Northern Miner staff writer Alisha Hiyate recently interviewed Mickey Fulp on the Venture market, the greenback and commodities. Listen to The Northern Miner podcast, or read the transcript below.
The Northern Miner: I’m Alisha Hiyate and I’m here with Mickey Fulp, the Mercenary Geologist.
Mickey Fulp: Thanks a lot Alisha, it’s always my pleasure.
TNM: Mickey, the resource sector is a tough place to be right now. You wrote a piece on your website in March, late March with the headline “It’s getting better.” Have you seen any further signs of a recovery since then?
MF: It did get better for the first four, five months of the year. Then we came into the usual sell in May go away — that didn’t happen. No one was selling, but then no one was buying.
Generally we have the summer doldrums when — we’ll use the Venture Index as the proxy – when it will go down. That didn’t really happen: the Venture Index kind of rolled around through the summer, it stayed above 1,000, approached the yearly high of 1,046 in March.
It didn’t quite get there, but we were seeing what looked like a setup for a nice post-Labour Day rebound. Everybody comes back to work and we would be off and running. But we got scuttled by a strong U.S. dollar and commodities have kind of really gone south. It’s been a hard commodities sector-wide downturn with one exception, which we’ll talk about. Precious metals are off 10% or more, oil is even down from a high of US$106 in the late summer to US$93 today — but as low as the US$90 level a couple of days ago, copper’s given back all its gains. Copper, as a review, had a correction in March, about a 10% correction. It fought its way back and was trading at that level in the low US$3.20s again and it’s been knocked down another US20¢ or so in the last couple of weeks.
That can all simply be attributed to a strong US dollar — this morning at 85.7 I think that’s a four-year high for the dollar.
TNM: So, if we started to come out of the bear market, did we — are we still in a bear market?
MF: Oh we’re still in a bear market and I fully expected and continue to expect the bear market to continue. What has surprised me is the downturn in commodities with all this geopolitical strife in the world — but it’s a run to a safe haven U.S. dollar right now. If you look at other currencies — well the Canadian dollar has been relatively flat against the U.S. dollar, but that’s North America moving in lockstep and the rest of the world currencies.
Look at the Australian dollar — it just continues to plummet. The euro correlates negatively with gold all the time — or with the U.S. dollar all the time, so it’s been down to US$1.27, the Swedish Krona’s down, so we see the relative strength of the U.S. dollar precludes any sort of rally that we would have in the Venture exchange. We’re now approaching the low 900s and we haven’t seen these levels since the first of the year. So the Venture Exchange was up somewhere around 12% over the year — it’s given back all of its gains.
I don’t expect that to stop til we get some stability — or until the U.S. dollar quits rising.
TNM: Ok, I want to talk about two commodities that you follow very closely: gold and uranium. First, what are your expectations for gold, given that the U.S. dollar has been strengthening — and also the fact that the safe-haven trade in gold seems to be fading.
MF: Well yes, that’s one thing that’s happened is gold is not the safe haven of particular choice, at least in the Western world now. We continue to see significant gold-buying in India and China and Central banks in not-so-stable-currency countries — for instance, Russia continues to buy gold.
At the beginning of the year, I said I expected the gold price to test its low of US$1,200. It looks like it might do that, but I expected it to end the year higher than it started — it started, if memory serves, about US$1,220, that’s the level we’re at right now. What we commonly see in the fall is what Frank Holmes calls the love trade, so you’ve got Indian festivals and Christmas coming, so that usually gives a little boost for gold, up to about Dec. 15 or so, and then we generally have some weakness in gold after that because all international payments are basically done in U.S. dollars so everybody’s cleaning up the books for the year, and so we see strength in the dollar at that time often to the detriment of gold, and those last couple of weeks in December often become a good buying opportunity for gold.
TNM: So once we start to see more momentum for the U.S. dollar, is it possible that we could see more strength in gold?
MF: Oh I think so. At some point, the U.S. dollar’s gotta quit rising and I can’t tell you what that is — it looks to me like it’s overbought right now; if you would have told me at the beginning of September that the dollar index was going to go to 85, I’d have just been flabbergasted because it’s hovered in that 80-range for so long. So once that stabilizes or comes off, as all markets, the pendulum will swing too high and the U.S. dollar at some point is going to correct. Then commodities will correct too, because if you look, the decrease in commodities over the last month has correlated very strongly with the rise in the U.S. dollar index, so in real terms, gold and silver — maybe not silver because it’s taken a little higher hit, but gold and copper and oil, arguably the three tradeable commodities that we really pay attention to in terms of the world’s economy, they’ve been relatively flat in real terms. They haven’t really lost any value — just the U.S. dollar’s high.
TNM: So while there’s been weakness in most commodities, you mentioned one exception and that exception is uranium. We’ve seen the spot price of uranium rise strongly from a low of around US$28 a lb. a few months ago to US$36.50 today. So what is the price responding to?
MF: Supply disruption — or even supply destructi
on. Disruption meaning mines are not producing enough uranium, and destruction implying mines are shutting down or not being developed, so once again it’s a pendulum that’s swung too far to the negative.
You know, a US$28 spot price for uranium was not going to last very long: number one, all the traders would come in and start buying up cheap uranium and then throw it back on the market when the price started to rise. Now there’s been some geopolitical issues between the Russians and Ukraine and Russia’s a big player in the uranium business, so that’s had some thing to do with it. But I think it’s just the realization that mines cannot produce uranium profitably at low prices and supply comes off and supply/demand fundamentals demand that it goes up. The real catalyst is still going to be when Japanese reactors restart. I don’t know if that’s going to happen this year.
In March, all the uranium stocks kind of front-ran what was looked on as compelling evidence that the spot price should rise. That didn’t happen. The spot price went from US$34 at around PDAC to US$28 for most of the summer. A couple months ago, that base was broken and it started to rise — it’s up 30% now in the last two months, but US$36.50 is still too low a uranium price for producers to come back on with supply.
In March, I said I’d be happy with US$40 uranium by year end – I’ll stick with that, I would be very pleased — and then we’re just going to have to wait until a real psychological boost to the market will be when we get even a couple of restarts in Japan.
There’s great debate in the industry as to whether the Japanese have been selling inventories: there are compelling reasons economically to think that their utility companies have had to to pay for this expensive LNG they replaced it with. But on the other hand, there’s no direct evidence that that has happened. Regardless, nuclear power plants have to maintain a year to three year — a year minimum — of secure supply and we’ve got 73 reactors being constructed worldwide and the Chinese are putting a couple in. So that’s a million pounds of uranium every time a startup occurs to jumpstart a big reactor.
TNM: Ok, we’ll leave it there Mickey, thank you so much.
MF: Ok thanks a lot Alisha.