Wednesday, January 31, 2007

U.S. Loses 3 Choppers in Iraq

I thought this article about the recent sharp rise in helicopter losses in Iraq was kind of interesting. According to AP, since May 2003, the U.S. military has lost 54 helicopters in Iraq, about half of them to hostile fire but 3 were lost since January 20. It's probably a statistical anomaly, but I thought it was interesting because of the comparison with the the 1979-1980 Afghanistan war. [Edit: Yes, it was a 4th helicopter that was shotdown in the past couple of weeks. The first article wasn't very accurate.]

Although the Soviets initially had free reign over the skies over Afghanistan, it is acknowledged that the use of American-supplied Stinger anti-aircraft missiles by Afghan fighters was a major factor in the Soviet defeat in Afghanistan. With respect to Iraq, the article notes that "the recent spate of losses raises questions about whether Sunni insurgents and Shiite militias may have stepped up attacks on helicopters or may have received new supplies of shoulder-fired anti-aircraft weapons. Sunni insurgents are already known to have SA-7 anti-aircraft weapons in their arsenal as well as rocket-propelled grenades and heavy machine guns, all of which pose a threat to aircraft."

Rebasing the Penny (Metals Market Wrap-Up)

1. Although the Bema shareholders approved the merger with KGC on Tuesday by 91% of the votes cast representing 59% of Bema's outstanding shares apparently the KGC - BGO merger is still subject to certain conditions such that it will take place "within the next few weeks" and not shortly after the shareholder approval as I had previously expected. My apologies for the misinformation. Still, KGC remains in a breakout of a descending triangle with a price target of $15.50. My other pick, GOLD, looks like it's getting ready to have that massive breakout. If it can clear the $23.75 to $24.00, it could enjoy a very large move. I'd watch it carefully if I were you. CUP also looks good on this pullback, though Copper has been kind of horrible.

2. I've been looking for a site that is for Oil, what Kitco is for Gold and I think I found one recently. RIGZONE.com has plenty of energy commodity-related infomercial in a format similar to Kitco's. They have commodity prices, industry and company news as well as the Rig Count which can be an issue during the hurricane season.

3. In case you were wondering how much of South African top gold producer's gold is produced locally in South Africa: AngloGold produces about half its gold from local mines, Gold Fields produces almost three-quarters of its gold in South Africa after buying South Deep, the world's largest deposit, and Harmony produces 90 percent of its metal here.

4. You probably already know that certain U.S. coins are worth more for their melt commodity value than for their face value. Though, there is some controversy about whether this is actually true. Recently, I found an article about this issue in Reuters. "Sharply rising prices of metals such as copper and nickel have meant the face value of pennies and nickels are worth less than the material that they are made of, increasing the risk that speculators could melt the coins and sell them for a profit." The timing of this article, considering that base metals seem to have topped out and have considerably depreciated recently, seems a bit odd. Interestingly, the article mentions that a senior economist at the Chicago Fed has suggested rebasing the penny at 5 cents, to fight penny hoarding by people who are hoping to sell pennies for their melt value. "Rebasing the penny would ... debase the five-cent piece and put it safely away from its melting point," he added. I wonder how rebasing the penny would actually work. Ofcourse, if the penny is actually rebased, then that might be all the more reason to load up on pennies right now.

5. Today is the FOMC interest rate decision. I will post the FOMC's latest statement showing revisions vis-a-vis the previous statement. Things feel somewhat bullish now in Gold, after a bit of a technical downtrend break and consolidation recently.

Monday, January 29, 2007

Gold's Suspicious Fundamentals

A breakout to the upside is a possibility in the near future since Gold broke another downtrend recently. However, it seems that some fundamentals behind Gold's move are a bit suspicious.

Let's look at Jim sinclair's 5 Golden Pillars. I consider each of the Pillars below and rate them on the following scale:

Strongly Bullish +3
Moderately Bullish +2
Mildly Bullish +1
Neutral or Indeterminate +/- 0
Mildly Bearish -1
Moderately Bearish -2
Strongly Bearish -3

1. Recognized Top in U.S. Dollar: Yes, the USDX has definitely topped out a few years ago. That is a given. It is also currently trading below pretty major resistance between $85 to $86. However, it is also not that far away from the $80 level which is important support for the Buck. Some might also argue that, from the point of view of trading psychology, there are currently too many US Dollar bears. As Clyve Maud recently mentioned (though I think he was quoting someone else), there are enough Dollar bears to fill 20 football stadiums and almost no Dollar bulls, or something along those lines. So overall, I rate this factor as "moderately bullish" for Gold.

2. Trust in U.S.A. Paper Assets Declining: There's been some evidence of that. Some foreign central banks have made some moves to diversify away from huge US Dollar holdings. Also, the Euro has come on strong, more strongly than some people expected. However, there's been no stampede to the exits. Also, China continues to hold massive US Dollar reserves of well over $1 trillion. Again, I rate this factor as "moderately bullish".

3. Bullish General Commodity Markets: The central Pillar has definitely crumbled recently in a fairly spectacular way. Oil and Copper are in at least short to medium term bear markets unless and until proven otherwise. Many other metals are also in bears. Oil not only broke a 5 year uptrend recently, it also broke down from a 3 month long consolidation. With winter approaching its stretch run, the fundamentals for Oil look rather bleak in the near term, barring any eruptions from Iran. We may go back to a bullish posture, but it will probably take some time. I rate this as "moderately bearish".

4. Triple Deficits of U.S. Budget, Current Account & Trade, Firmly in Place: That is true, they are "firmly in place", but the trade deficit has been getting a bit smaller recently, in large part due to falling energy prices. I think we've had 3 straight monthly readings below $60 billion now. I rate this as "moderately bullish".

5. Recognized Top in U.S. Treasury Long Bonds: This one is a bit unclear upon further investigation. I generally agree that long bonds cannot really stay bullish much longer and that a top is likely to be in place in the not too distant future. However, let's keep in mind that it is unclear whether such top is Dollar positive or negative. Generally speaking, higher interest rates are supportive of the Dollar. Sinclair seems to recognize this dilemma and counters with "If the increase in interest rates comes from liquidation of Treasury instruments by other central banks and international investors the dollar will reflect it by not rising with rising interest rates." That is the key issue, but I think it is still unsettled which way this issue will cut. I rate this as "Indeterminate".

So there you have it:

3 Factors that are "Moderately Bullish" (+6)

1 Factor that is "Moderately Bearish" (-2)

1 Factor that is "Indeterminate" (0)

The net rating for Gold comes to +4 on a scale of +15 to -15. In other words, the current fundamentals are only somewhat bullish for Gold in my opinion. Not nearly as bullish as they were in 2006, but definitely still positive. But positive enough to get a breakout past $650? The technicals currently seem to suggest that is a possibility, but the technicals in the Gold stocks are still unclear.

What do you think? What ratings would you give to the 5 Golden Pillars?

Saturday, January 27, 2007

Charts of Interest GOLD / KGC

Comments: As I previously mentioned, BGO shareholders will vote on January 30 whether or not to approve the merger with KGC. I understand that the transaction will be consummated shortly thereafter. As in the case of IAG and GG, I believe the approval of the merger, which will create the 4th largest gold company as measured by gold reserves, will give a brief boost to the shareprice of KGC. In any case, KGC recently broke out of a descending triangle-like pattern that has a measured target price of $15.50.

Comments: The chart of Randgold Resources Ltd. (GOLD) is starting to look interesting as the trendlines are starting to narrow. A measured move would be to around $33 to $34 if it is an upside breakout or it would slice off $9 in case the break is to the downside. There's been a little accumulation in the last three weeks.

Friday, January 26, 2007

Metals Market Wrap-Up

1. Royalty company Royal Gold Inc. (RGLD) closed the purchase of the Penasquito project royalty from Minera Kennecott S.A. De C.V., based in Guadalajara, Jalisco, Mexico, on Wednesday paying $80 million in cash and 577,434 shares of its common stock for a 2 percent net smelter return royalty on a gold, silver, zinc and lead mine in Zacatecas, Mexico. The Penasquito project, composed of two main deposits called Penasco and Chile Colorado, is under development by Goldcorp Inc., but the royalties won't start flowing for quite a while. Royal Gold also obtained the right to acquire additional royalties ranging from 1 percent to 2 percent on a number of properties in the region. I previously wrote that a 2% smelter royalty seems a bit modest considering that RGLD tapped its entire cash hoard and even took the uncommon step of issuing equity to acquire the royalty, but maybe the idea is that RGLD will exercise the rights on such other royalties. RGLD has been very active since December, closing the Gold Hill and Penasquito royalty transactions and announcing the acquisition of a royalty on the Pascua Lama Gold Project from Barrick.

2. Gradient Analytics, an independent research firm specializing in research in executive compensation, reported the results of a study that found that early exercise of deep in the money options by company insider's is often correlated with subsequent share underperformance. "What we found was that not only do these early, deep-in-the-money exercises result in share price declines over the period that follows, but they also are associated with earnings misses and future misses," Gradient founder Carr Bettis said. This is neither surprising nor gold related, but I just thought I'd post it here while I was on the topic of RGLD. Some RGLD investors believe that RGLD insiders have been using stock options to profit excessively at the expense of RGLD's shareholders.

3. Gold Fields Ltd. (GFI) was down nearly 8% during the last two days after it announced Thursday that it sold US$1.2 billion worth of new shares to repay debt. The company said it will use the proceeds of its share sale to pay off the debt incurred by its acquisition of Barrick Gold Corp.'s 50 percent stake in the South Deep mine and its rights under a joint venture agreement with Western Areas Ltd.

4. Keep in mind that the Bema (BGO) shareholders meeting regarding the approval of KGC's acquisition of Bema will soon be held on January 30, 2007. I'm expecting a brief shareprice boost to KGC following the announcement that shareholders have approved the merger.

Still Below the Neckline

Comments: Although Gold has nullified its Head & Shoulders Top pattern, the HUI continues to struggle below its own Head & Shoulders pattern. Last Thursday saw a failed attempt to break back above the neckline. That has bearish implications in the short term. Having said that, Gold has been positively diverging from the rest of the commodities complex which has positive implications overall.

I think the next question is where is the rest of the commodity complex going? If Oil and Base Metals are going to new lows next, then I think Gold could continue to stay range bound. If they have bottomed or will now enter into a trading range, Gold has a greater chance of breaking out to the upside.

Obviously the biggest question mark is the US Dollar. In that regard, Gold has been also positively diverging from the USDX recently and that is also a positive. It also looks like the USDX is struggling to get above a zone of resistance. in the 85 to 86 area.

Wednesday, January 24, 2007

Important Resistance Zone

Comments: on three separate occasions in the near past, the $640 to $650 area stopped Gold cold and led to bad sell offs. Now that we're back at this area, caution is advisable. I think it helps somewhat that sentiment is quite bearish, but that may be for a reason. After all, many commodities are currently in medium term bear slides. In his recent commentary, gold analyst Clyve Maud has suggested that we should not trust this move unless it breaks $660 convincingly, to avoid getting whipsawed again. I think there is wisdom in that approach. I closed out my USO bet today at a modest profit and I'm just going to wait and see what develops next.

I think geopolitical factors should be downplayed when investing in Gold, but I thought that China's recent use of a defunct satellite for target practice has some potentially bullish Gold implications. Not just the animosity that such a move raises, but also because of the possibility that it could help inspire a new arms race in the space sector--that would certainly be dollar dilutive. In fact, I generally consider geopolitical factors these days only to the extent that they are dollar dilutive and less from the perspective of whether they will lead to real crises or military conflicts. There's just too much scaremongering going on right now, the kind that caused Gold to get whipsawed in September so I don't really like that. If you read Jim Sinclair's MineSet these days, it's 75% filled with hack scaremongering about possible attacks and potential nuclear conflict and third world war scenarios. If this were any other sector, that stuff would be called "fluff".

Friday, January 19, 2007

Charts of Interest USO

Comments: This is the dilemma: on one hand, the precious metal company shares are negatively diverging from Gold, getting slammed down on any weakness in the precious metal. On the other hand, Gold is strongly positively diverging with respect to the other commodities, like Oil and Copper. What's the best way to play this situation, especially now that Oil appears to be having or is close to having a washout bottom? Check out the chart of USO, the oil derivative, above. Massive volume during the last few days which means a bottom of some sort is near. On the other hand, I think oil will eventually touch $45 so at best only a temporary bounce is in order. One issue with USO is that it seems to be trading at a discount to the actual oil price, probably partly because, unlike GLD, the underlying is only derivative contracts, i.e., paper. So that's a bit of an issue as far as potential investments are concerned. Unfortunately, I'm not really crazy about the XLE or OIH charts either.

Wednesday, January 17, 2007

Metals Market Wrap-Up

1. The action right now is encouraging, but I do not think it is particularly bullish. I'm surprised that Gold has remained above $600 while Oil and Copper have been slammed so hard and I think this bodes well for the future. However, I do not think that we are about to bust through the $640-$650 barrier at this point either. The miners don't really seem all that excited right now and, as I previouosly mentioned, a Head & Shoulders pattern is still in effect on the HUI, XAU and GDX. I think I might be a seller if Gold approaches $640.

2. ROYAL GOLD, INC. (Nasdaq: RGLD - News) today announced that it has entered into a definitive and binding agreement to purchase another net smelter return ("NSR") sliding-scale royalty for $20.5 million on the controvertial Pascua Lama project which is situated partly in Chile and partly in Argentina. RGLD is up over 2% today, but frankly, I'm not sure how good a deal this is. The NSR royalty only gives a fairly tiny %, ranging from 0.16% to 1.08% depending on the average price of gold during the quarter. It will be applicable to all gold production from an area of interest in Chile. The transaction also includes a 0.216% fixed-rate copper royalty, again that seems pretty low. The copper royalty applies to 100% of the copper reserves but does not take effect until after January 1, 2017. 2017! That's half a generation away. The acquisition is subject to customary due diligence and is expected to close in early March 2007. The property has about 18 million ounces of Gold in reserve, with about 80% of that on the Chile side. Interestingly, the sliding scale contemplates prices up to $800 or more--seems like they are considering the possibility that Gold prices could still go considerably higher.

3. New Jersey Mining Company (OTC BB:NJMC.OB - News), which was up big yesterday, announced that it had increased its silver resources to approximately nine million ounces with the recent addition of the Niagara copper-silver deposit located near Murray, Idaho. If this is the news that caused it to surge higher yesterday, you have to wonder whether there aren't any insider trading issues here.

Tuesday, January 16, 2007

Metals Market Wrap-Up

1. Eldorado Gold Corporation (AMEX:EGO - News), announcd the results of a pre-feasibility study and preliminary economic analysis of the Vila Nova Iron Ore Project in Amapa State, Brazil, in which EGO has the right to earn a 50% interest. To my knowledge, EGO is the only Gold company with an interest in an iron project.

2. Penny stock Golden Phoenix Minerals, Inc. (OTC Bulletin Board: GPXM - News) announced that the Company has finalized a Settlement Agreement and Mutual Release with F.W. Lewis, Inc., The Frank Lewis Revocable Living Trust, and The Sharon F. Lewis Trust, resolving a contract dispute concerning a former lease at its Contact Mine located in Elko County, Nevada and resulting in the elimination of approximately $3.25 million in current liabilities on the Golden Phoenix Balance Sheet. GPXM is a Nevada-based mining company with interests in Gold, Silver and Molybdenum properties.

3. Gammon Lake Resources Inc., (GRS) a Canada-based miner with properties in Mexico, on Tuesday said a sampling of its Ocampo underground mine in northern Mexico shows new evidence of high grade gold and silver. GRS has been hot recently, announcing last Thursday that its Ocampo Gold-Silver Mine has reached commercial production. Following such announcement, GRS is now producing at an annualized production run rate of 400,000 gold equivalent ounces (208,000 ounces of gold and 8.9-million ounces of silver) based on combined production from Gammon Lake's Ocampo and El Cubo Mines in Mexico.

4. Royal Dutch Shell evacuated staff from two oil installations in southern Nigeria and the military boosted troop levels in the volatile area Tuesday after a dozen village elders were killed in a riverboat attack, officials said. Production had not been affected by the clashes however. A few days ago, 9 South Koreans had also been kidnapped in Nigeria. Oil has been little aided by the recent incidents and seems to want to test $50 before any meaningful bounce. I think a $45 entry for oil would be reasonable, considering that we've had a breakdown from a 3 month-long consolidation. However, we'll definitely get a bounce before $45.

Charts of Interest HUI / KGC / NXG

Comments: The HUI is in a more bullish posture now that Gold appears to have nullified its H&S top. However, I believe that upside will be limited. HUI 333 appears to be an area of strong resistance and it is important to note that the HUI, unlike Gold, has not nullified its Head & Shoulders pattern--to nullify it would require a climb above the neckline which is at around 333 now. The target for this pattern, unfortunately remains 285 or so. Despite Gold's positive divergence relative to Oil and Copper, I believe that a retest of triangle at 285 may be likely.


Comments: NXG's breakout from its descending triangle remains valid after a successful retest of the breakout.



Comments: KGC has had a breakdown reversal and now is trying to breakout of the symmetric triangle pattern. Put this one on your radar screen as the month rolls on. On January 30, BGO, with which KGC has proposed a business combination, will put forward the merger to the vote of its shareholders. The merger should take effect shortly after that and, in my opinion, will lead to a brief boost in the shareprice of KGC which has been depressed since the merger announcement. The deal, which was slightly adjusted on December 22 to add back one asset that was originally intended to be spun off as part of the transaction, will result in an increase in Kinross reserves by 68 percent to create the world's No. 4 gold company in terms of reserves.

Monday, January 15, 2007

Metals Market Wrap-Up

1. A fire broke out in Chevron's Richmond Refinery, the largest oil refinery in the Bay Area.

2. DRD Gold (DROOY) issued 18.3 million new shares to help repay a loan. Equity dilution to pay off debt. Ouch.

3. Gold Fields (GFI) reported that it had completed repairs to the South Deep mine and preoduction there should be back at full capacity by February. Output at South Deep was 107,946 ounces during the three months to end March 2006, the last full quarter before the accident which led to the repairs. Gold Fields has completed the purchase of Barrick Gold's 50 percent stake in South Deep and another deal to buy a 34.7 percent stake in Western Areas owned by JCI Ltd. Western Areas owns the other half of South Deep.

Sunday, January 14, 2007

Metals Market Wrap-Up

1. Bird flu has recently reared its ugly head in Indonesia where 2 more deaths were reported yesterday, Vietnam, and possibly Japan. Although this is unlikely to have much influence on Gold, some experts still fear the possibility of an epedemic or pandemic which would undoubtedly be Gold bullish.

2. Considering that Oil recently broken down from a 3 month-long consolidation, I find it surprising that Gold has not been weaker. On Friday, oil prices rebounded by more than $1, however, I think that the $57.50 to $58 level would now provide very strong resistance and I think that Oil is medium term bearish, although a bounce is now probably quite likely. The energy market has had a hard time maintaining rebounds lately, despite several factors that have given prices a boost in the past: the possibility of another OPEC cut, tensions in the Middle East, still somewhat strong global energy demand, and escalating violence in Nigeria.

3. Over the weekend, I spent some time with a friend who works at Merrill's commodity desk who told me he believes that energy prices may be range bound in the near future, but he was bullish going into next year. His top base metal picks were currently nickel and zinc. He does not cover precious metals.

4. On Friday, Yamana Gold Inc. (NYSE:AUY - News), transferred its listing from the American Stock Exchange to the more prestigious (and more selective) New York stock Exchange. I think this may be a positive move for Yamana as it may lead to increased overall trading volume and liquidity. Other major Gold companies listed on the NYSE include: Barrick Gold Corporation (NYSE: ABX - News), Goldcorp Inc. (NYSE: GG - News), AngloGold Ashanti Limited (NYSE: AU - News), Gold Fields Limited (NYSE: GFI - News) and Harmony Gold Mining Company Limited (NYSE: HMY - News). Silver Wheaton's (SLW) trading volume arguably increased after it transferred from the AMEX to the NYSE on May 9, 2006, though a part of that increase was also likely due to the continuing success of this company. The NYSE has a total market cap of about $25 trillion and a daily trading volume value of about $86 billion.

5. Yama had provided its 2007 and 2008 operating guidance following the closing bell the previous trading day. Gold production is expected to exceed 620,000 ounces in 2007 increasing to more than 800,000 ounces in 2008 from mines currently in production and mines under construction. Total cash costs will be a stellar -$114/oz in 2007 and -$185 in 2008 (i.e., Yama will be making additional money for each ounce of Gold sold as a result of copper credits).

Friday, January 12, 2007

H&S Nullified

Comments: Bullish! It looked bad on Thursday, but a nice surge on Friday put Gold above the neckline of the H&S pattern. Looks like $645 may be the next price target.

Thursday, January 11, 2007

HUI Chart & Commentary

Comments: Sorry for not updating in a few days. If you've been checking in here, I really appreciate it. I've had some computer problems (comp restarting by itself). It was probably hacked by the Gold cartel. Anyway, to make a long story short, we're kind of in trouble here in Gold at the moment. After a breakdown on fairly heavy volume below the neckline of a Head & Shoulders top in Gold, we are now consolidating right below the neckline. The same H&S patterns are in effect in the HUI, XAU and GDX. The price target is about $575 and it would take a move above $615 to $620 to nullify it.

With Copper and Oil now in medium term bear markets (we'll see about Oil soon), I would be surprised if gold manages to bottom here above $600. I think we may need to see a retest of the Gold bull, which would mean $570 to $580. That's just my thought.

Thursday, January 04, 2007

Good vs. Evil

Jim Sinclair is an important gold industry insider and his site, MineSet is a must read for serious gold investors. However, at times I feel he gets a little shrill, playing the blame game when Gold doesn't appreciate as hoped.

It seems that in Jim's World, there are only two forces at work affecting Gold:

1. Honest investors who buy Gold and believe that Gold is the only means to wealth--and the companies that explore and mine for it.

2. Boiler room Gold shorting operations run by the "spin doctors" who are members of the Gold cartel.

If you get too carried away reading Jim, it's easy to begin believing that every day the action in Goldconsists of Biblical struggle between these sides, pitting GOOD against EVIL.

Metals Market Wrap-Up

1. Gold stocks as measured by the HUI and XAU are now in a short term downtrend. However, I believe that downside may be somewhat limited as long as the USDX stays below 0.845. The USDX is currently running up against some resistance. Unfortunately, the failure again at $640 spot gold was a bearish indication for now. It's possible we could see some choppy action, in which it will be good to buy weakness and sell strength.

2. Northern Dynasty Minerals Ltd. (NAK) is continuing to get flak about the development of its Pebble Mine gold project in Alaska. AP reported earlier today that Earthworks, a Washington D.C.-based environmental group, is paying between $10,000 and $20,000 to place ads in the January, February and March issues of National Jeweler, an industry newspaper, designed to "educate" jewelers about the Pebble Mine project in the Bristol Bay watershed, home to the largest sockeye salmon fishery in the world. The ads will ask jewelers to make a pledge at the Web site http://www.protectbristolbay.org. The pledge is as follows:


"1. We pledge not to source gold from the proposed Pebble Mine or any other major mines proposed in the Bristol Bay Watershed; and

2. In recognition of the importance of conserving this region, we support permanent protection from large-scale hardrock mining on public lands in the Bristol Bay Watershed."

I checked on the pledge web site but could not find whether any companies had signed the pledge. One link that was kind of interesting, at least from the environmental standpoint, leads to an interesting article arguing that junior exploration companies are less environmentally responsible than the majors because they have less of a history and less money. It's an interesting argument.