasion of Ukraine and new management. Now it is a more
conservative speculation, but one that still offers significant valuation-related upside potential and
leverage to the NG price.
The company’s current net asset value is around C$2.30/share and this is our initial 6-12 month target,
but what happens to the PRQ price will be determined to a large extent by what happens to the NG
price in North America.
PRQ has been added to the TSI List at last week’s closing price of C$1.50 as a trade with an expected
duration of up to 12 months. There is support at C$1.35 and initial resistance at C$1.80-$2.00. In our
opinion, it would be reasonable to average into a position over the next three months.
The Stock Market
The end of the bear
The bear market is probably over. The bear market in the cannabis sector, that is, not the broad stock
market.
In last week’s Interim Update we noted that the US Department of Health and Human Services (HHS)
had recommended the reclassification of marijuana from a Schedule I to a Schedule III drug under the
Controlled Substances Act. The US Drug Enforcement Agency (DEA) has final authority to reschedule a
drug and will now initiate its own review, but if the DEA accepts the HHS recommendation then the
onerous 280E federal taxation requirements to which state-legal cannabis businesses are currently
subject will be eliminated. This actually would be a far more bullish development for the cannabis sector
than approval of the SAFE Banking Act, which has been passed by the House numerous times only to hit
a ‘roadblock’ in the Senate.
In the Interim Update we also noted that the big one-day price gain in the AdvisorShares US Cannabis
ETF (MSOS) in reaction to the above-mentioned news wasn’t enough to signal a trend reversal. MSOS
had to end a week above its 200-day MA to generate preliminary evidence of a trend reversal and had
to end a week above lateral resistance at US$7.25-$7.35 to confirm a reversal.
The following daily chart shows that lateral resistance at US$7.25-$7.35 survived a test on Friday 1st
September, but that MSOS managed to end the week above its 200-day MA (the first weekly close
above this moving average in more than two years). Therefore, we have preliminary evidence of a trend
reversal and an end to the bear market.
A typical reaction to last week’s price action would be at least a couple of weeks of consolidation in the
US$6-$7 range. Also, there is a risk that the DEA will reject the HHS recommendation. The other side of
the coin is that if marijuana gets rescheduled as recommended by the HHS, then the fundamentals for
the cannabis sector will be more bullish than they were when MSOS traded at more than double its
current price late last year.
Current Market Situation
The following two daily charts show that the SPX and the NDX dropped by 5%-8% from highs in the
second half of July to lows on 18th August. They have both since retraced about two-thirds of their July-
August declines.
The chart patterns are potential crash patterns as described in last week’s Interim Update. However, at
this stage the probability of these patterns ending in crashes remains very low.
As discussed in the aforementioned Interim Update, at least one of two things will have to happen
within the next few weeks to boost the probability of a crash to the point where it is one of the more
likely near-term scenarios. One is a sustained break by the 10-year T-Note price below last year’s low.
The other is a pronounced shift away from risk as indicated by the SPY/XLU ratio.
At the moment the 10-year T-Note is holding above last year’s low and our expectation is that it will
continue to do so. Also, the following weekly chart of the SPY/XLU ratio indicates that at the end of last
week the ‘risk-on’ trend was still very much in force.
The SPY/XLU ratio is as stretched to the upside as it was when the NASDAQ was hitting its major high in
November of 2021, but danger won’t be imminent as long as it keeps rising. Based on the historical
record, the next large stock market decline won’t occur until this ratio breaks below its 20-week MA (the
blue line on the chart).
The most likely short-term outcome is that the SPX and the NDX will make new highs for the year this
month. The next most likely short-term outcome is that tests of the July highs during the first half of
September will be followed by declines to test the August lows.
Something Fishy
NVIDIA Corp. (NVDA) has been the poster child for this year’s ‘echo bubble’ and speculative surge in
stocks associated with Artificial Intelligence (AI). Not only has NVDA’s stock market performance been
extraordinary (refer to the following daily chart for the details), the financial results reported by this
company over the past two quarters have been extraordinary. It has reported percentage increases in
sales and earnings that are mindboggling for a company of this size (a company with tens of billions of
dollars of annual revenue). We don’t have the time or the expertise to do in-depth analyses of NVDA’s
financial results, but we do want to highlight something very strange.
The “something very strange” is that NVDA reported an approximate doubling of its total sales from Q2-
2022 to Q2-2023 with no increase in total cost, leading to an eye-watering gain in net profit. How does a
company that manufactures chips and provides data centre services double its revenue in a year with
zero increase in cost?
The way the company appears to have managed this incredible feat is to recognise revenue during the
first half of this year associated with services that it will provide in the future. In other words, during the
first half of this year it had substantial sales with no corresponding costs. This implies that in the future it
will have large costs for which there will be no corresponding sales.
As far as we can tell, NVDA’s management is running a type of Ponzi scheme. All will appear to be fine
as long as it can continue to bring forward sufficient future demand to enable it to report rapid
profitability growth, but at some point it will hit a virtual wall.
On a related matter, the company recently bought back some of its own stock near the all-time high
price. Given that the valuation is at a ‘nosebleed’ level even assuming that nothing ‘creative’ is
happening with the accounting, why would it do this? The only reason is to keep the bubble inflating for
as long as possible.
This week’s significant US economic events [Notes: 1) The most important events (to the
markets) are shown in bold. 2) A list of global economic events can be found HERE]
Date Description
Monday Sep-04 US (and Canada) markets closed for Labor Day
Tuesday Sep-05 Factory Orders
Wednesday Sep-06 ISM Services Index

International Trade Balance
Fed’s Beige Book
Thursday Sep-07 No important events scheduled
Friday Sep-08 Consumer Credit
Gold and the Dollar
Gold
In last week’s Interim Update we noted that over the final two trading days of the week there would be
some event risk for gold in the form of two US economic statistics: the Personal Consumption
Expenditures (PCE) Index (the Fed’s favourite “inflation” indicator) on Thursday and the latest monthly
Employment Report on Friday. The Employment Report was considered to be the more significant
because it had the greater capacity to surprise. It turned out that the PCE number on Thursday was
exactly what most market participants were expecting, whereas the Employment Report was slightly
weaker than generally expected.
Regarding the Employment Report, the headline jobs growth number was 187K. Although this probably
was slightly larger than expected, the jobs growth reported for the preceding two months was revised
lower by a 110K. Based on this year’s pattern, the 187K jobs growth reported for August also will be
revised downward when the September number is reported in early-October. Furthermore, all of this
year’s jobs growth numbers probably will experience additional significant downward revisions next year
when the jobs that have been added to the estimates by the Business Birth-Death Model are removed.
The US labour market is not weak, but it is nowhere near as strong as many seem to believe. It is
consistent with an economy on the verge of recession. Substantial weakness in the labour market usually
doesn’t become evident until a recession has been underway for several months.
There was a bounce in the gold price in reaction to the slightly-weaker-than-expected US employment
news on Friday, but by the end of the day the gain had been given back. The main reason that gold gave
back its price gain was a pullback in the T-Bond price (a rise in the T-Bond yield). The US$ gold price
continues to hold up extremely well considering the performance of the T-Bond, but it isn’t reasonable
to expect the US$ gold price to gain much ground until the T-Bond price begins to trend upward.
The following daily chart shows that the SPDR Gold ETF (GLD) ended last week above its 20-day and 50-
day MAs. If a short-term upward trend has begun (we think it has), then the 20-day MA should now act
as support during pullbacks. In other words, GLD should not close below its 20-day MA in the near
future.
The most important nearby resistance is around US$184. We suspect that this resistance will limit the
upside over the next couple of weeks.
Gold Stocks
In our previous two commentaries we wrote that the gold sector (represented by the HUI) probably had
bottomed, but that a reversal had not been signalled yet. The HUI had to end a day above 225 to
generate preliminary evidence of an upward reversal and end a week above its 12-week MA to confirm
an upward reversal.
The HUI closed above 225 last Monday and in doing so generated preliminary evidence of an upward
reversal, but the following weekly chart shows that last week’s up-move was capped by the 12-week MA
(the blue line on the chart). Therefore, the situation now is similar to what it was a week ago. It’s likely
that the gold mining indices/ETFs have ended their corrections and commenced multi-month rallies, but
this scenario has not yet been validated by a weekly close above the 12-week MA.
The Currency Market
In last week’s Interim Update we noted that the Dollar Index (DX) had dropped to around 103.0, where
there was support defined by the 20-day MA, the 200-day MA and the late-June rebound high. We went
on to write that the test of this support could have completed the correction from the 25th August spike
high, but that a decline to the lower support near 102 was more likely prior to the DX resuming its short-
term upward trend.
Support at 103 has held for now and by the end of last week the DX had rebounded to near its high of
the preceding week.
Last week’s price action didn’t provide any new clues regarding what to expect in the near future. In
particular, the rebound over the final two days of the week could be part of a multi-week correction or
the resumption of the DX’s short-term upward trend. If the short-term upward trend has resumed, it
probably will be limited over the weeks immediately ahead by important lateral resistance at 104.5-
105.5.
Stepping back, the rally in the DX that started after a false downside breakout in July probably is the first
leg of an upward trend that will extend into early next year. The reason is that both fundamentals and
sentiment remain strongly in favour of the US$ relative to the euro. Moreover, with the euro-zone
economy weak and getting weaker both in absolute terms and relative to the US economy, the
fundamentals that matter (trends in interest rate spreads and relative equity market performance)
probably will support the DX for many months to come.
Updates on Stock Selections
Notes: To review the complete list of current TSI stock selections, click on “Analysis” in the menu at the
top of this page and then select “Current Stock Selections”. When at the Stock Selections page, click on
a stock’s symbol to bring-up an archive of our comments on the stock in question.
Company news/developments for the week ending Friday 1st September 2023:
[Note: AISC = All-In Sustaining Cost, boepd = barrels of oil equivalent per day, dmt = dry metric tonnes,
CIL = Carbon In Leach, E&P = Exploration and Production, EBITDA = Earnings Before Interest, Tax,
Depreciation and Amortisation (a measure of cash flow), EV = Enterprise Value or Electric Vehicle, FS =
Feasibility Study, FY = Financial Year, IRR = Internal Rate of Return, ISR = In-Situ Recovery, JV = Joint
Venture, MD&A = Management Discussion and Analysis, M&I = Measured and Indicated, MLP = Master
Limited Partnership, NAV = Net Asset Value, NPV(X%) = Net Present Value using a discount rate of X%,
NSR = Net Smelter Return or Net Smelter Royalty, O&G = Oil and Gas, P&P = Proven and Probable, PEA
= Preliminary Economic Assessment, PFS = Pre-Feasibility Study], REE = Rare Earth Element
For the stocks followed at TSI, last week there was no significant company-specific news.
List of candidates for new buying
From within the ranks of TSI stock selections the best candidates for new buying at this time, listed in
alphabetical order, are:
1) EMH.AX (last Friday’s closing price: A$0.77). Business: Development of a lithium mine in Czechia
2) HCHDF in the low-US$1 area (last Friday’s closing price: US$1.14). Business: Gold and silver
production in South America
3) RRL.AX (last Friday’s closing price: A$1.60). Business: Gold production in Western Australia
4) SKE (last Friday’s closing price: US$4.81). Business: Development of a gold mine in Canada
The above list is limited to five stocks. It sometimes will contain less than five, but it never will contain
more than five regardless of how many stocks are attractively priced for new buying.
Chart Sources
Charts appearing in today’s commentary are courtesy of:
https://stockcharts.com/

Weekly 4th September 2023 - Speculative Investor

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9/3/23, 5:25 PM Weekly 4th September 2023 – Speculative Investor

Market True Fundamentals Model (TFM)

Gold (US$ Price) Neutral (19 May 2023)

US Equity (SPX) Bearish (01 Apr 2022)

Currency (Dollar Index) Bullish (30 Jun 2023)

Commodities (GNX) Neutral (14 Jul 2023)

Last week’s posts at the TSI Blog

Gold and ‘real’ US interest rates

Summary of current thinking/positioning

6) We have a cash reserve of around 35%.

Monthly Charts Review

A plausible path for silver involves this sequence:

2) A 1-2 month correction.

Oil is now short-term ‘overbought’

Uranium is now short-term ‘overbought’

It’s time to add some longer-term exposure to natural gas (NG)

The Stock Market

The end of the bear

Current Market Situation

Monday Sep-04 US (and Canada) markets closed for Labor Day

Tuesday Sep-05 Factory Orders

Wednesday Sep-06 ISM Services Index

Thursday Sep-07 No important events scheduled

Friday Sep-08 Consumer Credit

Gold and the Dollar

The Currency Market

Updates on Stock Selections

List of candidates for new buying

Charts appearing in today’s commentary are courtesy of:

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