Gold on the Cusp...

Comments: Gold has pierced the $600 barrier where it had been previously repeatedly rejected and is now seriously flirting with a break of the downtrend line. BUT, with the HUI up only 1.71% about an hour into trade, this breakout can't be yet deemed to be convincing. Volume is coming in at a decent pace so far.

Consumer spending rose an anemic 0.1% in September and Wal-Mart Stores Inc. gave a lackluster sales report. Generally, I'd say these news items are bullish for Gold, but they could also again raise the issue of possibly weaker than hoped seasonal jewelry demand going into the Christmas shopping season, similar to the issue that plagued Gold in September.

Meanwhile, the U.S. death toll in Iraq reaches 100 in October.

Progress in Iraq

BAGHDAD,Iraq - Fifteen policemen and two translators were kidnapped, then killed in Iraq's second-largest city, Basra police said Sunday. Gunmen also attacked an Iraqi government convoy and wounded a bodyguard of Prime Minister Nouri al-Maliki, but the leader was not in the procession, officials said as violence rose in Baghdad after a post-Ramadan lull. A mortar attack elsewhere in the capital killed four Iraqis and wounded four, while other gun assaults left two policemen and a civilian dead and two officers wounded. A kidnapped state television host and his driver also were found slain. North of Baghdad, gunmen ambushed a convoy of Sunni pilgrims bound for Islam's holy city of Mecca and killed at least one person, with attacks across Iraq causing a total of at least 15 deaths. The bodies of 23 people also were found, most believed to be the victims of sectarian reprisal killings.

By SINAN SALAHEDDIN, Associated Press Writer, October 29, 2006

QQQQs Look Ripe for a Fall -- But How Far?

Comments: Anyone think that Friday's action in the Nasdaq was anything other than temporary profit taking?

There are some interesting divergences forming in the general market right now. But it's unclear which way they will shake out.
Link: [http://www.stocktiming.com/Tuesday-DailyMarketUpdate.htm]

Gain/Loss for the Week: +4.9% . My gain for last week was +0.8%. Three straight weeks of gains for a change... But still have some serious work to do to recoup.

HUI Chart & Commentary

Comments: After a broken minor head and shoulders top on the HUI, the target price seems to be around 308 to 309, with 305 being important support below that. I made repurchases in a couple of Gold miners on Friday. The ideal situation would be to take my profits out of PSH (short QQQQs ETF) after a nice sell off in the Nasdaq, and put them fully back into gold stocks at support.

Current Portfolio Allocation: 59% short QQQQs and SPY; 36% long Gold, 5% long Copper. Small Put position in QQQQ.

(Gold) Sentiment: bullish, until proven otherwise.

QQQQs

Comments: Although the QQQQs are again testing the downtrend, they are starting to look
toppy with a black hanging man candlestick the most likely outcome from today. Still, I wouldn't put it past the market to have some kind of blow off top that breaches the trendline.

HUI Chart & Commentary

Comments: The HUI looks like it will touch the upper part of a fairly narrow channel. I sold most of my gold and energy positions today at around 317 HUI for a fairly decent trade. Just going to wait and see how things begin to play out from here.

I also went short some QQQQs. Without confirmation, this is a bit risky, but the market is horribly overbought and the QQQQs' momentum has started to lag, while the Diamonds and the Cubes are horribly overbought.

Current Portfolio Holdings: 34% short Nasdaq 100 and S&P; Longs: 10% Gold; 5% Copper.

FOMC Policy Statement

Comments: Above is the text of the FOMC policy statement issued yesterday, with the changes shown vis-a-vis the statement issued in October. Looks like they're no longer worried about inflation from energy and commodities! A good point to reusher in a commodities bull market rally.

On an unrelated note, today median year over year new home prices came in with the largest decrease in 35 years. Not a surprise. The surpising thing is that the markets are actually trying to rally on the news...

Blog Spotlight: Age of Tyranny News

When you have a chance, please check out Age of Tyranny News, a blog published by current events and market analyst Jan Allen.

Link: [http://my.opera.com/prosperingbear/blog/]

In Age of Tyranny News, Jan comments about current events as well as market developments from a unique if somewhat apocalyptic perspective:

"I write Age Of Tyranny News for two purposes: First, to relate how a national emergency or event like a bird flu pandemic will establish martial law and tyrannical state corporate rule over the entire N. American continent.

Secondly, to communicate sound wealth preservation and management principles so that one can prosper in the coming Bear financial market."

Some of the more interesting features of Jan's Age of Tyranny News are the following:

• Jan divides recent times into different "Ages", and argues that we are now entering into the "Age of Financial Ruin" during which all asset classes except physical gold will rapidly and catastrophically depreciate in value. A true gold bug, Jan believes that gold mining shares do not hold the key to long term wealth preservation and will likely lose their value along with all other paper assets.

• Jan performs a very comprehensive analysis of Gold and other markets, using myriad tools, both fundamental and technical, including the esoteric Elliott Wave Theory. Jan's site is filled with numerous interesting charts as well as almost daily fundamental commentary, providing tons of ideas and information for fundamental investors and chartists alike.

• Jan has published numerous articles about the markets and wealth preservation, including many very insightful articles about Gold. The links to some of Jan's best articles are listed here: [https://www.quickbase.com/db/9jcvpas7?a=q&qid=20]

• Although Jan takes a more purist view about Gold than I do, I agree in many respects with the core precepts of his arguments about the dangers of the current downward trajectory of democracy and the deceptive health of the U.S. economy. I generally find Jan's analyses chilling compelling and consider Jan an intellectual ally, despite some differences between our respective approaches.

Oil AND Gold!

Comments: Mentioned yesterday, the Oil Services Holders (OIH) is continuing its break out as Oil surges past $60.


Comments: As we approach the FOMC interest rate policy announcement in about 1.5 hours, it looks like Gold stocks are anticipating Gold strength. It certainly helps a lot that the media fanned the fear of aggressive anti-inflation rhetoric being present in the statement throughout this week. Now that possibility appears to be priced in, leaving the possibly of an upside surprise for gold stocks (i.e., a less aggressive policy statement).

Comments: However, when everything is said and done, the move in the Gold stocks can't be trusted until Gold confirms the move by moving past $605 per ounce. Unless that happens, the breakout in the HUI could easily turn into another meltdown as we saw in September when Gold failed to confirm the rally in the HUI.

Sentiment: Bullish. Finally, there is a possibility of a break in the downtrend for gold...

Update on Kimber Resources Inc. (KBX)

I received the following update from Kimber's investor relations, stating that the prefeasibility study will likely be delayed until 2007. Keeping in mind that the pre-feasibility was already postponed earlier this year, an indefinite delay of the postponeed feasibility study is, in my opinion, quite disappointing. At this point, although it's a tough call, I'd have to say that I'm beginning to strongly lean in the direction of Jim Papluva's proxy drive to oust the current management and would recommend others to vote in favor of Papluva's motion. I have to give some recognition to investor relations at Kimber however, they are top notch and obviously deeply care about the shareholder base. Unfortunately, however, the continuing delays in developing the project and the failure to meet deadlines has been disappointing, to say the least. Let me know whether you will be voting for or against Papluva's proxy motion.

Milosz,

Thanks again for the email and apologies for not getting back to you on Saturday but typing long emails on the Blackberry doesn’t make a lot of sense.

Firstly, you are not alone expressing your uneasiness pertaining to the delay of the Pre-Feasibility and I think rightfully so. Management too is also disappointed and has admittedly erred by pinning down a date for delivery of the Pre-Feas without having all of the data hammered out ahead of time. As you probably know, every deposit is different and therein lies one of the major challenges because surprisingly enough even after 200 or 300 holes, an additional hole still tells us something about the deposit. The earlier delay allowed us to include the additional drilling into the block model and we had recently determined that there were more controls to the mineralization than we had first thought. Over the past few months our technical team has been working on the metallurgy of the deposit and this is the key area that needs more work right now.

Metallurgical tests to date show that gold responds very well to cyanide (heap leach scenarios) with recoveries averaging in the high 80’s low 90’s (% recovery). Silver is more problematic as is expected and typical and still requires more testing. The tests we have completed to date show that recoveries have ranges from less than 20% to 100% for silver and the research our technical team has been doing now point us to developing a recovery model for the entire deposit where we can map the different areas of the deposit and the corresponding expected recovery rates. This will allow us to pin down more closely an “average” recovery for silver. Additionally, I expect that Micon will look at varied methods of recovery to compare those (and the associated costs) with the base case heap leach scenario. Silver recovery rates seem to vary to depending on location in the deposit, grade, spatial distribution etc and all of these factors will be taken into account once the additional tests are back.

Testing is now ongoing and additional tests have been ordered and are awaiting commencement by the lab in Vancouver . I also suspect that more tests will be ordered in the future. Some of the characterization tests have come back but the more definitive column tests are not expected until early 2007.

As far as a time frame for a completed Pre-Feasibility study it is not expected before the end of December. With the bulk of the more definitive silver metallurgical tests expected in early 2007 I suspect that Micon will need that data in order to be able to deliver numbers that will be 43-101 compliant and thus would be followed by a Technical Report. Now having said all of that, rolling a Pre-Feasibility study into a Full-feasibility (Bankable) will not likely be a huge undertaking. The Company has been ahead of the curve when it comes to climatic studies, socioeconomic studies and environmental baselines all which are required for a full-feas so from that perspective we are in pretty good shape.

As you mentioned in your email, the Company will continue to put the quality of the
work and data ahead of a rushed job to meet deadlines. Our goal here is to build a mine, there isn’t an easy one out there, and we want to ensure that the proper steps are taken in order to achieve this goal. The average time frame from discovery to production these days (according to a respected mining analyst in Toronto ) is between 7 and 13 years. We’ve been at it about 4-5 so far and still think we can grow the resource as well.

Again, feel free to get in touch anytime I would be happy to clarify any additional questions you may have.

Best regards,

Oil or Gold?

Comments: The Gold Bugs index wants to break out on the weekly chart but the broken uptrendline is offering some resistance. A convincing close above 310 would be needed.


Comments: The Oil services Holders (OIH) looks a bit more bullish than the Gold Bugs Index right now, with a fairly clear downtrend break developing on some nice accumulation on the weekly chart. If oil begins to bubble, it will drag Gold higher eventually.

Current PM Portfolio Allocation: 66% Gold/Silver stocks and 34% Energy. Sold some calls on HAL today for a quick gain.

Update on Golden Star Resources (GSS)

One investor who has had 30+ years in the power generation industry had the following interesting comments about GSS's power shortage situation. I thought it would be worth repeating them here since he has obviously done considerable research about this issue and about GSS in general:

"From what I've found so far, I believe the entire country of Ghana produces 1,650 megawatts of power. 1,100 mw from hydro, the rest from fossil fuels. The fossil plant had to take one of their units down for repairs 2 months ago. I believe it to be a 110mw generator. The unit has been repaired in the U.K., and the Mining Council has air freighted it back to the plant. It is expected to be back in service before November 1st.

The hydro is served by an 8,000 square kilometer reservoir, that operates effectively between water levels of 240'-270'. The water level varies dramatically on a seasonal basis historically, with the low point for the year occurring in August before the rainy season begins. The rains came late this year and the water level fell as low as 237.1'. This caused the generators to produce power less efficiently, and resulted in much lower output. The rains have come, and the water level is back up to 244.4' as of this morning. The level appears to be rising between .15-.20 feet per day.

As a result of the lower total generation from all 3 power plants, industry was forced to cut back usage, and the country is experiencing rolling 12 hour blackouts every 3 days. The authorities are extremely averse to layoffs, and I expect Biox to be allowed to begin operations when the Aboadze fossil unit is back online before months end. Biox may only be allotted a 50-75% power allocation until the production from the hydro plants returns to normal. I expect full power restoration to be completed after the authorities meet on December 1st. GSS will then have all 3 mills running at maximum capacity.

A new fossil power plant is presently under construction, and is expected to be online before June 30, 2007. This will hopefully prevent any recurrence of the problem.

The company has definitely been snake bitten during the past 2 years. Q3 production is estimated at 54,000 ounces, down from the 100,000 level I originally forecast. They've been forced to take out a loan as a result. Once power is fully restored on December 1st, the company should be swimming in money. With the completion of Biox they now have a facility to efficiently process the sulfide ores that represent 70% of their holdings."

Gold Market Commentary

Comments: The HUI may be in an ascending triangle, but it needs to maintain the short term trendline depicted above. Unfortunately, Dwali, the Indian holy day, is this Tuesday after which it is possible that the bid that has kept Gold prices stable in Asian trade may disappear for a while. Nevertheless, some geopolitical tensions are currently recurring which may help a bit to stem aggressive selling. This month is on target to be one of the bloodiest months in Iraq for U.S. troops, which is again drawing media attention back to that little quagmire in the making. The situations in Iran and North Korea remain unresolved, though I personally don't have very high hopes from North Korea as a gold investor at this stage.

Considering that Gold dropped almost $10 today, the HUI has been fairly resilient. I'd usually say that is a positive divergence heralding gold stock strength in the imminent future, however, in this case it's less clear. Barron's came out with a fairly bullish note on Newmont Mining over the weekend, noting that it's target of $75 to $80 that it came out with in July of this year is still quite reasonable. Accordingly, Newmont has been outperforming today, dragging the whole HUI higher, in which it is the largest component. So it's unclear whether the HUI is really positively diverging or whether one major component is pulling it higher on a positive report.

HUI 5 Day Chart

Comments: It's still bullish, as it remains above the breakout line, but it's currently undergoing a little test of a minor broken uptrendline.

HUI and VGZ Charts

Comments: Not the most inspiring end to the week. Gold sold off with oil at the end. It's been a real struggle getting above $600 Gold.

Comments: The CFO of Vista Gold Corp. informed me by e-mail that the spin off of the Nevada properties is targeted for around the end of November. One of the leaders in the sector during the latter stages of the rally in Gold, Vista is currently narrowly avoiding the completion of a bearish Head & Shoulders pattern.

HUI 5 day Chart

Comments: Looks like the HUI is trying to establish itself above the uptrend but it's a struggle. Gold is likewise flirting with $600. It's unclear whether either can break through. Apparently, today's surge has to do with Saudi Arabia confirming its support for the OPEC oil production cut which would be the first since 2004 and would take effect from November 1. It's unclear however whether this along will be enough to push Gold and the miners through resistance.

Related Article: [http://financial-matrix.blogspot.com/2006/10/hui-5-day-chart.html#links]

PM Portfolio Exposure: 95% + 5% short S&P500. I sold my QQQQ Puts this morning after recouping a part of my loss.

Sentiment: Cautious. It's genuinely unclear whether whether we have truly bottomed or whether we still need to retest 260 HUI.

HUI Chart & Commentary

Comments: The HUI has support at around 295. Perhaps a production cut by OPEC could help. The action yesterday wasn't particularly encouraging actually, with the failure of the RSI to stay above 50.

Inflation Confusion (2)

In mid-August, I noted that traders seemed to be confused about the implications of the evidence of inflation on Gold prices

[Related Article: http://financial-matrix.blogspot.com/2006/08/inflation-confusion-1.html#links ]

It appears that this confusion is continuing. Yesterday, Gold sold down up to $10 on a PPI report that, in my opinion, was fairly inflationary, with core PPI coming in at +0.6%, despite the largest drop in PPI in 20 years.

Today, the CPI numbers came in a bit tamer than expected, with CPI coming in at -0.5% and core CPI at +0.2%, versus expected readings of -0.3% and +0.2%, respectively. Not surprisingly, Gold has been fairly steady so far following this news.

It is unclear what the reason is for the current views of the market that evidence of inflation is gold-negative. Obviouosly, this is evidence that people are fairly confident in the Fed's ability to manage inflation and are thus currently seeing higher inflation as being linked to more interest rate rises and dollar strength. Inflation being currency positive? That seems to be the implication under the current view...

I have some doubt whether the real Gold bull market can reemerge while such a popular view continues.

HUI and QQQQs

Comments: Despite the negative reaction among Gold traders, I believe that today's PPI report is positive for Gold. Although overall Producer Prices fell by the largest amount in 20 years, the core PPI, which excludes energy, rose an unexpectedly high 0.6%. This means that the inflation has risen notwithstanding lower energy prices. Now if oil can stay above $60, we could be in for some pretty "decent" inflation readings, at least from the perspective of Gold. Ofcourse, unfortunately, it's unclear whether traders are now afraid that high inflation readings will lead to higher interest rates and thus lower Gold prices. Things are very mixed up right now. Usually inflation is very Gold positive, but in the short term, it's unclear how traders would react to elevated inflation readings, given the Fed's alleged inflation fighting stance.

Comments: Right on cue (Q?), the QQQQs look like they're selling off hard after hitting the downtrend resistance. Gap down on pretty hefty volume should mean that I might get some play on my QQQQ Puts after all.

HUI and QQQQs

Comments: HUI looks short term bullish now. A touch or pentration of the upper bollinger seems likely with RSI going above 50.



Comments: The QQQQs look like they are at significant downtrend resistance. A good time to go short as the volume has been drying up and the RSI has gone oversold. Dow is 20 points away from the 12000 level, another possible resistance. I was too early with my QQQQ Puts, but if you haven't shorted yet, this may be a decent time to do so. It's hard to rationalize the ongoing rise in the Nasdaq, but it's also possible that it may keep rising into the November elections, so better keep your mental or actual stops fairly tight.