Precious Metals Market Roundup

Some recent news items that caught my eye:

1. NovaGold (NG)'s stock price was cut in half in one day after NG announced that estimated mine construction costs at its Galore Creek project would be around $5 billion, up from the $2 billion previous estimated at the time of the feasibility study. I bet some NG shareholders must be regretting not tendering their shares to Barrick. Although NG's joint venture partner in the project, Teck Cominco (TCK) agreed to spend more money to investigate the viability of the project, apparently, Clive Maund recently warned that NG may possibly end up being delisted. I bet Barrick execs must be snickering in delight... but probably not too loudly because NG and Barrick recently agreed to put their differences in the past regarding the development of their joint Donlin Creek project, which reportedly contains around 30 million ounces of gold reserves.

Actually, the Galore Creek news is generally bullish for Gold prices, because it raises the specter that not as many gold mining projects may be coming on line as previously expected and highlights again the tremendous cost pressures faced by the industry which should help to keep a floor for the gold price.

2. It appears that OPEC won't raise oil output until at least January. That may help to keep a floor for oil prices. This may be partly offset, at least in the short term, by the fact that a U.S. intelligence report was recently released stating that Iran has had no weapons of mass destruction program since 2003. Another embarrassing blow for the Bush administration and for U.S. foreing policy. Iran will probably be emboldened by this development, already saying that it amounted to a "declaration of victory" for Iran. As a result, I would not expect oil prices to slide too low on this news as it will probably put the U.S. on an even firmer collision course with Iran. Condi Rice was quoted as saying "that frankly is good news", in a laughably glib response to the intelligence release.

3. Rob McEwen, Chairman and CEO of US Gold Corp (UXG) exercised warrants to increase his shareholding in UXG to 21.5% in a likely effort to shore up UXG's falling share price. Some shareholders have likely been concerned by what appears to be a management shakeup recently at UXG. I would not bet against Mr. McEwen however. In a sector where good management is quite hard to find, I believe that Mr. McEwen is one of the best. UXG may be enjoying a washout bottom on huge volume the last couple of days.

4. This was announced on November 6, but only recently caught my eye: GSS's total cash costs were an awe-inspiring $707 for Q3, accoridng to GSS's Q3 report in which they announced another loss to the tune of $12.7 million. $707! Unbelievable...

Chart of Interest (PAL) - Washout Bottom?

Comments: PAL approaching significant support as it becomes increasingly oversold. Unfortunately, although this company is a producer that is increasing its production profile, this coming is not making money, which raises a question mark in this environment of high metal prices. In all fairness, metal byproduct prices have fallen a fair amount recently, which must also be weighing on the stock. PAL investors are currently also awaiting the pricing of a US$100 million secondary offering.

Nevertheless, there is strong lateral support between $4 and $5, and with daily volume reaching over 460% of average 90-day volume on Tuesday, a washout bottom may be getting very near (keep in mind the above chart is the weekly chart, so volume will not be fully reflected until the end of the week).

Gold / HUI Update

Comments: Sorry for the long pause. I've had a lot on my mind lately so it was difficult to post for a while. Anyway, coming back to the matter at hand, the HUI looks like it is consolidating nicely since running up big until the beginning of November. The consolidation has sliced almost 12% off the HUI from its early November high of just over 460. It has also lasted for over a week now. I think, at this point, time is on the side of gold investors.

There is a danger however of a Head & Shoulders pattern as indicated in the above chart, which, if activated, would point to a drop to the 200 day SMA at around 360-370 HUI. I think such drop require gold to dropping down to 750 or so and the S&P500 taking another dive. Hmm, the more I think aobut it, the more I think that both are possible. Nevertheless, any such drops should not be feared, as I think Gold would have a great chance to bounce back.

Some things I've been paying attention to recently:

1. The COTs are still somewhat bearish, but they have shown some improvement during the last 2 weeks. Still, this situation may need 2 to 3 more weeks, at least, to get to a "bottom" range.

2. Gold:XAU ratio continues to be fairly positive, being closer to a buy than a sell, for gold stocks, staying above 4.50, and even getting as high as 4.90 recently.

3. I'm watchinhg closely what Treasury Secretary Henry Paulson will cook up to stave off the tide of foreclosures. Apparently, the plan will be to freeze teaser rates on certain troubled subprime mortgages. The big question is who will take the hit? The administration has sworn that taxpayer money will not be used in any "bailout". According to the linked article, it may be the investors in the mortgage backed securities who may take the loss, in the form of lower interest rates. I wonder who those investors are and whether they will sue. Anyway, the idea is that lower interest payments will stave off foreclosure which is in nobody's interest. But, such a bailout, if successful, may create some moral hazard. Government to the rescue whenever people screw up. My friend, Andy, put it best that capitalism and free markets take a hit if things are not allowed to fail.

Oh, if you have a chance, check out Jim Sinclair's Mineset. Jim, a die hard gold bug, has predicted 29 of the last 3 financial crises that the U.S. has had, and he has some interesting thoughts about the proposed bailout.

4. Oil has sold off recently, by nearly 10%. But with a cold winter on the horizon and a new set of Iran sanctions getting close to final approval, I wonder if we'll yet see $100 oil on this upleg after all.

5. Turmoil in Venezuela (don't take the "oil" out of "turmoil"...). Talk of nationalization of foreign companies and huge protests over a referendum about a constitutional amendment. I wonder how that will all end up.

6. U.S. market was up this past week after Citigroup got $7.5bil financing from the Abu Dhabi sovereign fund. I guess they needed it, but with an interest rate of 11%--just imagine, a huge commercial bank like Citi borrowing at 11%!--they must be getting desperate.

7. Finally... this is funny. The US Dollar may displace the Yen as the favorite currency for carry trades.

Charts of the Year?

The below two charts could be the charts of the year.

1. the 3 Month Treasury Yield and
2. the Shanghai Composite Index.


Comments: No comments. The chart says it all.

Comments: Can you say "Parabolic..."?

HUI back at Resistance

Comments: HUI now back at first resistance after the recent collapse. With a 40 point gain since the recent low, it might not be a bad idea to take some "profits" off the down move at this point, but I wouldn't recommend selling too much, because at 324 the HUI and gold stocks continue to be a buy, especially with these new USD liquidity infusions coming almost daily from the Fed. COT numbers have been very volatile lately (just like everything else), and this past Tuesday, the showed a very large reduction in Commercial Trader net short positions, which was a promising sign.


Comments: USDX sliced through its 20 and 50 day SMAs recently. Again, 80.00 to 80.50 is MAJOR support.

Bloodbath in Gold Miners

Comments: The high level consolidation in the HUI, which started at the beginning of 2007, appears to have ended in a complete bloodbath recently, with the HUI, breaking down totally from its slightly uptrending trading range--despite Gold not doing anything interesting. It seems that the panic contagion that has hit financial markets recently is also now spreading, irrationally, in my opinion, to the volatile miners as well. Gold to XAU ratio went through the roof, and is still at almost 5.00. The two support lines in the chart above, are critical. With the credit crisis looming large, it seems that market participants are selling volatility, and unfortunately, the miners have traditionally been one of the most volatile of investments.

Actually, the current complete dumping of gold stocks (don't even get me started on silver), seems quite irrational considering the actions of the U.S. Fed recently. The Fed has added $100 billion in liquidity in recent weeks, through repo transactions, among others, as well lowering the interbank lending rate by 0.5%. In fact, it added $3.75 billion even today.

And the political pressure is mounting on the Fed. Treasury Secretary Paulson, mentioned today "We're really focused on the subprime market, and we're really focused on the homeowners -- mortgage holders -- who are in danger of losing their homes."

The ever glib Bush, insisted that "The fundamental question, 'Is there enough liquidity in our system?' And the answer is `Yes, there is,'" the president declared. Don't worry Mr. Bush, I have a hunch that when it comes to liquidity, there will soon be more than enough...

USD - Get Ready to Stick a Fork in It

Comments: First of all, my apologies for not posting for 6 weeks, I was recently very busy with certain matters. Hopefully, I'll be back to soon to making entries here on a more regular basis.

The USDX looks wonderful for Gold investors. As in wonderfully crappy. The USDX couldn't even make it past the first lateral resistance point at just over 81. Sure, it is still a bit oversold, trading somewhat below its 50 day SMA, but that chart looks very weak right now (i.e., very promising from the perspective of Gold investors). 80.00 to 80.50 is MAJOR support for the USDX, the significance of which cannot be overstated!

With the U.S. churning out horrible economic reports on an almost daily basis, I wonder if this coming week's FOMC rate announcement may result in investors finally sticking a fork in the USDX for good.

But then, who knows, the Gold consolidation has now lasted almost 1.5 years, so it could last a little bit longer yet. It's been so frustrating...

Gold to XAU Ratio

Comments: XAU approaching resistance.

Comments: This chart bears watching. It's very close to a (bullish) breakdown in favor of Gold miners. It's hard to judge right now whether such breakdown would be for real because the general market was up big this past week, taking everything, including gold miners with it. But the RSI has shown a major breakdown (bullish for Gold). I've been reducing my positions into the strength this past week, but I'll be keeping an eye on this ratio.

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.

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.

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.

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.

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:

• "Gold and US Real Estate Quietly Breaking Down"
  http://biz.yahoo.com/seekingalpha/070521/36092_id.html?.v=1
  
  "Why I'm Selling My Gold and Silver"
  http://biz.yahoo.com/seekingalpha/070517/35796_id.html?.v=1
  
  "Are Gold Stocks Hanging in the Balance?"
  http://gold.seekingalpha.com/article/35844?source=i_email&u=30946

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.

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.

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.

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.

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.