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%

Important Inflection Point

As the HUI is set to test its downtrendline today, we face an important inflection point. The HUI needs to confirm the downtrend break already achieved by the XAU and the GDX. Although there are a couple of yellow flags, I believe that the HUI will shortly break its downtrend and follow the XAU and GDX higher.

The yellow flags are the following:

1. Non-confirmation by HUI of the downtrend break in XAU and GDX.

2. Low to moderate volume in the GDX following downtrend break and little follow through in XAU or GDX downtrend breaks.

3. Gold tentative having gained relatively little since the USD breakdown.

Although these flags are noteworthy, I think they will not preclude a downtrend break by the HUI in due course.

First of all, we need to understand why the HUI is showing a non-confirmation today; why is it still below its downtrend line? The main reason is because of its outperformance in September, which cratered a less steep downtrendline due to the September spike up which had not been confirmed by the XAU. In a sense, to attach major significance to the HUI's non confirmation thus far, would be like punishing the HUI for being extra strong in September. In this sense, you can sense the sometimes arbitrariness of the angles of trendlines.

I think it is significant that the traditionally weaker XAU broke out, rather than the stronger HUI. Usually it's the XAU that needs to confirm the break out in the HUI, rather than the other way around. I think it's a bit upside down to argue that the stronger index has to confirm the weaker one.

Second of all, the situation we face today is completely different than the one that we faced in September. In September, when the XAU didn't confirm the HUI, the HUI had surged on expectations of strong seasonal demand, which failed to materialize, and ion the face of a recent downtrend break in the USD. Today, we have strong seasonality AND a major breakdown in the USD, the type of breakdown from which we are unlikely to see a strong recovery since it sliced through major support. That is a significant difference and provides a reason for the HUI to go higher this time.

Finally, we have the action in the GDX. Although it hasn't shown a surge in volume, it has shown steady accumulation the last few days, accumulation which it hasn't seen in months. (I can't post the GDX chart at the moment due to a technical issue.)

HUI and XAU Charts & Commentary

Comments: I think there's a clear channel line being formed in the Gold stocks. The buy and sell points are as outlined in the chart above. I think we're going to have another shot at $642 tomorrow. I'm kind of bullish on this right now even though it's closer to the sell channel line because (i) we had the downtrend break just recently, and (ii) MACD bullish crossover.

Comments: The HUI is the one that hasn't broken its downtrend yet and it needs to to confirm the the break in the XAU downtrend. It's ironic that the HUI appears to be lagging this time. After all, it's higher trendline is because its September high was relatively higher than the XAU--it was in September that the HUI started to break out but the XAU failed to confirm.

Maybe the XAU is more bullish because it weighs silver stocks more which have been on a roll? That's actually something that I need to check: whether the XAU is more weighed towards Silver than the HUI (it is after all, called the Gold & Silver Index). If you happen to know the answer to that question, please let me know by posting below or by e-mail.

Newmont Mining Corp. is Undervalued

Comments: NEM is seriously undervalued here. It was valued higher in 2006 when Gold was $475 and even higher in 2004, when Gold priced at $425. I know they have reserve replacement issues, and declining production in some mines, and recently they've been bitten with the country risk issuen in Uzbekistan, but it's still a very solid company. Barron's was right to recently state that Newmont could still sail to $70+.

Why I'm More Bullish on Silver than Gold

Silver is definitely looking more bullish than Gold these days. Whereas most Gold stocks are breaking downtrends, many silver stocks are looking like they are getting ready to break out to new highs, which portends greater potential for gains in the near future.

I'll definitely be overweight Silver in the coming couple of months. The only Gold plays that I really like right now are AUY, AEM and GSS, and the latter is always a bit of a question mark.

Anyway, check out the Silver Stock charts below:

Comments: After underachiving for so long, HL looks like it's getting ready to retest and probably break the April highs. Although it's not the most pure Silver play, HL nevertheless billed itself as the lowest-cost primary silver producer in North America in 2005.

Comments: The only publicly traded company with 100% of its revenues from Silver, SLW also looks like it's getting ready to retest its all time highs after getting temporarily beaten down on the news of GG's sale of a portion of its SLW holdings. Since GG continues to be a major SLW shareholder, there is some possibility that this news might create a perception that there is some share overhang from possible future share sales by GG. However, GG stated that it has no intention of selling more SLW shares in the near future and, in any case, the past sale was a private one to investors off the market, so I don't think this will be a major issue.

Comments: Although not quite yet ready to challenge the April highs, PAAS is breaking out of a 5 month consolidation base and has topped its September peak.

Comments: SSRI has been coming out with lots of good news recently and has overtaken SLW as the silver play of choice, at least for now. It made a breathtaking move soaring to all time highs above an ascending channel line on Friday following heavy accumulation.

Charts of Interest KGC / USGL / CUP / RGLD

Comments: Update from a couple of days ago. I think CUP is getting ready to break its downtrend. I'm excited about the prospects for this stock. Keep in mind that they have 2 pieces of good news in the pipeline--the announcement of reaplcements to the departing CFO and CEOs. Any news that helps to clear up that uncertainty surrounding the leadership of the company will be beneficial for CUP and if it comes during a time of rising Copper prices which look like they may be ready to reverse their recent downtrend, would be tremendously benefial to CUP. I'm excited about the prospects for CUP.

Comments: USGL hasn't significantly come off its lows yet but I think it might be getting ready to make some kind of decent move soon. This stock has some catching up to do and there is still the issue of consolidating the Cortez trend in Nevada. There hasn't been much news about that recently, but if that whole thing gets started again, USGL could enjoy a decent pop--though there could definitely be some jittery trading prior to the completion of any merger, considering the first merger attempt had to be aborted which marked the top for USGL followed by an ugly reversal.

Comments: Most larger cap gold companies announcing mergers have initially sold down, traded sideways for a while, then rallied after the completion of the merger. GG and IAG are good examples of that kind of action. That's why I'm putting KGC on my Watch List. It's scheduled to close its $3.1 billion merger with Bema Gold (BGO) in late January. The deal requires approval by 2/3s of the shareholders of Bema, which vote will take place in early January. The deal will also involve the spin off of certain exploration assets. I'll be looking to build a position in KGC in mid to late January.

Side Note: KGC's investor relations didn't respond to my question about the merger. I guess they're busy working out the details fo the deal...

Terms of the Transaction: [http://kinross.com/news/1162006-1.pdf]

Comments: Royal Gold (RGLD) recently announced their first significant deal in ages. On October 26, 2006, RGLD announced an agreement to purchase a sliding scale net smelter return (NSR) royalty from Nevada Star Resources Corp., on the Gold Hill deposit, increasing RGLD's already substantial exposure to Nevada. The payment will be $3.3 million for a royalty with a maximum payout of $10 million. The Gold Hill deposit is controlled by a joint venture between Barrick and Kinross Gold.

Early in October, RGLD CEO spoke about his days as a miner, recounting that there is a "tremendous amount of romance being at a mine site" in an interview with the Denver Post... Hmmm... Related Article: [http://www.denverpost.com/ci_4494031?source=rss]

Side Note: RGLD's investor relations has never responded to any of my e-mailed queries. I guess that's the other side of only having 13 empoyees. Not enough people to answer e-mails from investors...

Happy Times?

Comments: A forceful move down in the USD portends good things for Gold. There is still some lateral support but I think it's just a matter of time before that breaks--if it doesn't break early next week. The volatility bands were squeezing shut very tightly so there could well be quite a lot of volatility left in this move.

[Edit from Sunday 11/26: a senior Chinese F/X official was quoted over the weekend as saying that countries that are holding U.S. Dollar reserves find it difficult to diversify because no other asset has the same liquidity as the U.S. Dollar, making a big sell off in the USD unlikely. I think this news may result in some kind of bounce attempt in the U.S. Dollar. That's the problem with relying on these rumors that China is going to diversify out of the U.S. Dollar and into Gold. However, one alternative to the U.S. Dollar is the Euro, which offers plenty of liquidity. So, in my opinion, China doesn't need to diversify its reserves into Gold, for Gold to appreciate--they can indirectly cause Gold appreciation by buying the Euro instead, with which Gold has been strongly correlated.


Comments: The XAU was the index that failed to confirm the move up in the HUI in September, but this time it appears to be leading in breaking the downtrend, despite some weird-looking chandlestocks the last two days. Still need HUI to confirm the downtrend break (a move above 347 should do it).

Portfolio Gain/Loss for the Week: +4.75%. I made back last week's losses and then some. I bought back a bit on Friday, but I was careful not to go overboard just yet. Hopefully December will bring another nice long winning streak. In my options portfolio, I really lucked out on the FCX calls, which was a huge surge for me. I'm around half way to making back my depressing options losses now. Just going to take it one day and one week at a time.

USD Chart & Commentary

Comments: Perhaps my caution was unwarranted yesterday. When I look at the size of the down move in the USD, I can't help but think that a Gold rally must be around the corner. Only thing left is the lateral support. It's strange that the gold stocks were so lukewarm on a move in the USD like this. Very strange. Anyway, like I said a couple of days ago, a big move is coming in the USD. Deep penetration of the lower Bollinger implies that this move will have some legs (down). But we'll see. I got out of most miners yesterday because they reacted against the downtrend line. Might as well be patient a little longer and see whether we can close above the trendline.

Precious Metals Sector Recap

• Barrick Dogs NovaGold: Barrick is not to be easily dissuaded from its bid to acquire NovaGold. It's been a while since I've seen one company dog another like this so publicly. If you haven't read the below, it's worth a read. I'm guess it will lead to a law suit or two being filed by NG.

Related News Release: [http://biz.yahoo.com/iw/061117/0186161.html]

• Update on Platinum ETF: Looks like people are now getting sceptical about a platinum ETF coming out as no filings in connection therewith have so far beeen made. Platinum made what looks like a reversal spike up, going as high as $1400 per ounce before falling back now to $1145 per ounce, all during the last day and a half. Because people voiced the same scepticism about the Silver ETF (that there's not enough liquidity in silver to allow an ETF), it's hard to know what to make of the rumors. However, one statement did catch my eye in the article below: "The longer term prospects for platinum demand have been damaged by this move. It will accelerate substitution efforts from industrial users of the metal and with Chinese jewelers unable or unwillingto buy platinum ahead of Chinese New Year it will prompt a switch to other precious metals--white gold, yellow gold and palladium," according to UBS analyst John Reade. I have a feeling that this big spike in platinum prices may mean good things still to come for palladium, and so I haven't yet sold my PAL holdings.

Related Article: [http://www.platts.com/Metals/News/8748768.xml?sub=Metals&p=Metals/News]

HUI and USD Charts & Commentary

Comments: Not crazy about the action today. Sold most of my precious metal holdings after the HUI couldn't break the downtrend line. It's too early to tell though whether we're going to get a swoon, or whether this is just a pause before the Thanksgiving holiday. I'm carefully watching the slope of the 200 day moving average. On the XAU, the slope has turned down, thus confirming the bearish crossover of the 50 below the 200 day moving average. Will the 200 day moving average do the same on the HUI? That would make me more bearish. Right now, I'm just stepping to the sidelines. One other thing to note, is that it looks like today may end on a shooting star candlestick, which can be a bearish reversal candlestick.

Comments: This is the chart that holds the key. We need to keep in mind that above $600, physical/jewelry demand has not proven itself. So it's all about which way the dollar goes now. There's a big move brewing in the USD judging by falling volatility as measured by the bollinger band width. The other indicators (the fact that it's trading below the 50 and 200 day moving averages and below 50 RSI) seem to point towards a drop. But we can't be sure, that's why I've decided to take the more cautious route of stepping to the side, especially after the mediocre action in the stocks today.