Thursday, May 31, 2007

Turning Point?

I hate to say it because there have been so many disappointments and false hopes along the way, but today is the first day that miners are positively diverging from Gold in a very significant way. Silver is back out of the danger zone and the HUI should be above its broken trendline, at least as of midday, though that is something I will have to double check. The end of day action will really be the key here. Let's keep our fingers crossed.

HUI absolutely needs to get past 334-335, otherwise it could be a triple top on the 10 day chart.

GDP revision down to 0.6% growth (barely positive growth) is what seems to be feeding this move now along with some other pretty hairy economic numbers recently. Also, sentiment recently was just getting extremely bearish, probably too bearish.

A $1 million value bathtub made from 18 karat gold was stolen from a posh Tokyo hotel yesterday.

Wednesday, May 30, 2007

Metals Market Wrap-Up

1. What the hell is going on with gold stocks? Yesterday gold was up big and the HUI finished in the red. Today, Gold is barely holding on to the lows of the recent move, and gold stocks look like they are positively diverging. C'mon!

2. Jimmy Rogers has turned bearish on Gold for the intermediate term, citing too high COT open interest and general excessive speculation. Jimmy has always argued that there is more money to be made in other commodities, and recently, in particular, the agricultural commodities. But nevertheless, he's an important voice on commodities in general, including Gold.

3. It's not easy to argue that NEM is still the bellwether for the industry, since it is no longer the largest cap stock and since now ABX is a lot less hedged, but, for whatever it is worth, NEM looks like it has been positively diverging in the last few days.

4. Looks like the Chinese regulators are taking the right approach: trying to prick the stock bubble before it gets completely out of hand. I think that is the right move and it will ensure that there is no real "crash". Still, a correction of 20 to 25% is definitely possible. Unlike some analysts who believe now that the Chinese market is the be all and end all, the critical linchpin that, when gone, will cause massive sell offs in other markets, including world stock and commodities markets, I think the Chinese market is just one big irrelevant red herring.

  • (i). The Chinese market had nothing to do with anything until about 1 year ago. The current bull market in commodities and in other stock markets owed nothing to Chinese stock market, which was a phenomenon that arose barely in the last year. How did the Chinese market suddenly become so important for everything?
  • (ii). The Chinese market still has significant restrictions on foreign ownership. Sure, some foreigners are able to override that, but it's nothing like Tokyo or NYSE. Foreigners haven't penetrated that market enough for it to have any real collateral significance.

The Chinese market is one big red herring. I'm surprised that so many people believe it's now a linchpin for world markets and the world economy as a whole. It's right up there with the "unwinding of the yen carry trade" scare for the dumbest popular ideas floating around the markets these days.

Tuesday, May 29, 2007

Gold: The Bear Case...

If I were to try to make the bear case for precious metals, I'd have to point to these two charts as presenting the strongest arguments.



Comments: A bullish wedge with the RSI not confirming the recent downward price action. It looks like it is setting up to rally to the $86 to $88 area--if it can break out of the wedge. There is resistance between $82.5 and $84.



Comments: Silver looks VERY weak right now. MACD looks like it wants to roll over.

Coming to think of it, the HUI chart isn't looking all that swell right now either.



Thursday, May 24, 2007

Gold Stock Valuations

I highly recommend the latest article by Adam Hamilton about Gold Stock Valuations.

It's been not much of a secret that gold mining companies have struggled to meet earnings estimates this quarter. In fact, I'm hard pressed to think of any XAU or HUI components which met let alone exceeded estimates.

This was something that really bothered me. But after reading Adam Hamilton's article, I have come to realize that this is really a non-issue.

Hamilton, arguably the most cerebral of the gold analysts, sets for the following arguments:

1. Gold mining stock P/Es have been falling drastically since the start of the gold bull market.

2. Today, gold mining stocks are the cheapest relative to earnings that they have ever been during the current bull market.

3. While the gold mining sector initially needed contrarians to buy into the sector at the gold bottoms around 2001, when P/E ratios were sky high, Hamilton makes the fascinating argument that the succeeding bull market waves in gold miners will ultimately come from mainstream value investors who will realize that gold stocks are finally competitive in value to main stream growth and technology stocks.

The argument is, as is typical of Hamilton, very strongly supported with historic evidence and facts.

I've been worried a lot about how miners have struggled to make money. But after reading that article, it was pretty easy to come to the conclusion that, for the most part, the failures to meet earnings estimates are a non-issue in the gold mining sector, considering the long term trend of falling P/E ratios.

Metals Sector Wrap Up

1. AP reported that sales of new homes surged in April by the biggest amount in 14 years, but the median price of a new home dropped by the largest amount on record. Now if that was graphed on a candlestick graph with volume overlay, it would look like a big and long red candle on heavy volume. Ouch!

2. Novagold Resources (NG) announced yesterday a partnership with Tech Cominco (TCK) to build its $2 billion Galore Creek copper-gold mine in northwestern British Columbia. Although shares of NG surged up to 11% yesterday, they are still well off the highs during the period of the Barrick bid. Under the terms of the partnership, NG will cede 50% control of the project to Tech Cominco. I wonder if some NG investors have had second thoughts about rejecting the tie up with Barrick.

3. The surge in the price of uranium during the last months seems to have prompted some gold mining companies such as Harmony Gold Mining to consider ramping up uranium investments. Harmony is considering spinning of its uranium assets into a separate company.

4. Speaking of Harmony, it joined the list of recently miners to close out their gold hedge books when it announced last week it closed out its Australian hedge book for $75 million.

5. CUP has been on fire lately despite copper weakness. HL at trendline support right now.

Tuesday, May 22, 2007

Metals Market Wrap-Up

1. It looks like OMR's recent underwater shipwreck treasure find is stirring up quite the controversy now, with Spain wanting a slice of the pie, if not the whole thing, if it turns out that the find was made in Spanish waters.

2. In company news, Hecla (HL), a primary silver company, announced yesterday a stoppage at its Mina Isidora gold mine near El Callao, Venezuela. According to Hecla's President of Venezuelan Operations, Mike Callahan, "We would expect about a 10% effect on gold production for the year. This would be reflected in second-quarter results, which could be negatively impacted by approximately 12,000 ounces of gold. We would anticipate a negligible impact on the company's gross profit." HL is trading down 3% today in contrast to the HUI which is down about 1%.

3. GBN up big today on a down day in Gold. I wonder if something is brewing there.

Gold Sentiment Gets Nasty!

Sentiment has been turning very bearish in Gold recently. First the fears that IMF would unload 400 tons of Gold to help plug a funding deficit then the media attention on the sudden drop in GLD's gold holdings that "spooked" investors".

According to the report on the GLD outflows, "analysts cautioned that a continued outflow could be an indication that further liquidation in the gold market might be on its way."

And look at the analyses that are being bandied about these days among amateur investors:

Of course, not every analyst is bearish, but still, there does seem to be a fair amount of fear among gold investors these days which is being fueled by media reports. No doubt a part of it originates from memories of last year's painfully unpleasant May super selloff in Gold that continues to linger in the minds of Gold bulls.

Whatever the reason, fear usually means opportunity. The current horrible sentiment among gold investors is just making me all the more bullish.

Saturday, May 19, 2007

Spotlight: Odyssey Marine Exploration (OMR)

Do miners have the right business model for finding silver and gold?

Odyssey Marine Exploration, an AMEX-listed company (OMR) specializing in the archaeologically-sensitive exploration and recovery of deep water shipwrecks throughout the world announced on Friday what is believed to be the largest collection of coins ever excavated from a historical shipwreck!

The artifacts recovered from the site include over 500,000 silver coins weighing more than 17 tons, hundreds of gold coins, worked gold, and other artifacts. According to preliminary reports, the value of the find may be around half a billion dollars.

Considering that the company had a market cap of a little over $200 million, it's one day surge of over 80% on Friday is understandable in light of the massive potential value of its discovery.

Thursday, May 17, 2007

Yamana to Sell Fool's Gold!

1. Yamana Gold (AUY) is investigating the sale of pyrite and sulphuric acid from its gold and copper Chapada Mine. What is pyrite you may ask? Pyrite is that shiny metallic mineral popularly known as fool's gold.

2. Some encouraging news from the World Gold Council. Most recent statistics indicate that gold demand grew last quarter not just in value terms, but more importantly, in tonnage terms. While total demand in dollar terms rose 22 percent, volumes of gold sold edged up 4 percent at the same time to 831.7 metric tons.

"The absence of the extreme volatility of early 2006 increased gold's appeal, said council spokesman George Milling-Stanley. 'It's not the absolute price gold reaches,' he said. 'It's how it gets there. A volatile price makes consumers all over the world hang back.'"

I consider this to be a very important piece of news. Even though the next upleg in gold is likely to be primarily currency related, we must not forget that physical/jewelry demand has been the bread and butter of the Gold bull, accounting for 70 to 80% of the total demand. It's very good to know that physical buyers have adjusted themselves to the higher prices.

3. Dehedging is all the rage lately. First Barrick and now DROOY affiliate Emperor Mines has unwound its hedge book.

4. Miramar ("Arctic Gold") reported intriguing drilling results at its Hope Bay project in Canada, with several drill holes returning visible gold. MNG is up over 8% so far in the day.

5. Moody's revises Newmont's (NEM) credit outlook to negative from stable, citing costs and cap ex.

Volume Coming in Fast and Thick!

Comments: Finally the volume is starting to fly. That's s good sign. GDX/HUI positively diverging from Gold as well.

Tuesday, May 15, 2007

Precious Metals Sector Wrap-Up

1. Looks like the communist leaning New York Times is finally reaping what it has sown.

2. As predicted, AUY rolling over after its earnings miss. This action just confirms what the chart has been saying recently--which is that AUY is currently destined to perform at or under par with the HUI. The future remains bright however. Below $13, AUY becomes interesting. GSS also not behaving too well at the moment. Below $4.00 and $3.75 comes into play.

3. Hopefully TRE will finally roll over as it has been threatening to do for some time now. That will create a buying opportunity--though considerably lower than where it is now.

4. I wonder how low NEM will drop. Now that ABX is unhedged, it may eat NEM's lunch, at least in the near term.

5. A whole slew of earnings misses int he precious metals sector during the last couple of weeks. Hard to think of any companies that actually beat estimates. If you can think of any that beat estimates, let me know.

6. I'm still fretting about the COT dilemma.

Monday, May 14, 2007

Bottom in for Gold this Week

I think we're almost at a bottom for gold and Gold miners. It's getting very close to the trendline on the HUI and we recently bounced down from 5.00 on the Gold to XAU ratio. The $82.50 to $83.00 area looks like a steel ceiling for the USDX.

The only negative factor is the net commercial short position in the COTs. I'm hoping that as a result of the recent sell off, the net short position will go down significantly.

Fundamentally, I've only been keeping a little attention recently to the numbers coming out on the U.S. economy, but generally speaking, 2 out of 3, if not 3 out of 4, economic reports are Gold positive these days. The USD is also taking hits on the geopolitical front.So fundamentals are in place for a rally, in my opinion.

I think a part of the selling right now is due to the bad memories of the Gold sell off last May which occurred around this time. Seasonality turns negative around this time, but I think that this time, it is less relevant because this time, the Gold surge will be driven by currency considerations, rather than women buying gold jewelry in China and India.

I think the next targets will be 360 HUI and then, not long afterwards, 400. It wouldn't surprise me to see HUI go to 325 first though.

Exploration Value

I've come up with a new matric, called "exploration value", which is calculated by dividing the exploration budget for 2007 by the market cap (as of May 11). Here are the results for a few companies. According to this matric, GSS has the largest exploration budget to market cap ratio.

Company Exploration Budget Market Cap Exploration Value

GSS 15m 0.965b 0.015544
NEM 175m 18.54b 0.009439
AEM 40m 4.35b 0.009195
GG* 120m 17.07b 0.007029
AUY 32m 4.95b 0.006464


(*GG expressly stated in its annual report that it will focus on development rather than greenfields exploration or "wildcatting" as it calls it).

If you happen to know the exploration budget for 2007 of any metal company, let me know, and I will compare it in the table above, and send you an updated link.

Sunday, May 13, 2007

Update - Kimber Resources (KBX)

Not much has happened at Kimber and the company has been eerily quiet on the news front. No news on the CEO search--maybe because potential CEOs are wary of an activist shareholder looking over their backs. The latest news has been a joke. For instance, Kimber recently announced that it drilled one hole for a possible extension to the Carman deposit. Total fluff.

Just how far things have fallen at Kimber is indicated by the new description of "About Kimber" which is included in KBX news releases. Previous releases stated to the effect that Kimber is hoping to prove up a resource of 3 million gold ounces at Carmen and nearby structures. Now, at the end of the description, we instead get to read about Carman's most promising "grab sample" results from a completely unrelated property.

The Carmen prefeasibility study, originally scheduled for February last year, rescheduled for November last year and then indefinitely put on hold, remains a major question mark.

The potential upside is that some of the drill results at Carman have not been reflected yet on their resource updates, the prefeasibility study may come through one day and many of Kimber's properties still remain unexplored. Also, KBX is close to major support now. But don't hold your breath. This company has made many mistakes.

I have a feeling that once the CEO is appointed, Kimber will shortly thereafter come out with the prefeasibility results. I'm guessing that the largely completed but unannounced prefeasibility results are being currently withheld to help attract the new CEO, since that will give the newcomer some momentum, starting off. But who knows what is really going on there.

Charts of Interest Gold / HUI / GSS / BVN


Comments: Gold looks like it may be getting close to support, if it hasn't reached it yet. COT numbers are still bearish though.


Comments: HUI close to support and may be bouncing from 200 day MA.



Comments: BVN looks like it's trying to go parabolic, but RSI looks like it's making a lower high. Non-confirmation...


Comments: Chart a little scary. Let's hope old channel line holds as support, though any rallies might be capped by broken trendline at around $4.40. Weakness is Gold could easily see GSS go to $3.87... maybe even $3.75. GSS has a lot of intriguing prospectss, but it just can't completely get its act together. Last quarter was another loss with one of their two mines having spectacularly horrible cash costs, and there's likely more to come in Q2.

They've already missed their guidance for the year in terms of production and cash costs, since their previous estimates assumed that BIOX would be commissioned by April 1. On the other hand, the future looks much brighter if the BIOX plant can be commissioned and if the energy problems can be solved, the HBB feasibility study was fantastic (though analysts had expected lower capex), and there are plenty of exploration efforts in the works--results from Sierra Leonne (of all places...) are due in this quarter.

Thursday, May 03, 2007

Precious Metals Sector Recap

1. There was only one analyst who had an estimate, but RGLD missed it by 33%, making 14 cents per share earnings vs. estimate of 21 cents per share. With a P/E ratio of 45, it's hard to imagine how it is possible that RGLD could be trading up today with such a miss, though admittedly, I didn't read through the whole report or listened to the CC yet. By the way, it seems strange that the analyst keeps missing the earnings numbers for RGLD. I'm hardly an expert in this but it seems that royalty streams shouldn't be too difficult to estimate once you have an idea of the approximate production from the relevant mines.

2. CDE announces a merger with 2 companies that are affiliated with each other for a deal value of $1.1 billion. CDE only down about 2% so far however and it's trading right at that support which is just below $4.

3. PAAS has bounced back nicely since their miss of a few days ago. It seems that this PAAS has stockpiles of concentrate that had not been sold yet so that mined ore should create revenues this coming quarter.

4. As for gold, I don't think the bottom is in place yet. Still need lower Gold to work off some of that bearish COT commercial net shorts. In fact, I don't see how we can get a sustainable rally without lower Gold prices, unless the Commercials pull back on the net shorts at the end of the week.

Wednesday, May 02, 2007

HUI to Bottom Soon

I think we'll see a HUI bottom between 325 to 330.

Is it time to give the gold miners another look. As with every investment idea, there are pros and cons and in the end, an element of luck and chance is involved, but I think there are some interesting fundamental factors that argue in favor of the miners getting their groove back soon.

Let's review some of the Pros and Cons for investing in the miners at around here or a bit lower.

PROS:

  • The miners have been selling off yet again and as the sell off has progressed, valuations are becoming more attractive.
  • As a significant contrarian indicator, there is very little interest in investing in gold miners these days. Traditionally, gold miners give 2 to 3 times leverage in the movement of gold, but during the last 12 months, returns from the main gold mining index are below that of Gold itself, which is a significant anomaly and gives a good idea about how little interest there is in this sector right now. The miners are considered by at least one important indicator, the Gold to XAU ratio, to be extremely undervalued relative to the price of the metal.
  • The fundamental picture remains sound and has probably improved since 6 months ago. Briefly reviewing the fundamental picture: (1) US trade and domestic debt continue to be high, (2) inflation continues to be an issue, it's not spiralling, but it's not going away completely either... inflation has not had a super spike as some people feared, but on the other hand, the Fed hasn't totally dealt with this issue either so that it has continued to act like a gnawing cancer, rather than a heart attack, (3) U.S. economic growth has slowed, creating pressure on the Fed to lower interest rates, and high interest rates (or should I say interest rates that are higher than in Europe and in Japan, since 5.25% is not "high" by historic standards) are one of the few remaining pegs keeping the USD afloat (though I recently read an interesting argument that lower interest rates will decrease the debt load owed to foreigners in the future, so that we can't say for sure that lower interest rates would be USD negative), (4) geopolitical factors continue to argue for a risk premium in Gold, Iraq, Iran are the main issues obviously, but there continues to be trouble in important oil producers in Africa and South America, among other issues Generally speaking, although it could be debated, I think we continue to live in a world where there is a greater chance of some horrible disaster or war breaking out, than for some incredible peace to break out, if you know what I mean.
  • Chart factors are quite favorable--though technical analysis is a bit like astrology. Sometimes it works well, sometimes it doesn't. Adam Hamilton recently posted an interesting piece at www.zealllc.com in which he argued that the HUI has already started its inexorable climb to 550 or higher!

CONS (or should I rather call them risks)

  • May to August are seasonally the weakest months for physical Gold demand. In fact, last May was simply a total catastrophe and people still have painful memories of that. Traditionally, physical gold demand (most of it jewelry demand) accounts for 70% to 80% of total gold demand so weakness in this type of demand is significant. However, there are two counter arguments to that (1) I believe that the next wave up in Gold will be driven primarily by USD currency hedging concerns rather than women buying jewelry in India, and (2) I think last year's painful May dropoff and the specter of weak physical demand during the summer, creates a kind of psychological wall of worry that markets like to climb.
  • A gold rally would depend in large part on the USD breaching levels against competing currencies that have never been seen before. I think this is possible, and in fact inevitable, in light of what I have learned about the economic outlook and current status, however, betting on it happening in any particular time period is "risky" in the sense that it's difficult to predict when exactly it will happen and betting at the wrong time, could end up costing.
  • The USD is very oversold. You've probably heard of the Euro making new all time highs against the USD recently. A relief in the USD is possible, which could potentially be Gold negative. My counter to that is that there is a pretty good chance that any relief rally would fizzle, as neither the fundamentals nor the chart of the USD index are very encouraging going forward. I'll be looking for the 82.5 to 83.0 level on the USDX to stop any USD rally.

Precious Metals Sector Summary

Recent highlights from the Precious Metals sector:

1. Vista Gold (VGZ) announced on Monday that its delayed arrangement whereby it will spin off shares of a new entity named Allied Nevada Gold Corp. will finally close on May 10. VGZ had a breakout recently, so it will be interesting what happens to the shares of the two entities. I have a feeling that the Allied Nevada Gold Corp. spin off will be a success, since this entity will own VGZ's Nevada properties, which could be in high demand.

2. Barrick (ABX) announced the closure of its corporate hedging program, reporting a one time charge of $557 million in connection therewith. ABX will now be selling all its gold at spot prices. Barrick also raised its dividend by 36%. ABX's chairman and founder Peter Monk recently mulled the possibility of ABX's diversifying further into base metals in light of ABX's underperformance relative to other miners. It's hard to understand that logic however, considering that base metal miners actually have much lower P/E ratios than Gold miners. Though, it is true that they tend to be significantly more profitable. Maybe in the long run, the market will recognize and fully value that profitability. Obviously, when the biggest player in the industry closes out its hedges, that is a sign that industry insiders definitely expect higher Gold prices going forward. In that sense, this news is bullish. On the other hand, it also eliminates a further source of future buying so in that practical sense, it is also not bullish.

3. Mine workers launched a nationwide strike in Peru on Monday to demand better job benefits, but it was unclear to what extent the country's silver, copper, zinc and gold producers would be affected. This is potentially bullish for metals prices as Peru is an important metal mining country, though for now, the strike is not that significant and has only just started. Companies with mines in Peru include ABX, BVN, NEM, PCU, Swiss-based Xstrata, and local miners Volcan and Cerro Verde.

4. My buddy Dean sent me the following interesting article about Gold and other precious metals and gem stones becoming an