Capitalight Research will be attending this year's Prospectors & Developers Association of Canada (PDAC) held in Toronto.
We hope you can attend and stop by our booth #350 for a chat!
February Market Minute
2023 has started off on a positive note for equity markets! According to two key beginning of the year indicators from our technical analyst team the positive start is a good sign for equity markets to finish the year higher.
The first of the positive technical signs was the first five days of January. This indicator holds that “the direction of the first five trading days of the year predicts the direction of the market for the remainder of the year, a positive First Five Days has resulted in a full-year positive equity market some 85% of the time”. The S&P 500 gained 2.8% and the TSX gained 2.5% over the first five trading days in 2023.
The second was As Goes January, so Goes The Year. As the old adage goes: “if the market closes up in January, it will be a good year; if the market closes down in January, it will be a bad year. This has been right almost 9 out of 10 times since 1950” (Almanac). The S&P 500 closed January up 6.2% and the TSX gained 7.1% for the month! Our technical analyst team added a third positive technical sign to the list for January in a recent market note. Not only have the markets gained during the first five days, but they triggered an extremely important indicator. One of the most reliable technical indicators is called the “Breadth Thrust”. This occurs when the Advancing stocks outnumber the Declining stocks by a 2:1 ratio during a 10-day period. This happened not only in New York, but also in Toronto.
During the last 10 times this occurred since 1962, the market gained between 12.3 and 30.0 percent.
According to recent AAII Investor Sentiment Survey, Investor sentiment is also turning less bearish!
Copper Prices Bounce Back
LME copper prices also started 2023 on a stronger note. Prices rebounded to U.S.$4.13 in the second week of January – a level not seen since June 2022. Traders are betting that China’s relaxation of COVID restrictions – together with an array of stimulus measures for the property sector – will help to rejuvenate China’s economy by 2023:Q2 – leading to stronger copper demand in the world’s largest consumer. The turnaround in sentiment also reflects expectation that U.S. inflation has peaked, allowing the Fed to slow the pace of rate hikes a development which would push down the U.S. dollar trade-weighted. In fact, the U.S. CPI slowed to 6.5% y/y in December, with a -0.1% drop m/m.
As a result, the DXY Index lost further ground on January 12 and is now 10.4% below the 20-year high it reached on September 27. This development will make it easier for miners to push through higher dollar commodity prices. There is a close inverse relationship between the U.S. dollar trade-weighted and industrial metals. Visible exchange inventories for copper (the sum of LME, COMEX, Shanghai Futures Exchange and Shanghai bonded warehouse stocks) ended 2022 at very low levels and have declined further in January.
Silver also Trending Higher
The decline in the U.S. dollar at the beginning of 2023 also gave silver prices a boost. Silver, as with most commodities, is priced in U.S. dollar terms, both within the U.S. and abroad (the dollar is the benchmark pricing mechanism) and like most commodities the silver price generally moves in the opposite direction (inversely) to the U.S. dollar. During the years following the Dot-Com crash in 2000, the U.S. dollar appreciated, climbing nearly 14%, while silver prices declined by over 15% to under $4.50 per ounce. The correlation between the Broad Dollar Index and silver over this period was -89% (the inverse relationship generally held). During the majority of the last “Metals Super Cycle” (from February 2002 through July 2011), the Broad Index experienced a long-term downtrend (losing nearly 30% of value) while silver prices climbed by over 800% (after peaking in April 2011 at just under $49 per ounce), with the correlation -78%. As silver prices declined into 2016 and stabilized through early 2020 again the inverted relationship held (with the correlation -79%). Since the onset of the Covid-19 Pandemic and continuing through the Ukraine War, silver prices have gained 90%, with the dollar declining 10%.
We are bullish on the outlook for silver as it should benefit from the end of the Fed's interest rate hikes. The economic recovery should additionally benefit silver as a precious metal with a high industrial use and with the easing of corona restrictions in China, silver demand should receive a further boost, as China is the largest consumer of silver.
The U.S. Debt Limit Debate
U.S. politicians are at odds again over raising the debt ceiling, a debate that has dragged on for months in the past. U.S. Treasury secretary Yellen warned Congress that the debt ceiling has been reached, and it will have to resort to “extraordinary measures” (using cash reserves), and if the debt ceiling is not raised by early June the U.S. government will not be able to pay its bills as the extraordinary measures will be exhausted.
A brief history of the debt ceiling
The debt ceiling was created in 1917 under the Second Liberty Bond Act also known as the debt limit or statutory debt limit. The debt ceiling is set by Congress and is the maximum amount that the U.S. Treasury Department can borrow by issuing bonds, when the ceiling is reached the U.S. Treasury Department must find alternative ways to pay expenses until Congress raises it. The debt ceiling applies to most federal government debt (i.e., government bonds and Treasury bills). It includes both debts held by the public and what the U.S. government owes other internal departments, such as what is “borrowed” from the Social Security and the Medicare trust funds. The debt ceiling has been raised 78 times since 1960, the most recent time was in December 2021 to $31.4 trillion. The debt ceiling went from just under $1 trillion to nearly $3 trillion in the 1980s, and has roughly doubled every decade since – 1990s saw it at $6 trillion, then by the end of the 2000s it stood at roughly $12 trillion etc. When Congress raises the debt ceiling it has a good estimate of when the ceiling will be reached so it is not a surprise that it was reached in January. And we have little doubt that Congress will raise it again, but a last-minute solution that results in a U.S. government shutdown is a possibility.
Exposure to precious metals is a great way to help diversify your portfolio!
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