So far, this month is looking like this annual scourge is alive and well and making life miserable for resource stock traders yet again.

It’s that time of year again. Thirty five thousand people descended on Toronto to take part in the largest mining industry confab in the world. The PDAC has become famous for the broad range of attendees, the numerous parties and the gouging by local hotel operators. In case you only go to Toronto for PDAC, $500 a night is not the usual price for a three star hotel in Hog Town.

For resource stock investors, the PDAC famous for something more sinister; the “PDAC Curse”. So far this month is looking like this annual scourge is alive and well and making life miserable for resource stock traders yet again.

We noted in the last issue that pull backs in resource stocks seem to follow on the heels of the PDAC. The conference is often held a little later in the month of March, and it coincides with the largest freeing up of private placement stock most years. That coincidence of timing is a big part of the reason for the pullback.
The better the market is the more likely it is that late March to late April will feature large amounts of profit taking and tax gain selling. Given how metal prices and Junior resource shares have fared the past couple of weeks there seems to be no danger of things getting frothy any time soon.

Many think the hype that always accompanies the big confab is also part of the problem and we don’t disagree. Most years there is very heavy news flow during PDAC week. Attending companies are trying to get investor, broker and analyst attention in a place where they can meet many of them efficiently face to face.

Big announcements are a common feature of the conference. When the dust settles, most companies simply don’t have much to talk about for several weeks. That makes it even harder for companies to turn their share prices around in the short run if markets have fallen.

For reasons elucidated in last month’s Journal, we don’t see much danger of heavy tax gain selling. A Greek debt swap and improving metrics most other places should help the sector start healing but not enough to necessitate widespread profit taking.

There has been heavier than average news flow thanks to the PDAC but it didn’t generate large gains that need to be consolidated later. The conference coincided with high fear levels ahead of the Greek debt swap and the (first) trouncing of the gold price. Even good news had little market impact. There may be delayed positive reactions to some of the recent news but that never has the same impact on trader’s psyches as a big, high volume reaction to a fresh news release.

While the market has been weak since PDAC, there were some strong positive reactions to drill news during late February. Granted, most of the companies that enjoyed them did not have huge market values to begin with. Nonetheless, the fact several companies could generate triple digit gains over a day or two and then hold most of those gains is a good sign. That sort of pattern only holds when some of the speculators have returned to the market.

The other positive note in recent sessions is large placements getting announced and closed. The volume of fund raising is still low compared to last year but it’s rising. Many companies have completed oversubscribed placements at above market levels. This generally indicates some large retail and fund money is starting to return to the market. Another positive sign if by no means a guarantee of future gains.

There is plenty of money on the sidelines still. That is a potential positive but won’t mean much in practice unless something entices those traders back to the market. A handful of good discoveries might do it, as would a new hot subsector. There are some sectors heating up but they are not large enough to move the whole market.

Volumes were improving until traders were scared off by Ben Bernanke on the one hand and Greece on the other. Fed Chairman Bernanke had made direct references to a new round of quantitative easing early this year. That had gold bulls excited but comments during his semi-annual Humphrey Hawkins testimony to Congress dashed trader’s hopes.

Several Federal Reserve board members have resisted the idea of more bond purchases right from the start. Bernanke himself seems to have backed off the idea now. His comments to that effect generated one of the biggest one day drops in the gold price in months.

Like many things in the market this is one of those unsurprising surprises. Economic readings across the board in the US continue to improve. It’s much harder to make a convincing case for QE3 then it was a few months ago. The February employment gains were larger than expected as were retail sales. Consumer confidence has been improving and an increase in the US economic growth rate seems baked in the cake for Q1 and probably the full year.

The scale of the drop in the gold price when QE3 hopes were dashed shows quite a few traders were leaning too hard on that one rationale to be long the yellow metal. While the pullback hasn’t been fun it was due after a long upward move. Clearing out the skittish is a necessity in any healthy bull market.

With another good job gain and more upward revision of prior month’s gains it’s unlikely the Fed will ease further. The market assumes the gap in relative performance between the US and the EU will widen further. This has overshadowed the Greek deal and caused the Euro to stall out even after the new bailout was agreed to.

The two charts below show the gold price and the US Dollar Index for the past six months. Gold topped and the USD bottomed most recently on Bernanke’s congressional testimony. The Greek debt deal slowed the Dollar’s advance, but not for long. The US economy has continued to generate improving numbers. Even though Bernanke has repeatedly stated the Fed will not raise rates until 2014 market participants increasingly assume it will happen earlier.

It’s going to be difficult for the Euro to strengthen under these circumstances and that in turn will make it harder for precious metals prices to advance. That is tempered by the fact the US trade deficit is growing again, the Current Account deficit is at a three year high and that gold continues to be a “risk on” trade for many.

There is still some chance that Europe can exceed traders’ very low expectations. Consumer and business confidence numbers in Germany have been fairly good. Europe’s largest economy is also the most likely to be able to reverse its slump. The peripheral countries won’t be any help but they represent only a tiny fraction of the EU economy. If Germany can generate a bit of growth there may be some new life breathed into the Euro and, by extension, precious metal prices.

Things are more complex for base metals and materials. In addition the impact of a strengthening dollar and Euro fears these markets have to contend with fears of a slowing Chinese economy.

Beijing announced it was lowering its annual economic growth target for the current 5 year plan from 8.5% to 8%. So far, Beijing has done a better job of managing its economy that most. The 8% figure is a target and, if the last 20 years are anything to go by, it’s a target likely to be exceeded in practice.

Inflation appears to finally be moderating in China. This leaves more room for stimulus if needed. Whether Beijing is ready to open the taps remains to be seen. Recent comments by Chinese leaders make it clear they are still very concerned about high real estate prices and unwilling to ease the pressure on that market.

China is moving to increase the amount of economic activity represented by consumer spending. This has to happen if the economy is going to mature and support higher incomes.

Redirecting the economy this way might mean less intensity of metal use, but that change will happen over many years, if not decades. There is still a lot of infrastructure build required in China, especially in the interior and eastern provinces.

Even if pressure to cool private real estate markets succeeds the construction boom isn’t likely to end. Beijing has promised millions of units of subsidized housing. That is a promise that has to be delivered on to maintain social stability. There will be plenty of metal buying out of China for some years to come.

LME copper inventories are now below their 2010 low. It still looks like most of the drawdown is going straight to Shanghai warehouses and no further. The continued increase in optimism will support copper prices but we don’t expect big lift from current levels until we see sustained decreases in both the London and Shanghai warehouse inventories.

By and large, most regions reported better than expected economic readings. Optimism has been improving and we think this will support moderate growth. Most large bourses are close to 52 week highs and some, notably the S&P and NASDAQ, have seen new post-crash highs.

It’s been a tougher road for resource equities so far but we still think 2012 will be a good year on a full year basis. Precious metals have to stabilize after their recent fall but there will be room for gains once that happens. China will have to put up numbers that dispel the hard landing scenario for its economy. If that happens base metals should see some lift again.

Once it starts, the climb will be slow and probably concentrated in gold and silver explorers at least at first. Even there, a small subset of well-funded and managed companies will have to lead the way. Better growth numbers should ultimately help base metals which could broaden and strengthen a resource stock rally.

There might be a little more post PDAC selling but an overdue and well deserved rally after that looks like the path of least resistance.