Sound Bites: Is the stimulus bullet train coming?

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July 21, 2016 - Since the beginning of the month, gold stocks have been more or less flat on the back of better expected US growth. Another factor driving investors into riskier assets is the hope that Japan will deliver a double dose of monetary and fiscal policy stimulus following the triumph of the Liberal Democratic Party in recent elections. While we remain skeptical about the narrative surrounding a US recovery that will allow the Fed to hike rates sooner than expected, the moves in Japan could be meaningful.

Will Shinzo deliver a stimulus package that shakes up the hunt for yield?

With Japan still perceived to have not broken free from the threat of deflation, societal pressure is on Japanese Prime Minister Shinzo Abe to make a breakthrough. Having met recently with former Fed chair Ben Bernanke, the cards appear to be falling into place for some sort of combined fiscal and monetary package that will dwarf anything that either the EU or the United States has seen. While we have heard a number of denials about the use of so-called "helicopter money," this may be nothing more than semantics.

For months there had been expectations that the Japanese government would implement a 10 trillion yen stimulus package. Now, those expectations have doubled to a 20 trillion yen or nearly US$200 billion package. Much of that money is expected to be earmarked for infrastructure spending both at home and abroad. If such measures are taken, it could help support the demand for industrial metals.

We have rerun our INK Edge Top 20 gold mining screens as of July 15th to include base metals stocks. This gives us a heads up as to which stocks could be candidates to enter the August Top Gold list, and how different that list might be if we were to include base metal names.

Below are the add and drop mining candidates as we head towards August including base metal names:

Candidates for August Mining Report

Adds
Name Ticker Focus
5N Plus Inc. VNP Specialty metals and chemicals
Alphamin Resources Corp. AFM Tin
Asanko Gold Inc. AKG Gold
Flinders Resources Limited FDR Graphite
Formation Metals Inc. FCO Cobalt
Geodrill Limited GEO Mining Services
Orbit Garant Drilling Inc. OGD Mining Services
Teck Resources Limited TCK Integrated
 
Drops
Name Ticker Focus
Auryn Resources Inc. AUG Gold
Cordoba Minerals Corp. CDB Copper-gold
Coro Mining Corp. COP Diversified
Eastmain Resources Inc. ER Gold
Gowest Gold Ltd. GWA Gold
Integra Gold Corp. ICG Gold
Jaguar Mining Inc. JAG Gold
Lion One Metals Limited LIO Gold

 

Competition to get into the Top 20 remains fierce as we head into August. All the candidates to be added have sunny INK Edge outlooks, while only two of the candidates for drops have a mostly sunny outlook (Cordoba Minerals and Gowest Gold). The rest of the drop candidates maintain their top-notch sunny status. However, gold stocks are feeling the heat as 6 out of the 8 drop candidates are pure-play gold miners while 5 out of the 8 add candidates include a significant if not complete focus on industrial materials.

By the beginning of August, we may have a better idea what Japanese fiscal and monetary policymakers have up their sleeves. If they unveil spending that meets or surpasses expectation, we could see upward pressure on bond yields. The Japanese construction binge would likely have to be financed through bond issues either by the government or its actors. All eyes will be on the BoJ to see what type of supporting role it is going to play and whether or not it looks like it will continue to be successful at suppressing bond yields low. If bonds start to fall, it could provide a modest headwind to gold while boosting the attractiveness of industrial commodities.

That said, the base case, no pun intended, is probably one of disappointment. At which point we may well be back to a guessing game of when the Fed will raise rates even as Japan and the eurozone struggle with policy. A few American economic data surprises on the downside could well be the next catalyst for gold to resume its march higher as US rate bulls once again head back to the waiting room for their day.

 

Monthly INK Edge Top 40 and Top 20 Gold Reports are available to INK Research subscribers or can be purchased individually in PDF format via the Canadian Insider Store. The July Top 20 Gold Report will be available in the store during the week of July 24th.

Listen to Ted Dixon on Roundhouse Radio FM 98.3 every Thursday for his weekly financial markets commentary at 7:30 am Pacific Time. If you missed the live broadcast, catch the replay here.

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