Inflation Confusion

1. It appears that we're back in the land of inflation confusion. Yesterday's surprising CPI print which showed higher than exected inflation both in the headline and core level, led to a surprising result. Gold was up AND the U.S. dollar was up. Chuck Butler, the President of Everbank World Markets, had the following comment today on this continuing confusion about inflation and what it really entails:

"Yes, this goes back to the Pfennig I wrote a couple of weeks ago about how things have changed over the years, and that low inflation doesn't warrant a strong currency any longer... The markets crave high interest rates... And you don't get high interest rates without inflation! This thought process is demented... Unfortunately, that's the thought process in the markets these days, so we have to play the game."

2. It appears the insurgents in Iraq are using new tactics, blowing up a couple of tankers filled with Chlorine gas recently in so called "dirty" chemical attacks. Meanwhile, another helicopter was brought down by small arms fire. "Army Lt. Gen. Ray Odierno said the military has noted similarities in some of the eight helicopter incidents in the past month in which aircraft were either shot down or landed under fire. A few of them might have been ambushed, he said." 8 choppers have been downed recently.

3. Another surprise was the Yen trading at 10 year lows against some currencies following the BOJ's 0.25% interest rate hike to 0.5%. Not many things are going the way one would think they should. Though, frankly, I'm not that surprised that the Yen has been weak. In fact, I fully expect it to be weaker if the BOJ continues to manage it the way it has. The Yen is basically a third world currency with plenty of inflation in the pipeline already. They're a "mere" 19 rate hikes behind the U.S., and the U.S.'s 5.25% isn't exactly ultra restrictive in any case.

4. A ">$2 million coin anyone?

5. NEM and ABX announced earnings today. Looks like cash costs are rising all around.

6. Keep your eyes on this stock: Gold Resource Corporation.

HUI Retreats from Resistance

1. Looks like the HUI is retreating from resistance. That makes sense to me. As I mentioned, the fundamentals are not optimal at the moment for a great Gold advance and the mining shares have been underperforming Gold, which is often not a good sign. Sentiment has been getting pretty bullish recently as well, perhaps too bullish. 340 is first support on the HUI, but if it can't hold that, then I think we will see a more pronounced correction, with Gold retreating back to $640 or so. That might provide a good buying opportunity. I'll be watching the Gold/XAU ratio closely as well. It's at 4.74 at the moment, which is fairly high. Above 5.00 and I believe it's just a question of time before we get a reversal--though ideally, I'd love to buy back in between 5.10 and 5.30. actually, I'm hoping for a nasty sell of now that I've been out of the miners for a few days. Looks like Andy and my patience may have paid off after all.

2. In company specific news, the usually snake-bitten GSS, which was actually one of the few gold miners companies that really shone recently, is getting killed today after announcing a secondary offering. It's down almost 8% today. After the chart repairs the damage, I think GSS should be a good bet. They've been coming out with fairly good news recently and seem to be generally turning things around. I'll have to get Tom's comment on the latest announcement. EGO, another strong performer recently, is also slammed today after announicng that its merger talks with Centerra are over. down 6%.

3. SA and IAG on the other hand, are trading up because of positive announcements. SA announced that a study of its Mitchell gold-copper discovery has confirmed a major new resource which may have significant expansion potential. At the moment, they estimate that Mitchell, which is one of their two main properties (Courageous Lake being the other) has an inferred resource of 13.1 million ounces of gold. SA's CEO, Rudy Fronk states in SA's press release today that "We could not be more encouraged by our prospects for value creation in 2007." Of course every CEO is likely to say that, however, I think SA's optimism may be justified. IAG is up on the announcement over the weekend of a a substantial increase in gold reserves and resources at its Rosebel Gold Mine in Suriname. KBX has also been strong into the general selling.

4. Volume is now coming in fast and furious on GDX during the last 30 minutes of trading and that's not a good sign.

5. Goldcorp (GG) announced the sale of two mines today to raise $300 million in a cash and stock deal. One of the two to go was the underperforming Amapari mine in Brazil. The Amapari mine was a money loser for GG, operating as of September 30 at a cash cost of $538 per ounce. Looks like GG is continuing to raise cash for the development of the Penasquito mine in Mexico. UBS lowered its target price on the news for GG, noting that the consideration for the mines, which also included $100 million in the shares of the acquirer, was below their valuation for the assets. GG is underperforming the HUI today, down 3.23% right now.

6. Lots of company specific news today, however, on the geopolitical front, it's worth noting that the troubles in Somalia are not yet over, with attacks increasing recently. I still think that area may develop into an Iraq-type of situation and it is, after all, adjacent to a major oil shipping route. so this is a development that bears watching.

Gold Shares at an Important Juncture

1. As is apparent from the chart above, we're at an important juncture for Gold Mining shares. It could go either way, but I think we aren't yet ready to break out of the huge triangle pattern that has been developing since May.

2. The helicopter shootdown theme first identified here at the end of January is getting a lot of attention in the media recently.

3. Looks like the U.S. Mint is taking a step in the right direction with the rollout of the $1 coin. At least it will have some intrinsic value due to the metal content. If you know the exact content and melt value of the new coin, let me know.

3. In company specific news, UXG relaunched its tender offers for White Knight Resources, Nevada Pacific Gold & Tone Resources, each at a 25% premium to the price of each company's shares at a day prior to UXG's previous take over announcement. The offer will expire on March 23.

4. Copper Update: CUP is back in an uptrend. I'd accumulate on any pullback, especially if it pulls back below $4. NTO has also been strong during the recent mini surge in copper prices but it has major resistance at around $4.10. TGB is another copper play. But CUP has the best chart out of the three in my opinion.

Divergence of Opinions

An interesting divergence of opinion from two of the more notable Gold analysts. Clive Maud is very strongly bullish at the moment (though his opinion is a bit qualified) and believes that the breakout has already started. In his February 12 piece, provocatively titled "HUI Set to Advance To 700 - 900..." Maud writes that "gold’s next uptrend isn’t a matter of conjecture or about to begin - it has already begun."

Jim Sinclair, on the other hand, has expressed a rare note of caution due to the divergence between the price of Gold and the Gold mining shares, noting also on February 12 that "Gold breaks above a key level, but not gold shares in general. I find that disquieting. There are always exceptions, we both know that. I am speaking of market phases, not of trends. Within a major bullish gold price uptrend there are bear phases. If a short can cover at a profit it is a bear phase within a bull market."

Frankly, that's about as bearish as I have ever heard big Jim. Good to know that he at least still calls it the other way occasionally.

The thing that I will be looking for over the next few days is whether we see some leverage reappearing in the mining shares relative to Gold. That's been a long time coming and without it, I don't see this move going all that much further (though it could potentially go as high as $680). So far, I'm not seeing that. Gold is about as high as it was on Friday, but we're still 4 HUI points below the Friday HUI peak. But we'll see, the day is still young.

2. In the meantime, the trade deficit for 2006 set a new record of $763.6 billion. This was the fifth consecutive annual record, and a 6.5 percent increase from the previous record of $716.7 billion set in 2005.

3. Coming back to Kimber Resources, that snake-bitten company, since Kimber's AMEX IPO occurred fairly recently, it's difficult to determine what would be an appropriate level of support for the current down trend and offer a pretty decent entry point (or reentry point). We have to look to the chart the Kimber shares trading on the Toronto Stock Exchange to see how low it might fall. Looking at that chart, I think a price of about US$1.20 (Canadian $1.40) seems like it should be support eventually. Then the long road back up. [I will have to post the chart of KBX.TO later, as there seems to be a technical difficulty in doing so at the moment.]

4. My friend Sandra forwarded to me a piece from the WSJ about the rising popularity of palladium in jewelry. The article notes that palladium is starting to look attractive not only as a platinum substitute but also as a substitute for white gold (which is gold alloyed with another metal, like nickel), because it is now much less expensive and because it weighs relatively little compared to the dense platinum. Interestingly, the article noted that "about 80% of sales of palladium jewelry come from China". I guess the newly rich over there aren't quite rich enough to afford Gold and Platinum. Interestingly, as far as I am aware, the obsession with using platinum in bridal jewelry is fairly unique to the U.S. In most other countries I have been to, the preferred metal setting for bridal ornaments is gold. If you know of a country other than the U.S. in which a metal other than Gold is preferred for bridal jewelry, let me know.

5. In a development that is bearish for Gold, North Korea agreed to terms in the 6 party talks relating to the nuclear issue. North Korea has been nothing short of a disaster for gold investors in the last year. Empty threats and blather and malfunctioning missiles and now this. [Edit: I was subsequently reminded by my friend Christine that I should probably be looking at the bigger picture as far as this issue is concerned, rather than just from the point of view of an investor. After all, I live in Seoul and I can't make any profit if I am dead. Food for thought...]

No New Tactics in Helicopter Attacks

In keeping with the helicopter theme, another article has now appeared to weigh in on whether the recent helicopter shoot downs in Iraq constitute a new trend. According to the AP, the U.S. Army's vice chief of staff, reported today that there is no basis for believing that insurgents' recent success in shooting down U.S. helicopters in Iraq means they have developed new attack methods or discovered new U.S. vulnerabilities.

I agree that it's too early to tell whether this is actually a new trend or simply a statistical anomaly. But I think the losses highlight the determination and ability of the enemy that the U.S. forces face in Iraq. After all, the U.S. has the best trained and best equipped armed forces in the world and you have to be exceedingly tough and determined to engage them successfully. Whether or not this is a new trend, the recent losses point to the fact that the U.S. is not fighting a static enemy, but an enemy that is cunning and adaptive.

Looking ahead in time, what would be the effect on Gold if the U.S. would be forced to withdraw from Iraq? It's unclear, but obviously it would depend on the terms on which the U.S. withdrew and what would happen afterwards in Iraq. Obviously, two scenarios that would be fairly Gold bullish in the long term would be if Iraq fell under the sway of militant Islam or if it became a state closely aligned with Iran, allowing Iran to control both sides of the Hommuz Strait, which is a major oil shipping route. In the short term, this might be offset somewhat by the fact that the withdrawal would obviate the immense dollar dilutive expenditures that are required to keep the War going as well as putting a stop to the steady material and personnel losses.

Attacks on Copters in Iraq Seen as Growing Risk

Whenever I read about the helicopter downings, I always can't help but think of my good friend and investing partner Andy, who is a captain stationed in the U.S. military base in Korea and whose proficiency includes being a Blackhawk pilot. I'm glad that he's safe and warm in Seoul rather than risking his life over in Iraq whenever I read about a new helicopter that was downed over there recently.

As I mentioned yesterday, there seemed to be a nascent trend of increased helicopter downings. A Bloomberg article that appeared on the front page of Yahoo News today seems to have picked up on this trend which I first started tracking here at the beginning of February. The article gives credence to my analysis, including the alarming parallel to the war in Afghanistan. It also includes an interesting speculation about the possibility of Iran's involvement in arming the insurgents in Iraq and the implications that such a development would have. On a related note, an Al-Queda group in Iraq released a video today of what it said was the downing of a U.S. helicopter.

I cite in relevant part from the Bloomberg article:

"The spike in successful attacks on U.S. helicopters in Iraq creates a growing risk for a major component of American military operations just as a new campaign to quell insurgent violence in Baghdad is beginning.

The downing of five helicopters in the past three weeks shows that Iraqi insurgents are becoming more adept at attacking these aircraft, which the military relies on for a variety of critical functions.

U.S. military officials are studying the downings to determine whether they reflect a statistical anomaly, or ``some new kind of tactics and techniques that we need to adjust to,'' said General Peter Pace, chairman of the Joint Chiefs of Staff. One thing that is clear, Pace said at a Feb. 2 news conference, is that ground fire ``has been more effective against our helicopters in the past couple of weeks.''

Four other helicopters went down between Jan. 20 and Feb. 2, killing a total of 21 people. All were shot down, Pace said. The five downings in less than three weeks were the most in a concentrated period since January 2004, when five helicopters went down, according to a survey by Washington's Brookings Institution.

Helicopters will loom large as U.S. forces increase their pace of operations in a new campaign to suppress insurgents and sectarian militias, said Anthony Cordesman, a military analyst at Washington's Center for Strategic and International Studies. The vulnerability of ground vehicles to roadside bombs makes helicopters especially useful as an alternative means of transporting troops, he said.

The U.S. is likely to be providing air support for Iraqi forces even after most American ground troops leave, because the Iraqis have little air capability of their own.

The importance of maintaining that supremacy through helicopters is illustrated by the experience of Soviet military forces that fought throughout the 1980s to suppress an insurgency in Afghanistan.

The turning point in that war was the U.S. decision to arm the insurgents with shoulder-fired, anti-helicopter Stinger missiles in 1986, said Milt Bearden, who as CIA station chief in Pakistan coordinated aid to the rebels.

``The mood in the resistance turned on a dime,'' he said. ``You felt that if you had a guy with a Stinger with you, you had a talisman.'' As helicopter losses mounted, Soviet morale plummeted, and by early 1989 all forces had been withdrawn.

If Iraqi insurgents have obtained weaponry such as the Russian-made, heat-seeking SA-18 missile, it would increase the risk to American forces, McCaffrey said. It would also raise tensions between the U.S. and Iran, the most likely source of such equipment, he said.

According to the Brookings survey, 57 U.S. helicopters had been downed in Iraq through Feb. 4, resulting in 172 deaths, or about 5.5 percent of total American deaths since the conflict began in March 2003.

Cordesman noted in a paper released yesterday that this loss rate was far lower than the U.S. suffered in the Vietnam War, during which about 5,000 helicopters went down. Still, he said, the recent downings indicate that U.S. forces face an adaptable enemy that has learned to ``swarm'' around targets such as helicopters with concentrated ground fire.

And Cordesman said the ultimate target of the helicopter attacks may be much farther afield.
``The more media attention the insurgents can get through such attacks, the more likely it is that U.S. domestic politics will increase pressure for withdrawal from Iraq or place limits on the use of U.S. forces,'' he wrote."

$666 - the Number of the Beast?

1. I have been of the opinion for a while now that Gold is in a very wide and broad consolidation after the huge run up in late 2005 / early 2006. This means that I do not believe that we are going to significantly surpass the most recent relative high of $725 and in fact we may not even reach $700. The action today is illustrative of my point. Gold has broken out to $666 (nice number eh?) on a day when the IAEA suspended half the aid that it provides to Iran, and the HUI is up a measly 1.2% right now. This kind of underperfromance has been endemic throughout the recent move in Gold and I think it is a very strong indicator that this move isn't going to go anywhere particularly significant and that we're likely to retest lows at some point, before the broad consolidation can be termed finished. Very significant negative divergence with the miners. This is what happened during large portions of 2004 and 2005 when gold stocks failed to go anywhere.

In any case, I believe that $680 should cap the current move in the short term, and I expect that the underperformance of the miners will continue until then.

2. Looking at the miners, one that has recently really stood out has been GSS, though it now appears to be going quite vertical. KBX is dead in the water at under $1.70, which was around the Amex IPO price which has now become a major point of resistance. Once Gold takes a dip, I would fully expect KBX to resume its slide and retest possibly the $1.40 that was the low of the recent crash.

3. Interesting announcement: from today, GLD will begin trading at 8:20am EST, rather than at 9:30am as other stocks. "The earlier opening will allow investors to start trading streetTRACKS Gold Shares (GLD Shares) at the same time that trading in COMEX® gold futures and gold options commences at the New York Mercantile Exchange Inc."

U.S. Loses 5 Choppers in Iraq in 2 Weeks!

1. Seriously, I think I'm onto something here tracking these chopper downings. The U.S. has now lost 5 choppers in Iraq in just over 2 weeks. I genuinely believe that today's surge in gold is closely linked to this. Keep in mind my comments about chopper shootdowns and what they entailed during the Soviet invasion of Afghanistan. This is potentially an important marker in the war.

"'The helicopter was flying and passed over us, then we heard the firing of a missile,' said Mohammad al-Janabi, a farmer who was speaking less than a half-mile from the wreckage. "The helicopter, then, turned into a ball of fire. It flew in a circle twice, then it went down.'"

2. Looks like not everyone in Bolivia is hot for Evo Morales' proposed steep mining tax increase. Interesting to read that the local miners were protesting, throwing around sticks of dynamine in La Paz.

3. I e-mailed TRE on February 2 regarding the the amount of the cash payments the comapny will be entitled to for optioning the Luhala and Itetemia Gold projects:

The January 30 recent press release regarding the: optioning of the Luhala and Itetemia Gold Projects: mentions that "The earn-in portion of the agreement: includes prescribed annual cash payments...."

What is the amount of the prescribed annual cash payments?: This seems to be an material piece of info that was: omitted from the press release.

Best regards,

Within a day I was copied on the following message from big Jim himself (though I have not yet received the answer to my question).

" Dear Helen:

I do not immediately recall if there is a confidentially clause in the Sloane contract, but assuming there is not would you send the pages relevant to rental, scheduled payment and work requirement to this inquiring stockholder. Please inform me of the determination.

RY, Jim"

Disaster at Kimber Resources

Kimber came out with its newsletter for January yesterday, and unfortunately for Kimber shareholders it was a disaster. I've been out of Kimber for some time, but it still hurts because this is one I recommended to some friends. This is a company which has a good land package and has one proven deposit so it still has the potential to become a Minefinders or Gammon Lake type of investment, however, the recent news confirms that Kimber is still a very long way away from that.

Certainly, there were some warning signs along the road, like the continuous delays with respect to the prefeasibility feasibility study for the Carmen deposit, the lack of any significant drill results for the El Orito Norte and Carotare targets, and the attention that the Company had recently been giving to other "promising" targets when the Company had previously stated that drilling up El Orito Norte and Carotare were their next top priorities after Carmen.

I'm not even going to get into the shenanigans at the front office.

Here is the newsletter in all its gory detail, with my appended comments:

VANCOUVER, Feb. 7 /PRNewswire-FirstCall/ - Kimber Resources Inc. (AMEX:KBX, TSX:KBR)

January brings a fresh start to a new year for Kimber Resources. [A refreshing introduction right before the disasster is spelled out in the next paragraph.] We are over the corporate distractions of the last half of 2006. [With a lame duck for CEO, I think it's a little too early for this statement.] We have strengthened our team in Mexico. At the AGM in December we welcomed some very experienced new directors to our board. The next key event will be the selection and appointment of the new CEO which we expect to happen soon. [I'll give Kimber credit for one thing. At least they've learned to dispense with deadlines, rather than setting deadlines and then ignoring them.]

In the field, access roads to all identified drill sites at El Orito Norte have been completed. ["...We're on a road to nowhere..."] As mentioned in the last newsletter (for November), results from Carotare at that time had not been encouraging. Since then we have completed Carotare West, a visually impressive structure with alteration, gold, and silver but our intersections have not demonstrated enough gold and silver to be economic. [But at least it's visually impressive.] The same can be said for the south structure at Carotare East. [Meaning, that it's visually impressive as well? Or meaning that it also hasn't demonstrated enough gold and silver to be economic? Or both?] After the excellent start when the first 28 holes in 2005 generated a resource of 240,000 gold-equivalent ounces this has been disappointing. Similarly, although we have intersected mineralized structures, early drilling at El Orito Norte has not provided much excitement yet. Drilling on the main structure continues and we will evaluate progress with each batch of results. [Read: Carotare, one of the company's top three targets is now officially a failure. El Orito, another one of the top three is looking increasingly like a failure.]

In order to achieve our objective of three million gold-equivalent resource ounces, rather than relying solely on Carotare and El Orito Norte, we initiated a reconnaissance exploration program in December to expand the search beyond the 3% of the property already mapped and sampled.[Read: the company is basically back to square one. With the exception of the Carmen deposit, which has stalled for over a year, this is no longer primarily a development company. It's now back to being a risky explorer.] This will be a key priority for 2007. [That's quite a change of priorities. Kimber went from a development company to primarily an explorer.] One new occurrence of epithermal alteration ("Arimo") only two kilometres southwest of Carmen has already been identified. The Monterde property is 28,000 hectares in area and 37 kilometres in length. [Wow. Big. Ah, the great wild wilderness. Lots of places to play hide and seek.]

More holes have been drilled on the Veta Minitas, a mineralized structure 200 metres to the west of the Carmen, which provided the excellent intersection (in LMR-47, reported November 29th). While we await results on the follow-up holes, we are optimistic that Veta Minitas will generate resources which could be mined from underground. [One good drill hole and the company is optimistic that it's going to be a mine. Considering that this place is right next to Carmen but wasn't previously considered as important as Carotare and El Orito Norte, but is now suddenly, after the failures at Carotare and El Orito Norte, getting hyped for its potential, I would be pretty suspicious about expecting too much from Veta Minitas.]

We have completed core drilling on our identified targets and accordingly, we are relinquishing the core drill for return when we have sufficient new targets. [Does that mean there are still reverse circulation drills at Carotare and El Orito Norte? Or are these targets being abandoned altogether?] This will come as a disappointment to some, but exploration is not solely drilling. [Yes, when a project fails, you're back to square one of conducting surveys, sending people out into the field to examine visually impressive outcroppings etc. As I mentioned, until yesterday, Kimber was primarily a project development company, not an exploration company.] The reconnaissance program will be integral to identifying additional drill targets, a key step to growing resources at Monterde. [A key step and a FIRST step, that, with luck, will lead back to drilling.]

Metallurgical studies on the Carmen deposit continue. Silver recoveries are the key. Not only does the recovery of silver range from high to low, but it also varies with location within the deposit and with the fineness of grind. We are currently considering alternative mining operations and processing methods as we continue to work towards optimizing the rate of return from the Carmen deposit. Open pit only, open pit combined with underground, underground only are all being looked at alongside heap leach only, heap leach and mill, and mill only. Combined feed from both open-pit and underground is already being used by Gammon Lake (Ocampo) and is being considered by Palmarejo (Palmarejo Trogan), Agnico-Eagle (Pinos Altos), and now Minefinders (Dolores). The possibility that the Carmen deposit includes resources which can be mined from underground is now a focus of attention. [This may all sound like Kimber has been confronted with a truly unique problem. But unfortunately, the point of the pre-feasibility study is to come up with answers to the questions raised in this paragraph. That's exactly what prefeasibility studies are about. There's no unique issue here at Kimber.] The pre-feasibility study will take place when enough is known about resources, metal recoveries, and mining methods. [Read: Kimber has no meaningful update or schedule for the pre-feasibility study since postponing it twice and the Carmen deposit which has been pretty much drilled to death, continues to languish indefinitely.]

I think this best sums it up:

About Kimber from January 17:

Kimber Resources Inc., which holds a 100% interest in the Monterde property in the Sierra Madre of northern Mexico. On the Monterde property, The Company is advancing the Carmen gold-silver deposit towards production. The Carmen deposit, an underground mine in the 1930's, is a typical low sulphidation epithermal system, oxidized, and believed to be suitable for open pit mining. Two adjacent epithermal systems first identified in 2005, the Carotare deposit and El Orito Norte exploration target, appear to be similar to the Carmen. The goal of the Company is to demonstrate at least three million resource ounces from the two deposits and exploration target identified. For further information on the company, visit SEDAR or the company website at.

About Kimber February 7:

"Kimber Resources Inc. holds a 100% interest in the Monterde property in the Sierra Madre of northern Mexico. On the Monterde property, The Company is advancing the Carmen gold-silver deposit towards production. The Carmen deposit, an underground mine in the 1930's, is a typical low sulphidation epithermal system, oxidized, and believed to be suitable for open pit mining. Two adjacent epithermal systems first identified in 2005, the Carotare deposit and El Orito Norte exploration target appear to be similar to the Carmen. The Company recently acquired a second project, the "Pericones" in Estado de Mexico. This prospective silver system is undergoing a mapping and sampling program with drilling expected in 2007. For further information on the company visit SEDAR or the company website at ."
___________________________________________________________________

Get it? The two adjacent epithermal systems appear to be similar. Period. But who cares? The important thing is that the company no longer expects 3 million ounces from their top three projects.

The funny thing is that the above description of "About Kimber" in which the reference to the company's goal of getting 3 million ounces from their top three targets was removed also appeared in the January 17 announcement which was titled "Kimber announces drill results from Monterde & sampling at Pericones project". You just had to look very carefully to see that little "detail" or rather omission at the bottom of the announcement.

$660 is Resistance

1. Looks like $660 is resistance. I think that is the last resistance before Gold can have a significant surge. But I don't really like what I am seeing from Gold today.

2. Another U.S. chopper down in Iraq? It seems another chopper was downed today, but it's unclear because the report refers to 3 helicopters being down in the last 2 weeks. But as you recall, I noted that a report a couple of days ago, mentioned that 3 choppers had been lost in the last ten days. [Edit: Yes, it was a 4th helicopter that was shotdown in the past couple of weeks. The first article wasn't very accurate. The U.S. command said two crew members were killed, and the top U.S. general conceded that insurgent ground fire has become more effective. I usually don't quote al-Queda sources, but I thought it was interesting that the article mentioned that n"n al-Qaida-affiliated group claimed responsibility and said its fighters had 'new ways' to attack American planes."]

3. TRE has been slammed, down over 10% in the last few days. It looks like a breakdown on heavy volume after a few weeks of narrow range consolidation, but hopefully a bottom may soon be near.

4. RGLD beat earnings estimates by 3 cents yesterday (24 cents vs. 21), but, with gold down by $10 today, RGLd is off by almost 1% since its earnings announcement.

5. It's 11am EST (1.5 hours into the trading day) and KBX has 700 shares traded. Lost and forgotten stock.

6. Still looking for that breakout on GOLD. Major resistance is between $23.75 and $24. Above $24 and GOLD should go over $30.

7. Bad news for Oil bulls. Ground hog Punxsutawney Phil failed to see his shadow today.

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.

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?

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.

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.

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".

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.

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.

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.