Metals and AUD get smacked!

James Gerrish

Yesterday night was a little calmer in overseas global markets compared to the previous night’s Donald Trump inspired 300-point rally in the Dow. However, what did catch our eye was the 1.4% fall in the $A following its correlated commodities - gold -1.4%, Copper -1.7% and oil 1.2% lower. With BHP for example set to give up around 70% of its gains from yesterday’s strong market surge, it's hard to imagine the ASX200 not giving back at least 1/3 of yesterday's gains.

Today not surprisingly, we have again focused closely on the metals as this is where we are anticipating deploying some of our capital in the coming weeks and potentially today with the gold sector. Note we usually focus on a sector/stock if we expect to be active that day even if it is to a degree covering "old ground".

Back on the 19th of February, we looked at the base metals as an overall index with the conclusion that we were targeting another 7% correction. This has clearly not occurred, and the index has actually ground 1% higher, however at this point after the almost 40% appreciation since December 2015 our preferred scenario remains a 7% correction for metals moving forward.

Base Metals Spot Index Weekly Chart

Base metals weekly chart

An important point that we often discuss in reports is how the market positioned and importantly, is it at extreme levels. Currently, the bullish position in commodities is the highest in over a decade, this adds weight to our current stance of being patient to enter our resources sector. When investors and traders alike are all positioned in one direction, short/sharp counter-trend moves are common occurrences.

Commodities Position Chart

position chart

In this morning's report, we have also included an excellent visual representation from Shaw and Partners Limited, of where the value is in resources space, the conclusion is to buy the big names BHP and RIO, sell the bulks (we are short FMG).

In the gold sector, which we will be watching closely today, it’s pleasing to see better value emerging in our target EVN than NCM, where we recently took profit.

commodities chart 2

Source; Shaw and Partners

Our ideal target area for BHP remains in the $24 area, ~ $1/~4% below where it will be today.

BHP Billiton (BHP) Weekly Chart

BHP

Following last night's $US16/oz. fall, the related gold ETF's fell ~4%. It's likely that our sector names will follow, the question for us at MM is when do we commence accumulating our favoured gold names?

1. Evolution Mining (EVN) $2.16 - The ideal initial buy zone is around $2.05, a 16% correction of its recent advance. This may be achievable today!

2. Newcrest Mining (NCM) $21.75 - We recently took profit on our 5% holding in NCM at ~$23.40, with a view to buying EVN closer to $2.05 - this is unfolding nicely. NCM itself is a buy closer to $20.50.

3. Regis Resources (RRL) $3 - The initial buy zone is around $3.20, but closer to $3 looks possible - the stock goes ex-div. 7c fully franked in 4 days’ time.

We cannot rule out a deeper and more aggressive correction for gold as the US starts raising rates, which is now regarded as a 70% possibility this month. Hence, we anticipate our buying will be slow accumulation into weakness.

Evolution Mining (EVN) Weekly Chart

EVN

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Conclusion

Overall, we remain bullish stocks until at least late April when a 4-5% pullback may unfold as is a seasonal habit.

  1. Today we anticipate allocating some MM monies into EVN ~$2.05.
  2. We will remain patient on the major miners BHP, FMG and RIO.

James Gerrish

James is a Portfolio Manager within Shaw and Partners heading up a team that manages direct equity and option portfolios. He is also the Primary Contributor to Market Matters, a daily investment report that offers real market insight.

Expertise

ASX:BHP ASX:FMG ASX:NCM ASX:RRL ASX:RIO ASX:EVN ASX:RRK

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