Best Wishes in the New Year

Comments: I would like to take this opportunity to wish the gentle reader all the best in the coming year. I hope that the new year brings you much luck, gold and most of all, happiness.

Downtrend Break

Comments: The action has been weird in the miners. After the mining indexes regained their uptrend line, they have no managed to also break the downtrend today-assuming the current action sticks. I suspect that there will be some back down in order to fill the small gap left today down to 140.09 in the XAU. The action is very tricky now because it's around the end of the year when trading volume isn't all there.

Last Week's Gain/Loss: -2.76%. Third straight weekly loss. Although the losses haven't been large, they have been a bit disappointing.

Metals Sector Wrap-Up

1. Vista Gold Corp. (Amex: VGZ) announced on December 22 that the closing of the proposed arrangement which will cause the spin-off of certain of Vista's Nevada Gold properties, is now expected to occur in the first quarter of 2007. Looks like there will be more delays for this transaction, which was originally scheduled for the end of this year. I'd expect VGZ's shareprice to continue to lag until this complicated spin-off is completed.

2. Pele Mountain Resources Inc. announced on December 22 that Goldcorp Inc. (NYSE:GG - News) has informed Pele that it has elected under its option agreement with Pele to form a 50-50 joint venture at the Festival Diamond Project in northern Ontario. According to Pele's press release last Friday, a 500-tonne bulk sampling program was completed at Festival earlier this year, with results reaffirming the presence of commercial size, gem quality diamonds within a suite of ultramafic rocks exposed in intermittent outcrop along a stratigraphic horizon that extends for more than five kilometres. Interesting that GG is now adding exposure to diamonds on top of the Silver and Copper exposure it already has. Despite the name "Goldcorp", Goldcorp seems to be steadily becoming less and less of a pure play in Gold.

The Trouble in Somalia (2)

Is it possible that militant Islam is establishing a 3rd front in the global conflict, in the Horn of Africa, to go along with the fronts in Iraq and Afghanistan? Increasing evidence suggests so.

1. The U.S. government says four al-Qaida leaders, believed to be behind the 1998 bombing of the U.S. embassies in Kenya and Tanzania, are now leaders in the Islamic militia.

2. "'Hundreds' of foreign-born fighters are fighting alongside Islamic courts' forces in battles around Idale and Deynunay villages, with more foreign fighters being deployed to the frontlines," news sources from within Somalia are reporting.

3. A handful of Islamist prisoners taken on the battlefield by Ethiopian forces were reportedly holding British passports.

4. The Horn of Africa is adjacent to an important oil shipping route, making it a strategically important enough location for a chapter of the U.S. Operation Enduring Freedom to be stationed in neighboring Djibouti to monitor and intervene, as appropriate.

If this conflict continues to escalate such that people do perceive that a "third front" has been opened, that will have bullish implications for Gold. Nevertheless, investors in the likes of TRE or NSU which operate in the samer general neighborhood, may wish to tread carefully.

MarketWatch mentioned the Somalia conflict as a factor in the rise in gold prices today, citing the Gartman Letter and Jon Nadler of Kitco.com fame.

The Making of a Quagmire

The situation in Iraq has generally been supportive of Gold prices, not only because of the geopolitical instability that it has caused, to which Gold has reacted positively, but also because the financing of the war has been dollar dilutive.

1. The Pentagon is requesting the Whtie House to seek $99.7 billion more for the Iraq and Afganistan conflicts. An interersting (albeit unoriginal) comparison emerges to the Veitnam War, as the amounts for the Iraq conflict is approaching the costs of the Vietnam War. The Vietnam War cost an inflation-adjusted $121 billion at its height in 1968, according to the Congressional Research Service. Interestingly, the war financing is done on the basis of off-balance sheet accounting, "Democrats such as incoming Senate Budget Committee Chairman Kent Conrad of North Dakota have grown increasingly critical of the fact that Iraq spending is kept on a set of books separate from the rest of government operations."

2. Bush is mulling a troop increase in Iraq, in the amount of 15,000 to 30,000 additional troops.

3. In another Vietnam parallel, the U.S. is also intensifying its efforts to "Iraqize" the conflict, that is, to increase the training of Iraqi troops and police so that the responsibility for the conflict can be increasingly handed over to Iraqis. The "Vietnamization" of the Vietnam War was generally considered a failure. Nevertheless, I think that one difference with Iraq is that the insurgents have not yet enunciated a viable alternative regime which I think has been an important factor in allowing the almost-failing government supported by the U.S. to limp along.

4. The November "stats" for the Iraq War for 2003, 2004, 2005, 2006, according to the New York Times:

FOMC Statement (Dec. 12)

Comments: I'm posting it a little late, but above is the December 12 statement of the Federal Open Market Committee following their decision to keep the federal funds rate steady. The revisions you see are the changes relative to the previous (October 25) statement. I felt that this statement was generally bullish for Gold relative to the October statement, because it leans more towards emphasizing economic weakness and the danger of the crumbling housing market than the October statement. In fact, we initially got a small bounce in Gold on this announcement, but it's been more or less down hill since then.

Have the Miners "Failed"?

Comments: A trendline break in the HUI that's now been confirmed by the XAU and the GDX. Also, the HUI is now trading below its 200 day MA. Not great. I find it also interesting that the XAU, which contains some miners who still have hedges, has been outperforming the HUI. I hope it doesn't portend anything. Anyway, we are in the middle of the holiday season now, so it's probably better not to read too much into the action right now, but nevertheless the chart is what it is. and it's not wonderful. The good thing is that there's now some pretty solid lateral support down to about 310.



Comments: the Gold:XAU chart shows the recent outperformance of gold against the Miners. That RSI downtrend break may be significant. I'm guessing we may see a break of the downtrendline from October. Considering that Gold is down only a $1 or so from 3 days ago, the miners have really been taking it on the jaw the last few days!

When you have a moment, please check out Jan Allen's provocative December 21 entry in his Age of Tyranny Blog. Jan argues that mining stocks are set to decline as Gold rises. "The precious metal mining stocks, which has been the premier means of wealth accumulation and preservation and accumulation, have failed," he writes.

I don't necessarily agree with the analysis, although I am aware that the mining shares' leverage to gold has been decreasing over time in this bull market. We are now also in tax selling season which is another factor that helps to explain the mediocre action in the miners. But the action is what it is, and during the last few days, Jan's analysis has been correct so I don't think it can be ignored.

Charts of Interest HUI / NXG / CUP

Comments: It looked bad for the HUI yesterday, but the XAU never confirmed the break by the HUI of its uptrend. But now we have some conjection that we need to clear. The RSI downtrend break and move back above 50 is a positive sign.

Comments: Big break out in the works at NXG.

Comments: Despite today's sell off which erased today's gains, CUP has now broken out and we can expect higher prices in the not too distand future.

Last Week Portfio Gain/Loss: -2.45%. A second week of losses, but it could have been worse considering the bad action in Gold.

Metals Wrap Up

• Peru Copper Inc. (AMEX: CUP) announced a new discovery. It's trading up around 5% at the moment.

• Northgate Minerals Corporation (AMEX:NXG) is reported the results of a new mineral resource estimate at its Young-Davidson property near Matachewan, Ontario.

• A recent Wall St. Journal report alleged that certain executives have been cheating on their taxes by manipulating the exercise date of their options, mentioning specifically Royal Gold Inc. (RGLD) Chairman and former CEO Stanley Dumpsey by name, among others. Here is a link to a related article that mentions the Wall St. Journal story. When I first read the news, I thought it was neutral to slightly negative for RGLD. However, considering that the amounts of executive compensation have been an issue at RGLD, I now believe that a report that draws scrutiny to the options compensation plan at RGLD is a positive for RGLD. It might be a bit of a stretch, but perhaps that is part of the reason why RGLD has been outperforming during the recent slide in Gold prices.

• Last week, Nevsun Resources Ltd. (AMEX:NSU) was downgraded by downgraded from "buy" to "sell" by Salman and its price target slashed from $5 (Canadian) to $2.85. Today, NSU was started at "outperform" by Haywood, with a price target of $5 (Canadian). Kind of makes you wonder what the different securities houses are really seeing and whether they are looking at the same thing.

"U.S., China Agree on Steps to Reduce Trade Imbalances"

"U.S., China Agree on Steps to Reduce Trade Imbalances"

With a headline like, you could easily be forgiven for thinking that last week's Paulson/Bernanke trip to China accomplished a significant breakthrough in the Chinese currency negotiations. But, as it turns out, I could say that "U.S., China Agree on Steps to Reduce Trade Imbalances" in the same way that I could say that "I will die". One day, both will happen. One day.

And so, while the USD enjoys some support in the short term as a result of a Paulson trip that looks today like it was largely symbolic, it looks like the ball may be back in the hands of the U.S. Congress.

The key quote from the meeting was the following: "We agreed on many principles even though we have differences in the timing of reforms,'' Paulson, who led the U.S. delegation, told reporters today [emphasis added].

Charts of Interest - HUI / GG / AEM

Comments: As we appraoch the uptrendline in the HUI, it should be noted that the RSI uptrend has been broken. Not the most encouraging of signs. The HUI has also dipped below its broken uptrendline now. While a bounce form there is possible, more downside is definitely not out of the question and it wouldn't surprise me if the HUI eventually bottoms at 320 to 330, rather than at the uptrendline.

Comments: GG is still in a bullish (falling) wedge, which is a reasonably predictive pattern, but with the failure to break out to the upside on Friday, as well as several recent distribution days, it makes me wonder whether the breakout will be to the upside in the end. It appears that we are right at the RSI uptrendline.

Comments: One of the leaders during the recent run, although AEM has recently broken its uptrendline, it has returned to its breakout point, from which a bounce may be possible. A break below that, however, will herald more downside.

The Trouble in Somalia

Thousands of Islamic militants have surrounded Baidoa, the only town Somalia's internationally recognized government controls. They promised to launch an offensive on December 19 if Ethiopia fails to withdraw its forces from Somalia. This conflict has been described as being potentially regional, as both Ethiopia and Eritrea are suspected of having troops on the ground in or near to, Somalia, though both have denied the rumors. The U.S. has recently been involved in the support of certain warlords who were recently defeated by the forces of the Islamic Courts. The U.S. has alleged that the Islamic Courts hide certain al Queda militants. [Related Article]



Two metal companies operate not all that far away from the conflict zone. Considering that the escalation of the conflict may have regional consequences, with possible spill over of refugees, and in fact may involve a regional war which coiuld attract Islamic radicals, it's perhaps not too surprising that these two companies, Tanzania Royalty Exploration Corp. and Nevsun Resources Ltd. have sold off hard recently as the tensions have mounted.

NSU is trading right at the bottom of a descenidng triangle pattern at the moment as trading volume has risen recently.

Anyone else think it's remarkable, but perhaps not surprising, that Jim Sinclair has made no real mention of this conflict on his generally excellent web site, Jin Sinclair's MineSet. It's remarkable because Jim is generally quick to point out each and every conflict and potential conflict going on in the wrold that could have any geopolitical spill over on Gold. I guess it's not great publicity for TRE if the conflict involves a potential regional war in TRE's neighborhood. Plus, it might be a bit impolitic of him to do that because of his ties to the Tanzanian government and his promotion of Tanzania as a stable country and good investment. Still, the fact that he's been silent about this kind of makes you wonder about his site's motto, that "the Spin really does stop here."

HUI Chart & Commentary

Comments: Liquidity getting thinner as the Christmas holiday approaches. Unfortunately, there's still a danger of one more drop off in the price of Gold and we are still in sell mode until proven otherwise. Still, the uptrendline is slowly approaching and I think there's a good chance for a bounce from there if we go that low. However, I think the chance of a meaningful rally to end the year is getting smaller and smaller the longer it takes to develop.

Big Day

Comments: Today (and tomorrow) will likely be big days for gold. The set up is definitely there for a rally. The sell off in Gold going into the FOMC meeting is, in my opinion, favorable. The HUI is tagging the broken major downtrendline. The RSI is back at the trendline. Seasonality is favorable until the end of the year. The only issue I see is the bearish MACD crossover.

Upcoming Schedule

The next week and a half are going to be busy for Gold, with a lot of major events that will likely have a large impact on the direction of price movement. The following events are key:

1. December 12 (Tuesday) - the FOMC announces its decision on interest rates and issues the accompanying policy statement.

2. December 13 (Thursday) - OPEC will meet to decide whether or not to officially implement further production cuts.

3. Treasury Secretary Henry Paulson is in China this week to discuss Chinese currency policies, among other things. I'm not sure when exactly the meetings will be wrapped up or when we can expect any news.

4. December 19 (next Tuesday) - the Bank of Japan announces their decision on interest rates.

Those are 4 very major events so Gold could be very volatile in the coming days. Since we are currently back to the broken downtrendline in the HUI and beginning to dig into resistance on the USD Index, I'm hoping that we'll get a major bounce and powerful rally to end the year in Gold.

HUI Chart & Commentary

Comments: A disappointing finish to the week in Gold. I think there is still a decent chance for the rally to continue however. Last Friday, the HUI tested the broken downtrendline from May. If the HUI can maintain itself above that downtrendline, there is a possibility of a rebound and a continuation of the rally. I'll be very interested to see what happenws when the USD Index approaches 83.50 to 83.60. Those were major points of support which were broken during the recent plunge and should now constitute formidable resistance. The result of the retest of this resistance should determine the direction of Gold in the short term.

Last Week Portfolio Gain/Loss: -0.56%. Considering the mediocre action in Gold recently, I actually did ok last week. I was up decently for the week until the horrible reversal on Friday. USGL, which announced that its shares will be traded on the American Stock Exchange starting from next week (as UXG), did well for me, and PAL, NSU and EP also did ok. The losers were RGLD, SLW and MDG, into which I bought in too early. The continuing weakness in SLW is causing me some consternation. CUP continued to go nowhere, but I sense that could change at any time.

Palladium Getting Ready to Breakout

Comments: I have a feeling that Palladium is soon going to break out to the upside from the symmetric triangle pattern. It's definitely acting more bullishly than platinum ever since platinum's huge recent upspike.

Comments: A possible play on the palladium breakout would be PAL (North American Palladium Ltd.). This company is frequently featured on the list of most lowly rated companies and was just given an "underperform" reiteration by HSBX a couple of days ago. Also, PAL announced at the end of last month that its CFO will be leaving the company. So you know that the company has some issues. However, it can get very hot sometimes, such as when palladium surges, which I think it has a chance of doing quite soon.

HUI Chart & Commentary

Comments: Although gold has sold off strongly, the HUI continues to diverge positively, being down only moderately. Today should bring the test of the first trendline. Whether or not that test succeeds, somehow I don't think the HUI will fall below the major broken downtrendline since May. That would mean a low of about 344 HUI. But that's just my speculation--hopefully I'll know the bottom when I see it. I exited most of my positions duirng the last 2 days so I'm ready for any sell off that occurs.

Some possible acquisitions: SA, AUY, SLW, RGLD, BVN, PAL, GSS, KBX and calls in GG, NEM and PAAS or SSRI.

HUI Chart & Commentary

Comments: It's kind of a tough trading environment right now in Gold stocks, with neither bulls nor bears being able to push the action decisively in any direction. Since we seem to be bouncing down from the upper channel line, I'd say we are in a consolidation/correction period. But on the other hand, the way that the gold stocks are getting bought up like hot cakes on any drop, like today, makes me nervous that I will miss the chance to reload my portfolio. Although Gold is down a fair amount today and so are gold miners, the HUI is diverging bullishly. NSU, mentioned yesterday, is continuing to do well for me today.

One possibility is that we won't go down all the way to the bottom of the channel but will continue to rally after we hit the steeper uptrendline which is at around 345 today. I think it will be important to exercise patience over the next few days. Just holding a handful of miners now and some NEM calls.

Inflation Confusion (3)

"Stocks Up on Easing Inflation Worries" reported AP today.

"Investors applauded Labor Department figures showing wages and benefits increased at a much slower pace in the third quarter than had been estimated. Recent concerns about inflation have eroded some hopes that the Federal Reserve would start lowering interest rates next year. The central bank has said inflation remains its primary concern."

As I have mentioned before under this thread, investors are obviously obsessing more about the Fed's response to the economy than about the direction of the economy itself. That says two things: (1) investors continue to believe that the Fed is still in control of the financial picture in the States, and (2) investors believe that evidence of low inflation is dollar bearish and gold bullish.

As I had previously mentioned, this is the opposite of what the picture should look like from the gold bug's perspective. It's an upside down world we live in these days where inflation is considered currency positive and lack of inflation a currency negative. During the rally late last year and early this year, increasing evidence of inflation (in the CPI and other inflation gauges) definitely fed the gold rally, which is the way it should be. These days, for several months now, evidence of inflation is being interpreted as gold bearish and lack of inflation, gold bullish. Today was case in point, as the lower than expected labor unit costs reading contributed to Gold initially spiking higher (though it did sell off during the rest of the day).

I believe that a reversal of the current market reaction towards inflation will be important for Gold to move into the next major phase of the bull market (the phase where it reaches past $887/oz). Certainly, the current distorted and confused perception of inflation and what it signifies, is fine for the rally we are currently in. But I doubt that Gold will really soar until this confusion is straightened out.

Related Article: [http://biz.yahoo.com/ap/061205/wall_street.html?.v=16]

Charts of Interest GDX / GSS / NSU / VGZ

Comments: After flirting with a breakout from the upper channel for several days, looks like Gold Stocks are finally succumbing to some profit taking. I don't expect that continue for too long however, because I don't expect Gold to fall below $640 on a closing basis. I think the break of the upper channel will in fact occur, sooner or later, but not until the gold stocks have had a bit of a breather. Buying back in at around 350 HUI might be a decent bet.

Comments: I received today from VGZ the belated Notice of Special Meeting which was held on November 16 regarding the spin off transaction involving the creation of Allied Nevada Gold Corp as a spin-off company from VGZ. I can kind of understand after leafing through the Notice why shareholders weren't crazy about VGZ, selling it down, as the spin off approached, despite higher gold prices.

The Notice, which describes the proposed spin-off in considerable detail, including its tax consequences for shareholders, option holders and warrant holders, is well over 200 pages of fine print! Complexity is rarely a big crowd pleaser with investors. Incidentally, Minco Mining & Metals Corp. rallied sharply in early September after they announced the abortion of their proposed spin-off of subsidiary Minco Silver. Obviously spin-offs in the precious metal sector haven't been a big hit. One good thing of the VGZ spin-off, however, will be the creation of a new entity which is eventually intended to trade on the American Stock Exchange. This is good because, with the rate of consolidation in the sector leading to an increased narrowing of the number of tradeable names out there, sometimes I feel like I'm running low on trading options.

Comments: Failure to meet deadlines in a timely manner as well as continuing share dilution have been major complaints of shareholders of NSU, a gold and base metal miner operating in Eritrea and Mali. I wonder whether the increased tensions in neighboring Ethiopia in connection with the situation in Somali may have also exerted downward pressure on the price. However, this company is now trading at support and may be a speculative buy, though one should keep in mind that NSU tanked while the gold price rallied, which is generally not the most encouraging sign.

NSU recently completed their feasibility study for their contemplated mine in Eritrea, which normally leads to greater leverage to the metal price. NSU's Bish Property in Eritrea is somewhat unusual, as far as the mineralization is concerned. The feasibility study for the mine indicates that during its projected 10 years of mine life, the mine will be producing primarily gold from the ore layers most near to the surface, followed by primarily copper and some gold in years 3 to 5, followed finally by zinc, copper and gold in years 6 to 10, making it a Gold and Base Metals mine, at different stages of production.

Altogether, the metals that are expected to be produced over the life of the mine will be as follows:

- 1.06 million oz gold
- 747 million lb copper
- 1,092 million lb zinc
- 10 million oz silver

NSU is trading up on heavy volume today as I type this so it may indeed have a decent chance of bouncing from the support.


Comments: A breakdown from a bearish wedge should see GSS going to $3.10 or possibly lower. Still, I am generally more positive on GSS as their prospects next year, barring any more unforeseen catastrophes, are fairly encouraging, especially if the energy shortage situation improves in Ghana, which I understand it should.

Charts of Interest CUP / BVN / RGLD / USGL / SSRI

Comments: Since the move occurred on fairly heavy accumulation, I think the break above the upper channel line by SSRI is legitimate and SSRI should continue to hold above it. Last week SSRI managed to suck in a lot of buying interest which would have otherwise been reserved for SLW, leading to the latter's so so performance.

Comments: Testing a trendline now. Looks like a good bet to challenge the gap between $5.70 and $5.92 sometime in the near future.

Comments: A Clean break of the downtrendline. RGLD is a buy on any pullback. With 19.6% of the float sold short (as of November 10; I imagine at least some of them have since covered), RGLD could see a potentially explosive rally on short covering in the coming weeks.

Comments: Testing a downtrendline now. Has been seeing very nice accumulation.

Comments: It appears that CUP is in a long and narrow bullish wedge with an upside target of +$1.5 folloiwng a breakout. It tested the downtrendline last week, but no breakout yet. Obviously, a lot depends on copper and how it holds up.

HUI Chart & Commentary

Comments: I wondered if we might get a channel buster last week in the HUI, but I think the possibility of that happening has passed. Nevertheless, since Gold has broken past the $641 mark, I would expect a fairly tight consolidation now, leading to further gains soon. I don't see Gold falling below $640 anytime soon, so I don't see the HUi selling off too sharply either.

Weekly Portfolio Gain/Loss: +3.35%. Another winning week. USGL and a small positon in AUY did well for me. EP in energy, finally perked up a bit. SLW and GSS disappointed, but still had gains there. CUP has gone nowhere since I picked it up, but we'll see about that. I wonder if I'm going to regret letting go of RGLD on Friday. Considering the really high ratio of shorts to longs in that stock, it can be quite explosive when it makes its move due to short covering and I wonder if I sold it too early. I was also encouraged by some great gains in my options portfolio. Sold off my FCX and PAAS positions to deleverage a bit.

% of Silver Components in the HUI and XAU

A few days ago, I asked whether anyone is aware of the relative proportion of silver companies among the components of the XAU and the HUI. In connection therewith, I received an e-mail from "Barry" who was kind enough to provide some handy links that enabled me to roughly calculate the relative weighings of Silver companies in the HUI and the XAU indices.

Based on my calculations, Silver companies comprise 10.54% of the HUI while only comprising 3.99% of the XAU. This is a surprise since the HUI is supposed to be unhedged gold stocks whereas the XAU is supposed to be the index of gold and silver stocks. Based on this calculation, it seems my suggestion a few days ago that the XAU broke its downtrend first partly because of the outperformance of the Silver stocks, doesn't seem to be correct.

My method of calculating that, was ofcourse, less than scientific since all of the silver companies in both indexes derive at least a portion of their revenues from other metals (for instance, in the case of PAAS, its revenues are about 50% from Silver; for HL, the percentage is even smaller), and some of the Gold companies in both indexes also have silver credits. In any case, I counted only those companies who bill themselves as primary silver producers as "silver companies" for purpose of this calculation.

As of: 11/30/06, the relative weighings were as follows:

HUI Components
GFI 13.69%
NEM 13.38%
FCX 10.13%
AEM 6.03%
HMY 5.81%
GG 5.70%
EGO 5.62%
HL 5.52%
AUY 5.39%
MDG 5.07%
GSS 5.04%
CDE 5.02%
GOLD 4.69%
IAG 4.51%
KGC 4.41%

XAU Components
ABX 20.05%
NEM 15.80%
GG 15.75%
AU 9.93%
FCX 9.31%
GFI 6.92%
HMY 5.16%
AEM 3.96%
KGC 3.22%
MDG 2.31%
BGO 1.86%
PAAS 1.46%
SSRI 1.42%
GOLD 1.18%
CDE 1.11%
RGLD 0.54%