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Here's the weekly inventory numbers. I mainly look at what is labeled "Net" and "LME and SHFE Net". Copper is looking pretty good and I may open a trade in leveraged copper Jrs like QUA.TO, EQN.TO and/or my favorite CS.TO on margin this week. Zinc continues to look really bearish. It would have been good had gone short on the zinc Jrs when I considered it a couple of weeks ago.
Here's my look at the futures curve as it stands today:
Here's my animated look at how it has morphed over time. Here's how I look at this:
Here's my observations:
Copper looks pretty bullish. Another couple of weeks like this and things could get pretty exciting. Zinc continue to look bad. Wish I had shorted some high-cash cost zinc miners last week.
This document (click here) provides the results of a quantitative attempt to rank, by country, friendliness to mining companies.
If you own shares of companies with mines outside of USA, Australia, Canada and Mexico, you might want to see how risky this report rates them.
For example, New Guinea Gold (NGG.V) fans, did you know that New Guinea is rated worst in the world for permitting delays? And New Guinea is in the lower half for overall ranking?
Ghana, home of my favorite gold turn-around pick, Golden Star Resources (GSS), is not bad at 8th.
To save you the trouble of skimming through the document, here's the final, overall, rankings:
Australia, Canada, USA, Chile, Mexico, Greece, Brazil, Ghana,
Argentina, China, Namibia, Mongolia, Peru, India,
South Africa, Zambia, Kazakhstan,
New Guinea, Bolivia, Russia, Indonesia,
And the worst three (no surprise):
D.R. Congo, Zimbabwe, Venezuela
Monty
From CRDNLAU on the InvestorVillage RNO board (note: TOUT TV is CNBC):
" The
financial media such as TOUT TV have one object and one object only.
Keep the producer employed. If they say the market is going to a very
warm place (not warmcamp) in a handbasket you will sell everything. If
you sell everything you won't watch. If you don't watch the ratings
will drop. If the ratings drop the producer will get fired. If he/she
gets fired so will they. Therefore whatever they say it is to keep you
invested and hence watching. Then the producer keeps his/her job and
they keep theirs. It is all perfectly objective. The objective is not
to have to go home and tell the spouse/boyfriend/girlfriend or all of
them that you got canned.
crdnlau
"
A significant rise in inflation has been seen (and can be expected to continue) given the double-digit growth of the money supply now occurring in the US, the EU and other G-20 economies (see http://www.financialsense.com/fsu/editorials/dorsch/2008/0102.html). A flight from the dollar to gold is now expected by many observers and is even being covered by mainstream newspapers (see http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/01/06/ccgold106.xml&CMP=ILC-mostviewedbox). This article models, in a simple fashion, a dollar flight to gold’s impact on the price of gold.
This growth in the money supply has actually been taking place since the mid-1990s. The excess money has to go somewhere and since the mid-1990s it has found its way into the Internet stocks producing a bubble and, following that, into the recent housing market causing the housing / subprime mortgage bubble. This article concludes with some thoughts about how gold differs from the Internet stock and Housing bubbles.
Table A provides a basic perspective on how the gold mining industry compares to the global economy. As you can see, even at recent elevated gold prices, the value of gold being mined is only .2% of the world GDP. Gold mining is thus an extremely small component of the world-economy. Total existing gold demand is balanced with supply at current prices and is roughly 98 billion dollars. Most of gold mine production (74%) is used for fabrication (primarily jewelry). The remaining demand is classified as investing demand. Importantly, gold investment demand constitutes just 0.05% of global GDP. All of this points to the fact that even a very minor shift of the world’s investment into gold will have a huge impact on gold demand.
This article explores this impact by means of a model. The basic outline of the model is as follows:
In a flight to gold scenario, supply is assumed to be inelastic. That is, existing holders of gold will not want to part with their gold (because its price is rising and the dollar is unattractive). The other supply of gold is what comes from gold mines. The lack of production increases in the face of the rapidly rising price of gold over the last few years demonstrates that supply of gold is also inelastic. So, the model has the supply of gold being perfectly inelastic at the current rate of mine production. This is a bit of a simplification, but it still allows real insight into the effect of a flight from the dollar to gold.
Existing demand is considered separate from any dollar-flight demand and is assumed to remain constant in dollars. Thus the amount of oz of gold going to this existing fabrication and investment demand scales inversely with the price of gold.
Additional annualized dollar-flight demand is assumed (based on illustrative guesses by the author of what seems reasonably likely).
The modeled price of gold is then the total annual demand divided by the annual mine production.
Table B models the effect of a flight of petrodollars to gold. The oil producing countries listed in the table have already expressed, to a great or lesser degree, dissatisfaction with the use of the dollar as the reserve currency, either for political reasons or because of inflation resulting from the dollar’s recent devaluation. Table B models the effect of those countries investing a small fraction, 5%, of their oil revenue in gold rather than dollar denominated financial instruments. This results in an additional $54 billion of gold demand which pushes the modeled price of gold to $1401 / oz. This change of investment policy could continue for a number of years pushing the price of gold up indefinitely.
China has a huge trade surplus to the United States and is holding 1.2 trillion dollars of reserves. Table C models the effect of China, over the course of a year, shifting 5% of those reserves into gold. This increases gold demand by $60 billion pushing the modeled price of gold up to $1454 / oz. This change in investment policy might continue beyond a single year as the trade imbalance persists and as China continues to move additional fractions of its reserve from the dollar into gold.
Table D
models the effect of a very small fraction (1%) of US household
financial assets being moved from where they currently reside
(equities, mutual funds, bonds, pension funds holding the same) into
gold. US household financial assets are so large that even a 1% shift
increases gold investment by $422 billion pushing our modeled price
of gold up to $4769 / oz! This illustrates how sensitive the price of
gold is to a change of investor sentiment.
Table E
models the effect of a minor panic flight from the dollar. In this
scenario all of the previous shifts take place at once and the amount
shifted is doubled. Having multiple different simultaneous dollar
flights to gold is not unreasonable. If the dollar becomes severely
unattractive you would expect many holders to head for the exit door at
the same time. The doubling of the previous four modeled flights
seems to the author to underestimate the effect of even a minor
panic. This scenario, as modeled, yields a modeled price of gold is
then $10,771.
The
graph below summarizes the modeled results.
The author does not consider any of the above modeled-gold prices to be forecasts. He does consider them to be very illustrative of how sensitive the price of gold is to even minor shifts of investment from the dollar into the gold.
There have recently been a spate of forecasts of upcoming gold price rises based on adjusting for inflation the 1980 peak price of gold. The author submits that these forecasts could be way too low if a serious flight from the dollar to gold takes place.
As a postscript, there remains one important thing to say about how a dollar flight to gold differs from the Internet stock bubble and the Housing bubble. The supply of gold is inelastic. Even though the price of gold has more than tripled in the last few years (from $250 / oz to around $900 / oz), gold mine output has stagnated.
The supply of worthless Internet startups is, as we found out, anything but inelastic. After the mania got going, Wall Street produced out of thing air a limitless supply of worthless Internet startups. Soon the bubble popped that their price returned to their actual value, zero.
Similarly, home builders have found that the supply of new houses, while initially inelastic, was quickly made elastic by the flood of houses brought to market. Home prices are now returning to their actual value.
In the first
really classic bubble, the Dutch found that tulip bulbs, while
initially inelastic, after a couple of growing seasons was completely
elastic and the bubble burst. And the price of tulips collapsed.
Because the supply of gold is inelastic, the rise of the price of gold does not constitute a bubble, at least not the same as the Tech bubble, Housing bubble and Tulip Mania. It is not susceptible to the same kind of wall of supply induced collapse.
The dollar is completely different from gold. Its supply, like the other fiat-currencies, is like worthless Internet startups: perfectly elastic. Just as venture capitalists could produce a limitless supply of Internet startups, central banks can produce a limitless supply of fiat currency. It is this very difference in elasticity between the dollar and gold that could trigger a flight (or panic) from the dollar to gold.
About the author
MontyHigh is an individual investor who woke up one day and realized that a 10% swing on his retirement savings returns was roughly the same as his day-job's salary. Since then he's been learning all he can about investing and trading. His investments are currently concentrated in select Canadian junior precious-metal mining stocks. You can follow his learning experience on his blog, World of WallStreet (http://montyhigh.typepad.com/world_of_wallstreet/), on which he frequently posts.
Here's my look at gold. As predicted by the much admired Investor Village's Tobinator (Toby Hansen), gold started a correction from an overbought condition (the correction started one day later than Toby's warning). Toby has been impressing folks over at Investor Village with his technical analysis, so let's see if I've picked up any Fibonacci number tricks from him.
The chart shows the first Fibonacci support at $862. After the previous advance (also in the chart, ending in November) the price dropped back to that advance's first Fibonacci support ($773) and then started the recent advance. Its this kind of situation that has got me thinking there might be something to this Fibonacci number stuff.
There's more support around the second Fibonacci ($845) as support was established by the November high ($848). Seems pretty bearish to me if it breaks this support.
Last September the RSI came back from overbought in a fashion very similar to the price movement of the last two days (Jan 15 and 16). That is, with one big down day followed by a smaller downish day. In September, the price of gold then started climbing again. If the September pattern repeats gold won't need any Fibonacci support at all.
Monty
Here's the inventory numbers. Zinc looks pretty bad. I'm weighing which high-cost, low-cash zinc miner to short. Copper seems to no longer be climbing and the LME canceled warrants jumped (see the blue Net line) which forecasts a lower headline number going forward. I may look for a short term trade in copper (buy some PCU calls or something). My copper favorites are CS.TO, NDRS.PK (soon to be NRD.TO) and ZMR.TO.
Here's a typical gold-bug article: Gold Is The New Global Currency
Here's a typical quote from the above typical gold-bug article:
"Prices have a long way to go before they approach the
inflation-adjusted record touched in 1980 when Soviet tanks invaded
Afghanistan. At Monday’s $859, gold was trading at less than half that
level. It could top $1,000 and still be at the lower end of what some
analysts argue is a safe haven range."
Why do people keep comparing the current price of gold with the inflation adjust peak price from 1980? That was a bogus price as witnessed by the immediate collapse that occurred after 1980. We should be comparing the current price of gold with a normal price, the price of gold before or after the 1980 spike.
So, (looking at the chart below), let's be generous and use $300 seen at the bottom of the first correction to the 1980 spike. If the 675$ spike equals $859+859 inflation adjusted (as this article asserts), than a proper price for gold (inflation adjusted from $300) is 764$. If you don't like my $300 price, pick another, but don't pick that peak price from 1980 because that obviously was not an ordinary price because it immediately collapsed by more than 50%.
Here's an independent way of calculating inflation adjustment: http://cgi.money.cnn.com/tools/allowance/allowance_101.html?step=calced&templName=allowance.html&resultsmode=2&allowance=%24859&year=1982
It says that $859 in current money is the same as $431 in inflation adjusted 1982 money. So, just going on inflation adjustment, it looks like current gold prices are in the right ball-park.
I'll be happy to accept some nit-picking on the numbers I've used, but the basic principle holds: Gold does not look notoriously unpriced when using the ordinary method of inflation adjustment. I'm bullish on gold (particularly gold stocks, see this earlier post), but let's not kid ourselves.
I've got around 5% of my portfolio in SKF, the ultra short financial stocks ETF. Ultrashort means that when the XLF financial stock ETF would go down 1%, SKF should (if it works as planned) go up 2%.
Here's why I'm short the financial stocks:
I consider the financial stocks going down to be yet another example of what happens when a bubble bursts. The above chart shows, for the other two recent examples of bubble bursting, how much the related stock prices fall afterward.
QQQQ represents what happened after the tech bubble burst. The chart shows what happened to the QQQQ ETF price from the peak week (2/28/2000) to its lowest point (9/30/2002), a fall of more than 80%. If you had been holding an ultrashort during that period, you could have expected to have had roughly a 16-bagger (increased your investment sixteen-fold). NOTE: Here's how I get 16-bagger: Suppose XLF dropped 80% in 16 compounded 9.5% drops (e.g. 20% = POWER(1-0.095,16)). The ultrashort would be expected to rise in 16 compounded 19% rises (e.g. 1617% = POWER(1.0 + .19,16)).
Homebuilders represents the average price of the following six homebuilding stock prices: HOV, LEN, RYL, BHS, PHM and BZR. I would have used the homebuilder ETF, XHB, but it started after the homebuilder stock peak. The line in the graph indicates what happened to the average of these stock prices from 7/25/2005 to the present (they are apparently still falling).Again, if you had an ultrashort ETF equivalent of this you would have had a sixteen-bagger if you held from the peak to the present.
It looks to me like a correction to the bubble-burst fall took place with both QQQQ and the home builders at around week 58. This looks like a good time to close such an ultra short getting more than a two-bagger with both. If you were still bearish you could reenter the ultra short position after the QQQQ or home builder stocks hit a new low.
That brings us to the financial stock ETF, XLF. As you can see (above), it has been 47 weeks since its peak, which was on 2/12/2007. XLF is down 24% from its peak (and the ultra short, SKF is up 67%). This is not as steep as what QQQQ and the homebuilders experienced when their bubbles burst. This may be because the financial stocks are the darlings of wall street and there is still a lot further to go or it could be that being the darlings they will be kept from following the full fall of other sectors after a bubble burst.
Below is the chart for SKF (the XLF ultra short). As you can see, its up 67% since XLF peak on 2/12/2007. That's pretty close to what you should expect from double what you'd get with shorting XLF for the same period. I was a little late to this party and entered when SKF was at 102 in December 2007. So, I'm up around 10%. I'm planning on using the QQQQ and the homebuilders as a guide and exiting around week 58 which would be around the end of March 2008.
Here's the inventory numbers. Copper seems to no longer be climbing and zinc did not climb as fast last week. I'm pretty concerned about the probably USA recession and am pretty much staying clear of base metals. If copper starts falling again, I'll start shifting more money into it. My copper favorites are CS.TO, NDRS.PK (soon to be NRD.TO) and ZMR.TO.
First Majestic Silver Corp (FR.V) is a mid-tier silver mining company in the making that is valued like a junior. Compared to Hecla Mining (HL), a steady mid-tier silver mining company, First Majestic is undervalued between 2 and 3 to 1.
FR.V has three operating silver mines in Mexico and is already producing silver at an annualized rate of 3.2 MM oz/year (with a minor lead byproduct equivalent to 400M oz Ag/ year). The three mines are capable (and forecast) to ramp up production to a 6MM oz/year rate during 2008 without further dilution. The mines are also being aggressively explored with 11 drill rigs. The forecast result of this is 300 MM oz of resources by the end of 2008.
FR.V's management is the kind that garners my respect having a proven track record building substantial mining companies. The CEO is John Neumayer was the founding president of First Quantum Minerals whose market capitalization exceeds 5B$. The COO, Ramon Davila, has held key operating posts in Mexico's largest silver mining companies, including VP of Mining operations for Luisman and president of a subsidiary of Pan American Silver Corp where he was in
charge of all aspects of production, exploration and administration of
Pan American's Mexican operations.
My spreadsheet analysis comparison of FR.V to Hecla Mining (HL) based on $14/oz silver indicates that, should FR.V achieve its forecasts, by the end of 2008 FR.V's silver production will be equivalent to HL's. FR.V's price will have to increase, relative to HL, by:
This makes First Majestic (FR.V) look to me like an Easy Double in 2008. Continued growth of its existing mines and resources, its aggressive, competent management and the opportunity for significant consolidation of Mexican silver juniors gives First Majestic considerable upside from there.
So, how is it that FR.V finds itself so undervalued? This is probably attributable to two factors:
The above chart indicates that First Majestic has been consolidating for the last two months after recovering from August's sell-off, but now looks likely to breakout. Unlike true junior silver miners, FR.V has not suffered from tax-loss selling. It has excellent support around 4.20$C which is 11% below the recent close. Here's some catalysts that could cause it to break out of its trading range:
First Majestic looks like a really fat pitch to me. Unlike the true juniors I will be profiling over the next couple of weeks, First Majestic is not lacking anything specific that is holding back its valuation other than a relatively simple expansion of its current activities.
First Majestic is actually my favorite stock right now. Its relative lack of liquidity has been keeping me from enlarging my position, but now it looks so good that I've been adding to my position over the last couple of days despite the chart looking a little overbought as of today's close. If you are considering entering you might want to wait either for a break out or for it to fall a little closer to that support at 4.20$. You may miss the boat if the expected drill results come out before you enter and it jumps 10 or 20%.
Of course, everyone should do their own due diligence and invest their own money.
If you are interested in this kind of profile, check my blog over the next couple of weeks (http://montyhigh.typepad.com/world_of_wallstreet/) as I'm planning on profiling several junior precious metal stocks I'm holding.
I've reading (and admiring), John Hussman's weekly Weekly Market Comment (see http://www.hussmanfunds.com/weeklyMarketComment.html) for a couple years now. He seems to be among the most sophisticated, well-balanced, conservative and truly insightful money managers out there who publishes his thinking on a weekly basis. I've learned a lot from him.
Because he is so well-balanced, I was really surprised to see him in this week's commentary somewhat on the same wavelength as your author regarding precious metals:
"In precious metals, the Market Climate remains favorable, and the
Strategic Total Return Fund currently has just under 20% of assets
invested in precious metals shares. The U.S. dollar, having cleared its
oversold condition, may be vulnerable particularly if employment
figures are not particularly strong."
20% is a very large allocation for Hussman as he is such a believer in employing diversification to achieve safety and steady returns (unlike your author who is employing concentration to maximize gains despite increased volatility).
Digging through his archives reveals this article from 1999 (!!!): http://www.hussmanfunds.com/html/gold.htm. It gives his thinking on precious metal stock investing . This is the best treatment, from a moderate, non-conspiracy viewpoint, that I've ever seen on precious metal stock investing. Its pretty interesting to consider how timely it is and probably explains why Hussman is so bullish at this time.
Here's Hussman's money quote from that article:
"Not surprisingly, the combination of all of these is rare but
extremely powerful. In the rare instances when 1) The rate of inflation
has been higher than 6 months earlier, 2) Treasury bond yields have
been lower than 6 months earlier, 3) the NAPM Purchasing Managers Index
has been below 50, and 4) the Gold/XAU ratio has been above 4.0, the
XAU has soared at an astounding rate of 123.63% annualized. In
contrast, when none of these have been true, the XAU has plunged at
-53.21% annualized. That's a gaping difference."
So, let's see where we stand against Hussman's four criteria right now, at the start of 2008:
(1) Rate of inflation is higher than 6 months earlier -- The year over year inflation has risen from 2.7% in May 2007 to 4.3% in November 2007 even though the month-over-month inflation is unchanged at .6% (see http://www.bls.gov/schedule/archives/cpi_nr.htm#2007). While this is not perfectly clear, I would presume that in spirit this matches Hussman's criteria of "rising inflation". Here's the November BLS CPI summary:
"The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.6 percent in November before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The November level of 210.177 (1982-84=100) was 4.3 percent higher than in November 2006."
Here's May's summary:
"The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.6 percent in May, before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The May level of 207.949 (1982-84=100) was 2.7 percent higher than in May 2006."
(2) Treasury bond yields have been lower than 6 months earlier -- In the last 6 months the 30 year treasury yield has fallen from 5.12% to 4.45%, see http://www.treas.gov/offices/domestic-finance/debt-management/interest-rate/yield_historical.shtml and http://www.treas.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtml.
(3) NAPM PMI under 50 -- We haven't gotten here yet, but are getting close. The last four readings are: 53.8, 52.9, 52.0, 50.9 or steadily trending lower at roughly falling 1.0 per month (see http://research.stlouisfed.org/fred2/series/NAPM). These readings come out on the first business day of the month, and we'll get the next reading January 2 at 10AM which could meet Hussman's criteria.
(4) Gold/XAU ratio has been above 4.0 -- Here's the chart, currently at 4.83 which is well above Hussman's criteria. You can see from the chart that for almost the entire bullish period from 2001 onward this criteria was met and that when it was not met (Q2 02, Q4 03 and Q1 06) that the XAU index languished. This is really impressive given that Hussman's criteria was established in 1999 (before this entire period).
To summarize, the current situation:
In the past when this pattern held, gold stock rose over the next six months at the rate of 123% annualized. My own investments are highly concentrated in Jr precious metal mining stocks that have diverged from the advancing price of gold even more than XAU's large caps. The "reversion to the mean" principle suggests that these juniors that could advance even faster than Hussman's pattern for large caps suggests.
I've been and will be profiling my favorite junior precious metal mining stocks on my blog, http://montyhigh.typepad.com/world_of_wallstreet/.
About the author
MontyHigh is an individual investor who woke up one day and
realized that a 10% swing on his retirement savings returns was roughly
the same as his day-job's salary. Since then he's been learning all he
can about investing and trading. His investments are currently
concentrated in select Canadian junior precious-metal mining stocks. You can follow his learning
experience on his blog, World of WallStreet, on which he frequently posts.
First Majestic Silver Corp (FR.V) is a mid-tier silver mining company in the making that is valued like a junior. Compared to Hecla Mining (HL), a steady mid-tier silver mining company, First Majestic is undervalued between 2 and 3 to 1.
FR.V has three operating silver mines in Mexico and is already producing silver at an annualized rate of 3.2 MM oz/year (with a minor lead byproduct equivalent to 400M oz Ag/ year). The three mines are capable (and forecast) to ramp up production to a 6MM oz/year rate during 2008 without further dilution. The mines are also being aggressively explored with 11 drill rigs. The forecast result of this is 300 MM oz of resources by the end of 2008.
FR.V's management is the kind that garners my respect having a proven track record building substantial mining companies. The CEO is John Neumayer was the founding president of First Quantum Minerals whose market capitalization exceeds 5B$. The COO, Ramon Davila, has held key operating posts in Mexico's largest silver mining companies, including VP of Mining operations for Luisman and president of a subsidiary of Pan American Silver Corp where he was in
charge of all aspects of production, exploration and administration of
Pan American's Mexican operations.
My spreadsheet analysis comparison of FR.V to Hecla Mining (HL) indicates that, should FR.V achieve its forecasts, by the end of 2008 FR.V's silver production will be equivalent to HL's. FR.V's price will have to increase, relative to HL, by:
This makes First Majestic (FR.V) look to me like an Easy Double in 2008. Continued growth of its existing mines and resources, its aggressive, competent management and the opportunity for significant consolidation of Mexican silver juniors gives First Majestic considerable upside from there.
So, how is it that FR.V finds itself so undervalued? This is probably attributable to two factors:
The above chart indicates that First Majestic has been consolidating for the last two months after recovering from August's sell-off. Unlike true junior silver miners, FR.V has not suffered from tax-loss selling. It has excellent support around 4.20$C which is 9% below the recent close. Here's some catalysts that could cause it to break out of its trading range:
First Majestic looks like a really fat pitch to me. Unlike the true juniors I will be profiling over the next couple of weeks, First Majestic is not lacking anything specific that is holding back its valuation other than a relatively simple expansion of its current activities. First Majestic is actually my favorite stock right now. Its relative lack of liquidity has been keeping me from enlarging my position. II expect I'll be enlarging this position over the next couple of weeks if its price does not run away.
Of course, everyone should do their own due diligence and invest their own money.
If you are interested in this kind of profile, check my blog over the next couple of weeks (http://montyhigh.typepad.com/world_of_wallstreet/) as I'm planning on profiling several junior precious metal stocks I'm holding.
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