World Of Wallstreet

No Stops Left To Run

So, I guess the Cartel figured they better let it rise. 

MontyHigh, www.worldofwallstreet.us

 

 

Gold And Silver Short Term Trading Plan Update

Here's where we were at the close yesterday:

We appear to be following the 2006 playbook. I expect I'll stay where I am, heavily leveraged long gold with some long silver out of the money call options as long as we follow the 2006 playbook.

MontyHigh, www.worldofwallstreet.us

I Think The Egypt Situation Is A Big Deal

How about you. It clearly the biggest international development since the Greece financial crisis.

You've got 90 million people who can't feed themselves kicking out the former USA client-state  government. I think Mubarak is already gone and the US empire is focused on figuring out how to shape whatever comes next and keep it from spreading to other US friendly middle-eastern assets (Jordan, Saudia Arabia, Yeman, Kuwait, UAE, etc.). 

What's going to come next and how long will it be before a government gets a handle on things. If the chaos goes on long enough I think we are talking about the biggest International relief effort in decades and a largish International peace-keeping force.

Here's the best three short pieces I've seen on it(no particular order).

http://thehourlyg.blogspot.com/2011/01/what-you-get-for-2-billion-year-in-aid.html - points out that US aid is only 1% of Egyptian GDP.

http://blog.atimes.net/?p=1661 - says Egypt imports half its wheat and expect food riots.

http://cluborlov.blogspot.com/2011/01/fix-is-off.html - here's to quick points:

1. "Egypt, which is home to half of the world's Arabs, is the fulcrum on which the Arab world turns."
2. "Is the Middle East going to turn out to be Washington's Eastern Europe?"

Thinking about this from the rather prosaic gold trading perspective... I'm thinking every "strong-man" in the middle east and their henchmen are busy transfering their assets out of the region and are amassing as much physical gold as they can buy. It will be quite interesting to see if the Gold Cartel can keep its price in check next week.

Leave me a comment with links to the best pieces you've seen on this and what comes next.

MontyHigh, www.worldofwallstreet.us

 

 

January Gold Seasonals: Outlook Is Bullish

This post provides my look at the January seasonals for Gold. As far as trading gold goes, my method involves keeping an eye on fundamentals:

• Especially whether they are buying in India or not. As long as there is buying in India there is significant downside protection against a sudden dramatic price fall.
• Also watching for central bank buying/selling (buying is bullish), negative short-term interest rates and whether the basic macroeconomic outlook indicates increasing long-term safety.

While the fundamentals are bullish (as they seem to be now), I'm concentrating on this kind of seasonal analysis to guide my trading.

Here's my table after looking at the charts for the last 9 years (since the gold bull market got seriously underway):

 
Column M indicates that the average return for the month (if gold is held thruout without any stops) is 3.05% with 6 of 9 years having positive results and the worst mothn being down -3.8%. This is generally bullish in my book.

Column P indicates the worst possible outcome (if you exited at the close of the worst day of the month). The worst day of the worst month is down -8.7%. That's bad, but not horrendous.

Now, the lead up to which years are most like the leadup to Jan 2011? Well, 2011 is the third year of a presidential cycle (and so is "like" 2003 and 2007) with results of +5.9% and +3.1% respectively. That seems pretty good. 

Another way to look at this year is that this year, the price of gold is ending the year (unless something dramatic happens tomorrow) in a strong up-trend with the price above the 20 day simple moving average and the 20 day above the 50 day which is above the 100 day which is above the 200 day simple moving averages:

Column R provides the results for Januaries which are entered in a similarly strong up-trend (and with a stop of a 20-day moving average crossing). The result look pretty strong. At this point, I'm pretty bullish about January 2011 and expect to stay leveraged long gold. This is not investing advice, it is just my own expectation of how I'll trade.

What are your expectations for gold for January and what is the basis for that expectation? Leave me a comment.

I will leave it as an exercise for the reader to determine whether the same kind of seasonals apply to Silver.

MontyHigh, www.worldofwallstreet.us

Here's the charts for the last 9 years with the charts of the years most like this one appearing first:

Gold Trading: What To Do?

Well, I'm wondering whether this is a significant correction for Gold (and Silver).

The above is the current chart updated to the time of writing.

The following charts of the three fairly recent situations that seem similar to todays. By fairly similar I mean:

• Had been RSI overbought for a while.
• Had a correction that took the RSI down to 50 but not much further.
• Had a recovery after a small number of weeks that brought the RSI back to 70.

The PINK lines are the first case of a significant down day following that recovery of the RSI back to 70.

None of them seasonally match our present predicament occuring in January or February. All of them had a bounce on the day following the equivalent of yesterday (which we aren't having today). So, they don't seem to directly relate to our current circumstance.

All of them moved back on to renewed strength and highs. That's attractive.

Based on this circumstance, I guess I'm going to hold at least another day. I'll probably hold provided we don't get a 4PM close below yesterday's low.

What do you think of the next week or so for gold and silver?

MontyHigh, www.worldofwallstreet.us

P.S., The silver charts are similarly quite different from current circumstances, similarly went on to very nice further gains without violating the equivalent of yesterday's lows. I reiterate that I'll probably hold provided we don't get a 4PM close below yesterday's lows.

 

I Know A Manipulated Take Down When I See One...

This is the kind of price action that convinced me that GATA was right about a U.S. government led cartel manipulating the price of gold down to make their economic policies (in this case QE2) look "ok".

If you entered here I think you got a good entry point. They will be feasting on Gold tonight in India at this price, I expect.

MontyHigh, www.worldofwallstreet.us

 

Best Of The Web: Hussman Argues That Quantitative Easing Provokes Gold Hoarding

John Hussman is my favorite of the main-stream investment commentators. He brings a conservative, fundamentals approach to stock investing with a deep, academic insight into the macro-economic outlook. This week (click here) he brings the graphs and data to show that about the only thing quantitative easing really does is unnaturally and only for the short-term ramp up asset prices, especially gold as hoarding commodities beats getting a negative real-rate of return on bonds.

He claims that historically gold stocks do great (something like an %86 per annum return) when real-interest rates are negative and when the Chicago purchase manager's index is sub-50 (indicating contraction). The most recent PMI was 60.4, so we haven't gotten to is ideal condition for gold stocks yet.

At little tough to plow thru, but its really nice to have this kind of empirical backing for your main investment theme.

I'm still holding out until tomorrow to dispense with my 1/3 cash and plunge back fully into precious metals trades and investments.

MontyHigh, www.worldofwallstreet.us

More Gold Price Entrail Gazing

As I continue to ruminate about this gold correction, I ask myself a couple of questions: What happens to silver in this kind of a correction? What happens to gold stocks. I'm going to try to update the previous set of charts to address these questions.

In the charts that follow the light blue boxes show a reasonable exit (based on a gold RSI 50 downward crossing after having made some real money, preferably having the RSI touched or crossed 70). The use of the $SILVER:$GOLD and GDX:$GOLD ratios shows the relative performance of silver and gold stocks over that period.

The table that follows summarizes the results quantitatively (numbers are approximate as they are eyeballed from the chart and run thru a calculator):

Surprisingly, Silver does as well or better than gold every time. Guess I'll find a leveraged silver play (e.g. SI options or perhaps SLW options). Got any other pure (or nearly pure) leveraged silver plays? On the other hand, gold stocks underperformed gold coming out of these corrections 3 of 5 times and only out-performed gold once. Guess I'll try to lay off with restoring my gold miner positions, at least until I find some new names I really like.

MontyHigh, www.worldofwallstreet.us

P.S., Its probably worth looking at the run up to these gold tops in terms of the GDX:$GOLD ratio as it seems to me that a falling ratio is an indication that at top is nearby.

 

Update: Gold Correction Underway... What Next?

Here's yesterday's chart:

As you can see, the first up day after an RSI 50 touch occurred. I expect I'll be reentering long on Monday if near the 4PM close gold is higher than today's 4PM close.

MontyHigh, www.worldofwallstreet.us

P.S., Here's a minor clarification I record for myself. By staring at the above chart's last day open, high, low and close and comparing it to the kitco 24-hour chart I deduce:

The $GOLD chart includes "after hours". The $1315.50 low occured befoe 3AM. The $1328.10 close occurred at the 5:15PM after hours close. The $1328.50 high occurred between 4PM and 5:15PM. The open price of $1326 appears to correspond to the 6PM open of the night before.

Gold Correction Underway... What Next?

This post was mostly written last night. I don't think the price action of today changes much and, in particular, I don't think it triggers a reentry according to the criteria at the end of the post.

That 20% run from roughly $1160 to $1390 was pretty sweet. We've had quite a party in gold since the end of July, but it appears the party is over. I don't think the bull market is over (because the fundamentals still seem strong). Here's some fundamentals that come to mind that seem bullish to me:

• The Indians have been importing with lavish premiums lately.
• Central banks are buying (mainly China and Russia) with others openly talking about joining in (google the news for Korea and gold).
• European central banks are no longer selling gold.
• The dollar is soft and there is a currency devaluation contest underway.
• The Gold Cartel which has been suppressing the price of gold is still out there suppressing away leaving gold under pressure to jump as soon as they run out of physical gold to sell. 
• Interest rates are near zero so you don't lose any significant interest holding gold rather than bonds.
• Everyone is talking about Gold being in a bubble.

So, I think its just a correction. At this point, given that I don't know when an overbought run is going to end, my policy is to wait until its clearly over (that was Tuesday morning at around 8:30AM) and close as fast as possible leveraged holdings (options and futures) and sell, on the first day, as much of my Juniors which are not core holdings as I can without personally dragging down the stock prices much. My remaining core holdings at this point are Gold Resource Corp[GORO], Rio Alta Mining [RIO.V] and Dynasty Metals And Mining [DMM.TO]). My policy is that the first day of a correction is the best day of a correction to sell. I don't want to get panicked out near the bottom.

So, what this post is about is to look really hard at the Gold charts and try to figure out a set of criteria to use for determining when this correction is bottoming. I'm going to identify similar situations and see if they can provide a guide to the criteria to consider.

Here's a rather big 5-year gold chart. The recent run-up appears as a sustained period where the RSI is overbought followed by a quick drop in the RSI to around 60 (at least). There are four (maybe five) previous similar appearences. One takeaway here is: This kind of 2-month run up in Gold is really not that unusual. It happens about once a year. And the correction that follows is also something we go thru it about once a year. If you aren't a trader you could just wait it out. The fact this happens once a year really brings into question the idea that gold is in a bubble and that now the bull market is over.If there is a blow off top to the gold bull market is going to have to be something a lot bigger than this gold run. 

The four previous big gold runup ended in: Dec-05, May-06, Nov-07 and Dec 09. Perhaps there's something comparable ending in Feb-08. So let's look at each of them in detail.

The Dec-05 correction was a minor one with gold falling around 10% (from 540$ to 490$) and in pretty much in a straight line with the bottom 6 days after the top. It:

• Did cross the 20-day moving average,
• Did not touch or cross the 50 day moving average and
• Did not touch or cross the lower bollinger band. 

The following policies would represent good re-entry points:

• First up day after the RSI  crosses below 50.
• First nice white candle.

 

The May-06 correction was a major correction with gold falling around 25% (from 726$ to 542$) pretty much in a jagged straight line hitting the bottom after 23 days (a month). It:

• Did cross the 20-day moving average,
• Did crossed the 50 day moving average (with one minor next-day recrossing) and
• Did touch or cross the lower bollinger band multiple times intraday and closed outside of the lower bollinger band for the final two days. 
• Did cross the RSI 50 (with one minor next-day recrossing).
• Did cross the RSI 30 - folks must have been sweating bullets at that point. 
• There was a period of four consecutive without a lower-low far before the bottom.

The following policy would represent good re-entry points:

• First up day after the RSI crosses below 70.
• NOTE: A fifty-day up crossing would result in being quickly stopped out for a minor loss.

The Nov-07 correction was a minor one ith gold falling around 10% (from 850$ to 770$) pretty much in a jagged path hitting the bottom after 8 days. It:

• Did cross the 20-day moving average,
• Did not cross or touch the 50 day moving average on its descent to the bottom, 
• Did not touch or cross the lower bollinger band,
• Did cross the RSI 50.
• Did not cross or touch the RSI 30. 
• There was a period of two consecutive without a lower-low before the bottom.

The following policy would represent good re-entry points:

• First up day after the RSI crosses below 50.

The Feb-08 correction may not really be comparable to the current correction as its preceeding rise did not have as long as sustained RSI above 70 as the current correction's run up. The Feb-08 correction was a minor one ith gold falling around 5% (from 942$ to 890$) pretty much in a straight path hitting the bottom after 5 days. It:

• Did cross the 20-day moving average,
• Did not cross or touch the 50 day moving average on its descent to the bottom, 
• Did not touch or cross the lower bollinger band,
• Did just touch the RSI 50.
• Did not cross or touch the RSI 30. 
• There was a period of only one day without a lower-low before the bottom.

The following policy would represent good re-entry points:

• First up day after the RSI touches 50.

The run up to the Dec 09 correction seems the most like the current correction's run up. That is unfortunate as this correction is seemingly the hardest to call a correction for. The Dec-09 correction was a moderate one with gold falling around 12% (from 1222$ to 1078$) jagged path hitting the bottom after 13 days. It:

• Did cross the 20-day moving average,
• Did not cross the 50 day moving average (with a one-day cross back) on its descent to the bottom, 
• Did not touch or cross the lower bollinger band,
• Crossed and stayed below the RSI 50.
• Did not cross or touch the RSI 30. 
• There was a period of three consecutive days without a lower-low before the bottom.

The following policy would represent as good a re-entry point as possible:

• First definite up day after the RSI touches 50.
• Get stopped out on a new low. This happens twice.

Let's take a look at our current condition:

This correction is five days long already and could end tomorrow having crossed the 20 day moving average and with the RSI having touched 50. But only one of five previous cases recovered this quickly. The correction will probably continue at least another couple of days.

After reviewing the five previous cases, my reentry criteria is as follows:

• Reenter at the close of the first real up day after touching or crossing the RSI 50. I'd be more confident if this occurred from below the RSI 50.
• Get stopped out initially at the close of the second day if the closing price is not higher than the previous day. NOTE: Waiting for this confirmation may be desirable (look at the charts yourself) as they eliminate all of the getting stopped out situations except one. I expect I will actually scale in or wait for this second day confirmation.
• Thereafter exit on a lower low for the correction as a whole.
• Repeat as necessary (ouch, this could hurt if we get stopped out repeatedly).
• Where to take profits (after we have them) is for further study.

The Download 20101021gc summarizes the results of this post.

Here's my final observations from the table.

• The May-06 correction was by far the largest and it occurred after the largest runup. That runup was 50% higher than the Oct-10 runup. The difference in runups is evidence that the Oct-10 correction will not be as deep the May-06 correction.
• An approximately 10% correction (which would bring gold down to around $1250) seems pretty likely (see Dec-05, Nov-07 and Dec-09). There's a decent chance a reentry at the end of an up day 10% fall will be stopped out (see May-06 and Dec-09).

The seasonals are another factor that point towards a mild and short correction. October is seasonally bad for gold.

I'm prepared to be stopped out if necessary and I expect I will scale into leveraged long positions at the end of the first decent up-day provided there has been decent price support from India in terms of Indian gold imports in the days preceeding the up day. I'll complete my entering into long positions should the first decent-up day be confirmed the next day. The actual vehicle(s) for going leveraged long are an item for further study.

That's what I'm thinking right now about this gold correction. Nobody knows short-term what is really going to happen. I certainly don't recommend that you act on any of the thoughts in this post. They are just a way of me capturing and sharing my own thinking for the sake of myself and my readers. I do expect I'll be referring to this post frequently as the correction (and recovery thereafter) proceed.

If I have the time I will author a similar study for silver this weekend.

MontyHigh, www.worldofwallstreet.us

I'm Bearish The US Stock Market, But I'm Not Suicidal

I got creamed from from the summer of 2007 thru late 2008 by sticking with positions based on two faulty fundamental-based outlooks:

• First that my base metal miners were so undervalued at current metal prices that they would be fine even if base metal prices turned down. Instead, the stock prices got murdered in anticipation of metal price declines that, when they came, far exceeded my expectations.
• Second that gold would rise as a safe have pulling my undervalued Jr gold producers up with them. Instead, gold got hit because gold traders were leveraged up and needed to liquidate and Jr gold producer got hit worse than other stocks because, being Jr, they were considered "riskier".

Now, we seem to be in a similar situation: My my fundamental outlook is for the US to go thru an economic contraction pulling the general stock market down with it as the deleveraging from the credit bubble continues. Instead, the general market is going higher.

This time, I'm using technical analysis to keep my possibly-flawed fundamental outlook from turning into another massive money-losing disaster. When the S&P 500 crossed 1130 today, I closed my bearish positions: S&P 500 put options and retail ETF (XRT) put options for a smallish (around 1% of portfolio value) loss.

Here's the chart which made me close those shorts. As you can see, the S&P 500 broke thru that resistance at 1130. This is a perfect example of the Technical Analysis Maxim: double-tops usually hold, triple-tops are usually broken. From here there is just minor resistance after another 3 or 4 percent rise (say 1176) and really no significant resistance until the year-to-date high at 1220.

Its possible we'll get whipsawed and the S&P will fall back below that resistance, but I'm not going to let a losing position get worse and worse on that kind of hope. I'm going to use Technical Analysis to keep me from the kind of big losses I experienced in 2007 and 2008. 

This leaves me with some cash (not much), but mainly long precious metals (Gold and Silver call options) and Jr gold producers both of which have been jumping into overbought conditions. I have my finger on the sell trigger for these as well, especially the silver options. Its going to take at least 2 down days to get me to sell because there seems to be so many buyers waiting for a dip get increase their positions.

Well, that's what I'm doing. So far, adding Technical Analysis to my arsenal seems to have not reduced my upside much but seems to have helped limit my downside quite a bit. How do you keep an error in judgment from turning into a disaster? Leave me a comment.

MontyHigh, www.worldofwallstreet.us

Jr Miners Way Overbought: Sell Like Hell On First Down Day?

The $CDNX is as close as there is to a Jr Gold Miner's index. It looks way overbought:

What makes it overbought [looking at rightmost blue rectangle]?

• Look at that long string of white candles going parabolic! And they are all outside of the bollinger bands.
• Look at that RSI which has been over 70 (green) for more than a week and is around 85!

Now let's look at the other two recent cases where this index has become overbought (see the leftmost two blue rectangles). They looked just as overbought as the $CDNX is now. In both cases the jig was up the first day after a non-white candle came out. In the first case there was about a week of consolidation and then a serious decline took place (13%). In the second case there was about two weeks of consolidation and then a serious decline (21%).

I expect that I'll be selling my Junior Gold miners hard into the close of the first day (probably today) where a non-white candle is forming. There's lots of reasons not to:

• Emotionally, I don't want to do it. And, the other gold charts are pretty bullish.And silver is pushing thru that really tough resistance at $20. Its strongly correlated with gold miners.
• And fundamentally, the gold outlook (and the expectation of making profits for gold miners) is pretty bullish.
• And, its expensive because of how illiquid they are. I will probably pay more than 5% to get out and get back in.

Still, these two prior episodes show that overbought conditions don't go forever and it gets ugly when an overbought condition corrects.

I wish there were a way to hedge the stocks that I have against this kind of drop. The best I can think of is to buy puts on things like the GDXJ.

Do you have any thoughts on how to hedge Jr gold miners (especially Jr producers)?

Do you have another index for following Jr Gold Mining producers?

Finally, do you buy this overbought argument? If not, why not.

I've got my finger on the sell trigger, how about you?

Leave me a comment.

MontyHigh, www.worldofwallstreet.us

"Gold Gets Taken Down 95% Of The Time On Unemployment Day..." NOT!

If you move in certain circles in the gold investing community, I bet you've heard it said: "Gold Gets Taken Down 95% Of The Time On Unemployment Numbers Day".

Well, I decided to figure out if it is true. If it is, its definitely tradeable and you could easily pull down a 6-figure income trading gold options just one day a month. Nice work if you can get it.

Here's what I did to test this theory. I:

• Downloaded a couple years of the daily results for the Gold ETF, GLD (open, high, low, close).
• Got the Non-Farm Payroll Dates for the last 2.5 years from the Bureau of Labor Statistics.
• Computed the results of a "going short GLD at the close on the day before" and exiting:
• • At the close of Non-Farm Payroll Day (a Friday).
  • At the close of the next trading day after Non-Farm Payroll Day (usually Monday).
  • At the low of the Non-Farm Payroll Day to see what the result would be if you were a day-trading genius.
  • At the open (9:30, about an hour after the numbers are released) of the Non-Farm Payroll Day. 

Here's the results I got in tabular form (click here:  Download 20100805gldunemploymenttrade for the spreadsheet):

The results really don't look that good. Please let me know if I made a blunder in the spreadsheet. Here's what I see in the tabular results:

• They don't look tradeable to me. The average gain is way to small relative to the maximum loss.
• Actually, for the close-to-close trade results in a winner only 52% of the time so at best you can say "THEY TAKE IT DOWN 52% OF THE TIME ON UNEMPLOYMENT DAY". That is not going to impress the CFTC or the SEC or anybody.
• To my eye, the close-to-open trade looks the best. The winnings are meager, but there aren't really many substantial losses. Here it is in graphical form. 

The maximum loss is only around 2% (which is acceptable). That was in early September of 2008 when all hell was visibly breaking loose (AIG going belly up after Fanny, Freddie and Bear Sterns). The problem is that the average gain is 1/10th that at .2%. That really doesn't look tradeable. 

Now, looking again I see that this trade was a winner for every month in 2009 except one. At that point in time I guess you could say that gold got hit 95% of the time. Before then and after that it has been a mixed bag. I'd say its a complete crap-shoot for tomorrow.

Well, another gold community bit of folk-wisdom turns out to be pretty questionable when looked at empirically. Do you think this calls into question the whole gold intervention theory? I would say it doesn't for me, but it makes me a little less convinced than I used to be and makes me want to back-test more of that kind of folk-wisdom. 

MontyHigh, www.worldofwallstreet.us

Gold Seasonals Looking Good From Here...

I've been watching the price of gold very carefully since the end of 2007. I'm sure everyone has noticed that the price tends to fall some in the summer and tends to have good action in the fall and early in the year.

So, here's a look (click here:  Download 20100805gldseasonals for spreadsheet) at what happens from where we are right now to the end of the month using as much historical data as I could easily obtain, specifically the GLD ETF weekly prices looking each year from the close of the second Friday in August (that would be next Friday).

I notice that:

• Even the worst years (2006 when gold was slammed in May and 2008 when gold was slammed in the fall of the great crash) that:
• • gold ended up at the end of the following March more than 10% higher.
  • the maximum loss you have to have the guts to sit thru was 8% and that in 2008 (which was a quite unusual year).
• On average the gains were over 20%.

Looks pretty good and I'm very much considering the best way to bet on more of the same. Leave me a comment on what you think and how you might play this. 

MontyHigh, www.worldofwallstreet.us

Of course, this is not a recommendation and everyone must do their own due-diligence and take responsibility for their own investing decisions.

Gold Interventionals Looming

  

I've been carrying a lot more cash than I usually do (22%) and am wondering when to reenter.

 

Obviously down there with gold in the $1150s would have been good.

 

But, here we are with gold at $1195 and two looming interventionals coming up:

(a) Tomorrow's unemployment report - a classic for takedowns. I've been planning to put that cash to work near the close tomorrow, but...

 

(b) Looming even larger is the Tuesday Aug 10'th Federal Reserve FOMC announcement - the stock market keeps going up while the economic news gets worse and worse confirming another economic contraction (IMHO). So what is keeping the stock market up?  Its got to be everyone expecting some kind of QE2 announcement to come out of this meeting. That means, with all these expectations, that next Tuesday is shaping up to be quite an interventional day.

 

But..., 10 year treasury bonds (Wed) and 30 year treasury bonds (Thur) have to be sold immediately after meeting, so the FOMC reading can't promise big time QE2 or no one will buy those bonds. Seems like the Federal Reserve (and allies) are in a tighter spot than usual, which calls for more gold intervention that usual.

 

With this in mind, I'm planning on keeping that cash as cash until next Tuesday at the earliest and probably until next Thursday.

 

Could you comment on whether you are expecting an interventional takedown in the short term?

 

MontyHigh, www.worldofwallstreet.us

Yahoo Finance Headline Gets It Wrong

Should read "Gold Kept In Check...". We'll get back above that $1190 resistance pretty soon, I think.

MontyHigh, www.worldofwallstreet.us

1978: Look At The Price Of Gold

A reader (many thanks) gave me a nice link to some historical gold graphs (hat tip to kitco.com, click here). Here's the one for 1978. In my previous post I went thru some of the parallels between 1978 (Carter mid-term election) and 2010 (Obama mid-terms).

The gold chart shows a quite nice 22% run from mid-July ($185) to (being conservative) mid-October ($225). 22% up from the recent lows (call it $1160) takes gold to ($1410). It could definitely happen this year (who knows what the actual probability is?). What kind of catalysts could trigger such a lift-off?

I wonder how much $1300 Dec 2010 GC calls currently cost? Anyone out there going to leverage up (with part of their portfolio) and make a bet on a steep rise in the price of gold this fall?

MontyHigh, www.worldofwallstreet.us

"They" Always Take Gold Down For Options Expiration Day... NOT!!!

Ok, I've heard what you've heard: "They" always take Gold and Silver down for options expiration day.

The data argues against that. The table below gives, for all the options expiration days in 2009 and 20010 (so far) what has happened with gold and silver prices (represented by GLD and SLV) from the 4PM close 1 and 2 days before options expiration to the close on options expiration day. 

As you can see, the price actually goes up into options expiration day close at around 44% of the time. So, THEY DON'T ALWAYS TAKE IT DOWN ON OPTIONS EXPIRATION DAY. 

While I kept playing with the data I found the day after options expiration is worse than the day before:

The most interesting pattern I found was what happens the four days that follow that first day after options expiration. Think this is curve fitting? Or do you think there is a real pattern to this options expiration day stuff and waiting one day for an entry makes for a good trade? A real key to good trading is being able to distinguish between real patterns and curve fitting. How do you make that distinction?

MontyHigh, www.worldofwallstreet.us

Here's the spreadsheet if you want to play with it yourself:

Download 20100727gcsioptionsexpiration

Silver Story: Too Good To Be True...

 

Here's a recent summary of the silver investing story I recently bumped into (I'm sure you've seen similar summaries elsewhere):

 

"These Facts About Silver Say It All

a) Diminishing Supply: Increasing Demand
- 600 million ounces of silver are mined yearly yet industrial demand for silver is over 900 million ounces per year, and new uses for silver keep expanding.
- Investment demand for physical silver has exploded with the advent of a number of silver ETFs and the increase in actual ownership of the physical metal by interested parties worldwide (for example China is now encouraging its citizens to own silver; the US mint is rationing silver coins).
- Total known world inventories of silver in the past 75 years show declines in above ground silver inventories of greater than 98%.

b) A Massive Short Position Exists
- Silver has a massive short position, probably greater than any commodity in history. If one factors in short positions on COMEX, the leasing of silver by bullion banks, banks and brokers selling silver certificates and other silver instruments with no silver to back them then it is quite possible that hundreds of millions – perhaps even billions – of ounces of silver are sold on paper that do not physically exist.

c) Inground Silver Is Limited and Will Become Much More Expensive to Mine
- The average occurrence of silver in igneous rock (igneous rock composes ~92.5% of the earth’s crust) is 0.07 PPM or 0.07grams of silver per metric ton of igneous rock, which means that on average 444.3 metric tons of igneous rock must be mined to obtain 1 troy oz of silver (1 metric ton/.07gram Ag)*(31.1gram/1troy oz)!
- Because of the geological phenomenon of epithemal deposition, very little silver remains underground.
- Only the recycling of silver containing products, the mining of scarce surface silver veins and the silver byproduct of base metal mining can provide fairly cheap silver.
- Silver is not found in placer deposits like gold but, rather, in veins and these silver veins are formed as epithermal depositions or condensation near the earth’s surface (like whipped cream on the surface of coffee). Simply put, the richest silver deposits are nearest the surface of the earth, and the deeper mines go, the less silver they tend to produce. Economically, the deeper the mine, the more expensive the silver.

The Result: The Price of Silver Can Only Increase – Dramatically!
- As current silver is depleted from the above mentioned epithermal deposits and mined deeper at much lower grades (approaching 0.07 grams per metric ton), the costs of mining silver must skyrocket and consequently the price of silver must explode.

The stage is set for a silver price percentage gain of extraordinary magnitude! It is time to embrace the new refrain "Got Silver?""

 

The  "Inground Silver Is Limited and Will Become Much More Expensive to Mine" part of the story is better stated than what you'll usually here (although Chris Waltzek has been pushing these ideas for a while).

 

Still, altogether this is too good to be true. The part that seems too good to be true is the beginning: "600 million ounces of silver are mined yearly yet industrial demand for silver is over 900 million ounces per year, and new uses for silver keep expanding."

 

How can one get the most reliable numbers on silver mining, recycling and industrial demand? I'm about to plunk down $100 or whatever it is for a copy of Christian's annual silver book. Is there a better source?

FWIW, I'm out of silver right now (expecting it to take a major hit with the next leg down of stocks and other risk assets) except for the fact that my favorite miner, GORO.OB (Gold Resource Corp) is actually half-silver. This kind of story is pretty tempting, but for it to be a slam dunk, the industrial demand has to be significantly higher than current mine supply.

So, once again: How can one get the most reliable numbers on silver mining, recycling and industrial demand?

 

MontyHigh

Central Bank Put Reduces Gold Volatility...

http://blog.atimes.net/?p=1498

 

This guy claims gold is not volatile compared to the S&P 500: "The dog that isn’t barking in capital markets is the volatility of the gold price. Despite gold’s move up to a new record, gold’s historical volatility is around 18%, compared to over 30% for the S&P 500."

Maybe on a longer term basis, but not on a day-by-day basis (witness today's [monday's] 2% takedown).

Here's another bit: "So the central banks appear to be accumulating gold, slowly and steady, buying on declines, and nudging the price up as gradually as they can in order to reduce their average cost. That might be why we observe so little volatility in the gold price. The prospective buyers, namely the central banks, are so much larger than the gold market that they avoid actions which might cause price spikes."

 

This guy's big mistake is that he lumps all the central banks into one category. Actually there are two major camps:

• Gold buyers (Russia, China, Saudis, Iran, India...) - who suppress long term drops in the price of gold.
• Gold rivals (USA, Bullion Banks, UK, anyone else?) - who actively suppress price jumps and cause very short term price downdrafts. 

Once again, the result of failure to accept the GATA perspective leaves a gold analyst seriously out of touch with what's really going on,

but still...its nice to see that through the mainstream analyst's eyes the Gold Buyers are now representative of all central banks. Seems like a data point indicating that the Cartel now has big new opponents and the Cartel is losing their grip on the price of gold.

 

MontyHigh, www.worldofwallstreet.us

Demand for bullion puts strain on vaults: Where is the gold coming from?

When I read this: "Demand for bullion puts strain on vaults
By Javier Blas in London

Veteran gold traders are fascinated by the sea-change in bullion demand – and the strains it is putting on banks and security companies’ network of cavernous vaults.”

 

I wonder: Where is the gold coming from?

 

It can't be coming from mines because mine supply is something like 2%/year.

 

I guess some of it might be coming from melted down ear-rings, bracelets, etc. but really... Enough to overflow "cavernous vaults"?

 

The gold must be coming from other vaults. Vaults we can't look into to see how much is there.

 

So, which vaults is it coming from? Not from European Central bank vaults. They are done selling.

I guess that leaves either US government vaults and/or from LBMA vaults. In either case its coming from the Gold Cartel's secret vaults and is moving into vaults where audits and even reporters can see that its stacking up.

This begs the question: How long until those hidden source vaults run low enough that their owners, like European Central Banks, no longer want to sell.

This article, which seems intended to paint the picture of a gold mania about to run out of steam, is actually a supporting data point for the GATA viewpoint: that the central banks have been surreptitiously selling their gold, that the gold has moved into "strong hands" and that the price of gold will erupt as the available gold for this selling runs low.

 

MontyHigh, www. worldofwallstreet. us

FWIW: Chart Review... Reflation Trade Still On (Weakly Though)

Just completed my pretrading chart review. Going to go long gold futures for a short term trade.

 

Here's the charts I find interesting. Don't have time to actually cut and paste the charts into this post.

 

BKX breakout. Banking stocks looking strong. http://stockcharts.com/h-sc/ui?s=$BKX&p=D&b=3&g=0&id=p82408217738&a=170899848

SPX at possible double top with RSI near recent highs. http://stockcharts.com/h-sc/ui?s=$SPX&p=D&b=3&g=0&id=p49012226722&a=135880573

TRAN breaking out. http://stockcharts.com/h-sc/ui?s=$TRAN&p=W&b=3&g=0&id=p27605170565&a=192632403

Dollar is in a triangle. Should continue higher. http://stockcharts.com/h-sc/ui?s=$USD&p=D&b=5&g=0&id=p67231887895&a=166258920

$SOX (semiconductors targeting recent highs). http://stockcharts.com/h-sc/ui?s=$SOX&p=D&b=3&g=0&id=p42005753032&a=193325190

30 year treasuries are still flirting with a reverse head and shoulders disaster. Makes "them" want to suppress gold. http://stockcharts.com/h-sc/ui?s=$UST30Y&p=W&b=5&g=0&id=p17225051855&a=187469066

Copper is consolidating just below a double top. http://stockcharts.com/h-sc/ui?s=$COPPER&p=D&b=3&g=0&id=p98691673496&a=134781029

Gold, last fibonacci gone, 50 day break down, targeting 1050 with quadruple witching coming out next week with FOMC next Tuesday. Short term long futures trade only based on interventional release only. http://stockcharts.com/h-sc/ui?s=$GOLD&p=D&b=3&g=0&id=p84653420881&a=183320883

Gold/Silver back to 65. The reflation trade is saved! http://stockcharts.com/h-sc/ui?s=$GOLD:$SILVER&p=D&yr=2&mn=0&dy=0&id=p65548417530&a=167283469

$HUI is targeting 360 from 420 based on fibonaccis and moving averages. http://stockcharts.com/h-sc/ui?s=$HUI&p=D&b=3&g=0&id=p19309140442&a=163272346

Silver looks barely ok. http://stockcharts.com/h-sc/ui?s=$SILVER&p=D&b=3&g=0&id=p89006582352&a=127980389

Crude is at the top of its channel with the RSI where it tends to run out. http://stockcharts.com/h-sc/ui?s=$WTIC&p=D&b=3&g=0&id=p69244740568&a=147631240

Uranium is on the train to nowhere. This is what housing (the next bubble) is going to do. http://stockcharts.com/h-sc/ui?s=U.TO&p=W&b=5&g=0&id=p48072889684&a=139978060

The overall picture is that the reflation trade is sort of on, but not really strongly. The gold picture (and HUI) is colored by the recent suppression. We'll see what it looks like early next week. I'm expecting a pop in this sector after the 30 year treasury auction completes.

MontyHigh, www.worldofwallstreet.us

Best Of The Web: Dorsch On Interest Rates

Here's (click here) a nice piece about what's coming up for USA interest rates.

Starts out with a great Buffet quote, which I'll repeat here because its so juicy: "As the old saying goes, what the wise man does at the beginning, fools do in the end... It’s like Cinderella at the ball. You know that at midnight everything’s going to turn back to pumpkins and mice. But you look around and say, one more dance, and so does everyone else. Everyone thinks they’ll get out at midnight. The party does get more fun, dance partners get prettier, - one more glass of champagne. And besides, there are no clocks on the wall. And then suddenly, the clock strikes 12, - and everything turns back to pumpkins and mice". Its that whiff of fear (which I pick up from that quote) that is one of the things that makes the investing game so fascinating.

The basic idea in the piece is that interest rates may go up sooner than most expect, perhaps at the end of Q2 2010. Dorsch expects that interest rates won't rise til then because: "Since 1954, the Fed has raised rates only after unemployment has peaked." That little nugget was worth the time spent reading the piece.

Here's a little bit about how fair and open the USA's "free markets" are. The plan for keeping inflation in check is to rig the markets for commodities (thereby cheating the commodity producing nations of the world [mostly much poorer than the USA] out of a fair price): "Instead, the Fed is calling upon Congress and the CFTC to rein in energy and commodity prices, especially crude oil, by limiting how many futures contracts hedge funds, investment banks and other speculators can control in 2010."

He ends up by saying that Volcker is calling for interest hikes sooner: "If you wait, it’s too late" and inflation is upon you. But, since when has anybody actually done what Volcker has called for (especially in an election year where the ruling party is in real danger of losing control of the house of representatives)?

So, Dorsch seems to suggest they will wait too late and raise rates too slowly: "If history is a guide to the future, the gold market has been able to climb sharply higher, alongside a rising fed funds rate. The Fed’s last rate hiking cycle, - starting in June 2004, - and beginning with the fed funds rate at 1%, wasn’t able to cap gold’s powerful advance thru May 2006, until the fed funds rate was lifted to 5.25-percent. Thus, for two-years, gold rose 40%, alongside a 425-basis point increase in the fed funds rate, since the Fed was lingering far behind the inflation curve."

The piece is nicely decorated with Dorsch's dual-Y-axis graphs that allow the correlation between seemingly unrelated time series to be visually assessed. Here's an example:

Pretty cool, huh? I'm going to have to learn how to make those graphs myself.

MontyHigh, www.worldofwallstreet.us

Korea To Follow China's Lead And Add To Gold Reserves

http://english.donga.com/srv/service.php3?biid=2009070411578

The above article, referenced by GATA (click here), indicates that Korea is going to start shifting some of its central bank reserves from US dollars to gold, following China's lead. I'm not familiar with the news source, but this makes sense and is, obviously, bullish for gold. Having central banks switch from being sellers of gold to buyers increases demand and increased demand pushes a commodity's price higher.

Here's the money quote: "According to experts, the comment implies that the bank plans to buy gold soon. Korea has the world’s sixth most foreign exchange reserves but ranks just 56th in gold holdings."

MontyHigh, www.worldofwallstreet.com

Mike Kachanovsky's Number On Junior Mining Stock: Impact Silver (IPT.V)

Mike Kachanovsky makes the case for silver better than most (click here). Says current price ratio (gold to silver) is over 50 to 1 while the ratio of gold to silver in the earth's crust is 15 to 1.

His favorite junior mining stock is my favorite silver Jr mining stock (actually only silver Jr mining stock):
"...the number-one junior mining stock in the world, in my opinion, would be IMPACT Silver (TSX.V:IPT)."

My Inputs To Toby Hansen's (Tobinator's) Quarterly News Letter

Attached (click here) is a PDF of my inputs to Toby's news letter summarizing my current overall outlook.

MontyHigh, www.worldofwallstreet.us

"Several Important Questions": Reader Question And Answer

I'm honored to have a reader leave a comment with a bunch of questions. Here's the questions (italics) with my responses in bold.

Hello,

I have several important questions for you:

1. Do you believe that gold stocks will tank in May this year? by that i mean that you must sell all your gold stocks because the gold price in May, June, July and August will decline immense?

A: Well, I'm really honored to have you ask me these questions. Anyone listening to me should consider that I'm just a software engineer who has been trying hard to figure out this investing thing. In the year leading up to July 2007 I made 3 million$ in Jr base metal mining stocks (nearly a triple) which has subsequently evaporated from holding too long and then moving to Jr gold producers as a safe have (which turned out to not be safe). So, I tend to go with what I believe in "all out" which results in very high volatility. I'm willing to take these risks because I consider myself diversified by having a lucrative, fairly secure day-job and by having a substantial, paid-off house. 

So, firstly, you don't want to invest like me. You really need to form your own convictions and take responsibility for your own investment decisions.

You ask if I think gold stocks will tank in May this year. My answer is: I really don't know, but the stocks I hold should be able to print money if gold holds above $800. I expect to dump if I reach the conclusion that gold looks like it will drop below $800. I think the basic fundamentals for gold are really strong, with quantitative easing eventually leading to significant inflation and with big chances of other investments going to zero in the mean time. Finally, I like the fact that Asian buying (India, Vietnam, China) seems like its beginning to kick in and support a gold price of $880. Still, there's definitely a chance of a breakdown and I'm not going down with the ship, so I'm watching really, really carefully.  

2. I hear everywhere that when inflation kicks in gold stocks will be worthless because the capital cost of gold mining will be huge and therefore the profits of these gold miners will be minimal.

Hard to know what will happen when inflation kicks in, but at $800 gold my gold mining Jrs should be able to print money. I think inflation drives inflation hedges like gold faster than gold mining costs (chief of which is salaries, secondarily crude oil). Anyway, look at Inca Kola's piece on gold mining vs gold (click here). His clear conclusion is that mining stocks are leveraged to the price of gold, so a rising price of gold (even if triggered by inflation) should be really good for the stocks I'm holding. 

3. They say that there is now deflation, accroding to Jay Taylor gold stocks do extremely well in a deflationary environment. When will this deflationary influence end in the gold stock market.

I've heard Jay Taylor on gold stocks and deflation and the only data point I've seen is the Homestake Mining stock chart. That's just a data point. Homestake had a huge find that was barely economic at the start of the depression and that benefitted from falling mining prices. I consider it to be just a data point. But... my Jr mining stocks should be able to print money at $800 gold, so I'm holding as long as that seems like a good bet.

But really, you ask "when will deflation... end". That's the five dollar question that nobody really knows the answer to. My plan is to hold stocks that are making a tonne of money at current gold prices and to bail should the price of gold soften "too much".

4. Is it smart to sell your gold stocks end of April and buy back these same gold stocks in May, June, July and August because prices of these stocks will be low and cheap again.

Hard to say, but the stocks I'm holding are very illiquid and I expect to take a 5 to 10% hit every time I trade in and out, so I try not to do that. I'm really watching the gold chart carefully and if I think support has broken, I'm bailing and I don't know what I'll do next.

Beneath i have some gold stocks of which i am thinking to take also a position, i hope you can advice which stocks you think are worth taking a position in.

1. Pediment Exploration, PEZ
2. Castle Gold, CSG - Got a bunch of this and I like it.
3. Alexis Minerals, AMC
4. Allied Nevada Gold, ANV
5. Starcore International Mines, SAM - Risky play. They have a crappy, marginal mine and have had trouble getting it profitable. They are not big enough that they will ever be taken over. I recall some cases where it seemed to me that management cared more about themselves than stockholders.
6. Romarco Minerals, R
7. Hawthorne Gold, HGC
8. Sangold, SGR - Great rocks. Who knows how many oz though? Everybody and their brother is following it and is in already. Plus, have you visited the stockhouse board? What a swamp pit! I have stayed away (when I could have made money) because I just don't see how I have an edge. With this one, I woulda, coulda, shoulda.
9. New Guinea Gold, NGG - Terribly undervalued if they can get their starter mine working, but they keeping failing to do so. I've trimmed my holdings down to where I don't really mind if they go to zero. Production results for Q1 are due this week. If they are at 3500 oz or higher for the quarter then my confidence rises some. 
10. AuEx Ventures, XAU
11. Animas Resources, ANI
12. Vista Gold, VGZ
13. Wesdome Gold, WDO
14. Eastmain resources, ER
15. Clifton Star, CFO
16. Canplats, CPQ
17. Premier Gold, PG
18. Rubicon Minerals, RMX
19. Andean Resources, AND
20. Lydian International, LYD
21. PDX Resources, PLG

Don't know anything about the rest of these. Other gold stocks I'm long on include: Gold Resource Corp, Dynasty Metals and Mining, Semafo, Troy Resources, Oceana Gold Corporation, La Mancha Resources and CGA Mining. I also hold some Impact Silver just because I really admire their management.

I want to thank you in advance.

I'm honored to have you ask my opinion, but one thing I realized about 5 years ago: Nobody cares about your money the way you do. I made a decision to take responsibility for my own investing decisions.

I sincerely would like your opinions.

Best of luck Ruud

I'll use this post as an excuse to put up my gold Jr fundamentals chart. The first chart is the stocks that I consider reference stocks to compare the others with (black), the second chart is my "less risky" favorites (blue, which are all probably too risky for a typical investor), followed by my "risky" favorites (green), followed by others that I've done in-depth due-diligence upon, but do not currently have large holdings of (dark red). All estimates are for 2010 and the price to operating cash flow is based on $800 gold.

Best wishes,

MontyHigh, www.worldofwallstreet.us 

Troy Resources Buys The Argentine Casposo Project: How Much Is An Exploration Oz Of Gold Worth?

Just a data point. Troy Resources (TRY.TO), a company that specializes in profitably opening and operating smallish gold mines, recently bought the Casposo project putting a solid project for its next mine into its project pipeline.

The project seems kind of small to me and seem to have good grades given that it is open mostly open pittable oz. The lack of any significant "inferred oz" means to me that there is no exploration upside. This is perfect for Troy Resources.

This is of interest to anyone investing in Jr Gold Explorers as it provides a data point for valuing exploration projects. The table below provides the key facts. I remember the data point simply as $50 / measured and indicated oz and $60 / proven and probable oz.

MontyHigh

TIC Data Vs Debt Seems Important: Is it?

http://jsmineset.com/index.php/2009/04/10/jims-mailbox-120/

 

The graphs say, if I get it right, that foreigners are no longer funding USA debt. Seems like a prelude to a currency collapse or hyperinflation, but I'm not that expert on this. 

 

It seems important. Is it?

 

MontyHigh

Unlightening: Bought Back In Yesterday About Half-Way

FWIW, I bought back in yesterday about half-way and now have about 15% cash. I like the overnight support and evidence of Indian buying. I don't like what looks like a head and shoulders pattern on the daily gold chart.

Its very expensive getting in and out of these Jr stocks (say 5% hit). I didn't lighten up as far as I did to make money but rather to protect myself against major damage. Now that all of the fundamentals have lined up (money growth, sub-inflation rate interest rates and Asian gold buying), I'm not so afraid.

In retrospect, it would have turned out better if I'd just been "long and strong".

My three biggest holdings at this point are Gold Resource Corp (GORO.OB), Castle Gold Corp (CSG.V), Dynasty Metals And Mining (DMM.TO).

Gotta go,

MontyHigh

Gold Outlook: Lightened More Today, Now 28% Cash

Here's the updated chart I'm following.

Here's the news from a bearish perspective:

• Confirmed breakdown thru $900 support, first fibonacci and trendline.
• Dollar moved up today.
• Trader Dan of www.jsmineset.com says that the $850 have been targetted by the recent technical action.

Hears the bullish news:

• There appears to have been at least some Indian buying in the last couple of days. I can't give you a link for this. This is probably the most important thing I'm looking for prior to moving that cash back in. The 24 hour gold chart (see below) seems to confirm this with a rise thru the Asian open followed by overnight steadiness.
• RSI is getting closer to oversold (30).
• Its somewhat rare to have more than three big red candles in a row and that's where we stand now. I expect some kind of breather in this downward movement.
• General market rally seems overextended and another downturn and renewed flight to safety may have started today.

I expect that I will stop lightening for a couple of days, but resume selling if that 200 day moving average and $850 get seriously violated.

MontyHigh

Belated Intermediate Outlook Turn: Lightening Up On Gold Jr Producers

Friday afternoon, I lightened up on my gold jr producers selling about 12% of my holdings. The long term fundamentals appear to be bullish for gold (and thus jr miners), but I don't like the short-term technical action. I admit that some of the recent bearish technical action is the result of gold cartel actions, but I don't think that invalidates technical analysis. The gold cartel triggered the gold reversal last last July and this kind of technical analysis might have protected me from the gold fall from around $900 gold all the way to under $750. This time I'm willing to lose some potential winnings. I'm playing it safe and getting out of the way (at least partially) when gold technicals turn bearish.

Ok, so here's the reasons I'm short term lightening up (in order of importance):

• These Jr gold producers are illiquid. I can't just decide one day to get out without moving the stock price quite a ways. So, I'm lightening in a case where, if the investments were liquid (like GLD, AUY, KGC, NEM, etc.) I would wait to see what happens next.
• The daily gold chart has turned bearish in my view (along with some supporting charts like the silver). This is discussed further below.
• Expert opinion: David Morgan (whose public outlook is "perma-bull" and who is on-board with the gold cartel idea) this week advised his subscribers to sell 25% (click here) of their precious metal mining stocks. I think the guy's calls have been pretty good. Rick Ackerman, the short-term trader has recently turned bearish on gold (click here). I've been paying attention to him and he seems to make good calls.
• Seasonals - we are getting close to the "sell in may and go away" period for gold. Resource stocks (and precious metal stocks in particular) are pretty notorious for having bad summers.
• The Indians have not been buying gold for some time. I believe they are the stoppers for any downward turn in the price of gold. The subscription-based LeMetropoleCafe's Midas commentary provides a daily read on Indian buying.
• $CDNX index (the best index for tracking gold exploration stocks) looks overbought.

Here's some data that looks bullish (short and long term) for gold (and my Jr gold producer minings stocks):

• There are no events immediately coming up, that typically triggers gold cartel gold price suppression. This past week was filled with these short term events: G20 meeting, Auto industry travails and the unemployment numbers.
• The US dollar chart is turning bearish.
• Almost every fiat currency has inflationary monetary growth (M1, M2, etc.) as they attempt to stimulate their economies.
• The precious metal Jr producers should be making a lot of money even with $800 gold. NOTE: This is not really a defense for these stocks. Resource stocks have gotten clobbered when their commodities turned south even though with the reduced prices the companies were still making lots of money. This is because when a commodity price starts falling there is no telling how low it will go (witness the catastrophic falls of oil, natural gas, nickel, copper, zinc and lead). The fact that my base metal miners were making money at current prices is the main reason that I used to justify staying in base metal miners after the commodities themselves turned bearish. This kept me from getting out of those base metal miners in time to preserve significant profits. I don't want to repeat this mistake.
• The economic data shows a continued global contraction (despite the recent boyant stock market action).
• The fraudster, banksters (who got us into this mess) continue to be fully in charge of the US economic policy and so can be expected to stink up the place as they try to save themselves and their buddies at the expense of the average Joe and the USA and global economy. 

So, I see the bullish aspects of the situation, but am lightening a little based primarily on the technical action. This is my current strategy: Use technicals to get me out of positions thus protecting me from too much damage when my fundamental viewpoint might be flawed.

This is the gold chart that has the bearish things I'm seeing:

Here's the bearish things I see in this chart (in order of importance):

• Uptrend from October 08 broken.
• Inability to reach a new high in Feb 09.
• First fibonacci breakdown (fibonaccis from Mar 08 high to Oct 08 low).
• 50 day moving average break down. 
• Fell through the psychologically important $900 round number.
• Right at a bunch of support between $900 and $880. 
• Next support is around $856 where the next fibonacci lies and where the 200 day moving average lies. 
• RSI and MACD are moving gently lower but not oversold.

I confess I don't see anything clearly bullish in this chart. The main positives I see are:

• Still well above the 50% fibonacci and could easily regain the first (38%) fibonacci with one good day. This occurring and holding would change my technical outlook to neutral or bullish. 
• Price action from the Mar 08 high hit an intermediate low around 1.5 months after the high. This year we are just about 1.5 months from that the high. So, cyclically we could turn up for a while here.
• Still well above the 200 day moving average with the 50 day moving average still moving up.

So, I'm taking it day by day, holding cash. At this point I will probably continue to sell about 3-5% of my portfolio every day until we get one of the following:

• Indian buying - this the most important indicator of real, short-term fundamental support.
• Gold closing above $905-910 (I'm not sure about the actual value I'll use). This puts us above that first fibonacci which is around $898 and above the psychologically important $900 round number.
• Gold becoming oversold as indicated by a sub-30 RSI.
• The US Dollar Index falling under 82 (breaking down through that last fibonacci).

Well, I don't claim to be a great trader, but I do take responsibility for my own investing / trading decisions and this is what I'm' doing now. Leave me a comment on what you current outlook is and whether its changing.

MontyHigh, www.worldofwallstreet

Here's the overbought (see RSI) $CDNX chart.

Here's the US dollar chart.

Here's the silver chart.

Troy Resources (TRY.TO) Buys Intrepid Resource's Casposo Deposit

Editor's Note: Inca Kola News (click here) is on my daily must-read list. Great coverage of Latin American mining and resource investing with personal commentary on politics from an informed, local perspective I can't find anywhere else. You can also find a set of individual stock fundamental analysis reports on this site (called NOBS reports) at $10 each. I buy them just so I can learn from the author how to improve my  fundamental analysis.

IKN's author, Otto Rock, World Of WallStreet's Lead Latin American Analyst contributes this piece about Troy Resources (TRY.TO). Troy is stock I have bought a bunch of (having learned about it from Inca Kola News) that I am coming to admire more and more. These guys know what they are doing, do not have stars in their eyes and have built and are running a successful stockholder-friendly business.

3/25/09

Troy Resources (TRY.to) (TRY.ax) News

Map from Intrepid Mining website

Troy Resources today announced it was paying U$20m (straight from the kitty) to buy the 'Casposo' deposit in the San Juan region of Argentina from Australian miner Intrepid Mines (IAU.ax) (IAU.to). Looks like a good deal to me. TRY has had a full production facility in mothballs for some time and has made no secret of the fact that it's been looking for a place to put it, with an ideal deposit grading 3g to 4g/t Au. That's what they've found in Casposo.

Check out the paste of the PR below, but you'll note an envisaged six year mine life for 338k oz Ag (including inferred) and 9m oz Ag (incl inferred), so via memory and quick ballpark numbers, your humble correspondent expects Troy expects to run its mothballed plant basically at optimum speed, as 60k oz Au per year with silver credits sounds just right (note more gold than silver production expected to begin with, with the mix changing in the later years). Also, notably most of the gold deposit is already in the probable reserves column...that's positive. As for the U$20m pricetag, if we use the totally totalled 454,900oz Au Eq number (below) that comes out of the Casio at U$44/oz. That works.

Importantly, very importantly in fact, please note that San Juan Argentina is very much miner-friendly country. As mentioned several times on this blog in previous posts, Argentina can be pro or anti mining, the key being the provincial level of government, not the national or local township levels. San Juan is a province that welcomes mining and has a long history of mining activity. It is the province that is home to the Argentine side of Barrick's contentious Pascua Lama gold project, but as Casposo is just 700masl and the polemic Pascua Lama is over 4000masl up the circumstances are very different. Add to the mix that the deposit is low sulphide and (although I'm assuming somewhat) is unlikely to need use of cyanide to extract the gold (UPDATE Thurs AM: after a lesson in metallurgy from those who know this rock better than I, it seems my assumption was wrong. The likely solution is a cyanide circuit. Thanks due to the person kind enough to un-ignoramus me). Make no mistake, Troy is in pro-mining country.

This type of small deposit is tailor-made for Troy, a company with a track record of bringing mines to production quickly (again, see below). It will also be able to totally fund the project from cash held at bank, so no need to get sticky in the credit markets.

Bottom line: Troy Resources, my pick of 2009, has just added investor value. DYODD, because I own (avg buy C$0.84). Right now TRY.ax (Aussie listing) is up 6.3% at A$1.285 which is C$1.106 at current forex. TRY.to closed at C$1.01 today.

Here's the PR to enjoy (I did at least).

Otto Rock

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March 25, 2009

Troy to Acquire the Casposo Gold-Silver Deposit From Intrepid Mines Ltd

PERTH, WESTERN AUSTRALIA--(Marketwire - March 25, 2009) - Troy Resources NL ("Troy") (TSX:TRY)(ASX:TRY) - NOT FOR DISTRIBUTION TO UNITED STATES NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES Highlights - Troy has reached agreement to buy the Casposo gold-silver deposit in San Juan province of Argentina from Intrepid Mines Ltd ("Intrepid"). - The acquisition price is US$20 million on closing and US$2m on the 6th month anniversary of first production. Troy will fund the acquisition from cash reserves. - Troy will look to fast track the mine development utilising the gold plant it holds in storage in New South Wales, Australia. Troy Resources NL ("Troy") announces it has reached agreement with Intrepid to acquire its 100% interest in the Casposo deposit in San Juan Province in Argentina (to see Figure #1 please click on: http://media3.marketwire.com/docs/try325.jpg). Troy will fund the acquisition out of cash reserves. Completion of the acquisition is subject to receipt of any consent or approval under any law or regulation affecting the parties and to completion of a reorganisation of certain subsidiaries of Intrepid not intended to be included in the acquisition. Completion is also subject to the parties settling a definitive acquisition agreement on usual commercial terms. Commenting on the result, Troy CEO, Paul Benson, said: "This is an exciting acquisition for Troy. Casposo is an excellent deposit and Intrepid have done a great job exploring and proving up the resource. We see this as tailor made for Troy as we can use our in-house expertise to bring the mine into production quickly. Our aim is to minimise capital and time to first production by utilising an existing gold plant we hold in storage. Ken Nilsson who has built and operated all of Troy's mines will take responsibility for Casposo." "The March 2007 feasibility study completed by Intrepid envisaged a 6 year mine life with the first 4 years being fed by a gold rich open cut followed by 2 years from a silver rich underground mine. The Argentinean based Intrepid team of geologists working on the project have done an outstanding job to date and we look forward to this group joining the Troy team as employees and continuing the exploration program with the aim of adding to the resource inventory and extending the mine life." "The province of San Juan has a very supportive attitude to mining and we look forward to working with the local regulators and communities to bring the mine into production as soon as possible." Troy has a track record of building mines quickly, efficiently and at low cost and this will be Troy's third mine in South America. In 2002 Troy acquired its first mine, Sertao, as an in-situ resource and quickly sourced an appropriately sized second-hand plant in Australia that was refurbished and transported to Brazil. In addition, Troy completed an infill drilling program which increased reserves whilst awaiting shipping. Time from acquisition to first production was just 14 months with an initial capital of just US$8m. Plant construction including earth works took approximately 6 months. Andorinhas, Troy's second Brazilian operation was acquired as an in-situ resource in November 2006 and developed by relocating the mill and plant from Sertao. As additional milling capacity was required, a second-hand mill was sourced from Western Australia. Following the acquisition Troy converted the resource to reserve status, constructed the processing facility and developed the open cut mine and poured first gold in March of 2008, sixteen months from acquisition to first production with an initial capital cost of just US$16m. In mid 2007, Troy commenced development of the high grade Mamao underground mine which is now ramping up to full production. With Casposo we will look to similarly fast track development to bring it into production as quickly as possible and expect to utilise some or all of the gold plant we have in storage in Cobar, New South Wales to lower the capital cost and time of the mine development. The Casposo project is subject to royalties payable to the original owners of the property of US$6 per gold equivalent ounce on the first 450,000 gold ounces (less royalties already paid totalling up to US$900,000) and a royalty of US$5.00 per gold equivalent ounce for each ounce of gold produced in excess of 450,000 ounces. Casposo is a typical Low Sulphidation epithermal style gold-silver deposit where mineralisation is hosted within rhyolite breccias and andesite. Veins are typically banded quartz-chalcedony colloform - crustiform banded with quartz - carbonate infill. Mineralisation is associated with an assemblage consisting of quartz, chalcedony, adularia, calcite, illite, sericite and trace sulphides. Gold and silver occur as electrum, native silver, sulfosalts and silver sulphides. Mineralisation at Casposo occurs along a 10 kilometre long west-northwest-east-southeast (N60 degrees W) regional structural corridor, with the main Kamila Vein system forming a sigmoidal set 500 metres long near the centre. The main structural corridor consists of 2 parallel vein sets dipping to the southwest at -60 degrees to -65 degrees (B Vein & Inca Veins). A secondary mineralised trend comprises multiple north-south striking sigmoidal structures that dip to the west at -65 degrees (Aztec, AF, B North & MV1 - Mercado Veins). Ore shoots are typically lenticular bodies up to 200 metres in length and up to 15 metres wide. Work completed included surface sampling and geological mapping, trenching and pitting, detailed trench sampling of the vein systems, reverse circulation and diamond core drilling, an airborne magnetic survey, ground gradient-array induced polarization (IP) and pole-dipole IP surveys as well as bulk sampling for metallurgical studies. A feasibility study, commissioned in 2005, was competed in March, 2007. The latest Casposo Resource estimate was completed in July 2008 by AMEC International Chile. Open pit resources were contained within a Whittle pit shell using a gold price of US$760/oz. Resources below this were classified as underground resources with a cut-off grade of 3.5g/t Aueq. Grade interpolation techniques were inverse distance weighted. The Casposo project is subject to royalties payable to the original owners of the property of US$6 per gold equivalent ounce on the first 450,000 gold ounces (less royalties already paid totalling up to US$900,000) and a royalty of US$5.00 per gold equivalent ounce for each ounce of gold produced in excess of 450,000 ounces. Table #1 Casposo Resources and Reserves -------------------------------------------------------------------------- CASPOSO MINERAL RESOURCES -------------------------------------------------------------------------- Gold Silver Gold Gold grade grade equivalent Gold Silver equivalent Tonnes (g/t) (g/t) grade (g/t) Ounces Ounces ounces -------------------------------------------------------------------------- Open pit Indicated 1,882,400 5.39 130 7.05 326,000 7,854,100 426,900 Inferred 15,800 5.61 137 7.38 2,800 69,900 3,700 -------------------------------------------------------------------------- Underground Indicated 193,800 1.97 196 4.49 12,200 1,223,200 28,000 Inferred 8,800 2.43 294 6.21 700 83,000 1,700 -------------------------------------------------------------------------- -------------------------------------------------------------------------- TOTAL Indicated 2,076,200 5.07 136 6.81 338,200 9,077,300 454,900 Inferred 24,600 4.47 193 6.96 3,500 152,900 5,400 -------------------------------------------------------------------------- -------------------------------------------------------------------------- CASPOSO MINERAL RESERVES -------------------------------------------------------------------------- Gold Silver Gold Gold grade grade equivalent Gold Silver equivalent Tonnes (g/t) (g/t) grade (g/t) Ounces Ounces ounces -------------------------------------------------------------------------- Open pit Probable 1,399,000 5.44 96.05 6.80 244,600 4,320,300 305,900 -------------------------------------------------------------------------- Underground Probable 335,000 3.99 220.5 7.11 43,000 2,375,200 76,600 -------------------------------------------------------------------------- -------------------------------------------------------------------------- TOTAL Probable 1,734,000 5.16 120.1 6.86 287,600 6,695,500 382,500 -------------------------------------------------------------------------- Notes: 1. Mineral Resources are estimated using a US$760/oz gold price and US$13/oz silver price. An economic function that includes operating costs, metallurgical recoveries and royalty costs has been applied. 2. Rounding as required by reporting guidelines may result in apparent differences between tonnes, grade and contained metal content. 3. Tonnage and grade measurements are in metric units. Gold ounces are reported as troy ounces. 4. All Mineral Reserves are reported in the Probable category 5. Mineral Reserves are estimated using a gold price of US$690/oz and US$11.80/oz silver price and an economic function that includes operating costs, metallurgical recoveries and royalty costs. 6. Cut-off grades for Mineral Resources were 1.41g/t gold equivalent for open pit and 3.5g/t gold equivalent for underground. Gold equivalent grades for Mineral Resources were based on metal prices of US$760/oz gold and US$13/oz silver and processing recoveries of 93.7% for gold and 80.6% for silver. 7. Cut-off grades for Mineral Reserves were 1.56g/t gold equivalent for open pit and 3.5g/t gold equivalent for underground. Gold equivalent grades for Mineral Reserves were based on metal prices of US$690/oz gold and US$11.8/oz silver and processing recoveries of 93.7% for gold and 80.6% for silver. 8. The information regarding Mineral Resources and Mineral Reserves is drawn from the technical report entitled "NI 43-101 Technical Report, Intrepid Mines Limited, Casposo Project - July 2008" that was filed on September 16th 2008 by Intrepid under its profile on SEDAR at www.sedar.com. Information of a scientific or technical nature in this news release was prepared under the supervision of Peter J. Doyle, Vice President Exploration and Business Development of Troy, a "qualified person" under National Instrument 43-101 - "Standards of Disclosure for Mineral Projects", a member of the Australasian Institute of Mining and Metallurgy. Mr. Doyle has sufficient experience, which is relevant to the style of mineralization and type of deposit under consideration, and to the activity he is undertaking, to qualify as a "competent person" as defined in the 2004 edition of the "Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves". Mr. Doyle has reviewed and approved the information contained in this press release. For further information regarding the project, including a description of the quality assurance program, quality control measures, the geology, samples collected and testing procedures in respect of the project please refer to the technical report entitled "NI 43-101 Technical Report, Intrepid Mines Limited, Casposo Project - July 2008" that was filed on SEDAR on September 16th 2008 by Intrepid Mines Limited and which is available under Intrepid's profile at www.sedar.com. This news release contains forward-looking statements. These forward-looking statements reflect management's current beliefs based on information currently available to management and are based on what management believes to be reasonable assumptions. A number of factors could cause actual results, performance, or achievements to differ materially from the results expressed or implied in the forward looking statements. Such factors include, among others, future prices of gold, the actual results of current production, development and/or exploration activities, changes in project parameters as plans continue to be refined, variations in ore grade or recovery rates, plant and/or equipment failure and delays in obtaining governmental approvals or in the commencement of operations.

ATW Gold (ATW.V) Management Does Another Private Placement...

Quite a fuss on the stockhouse board as ATW, having hit new highs and gone into production where they are supposed to be cash-flow positive.

So, the private placement comes out and its 22% under yesterday's close and offers a half-warrant at yesterday's closing price.

Seems pretty unfair to the earlier holders.

Now, here's the part that rich. The buyer of this unfair bargain is Sprott Asset Management (a pretty successful group of hard-nosed deal makers). Some of the posters on the message board see this as a silver lining as having Sprott accept a gift like this is a win-win situation because SAM "gives us much needed publicity".

Yet another example of how having stockholder friendly management is moving higher and higher in my evaluation of Jr mining stocks. From now on I'm going back at least 2 years on any stock I consider buying and look at what kind of financing they had done and when and why and for how big a discount.

I think I'm getting to the point where I can predict this kind of thing. Whenever a company hits a significant milestone and achieves a 52 week high and has plans for growth that requires capital look for the private placement. This kind of management is not patient enough to grow the company through its own cash-flow. They want grow a big empire as fast as they can so that can "take something off the top".

Here's my list of companies that are on my own confirmed stock holder friendly list (in the order they come to mind):

• Gold Resource Corp (GORO.OB) - management owns 1/3 of the company, the strategy is clearly to make money without diluting the company and the company targets 1/3 of all cash flow to dividends.
• Capstone Mining (CS.TO) - has done stock buybacks in the past to support the price when inordinately driven down. Did the whole Silverstone Resources strategy to unlock extra value for their shareholders.
• Impact Silver (IPT.TO) - is small, making a profit and resisting the temptation to dilute or get into debt to fund growth.
• Troy Resources (TRY.TO) - has a history of paying dividends and maintains a good balance sheet and is growing / obtaining new mining resources organically.

Here's my list of companies that are on my tentatively stock holder friendly list:

• Castle Gold (CSG.V) - profitable, not in debt, growing on cash flow and has a committee established to determine explore selling the company.
• Semafo (SMF.TO) - seems to be growing well without a lot of dilution.
• CGA Mining (CGA.TO) - has an extremely high percentage of institutional investors who won't put up with mindless empire building.

What companies do you have on your confirmed shareholder friendly list?

MontyHigh

New Guinea Gold Soap Opera Takes A Political Risk Twist

Well, after announcing missed production guidance recently, New Guinea Gold's Sinivit start up problems take a new twist (click here).

Apparently all it takes to shutdown a mining operation is New Guinea is 12 guys on foot walking up to the gate and demanding that it be shut down. 

The same thing happened to New Guinea's largest gold miner, Lihir Gold on January 27, 2009 (click here). There were only shutdown for three days (click here).

Both of these are good examples of one category of political risks: Troubles with locals. The other big category is trouble with the national governments (in the form of tax increases, nationalization, etc.).

So, investing in mining companies in politically risky countries has risks. We'll see how this turns out.

MontyHigh

FWIW, My Input To Toby Hansen's News Letter

Here's my input to Toby Hansen's widely admired, quarterly news letter. You can get a copy delayed by a week or so on this web site or directly by emailing a request to: tobinator00@yahoo.com.

There may not be a tonne of new information my inputs here (I'm sure Toby will have quite a lot of new material), but at least the tables here are up-to-date.

MontyHigh

 

Castle Gold (CSG.V): A WorldOfWallstreet.Us Top Pick

 

I maintain a universe of Jr gold producers (and near producers) that I follow. These companies appear to be the most undervalued companies I can find. You can find profiles of these companies and their comparative valuation at my web site, www.worldofwallstreet.us. This piece provides all comparisons based on 3/20/2009 closing prices.

 

The key metrics I use to compare these companies are, estimated for 2010:

    * Price to operating cash flow at $800 / oz gold.

    * Price to annual oz produced

    * Price to oz of gold in the ground (proven/probable, measured and indicated and measured, indicated and inferred).

 

First we consider a set of companies, that I consider to be useful for comparing my top-pick candidates against. Alamos Gold (AGI.TO) is a well-run, consistent performer held by an investor I highly admire. Minefinders (MFL.TO) is a recently in-production top-pick of Jim Puplava and John Goody (www.goldstockanalyst.com). Capital Gold (CGC.TO) and Western Goldfields (WGW) are probably the best references for comparison as they were recently acquired and are still trading (prior to their takeover closing). Their prices and resulting metrics thus provide a good reference for valuing a similar company. The table that follows provides my summary of the reference companies.

The next table provides my current top-picks (Castle Gold Corp, Gold Resource Corp, Semafo, Troy Resources). As you can see, they are all very undervalued in terms of estimated price-to-operating cash. As a top pick, each company has management I have confidence in.  It must also be able to stand a significant downturn in the price of gold (say $650 / oz) and not be in danger of “going to zero”.

Castle Gold (CSG.V) is one of my top picks at this time. It is a profitable, producer with a long-life, profitable and still ramping up heap-leach mine in one of the safer parts of Mexico. It also has a short mine life cash-flow generator in Guatemala that is scheduled to be closed in the second half of 2009. The path to ramping up to the estimated 2010 production of 50K oz / year probably consists of nothing more than letting out a contract to a higher-capacity mine subcontractor. Announcement of this deal is due any week now. There may be a small amount of financing needed as well.

 

As you can see, it is by far the most undervalued, in terms of estimated 2010 price to operating cash flow, of any of the miners appearing in this piece’s first tow tables.

 

Castle Gold has already begun to address its main weakness: Its production is too small for it to ever “grow up” to a mid-tier company. This is being addressed by forming a committee to consider mergers with larger companies.

 

Castle Gold is thus the most undervalued debt-free company I know of in terms of 2010 price to operating-cash flow and has the twin catalysts of announcements of increased production and being a takeover candidate in the very short-term. This is, overall, the best short-term play I know of.

 

Lookout though, because it is very illiquid. That is, any sudden increase in buying will push the stock price higher.

For what its worth, the table that follows provides the “speculative buy” companies I like and hold as of 3/22/2009. Each of these has more upside than my “top picks” but also higher risk.The companies are: Dynasty Metals And Mining, New Guinea Gold Corp, Oceana Gold Corp and La Mancha Resources.

Finally, here’s a table of Jr gold producer that I have held in the past but do not any longer either because they are not as undervalued as others or because I no longer have confidence in their management.The companies are CGA Mining Corp, Metanor Resources and B2Gold Corp.

Valuing New Guinea Gold (NGG.V) From Its Imwauna Project

I recently interviewed New Guinea Gold (NGG.V) CEO, Bob McNeil (click here) about their Imwauna project. New Guinea Gold's strategy has been, for some time, to use cash flow from its smaller, short mine-life Sinivit low-cash cost open pit mine to provide the financing to complete their exploration of the larger Imwauna project. Getting Sinivit cash-flow positive has taken way longer than expected (major frustation and annoyance for investors). At the time of this writing it still may not be meeting guidance. It has been 2 1/2 months since the latest production was reported and the share price is not far from 52 week lows.

To make up for this lack of cash, New Guinea Gold had to resort to a pretty darn expensive (in terms of interest rate and terms) convertible debenture dilution. Although the terms were pretty harsh, only a 10% dilution of the company was required.

The Imwauna project seems like a dandy. It currently has an inferred resource of 700 K oz of gold at over 12 g/tonne at depths that are open-pittable. This is, for example, 24 times richer ore than one of my favorite Jr producers, Castle Gold (CSG.V). That kind of grade will clearly support a very low cash-cost mine. The project is still, after 180 drill holes, largely undrilled and open at depth and along the strike. McNeil expects Imwauna to be a 2 to 4 million oz project.

This article provides a tabular valuation of New Guinea Gold by assuming that Imwauna dominates the company's valuation and assuming a range of ounces are proved up and a range of dollar per oz valuations for those ounces. Two sets of tables are provided:

• One assuming New Guinea Gold proceeds according to plan and requires no further dilution prior to proving up Imwauna's resource.
• Another assuming that Sinivit continues to disappoint and that a further two dilutions (totaling 20%) are required along the way to proving up Imwauna's oz.

With these tables, the reader can then choose his own estimates of number of ounces, value of an ounce and whether further dilution will be needed to evaluate New Guinea Gold's outlook. 

On the issue of how much an Imwauna oz might be worth, McNeil offered the following: "in all the M&A activity of 2008, exploration ounces (depending on location and “quality”) were valued at between $35 and $125 per ounce and production ounces at between $150 and 300. On the basis of those stats, since the Imwauna ounces are high-grade, if there were a million exploration ounces next year at this time, the mine would be worth $80 to $120mm. After development, which might cost $40-50mm, a million ounce mine would be worth approximately another 50 to 100%.". So, his (biased, no doubt) view is that Imwauna is worth between $80 and $240 / oz.

A company with a similarly sized project, Orezone, was recently sold for 45$ /oz. I believe it offers a realistic lower bound for valuing Imwauna as its project was much lower grade and Orezone was desperate for either a financing or a takeover and the deal was done at the depths of last fall's credit freeze up. New Guinea Gold should be able to do better as it is higher grade and Sinivit cash-flow should keep them from becoming desperate for financing. 

The recent acquisitions of Western Goldfields and Capital Gold provide a possible independent upper bound on Imwauna's valuation as these companies are profitable producers with little exploration upside. They are (while awaiting their acquisitions to close) currently valued at 88$ and $160 per proven and proven oz respectively. 

The table below provides Imwauna's valuation (in millions of US dollars) for a range of total oz and value per oz. Bold print (in each of the tables) provides my own "conservative, most likely and better than expected" estimates of the results of Imwauna's exploration and valuation. The math in this table is pretty simple.

Given New Guinea Gold's current fully diluted market capitalization of 34 million US$ and assuming no further dilution, the table below gives the amount that New Guinea Gold's current stock price would have to increase (or decrease) to match Imwauna's valuation. As such the table provides the takeover premium for New Guinea Gold (relative to its current price) if it were acquired after Imwauna's exploration completes. 

The last table provides a similar valuation only assuming another 20% dilution prior to its being acquired. 

So, to summarize, if New Guinea Gold proceeds according to plan it looks like a 6-bagger (485% increase) in a couple of years when Imwauna is proved up. If they do better than expected and find 4 million oz and get $125  /oz New Guinea Gold is more than a 14-bagger. And, if things do not go well and they find only 1 million oz, have to dilute 20% and get only 50$/oz New Guinea Gold should still be able to sell itself for a 17% premium. There appears to be a lot of upside in these outcomes and a "go to zero" downside doesn't really look very likely.

Now, let's look a little more closely at the short-term situation. What can we make of the Sinivit situation? Here's some thoughts:

• Positive: Sinivit has very high-grade ore for an open pit mine and so should be generating a lot of cash. 
• Positive: Sinivit has been having problems, fixing problems and ramping up production for a year.
• Positive: Sinivit's latest reported production, at 2865 oz/in 2.5 months, was getting close to the upcoming guidance for Q1 of 4500 oz.
• Positive: The plan to ramp up Sinivit's production further is pretty simple: increase the amount of ore being heap leached and leach it longer. It seems like it should work.
• Positive: There are numerous recent cases of heap-leach miners having startup problems, but eventually getting it right (e.g. Gammon Gold).
• Positive: Management is confident enough in Sinivit's turn-around to restart and even ramp up the Imwauna exploration activity after shutting it down to conserve cash.
• Negative: There have been no production announcements so far this year. Given New Guinea Gold's track record of waiting as long as possible to release bad news, this bodes for yet another disappointment. 

Because of that last negative, I've been biting my nails quite a bit as far as my New Guinea Gold investment is concerned. This article analysis has clarified the situation and reduced my anxiety and whet my greed. New Guinea Gold was able to get financing and only had to dilute 10%. There is still margin for error if Sinivit continues to disappoint. Even with a 20% dilution, Imwauna is so good there is still a good likelihood of a 5-bagger if Imwauna achieves 2 million high-grade ounces.

As I say, this analysis leaves me feeling good about my investment in New Guinea Gold, feeling tempted to buy more but recognizing that it is still a real speculation.

Leave me a comment.

MontyHigh, www.worldofwallstreet.us

P.S. There is a significant short term issue I failed to address. MacMin Silver, a bankrupt sister company of New Guinea Gold, holds 10 million shares that it will have to somehow liquidate as part of settling with its creditors. Nobody knows how this will be done, but if it is done on the open market New Guinea Gold's share price will be pushed down hard.

Recent Takeover Data Points Allow Valuing Jr Gold Producers

The recent acquisition of Capital Gold Corporation by Gammon Gold and the recent merger of Western Goldfields with New Gold provides fresh reference data points for valuing Jr Gold producers. The results is that three very comparable producers (Capital Gold, Western Goldfields and Minefinders) now have very comparablel valuations based on estimated 2010 price to operating cash flow at $800 gold and price to Measured, Indicated and Inferred oz of gold. This makes these two metrics probably the best metrics for valuing Jr producing and near-production gold miners with decent mine life. 

Its fortunate that Capital Gold released its quarterly financials within a couple days of the takeover announcement as it allows us to get a clear look at what was bought and thus have a clear comparison with other Jr gold mining companies.Here's some of the things I just gathered from their financials:

• 53 K annual oz/year.
• $386 Operating Cost (Less Depreciation) Per Oz. This is from the Income statement. It includes $79/ oz G&A and $31 / oz Exploration.
• $251 Per Oz. This is what the earnings announcement for cash cost. I don't see how you cannot include G&A at least as a valid expense as you surely can't cut it to zero during hard times.
• 10.7 Fully Diluted P/E annualized from previous quarter at $856 gold.
• 5.4 Price / Operating Cash Flow (Not Including Depreciation) annualized from previous quarter at $856 gold.

The table that follows provides the four reference gold miners I use as a basis for comparison with other Jr gold producers and near producers. As you can see, the latter three are valued nearly identically when considering estimated 2010 price to operating cash flow at $800 gold and price to Measured, Indicated and Inferred oz in the ground. These two metrics thus provide a very good basis for evaluating other Jr producers and near producers.

The table below provides the Jr producer miners that I currently like enough to hold shares. They appear roughly in order beginning with the ones I would buy first if I had no previous holdings. As an example, Castle Gold would have to nearly triple to have the same price to operating cash flow as the three reference miners and would have to almost double to have the same price to M&I&I oz ratio. I think you'll see that all of the miners in the table below are very attractive compared to the reference stocks in terms or one or both of those metrics.

Castle Gold Corporation and Semafo are the most undervalued Jr producers I know of.

Gold Resource Corporation and Dynasty Metals And Mining are companies going into production in the new few months that I like. They both have significantly better rocks (higher grade) than just about all other Jr producing or near producing miners.

SanGold Corporation (not in table) is another Jr producer with superior rocks. I don't like SanGold because its a soap opera. It has continual basher and pumper posts on its Stockhouse board. The amount of great rocks has yet to be delineated. It is pumped by most of the gold stock picker news letters. It is called "the next red lake", that is, great Canadian gold mine. All of these leave me with the impression that it cannot be undervalued having gotten all that attention. I could be wrong, but that's my take right now.

Troy Resources is a mining company transitioning from one mine to another which is still ramping up. The competence and shareholder friendliness of its management (which awards stockholders decent dividends) makes up, in my mind, for the relatively high cost per oz of gold in the ground.

La Mancha Resources, Oceana Gold and B2Gold are three high-cash cost producers that I consider more risky than the rest but which have certain attributes which make them, in my mind, worth holding. They are first to be dropped should I get quesy about the outlook for the price of gold.

Finally, New Guinea Gold is basically a gold exploration company with what looks like a really superior exploration project that is supposed to be funding that project's exploration with a short mine life open pit heap leach operation. I have previously discussed New Guinea Gold multiple times and expect to discuss it again in an upcoming article.

The table below provides my profile of two Jr producers / near producers that I used to own but no longer do.

I liked CGA mining as a takeover target even though it is not as undervalued as the others. A big institution just sold its position. As a big insider, I think that stockholder understands what CGA mining's plans are and the stockholder's selling its position means that CGA Mining is not planning on being a takeover target (at a premium) any time soon. Metanor's latest private placement caused me to lose confidence in its management. I don't invest in stocks whose management I don't have confidence in. 

That's my current take on the stocks I know the best. Let me know what you think and whether there's some others that are worthy of due diligence.

MontyHigh, www.worldofwallstreet.us

P.S, This is not a recommendation to buy or sell any of the above stocks. It just provides one way of looking at the above stocks.

Precious Metal Stock Takeovers: What To Make Of These Puny Premiums

There have been three recent precious metal mining takeovers/mergers involving World Of Wallstreet covered stocks:

• New Gold Buys Western Goldfields - resulting in a 9% pop for Western Goldfields. New Gold, a bigger producer with growth opportunities but no cash, buys Western Goldfields, a cash-rich and cash generating producer with no growth prospects.
• Silver Wheaton Buys Silverstone Resources - resulting in a 16% pop for Silverstone. Silver Wheaton, the world's largest (and heavily in debt) silver stream (royalty) company buys its smaller and only competitor, Silver Stone resources. The buyout takes place at a price that values Silverstone's royalties at a much lower value than Silver Wheaton's to the point where John Doody classifies the deal as "Silver Wheaton stealing Silverstone".
• Gammon Gold Buys Capital Gold Corporation - resulting in a 7% pop for Capital Gold. Capital Gold is very much undervalued relative to Gammon Gold on the usual metrics: price to operating cash flow, price to annual oz and price to oz in the ground.

What are we to make of this? In all three cases we find smaller, illiquid companies which are profitable, with no financial troubles, accepting acquisitions at truly meager premiums from companies that could afford to pay a lot more and still have the acquisitions be accretive (that is, increase the value of the buying company). SilverStone, in particular, is controlled by the same extremely savvy management that controls the highly regarded copper miner, Capstone Mining (CS.TO). These guys are clearly not suckers.

It surely is an example of the managements and controlling shareholders of the smaller companies wanting to monetize their profits and get out. To "take the money and run". It is a serious vote of a lack of confidence in the outlook for precious metals in general and junior producing miners in particular. The managements and shareholders must have concluded there is serious risk of a downturn and decided it was time to turn their illiquid shares into shares that they can sell (en-mass) if need be. These guys are "smart money". These are guys who should have a better than amateur view of the precious metals outlook.

This could be because last year the top for precious metals came in around this time of year and managements and big shareholders fear a similar downturn. It could be because gold just attemped to push through to all time highs and fell back in a double-top formation. We don't know why the "smart money' sold. The "smart money" did not give their reasons. They just sold their big, illiquid positions when they had the chance, when they had a buyer ready to take their whole position for a minor premium.

So, again, what are we to make of this?

I consider this to be a significant data point. This piece may annoy "permabulls" which find the need to knock down any data which does not support their overall outlook. I am trying hard to look all the data in the eye and listen to it and form an outlook based on all the data, both bullish and bearish data. I respect the opinion of these "smart money" players, but form my own outlook based on more than just the opinions of these authorities. I consider these takeovers to be a significant data point, but not one that compels a reevaluation of my overall bullish outlook for undervalued Jr gold mining companies.

I do, however, consider this to be a signal that it is time to seriously start watching what is going on and be ready to reduce positions or exit the industry if a downturn in precious metals gathers strength. This despite what appears to me as the fundamentals for precious metals getting stronger and stronger. I intend to let any technical downturn confirm these guy's "smart money" outlook over my own outlook and trigger the selling my holdings, especially those with higher cash-costs. 

Leave me a comment on what you make of these takeovers and what they mean.

MontyHigh, www.worldofwallstreet.us

P.S. dear reader. You have to make your own exit decisions if you hold any of the stocks I discuss on this web site. They are so illiquid that I cannot give you a warning of my exit until after I have sold my own shares.

Imwauna High-Grade Gold Project: An Interview With New Guinea Gold CEO Bob McNeil

This is a first for WorldOfWallstreet: an interview with a mining CEO, Bob McNeilCEO of New Guinea Gold corporation (NGG.V). I'll be following up this interview shortly with an article giving my valuation of New Guinea Gold based on the Imwauna project discussed below as well as the outlook for the currently producing Sinivit gold mine.

Bob McNeil, BSc (Hons), MSc. F AustlMM, is Chairman and CEO of New Guinea Gold corporation, a Jr gold producer with significant exploration upside. He is also co-founder and Managing Director of MACMIN NL, Chairman of Frontier Resources Ltd (ASX), and non-executive Chairman and director of Coppermoly Ltd (ASX). He identified and applied for projects in PNG and Tasmania, then sought and obtained financial support to establish New Guine Gold. During 40 years industry experience Mr.McNeil has amassed extensive managerial exploration and mining expertise with multinational mining and oil companies, both in Australia, USA and the Asia Pacific region. Early in his career he was directly associated with the Juno and Warrego mine discoveries at Tennant Creek in Australia. He was Regional Exploration Manager for Unocal, based in Tucson, Arizona and gained specific expertise in the search for porphyry copper deposits. In 1980, Mr McNeil transfered to PNG to establish and manage Exxon's PNG mineral exploration group, where he held the position of General Manager from 1980 to 1986.

Monty High: Ok, let's get right into it. New Guinea Gold has had some distractions lately and the Imwauna Gold project hasn't gotten much attention. Could you explain how Imwauna fits into New Guinea Gold's future?

Boc McNeil: NGG anticipates that Imwauna will become its premier project. It occurs in the same geological zone and is along the same structural trend as Placer Dome’s 4mm oz Misima mine and NGG has a resource target of 2 to 4 mm ounces for the project.

At Imwauna, on Normanby Island, the Company plans to drill an additional 10,000 metres in 2009. There is currently one diamond core rig on site, a second will be added in April and a third in June. In June ‘08, New Guinea Gold announced an Inferred Mineral Resource of 1.8 million tonnes at 12.2 g/t gold and 20 g/t silver for contained metal of 706,000 ozs gold and 1,160,000 ozs silver has been estimated for the Imwauna Project.

New Guinea Gold is conducting a Preliminary Assessment and subject to a positive result from that study, mine construction could commence in late 2010 with a possible gold production of the order of 70,000 to 100,000 ozs/year in 2011. The resource is likely to be largely open pittable. The viability of this possible production including the capital cost of the project, will be indicated in the Preliminary Assessment.

MontyHigh: 12.2 g/t seems to be really high-grade ore for an open pittable resource. Has the metallurgy been done to characterize the kind of processing required for this ore? Is it an oxide ore that is heap leachable or will it require a mill?

Boc McNeil: Yes 12.2 g/t is quite high grade – for example we are profitable mining 5 to 6 g/t at Sinivit. Yes some preliminary metallurgy has been done. The scale of the operation will dictate having a mill – leaching that quantity of ore would take up too much surface area. The potential cost of the whole process – capital (including mill etc) will be part of the preliminary assessment (ie pre-feasibility) study.

MontyHigh: I don't get it. There are lots of heap leach operations in Mexico producing more than 100K oz / year. What's different about Imwauna?

Boc McNeil: The mineralization is low sufiphidation, epithermal style – more efficient to install a mill on this instance.

MontyHigh: Ok, let's get back to the 2009 drilling. For perspective, how does the 10k meters of drilling planned for 2009 compare to the 2008's drilling? Can you estimate the fraction of that drilling that will be focused on increasing the mineralized tonnes versus what will be focused on upgrading inferred oz to a measured and indicated status? Is there any kind of timetable for the next Imwauna NI43-101? Finally, the 12 g/t grade is good enough to support underground mining. Are there plans to drill deeper to determine how far the deposit extends depth-wise?

Boc McNeil: It’s approximately double the drilling done in 2008. About 75% will be focused on increasing the size of the resource, the balance on upgrading the existing resource.

If sufficient new ounces are discovered, the prelim assessment will contain an updated 43-101.

Even then, drilling will still need to go on for two to three years to determine the full lateral and depth extension. Surface work has discovered gold over about a 10 km area, and its possible the deposit may connect with the gold mineralization at Weioko (owned by NGG) which is about 12 km’s NE.

MontyHigh: So drilling to find how deep it goes is not a priority for 2009.

Boc McNeil: Yes – its’ a vein swarm system and tracing individual veins to depth is time consuming and expensive, and likely to produce fewer ounces short term than shallow drilling.

MontyHigh: Ok, lets summarize the drilling situation for Imwauna. In July of 2008 an NI43-101 technical report came out, based on 138 drill holes, putting the Imwauna Inferred Mineral Resource, at that time of 1,800,000 tonnes at 12.2g/t gold for contained metal 706,000 ozs gold. This is very high-grade ore. Since then drilling continued in 2008 and the drilling is planned to continue at an accelerated pace 2009 aimed at increasing the size of the resource and upgrading the existing resource. Fully drilling out the project will take two or three years, but mine construction could being earlier. The resource target is 2 to 4 million oz.

MontyHigh: Great, let's move onto valuing this project. Have you been comparing Imwauna to other projects of similar size? Can you name a few of those comparable projects?

Bob McNeil: The model for the mine Placer Dome’s Misima mine which produced 3.7 mm ounces of gold plus silver. Since it was owned first by PD and then Barrick, no independent valuations exist. There are no similar open-pit projects operating in PNG, and South American projects have a different risk profile.

The purpose of the pre-feas is to put a value on the deposit, considering mining and capital costs reserves and resources etc etc, so investors will need to wait for that for a more precise definition of value. In the meantime, in all the M&A activity of 2008, exploration ounces (depending on location and “quality”) were valued at between $35 and $125 per ounce and production ounces at between $150 and 300. On the basis of those stats, since the Imwauna ounces are high-grade, if there were a million exploration ounces next year at this time, the mine would be worth $80 to $120mm. After development, which might cost $40-50mm, a million ounce mine would be worth approximately another 50 to 100%.

MontyHigh: On that note, I was hoping you would comment on the fairly recent Orezone acquisition which took place in December. They had 3 million oz of reserves and were valued at 45$/reserve oz. It seems pretty comparable, based on size to what New Guinea Gold is shooting for with Imwauna. The main difference that I see is the grade. Orezone was heap-leachable but at 1.65 g/tonne. Imwauna is close to 8 times higher grade, but needing a mill. Can you comment on how valuable an Imwauna oz might be compared to an Orezone oz and have their been an open-pittable, million oz or more acquisitions recently with grades comparable to Imwauna? I'm not aware of any with grades higher than 3 g/tonne. If Imwauna is in a class of its own, might it command a premium to other lower-grade exploration projects?

Bob McNeil: Good question and the answer is grade makes a very big difference – higher grade means less ore to be processed and therefore lower cash costs and therefore potentially a “premium price” per exploration ounce.

Orezones assets are in West Africa which carries a different level of political risk than PNG. Fortunately, IAM Gold has assets in Africa and is familiar with the ground. Also look at the timing – the junior mining sector was cratering in December and getting new financing was/is very tough.

That’s why, while it’s interesting to look at other transactions – they are only a guideline. You need to look at the values generated by the preliminary assessment so reach a definitive conclusion.

MontyHigh: Ok, this may be the last question. Can you name two or three recent deals where an advanced development project was sold that are more comparable than the Orezone deal?

Bob McNeil: Don’t know of anything – remember you’re talking about 1+mm (up to possibly 5 mm) highgrade ounces, near the sea (no tailing issues) in PNG, low cost labour, stable democracy, resource based economy where the government is asking to speed up development and where barrack and RTZ are already successfully mining. The only other recent highgrade transaction that I’m aware of was Aurelian, (7.2 g/t) where Kinross paid $86 per ounce for a much larger 13mm oz deposit. But That was in Equador where the government has frozen development pending a review of the mining act. Will check and see. In the meantime, can you send me a complete version of what you have so Bob and I can check it today?

MontyHigh: So to summarize, Imwauna looks like a very valuable gold deposit, but at this time its hard to put a dollar value on what it is going to provide New Guinea Gold shareholders. This is because the number of oz and their overall grade are yet to be determined and more especially because the market price for this kind of deposit is not all that clear. It seems that the Orezone deal, assuming the price of gold holds up, provides a lower bound (on a price per oz basis), but the value could be as much as two or three times that. I would like to thank your help in providing World Of Wallstreet readers with a better understanding of this project.

Revisited: Is Gold Overbought? How Far Will It Run? Recent History As A Guide

On February 22, I asked the above questions and gave some evidence that it would run into the 1200s (click here).

So, do we have answers to the above questions? Yes we do:

• Was Gold Overbought? ANSWER: YES
• How Far Will It Run From 2/22/2009? ANSWER: No where, that was an intermediate top.

Time for me to eat a little humble pie. But the article did begin with "I don't know how much credence what I'm about to present". I've been eating a lot of humble pie this week. On Monday I "called' (actually guessed) that the bottom was in. WRONG.

I guess one more thing. When I put the original 2/22/2009 post on a precious metals message board it got 30 "recommendations". This is a good gauge of how much people like to get information that confirms their biases even if it really doesn't have much to back it up.

MontyHigh

Valuing Jr Producing Gold Miners, Part 9 Supplemental: Dynasty Metals (DMM.TO), Dealing With Political Risk

This post supplements the latest post in this series (click here) which continues the series on Open Pit Gold miners begun here, continuing here, here, here, here, here, here and here now profiling another gold miner in which I just opened a speculative position.

I've been spinning up more on Dynastry Metals (DMM.TO) and would like to provide some more information.

Stockhouse.com's Importent read my article and had this to say:

"MontyHigh,

Dynasty Metals and Mining's first two properties that will become active mining operations (Zaruma and Jerusalem) have grades over 10 times the average grade of current producing gold mines (over 13 g/t versus the average worldwide grade which has dropped from 1.65 g/t in 2005 to 1.25 g/t today despite the fact that exploration has increased from $1 billion in 2001 to $5 billion last year).  The capex required to get Zaruma and Jerusalem from the current annual production of 100,000 oz/year to 350,000 oz/year is under $50 million.  Production costs will be very low.  DMM's share structure is incredibly tight, suggesting that cash flow per share and earnings per share will be many dollars per share within about 3 years even if gold does not continue its impressive ride higher.  DMM's properties also have incredible exploration potential.  For example, 90% of the Zaruma property has yet to be even explored and its main ore body is over 13 g/t.  Compare that potential to other junior mining companies that will crow from the rooftops over hitting 10m of 2 g/t quasi-ore.  IMHO, if DMM's properties with their imminent production and exploration potential were located in Canada or the U.S., then institutions would be tripping over themselves to pay $25-30/share for this stock.

The only thing holding DMM back from a very dramatic rise in the shareprice is perceptions of political risk.  The reason I have heavily invested in DMM is that I believe the market is measuring the political risk of DMM completely incorrectly.  Why is the market wrong?  Lets start with a few facts.  First, there was strong executive and legislative support for the new mining law that promotes large scale mining in Ecuador.  In fact, President Correa has tossed far left radicals out of his government and waged an aggressive, public campaign against the small, crazy minority in Ecuador that seems to want the country to starve to death on a mountain of gold (to paraphrase Correa's colorful description of them). 

The need for a successful mining sector in Ecuador has increased dramatically over the last year as revenues from oil production have plummeted.  Therefore, it is very much in Correa's interest as well as the interest of Ecuador for the country to play nice when it comes to mining over the next few years.  Because of the need to nurse the nascent mining industry into something much more robust, DMM is in an ideal situation.  The reality is that DMM is going to be the only significant gold producer in Ecuador for years to come.  So, if DMM doesn't get a fair deal when it comes to royalties, taxes and general treatment then the whole mining sector in Ecuador will be stillborn.  The same reasoning applies to a potential Windfall Profits Tax.  When DMM is the only company that will be producing, it makes little sense for the government of Ecuador to get aggressive on this issue.  Yes, they would milk a few extra dollars off of DMM, but they would risk becoming a mining pariah state before Fruta Del Norte, Corriente's properties and many other early-stage properties can develop.

People who think DMM will get a raw deal must be of the opinion that President Correa is going to take a very self-defeating approach to the mining sector.  I believe, on the other hand, that despite Correa's socialist leanings that he is at least pragmatic.  Unlike Hugo Chavez and Evo Morales, Correa appears to be someone that is rational and who will take a much more moderate approach.

Of course, things might be different if there was a meaningful local opposition to Zaruma going into production; however, there is strong local support for DMM and there have been no protests, unlike elsewhere in Ecuador.  One of the reasons there has been no visible opposition to the construction of the Zaruma mine is the whole project has been built to the highest environmental standards.  Furthermore, being an underground mine, President Correa was extremely surprised at what a small environmental footprint the project has.  When Correa has made recent statements about how great and environmentally friendly Canadian mining companies were (the best in the world according to Correa) you can be assured that he was referring to DMM's Zaruma project.

You asked about the Dynasty Golfield's potential to be open pitted.  I can't answer that, since there is no feasibility study at the moment, but I can tell you this: there is some very high grade ore near the surface, and to exploit this potential DMM is currently building a road from Zaruma to the Dynasty Goldfield project.  I expect to see DMM trucking high grade ore from Dynasty Goldfield to Zaruma soon after the plant expansion is completed.  This will be a nice bonus that the market has yet to consider in its calculations about DMM.

You asked about Kinross takeover talk.  While anything is possible, I don't expect to see this happen.  The company is very tightly held, and Robert Washer is the man who controls the company's destiny.  I have spoken with Washer on a couple occasions, and he doesn't strike me as a guy that has any plans of bailing-out for a paltry profit of a few bucks per share on Dynasty.  He has a quiet, no BS confidence in the company.  He knows DMM's imminent potential for growth and cash flow, and he is prepared to build the company.  He is NOT a fly-by-night promoter looking for a quick score."

Being a little picky, I'd like to make the following comment on Omniportent's post:

• I grant you that DMM's Zaruma project's ore grade is way higher than average, but the average includes open pit miners. If you include just underground mines, I'd put Zaruma at between 2x and 3x average. Still that's very impressive.

Since I posted the story there have been a couple of other items:

• Dr. Jose Serrano Delgado, Sub-Secretary of Mines in the Ministry of Mines and Petroleum of Ecuador (the "MMP"), announced that the MMP has lifted all suspensions on mining activities in Ecuador, and that formal letters to this effect are in the process of being sent to mining companies. This confirms that the political risks are settling down.
• DMM's CEO was interviewed on BNN (click here). He reports DMM is on-track to commission the Zaruma mine's processing plant by the end of March. By the way, how long has it been since you've seen a mining CEO with this kind of giddy smile?

Bottom In For The Gold Correction? This Is What I've Been Waiting For

Look at the light blue line. That is what has been happening in Asia for weeks. I think it means the Asians think gold is over priced. Now look at the red line. Nice pop for the Asian open. This change means, I think, that the bottom is in for the gold correction.

Just my best guess. No guarantee or anything. We'll see.

MontyHigh, www.worldofwallstreet.su

Valuing Jr Producing Gold Miners, Part 9: Dynasty Metals (DMM.TO), Dealing With Political Risk

This post continues the series on Open Pit Gold miners begun here, continuing here, here, here, here, here, here and here now profiling another gold miner in which I just opened a speculative position. I have broadened the scope of the series to include underground miners.

For what its worth, of the stocks covered so far, I still hold Castle Gold Corp, Semafo, B2Gold (well, Central Sun Mining actually which will be bought by B2Gold) and Metanor Mining. I have been accumulating this piece's company, Dynasty Metals (DMM.TO).

Dynasty Metals is a near-producer gold mining company with a large amount of great rocks located in politically risky Ecuador. With the passage of the new mining legislation, the politics in Ecuador have improved substantially. This explains why I am willing to accept the political risk.

Dynasty has three projects. The Zaruma project is due to start commissioning in March 2009. Together the projects have almost 3 million measured and indicated oz and 6.46 million M&I&I oz. As such, it is bigger than most Jr producers profiled in this series. 

Zaruma is a high-grade (14 g/tonne) underground mine that is expected to produce, initially, 100K oz/year. The processing plant has the capacity to support increased production to 250K oz/year with minimal capital expense. The 100K oz/year number is used for comparison purposes. This provides a 10 year mine life using the M&I ore and a 20 year mine life using M&I&I. Inca Kola News' Otto Rock estimates as cash of of $280 /oz. I'm going with $300 / oz. Still it is a low-cost producer.

The remaining two project look very attractive also with high-grade ore. There are tonnes of exploration upside for all three these projects.

As far as political risk is concerned, the passage of the mining law opens the way for Dynasty profitably getting into production. There is still risk as there are windfall profit tax provisions whose impact on Dynasty is unclear at this time. I got lucky and jumped out of Oceana right at its near-term top.

Here's my qualitative summary of the Dynasty situation:

• Con - Ecuador political risk. Of course, this cuts both ways in that further improvement would lead to an increased valuation and takeover prospects for Dynasty.
• Pro - Very near-term production.
• Pro - Very high-grade rocks leading to low cash-cost production.
• Pro - Excellent production increase opportunities with minimal capital expense.
• Pro - Two excellent additional projects that are ready for feasibility studies. These allow for longer term growth and make Dynasty Metals a mining company that can "grow up" to mid-tier status (or be a takeover target). 
• Pro - Excellent exploration upside for the existing projects.

For now, the pros outweigh the cons, especially given that I have little other political risk in my holdings. The thing that pushed me to dump my Oceana Gold for Dynasty Metals was the cash cost. I expected, correctly, that the recent gold price weakness would impact Oceana, with its high cash cost and debt, more than other gold producers and so switched to the low-cast cost Dynasty Metals.

The table below shows that at 100K oz/year, Dynasty Metals is competitive on a price to annual oz and price to operating cash flow basis. If they expand beyond 100K oz/year in the 2010 time frame then Dynasty becomes superior as far as these metrics are concerned. Dynasty is superior as far as price / oz in the ground is concerned. It also has a low cash-cost which reduces gold price risk.

The daily chart (below) shows that Dynasty Metals has already enjoyed a five-bagger off its November lows. This is a case where having a good understanding of Latin America politics can provide a real investing edge. Just one more reason to follow Inca Kola News. I did not enjoy that jump. The chart shows that Dynasty is at the lower end of a steeply rising channel and the fibonacci numbers indicate that it is targeting the previous high of $5.71 which, if hit, will be around the middle of the rising channel. 

The weekly chart (below) shows that Dynasty has more than a double to go to reach its earlier highs and that it is consolidating around the first fibonacci number.

The next catalyst for Dynasty is the start of plant commissioning scheduled for the end of March 2009. Dynasty recently did a private placement and is cashed up to go into production. I expect I'll hold my Dynasty position until either my macro view on Gold changes or at least until the mine has had a couple of good quarters of production.

Of course, everyone should do their own due-diligence and make their own investment decisions. All of the above material comes from my own amateurish reading of the company websites and related financial documents (plus Otto Rock's No BS report, only $10). As you know, I am a software engineer, not a financial advisor.

MontyHigh, www.worldofwallstreet.us

Obvious (But Original) Thought About The Gold Stock To Price Of Gold Ratio

The following graph has been commented upon by various Gold stock investing news letter writers, aka pumpers.

The argument is that gold stocks (as represented by the $HUI index) have not been doing as well as the price of gold itself; that previously, gold stocks were substantially higher relative to gold than they are now. With the usual reversion to the mean, this means that gold stocks "should" rise relative to the price of gold going forward. This means they are a better investment, in some sense, than gold itself.

Up until having my original thought, I considered this to be a pretty valid argument.

Just eyeballing the chart we see that a ratio of about .5 is about right for the "previous" mean that the stocks (and gold) "should" be reverting to. The ratio is now about .3. That is, 40% lower than this mean we are discussing.

Now, that's an interesting number. Down 40%. Sounds like the general stock market. Down roughly 40%.

Here's the original thought: Maybe the reason why gold stocks are down 40% relative to the price of gold is because they are stocks and, like all stocks, they were overvalued back in the good old days (2004 to 2007) and have come down accordingly. If that is the case, then you can't really expect gold stocks to revert to that overvalued, "bogus" mean. In fact, relative to gold they may, like all stocks, continue to fall (going forward).

Look at the chart again. They could easily fall to a ratio of .15 (the low from the previous, very mild recession). That would be another 50% loss relative to the price of gold. Now, that's a new thought!

What do you think?

MontyHigh, www.worldofwallstreet.us

Is Gold Overbought? How Far Will It Run? Recent History As A Guide

I don't know how much credence to give what I'm about to present. It is an example of using inductive reasoning to estimate the future of a complex system based on inadequate past data and inadequate in depth knowledge of the internals of the system. In other words, we are in the usual situation as far as predicting market prices are concerned. Nassim Taleb would be horrified if I claimed that this was an accurate prediction.

There is no way to predict the future price movement of gold with certainty. As a side note, this is one thing that leaves me less than fully satisfied with Jim Sinclair's commentary: Sinclair claims certainty. I think this is a disservice to his readers, as I am with Taleb in believing that there is no "certainty" when it comes to predicting the future. 

This piece provides the best evidence I know of for estimating how far the current run will extend. If you know of better data and analysis please leave me a comment.

Gold is running. It just broke $1000 (see below). Is it overbought? Will it keep running? Frank Barbera, who I admire, is interviewed in this week's Financial Sense New Hour. His view, if I summarize correctly, is that gold stocks are clearly overbought and gold looks overbought and that investors should be careful at this point.

RSI is a simple measure of price momentum. On Friday, the same day gold broke $1000, RSI broke 70. 70 is the classic overbought level for the RSI indicator. This article looks at what the RSI breaking 70 has actually meant recently in this gold bull market. Its conclusion is quite the opposite of Frank Barbera's.

Gold has been a bull market for years and its RSI has broken the 70 level three other times in the last three years (see below), in 2006, 2007 and right at the start of 2008.

Just eyeballing the above chart leads to the conclusion that, when the Gold RSI (on those occasions) broke 70, the price of gold continued to rise nicely. This piece looks in detail at what happened afterwards and quantifies those runs. It, starting from when the RSI broke 70, looks at the:

• number of weeks until that run's price peak.
• percentage gold price move to that run's price peak.
• number of weeks until the RSI touched or crossed 50 (neutral). This is given as an example trade exit signal.
• percentage gold price move to the RSI touching or crossing 50.

The first crossing of RSI 70 took place on March 30, 2006.

The second crossing took place on September 6, 2007.

The last crossing took place on January 2, 2008.

The table below quantifies the results. The target prices are arrived at by assuming the same percentage rise occurs for the current as for the run in question.

I find these results to be surprisingly consistent. At this point, I'm looking for gold to continue to rise for 6 to 10 weeks with a $1200 target price. I will then begin to look for a top and the right place to trade out. I'm looking at the gold RSI falling below 50 as a possible stop.

For me, my expectation of a continued rise in the price of gold (based partly on this analysis) is strong enough, given the fabulous fundamentals of the Jr producer gold mining stocks I hold, to leave me fully invested in those junior producers.

As you know, if you follow my posting on the World Of Wallstreet web site, these Jr producers are estimated to have a 2010 price to operating income ratio of 3 to 1 (or less) at $800 gold. I consider this greatly undervalued as gold mining stocks usually have an over 10 price to operating income ratio. 

Thus, with this estimate of the current gold run, the positive fundamentals for gold and the margin of safety in these gold stocks, I believe I have a reasonable basis for expecting a positive outcome from my investment strategy. Everyone should certainly do their own due diligence and make their own investing decisions.

MontyHigh, www.worldofwallstreet.us

For the record, the stocks I hold and especially like are:

• Gold Resource Corporation (GORO.OB)
• Castle Gold Corporation (CSG.V)
• Semafo Inc. (SMF.TO)
  
• Metanor Resources (MTO.V)

I also hold and like, to a lesser degree, the following:

• La Mancha Resources (LMA.TO)
• Dynasty Metals And Mining (DMM.TO)
• Troy Resources (TRY.TO)
• Oceana Gold Corporation (OGC.TO)
• CGA Mining (CGA.TO)
• New Guinea Gold Corporation (NGG.V)
• Douglas Lake Minerals (DLKM.OB)

This is not a recommendation to buy any of these stocks or gold itself but is merely an analysis of a possible scenario for the price of gold, going forward.

FWIW: What I've Been Selling And Buying

I'm done rearranging holdings for at least a couple of weeks I think.

Here's what I've been selling lately:

• First Majestic Silver, FR.TO - Changed my view about management, don't like silver right now. Also, flagship mine is near the USA border of mexico which I consider politically unstable.

• CGA Mining, CGA.TO - because of the issue Bobwins mentioned which was a red herring, but it wasn't the cheapest. Still have some.

• Impact Silver Corporation, IPT.TO - love this company's management, but don't like silver. It is a very small company.
  

Here's what I've been buying:

• Castle Gold Corpation, CSG.V - very undervalued. Spoke to a big stock holder recently who said he thought management was open to some kind of merger / combination. Far from the riskiest parts of Mexico.
• La Mancha Resources, LMA.TO - seems very undervalued, but I haven't gotten a full grip on the financials. I went for it because its so undervalued and its not Mexico.
• Oceana Gold Corporation, OGC.TO - very leveraged to price of gold with a world-class gold / copper project half built needing financing. This is a central sun mining play from my perspective as I think some kind of deal will get worked out.
• Troy Resources, TRY.TO - very competent management and they pay a dividend. Good price to operating cash flow, bad on price to oz in ground. Recommended by Inca Kola News' Otto Rock.
• Dynasty Metals And Mining, DMM.TO - in recently politically improved Ecuador. Very cheap for the size of the company and number of oz. Given the ok by Otto Rock.

That's it. Just some ideas and things to look into. This is not a recommendation. Do your own due diligence.

MontyHigh

Judging Gold Mining Drill Results

Someone on a message board asked how you evaluate gold mining drill results.

Here's my response. Let me know if you'd think my numbers are off or if you have anything to add.

"Judging Au Drill Results

Well, I've been reading a bunch of them for the last year and here's what my faulty brain says:
(a) Make a distinction between open pittable and underground.
(b) Open pittable - make a distinction between oxide (heap leach) and sulfide (needs a mill).
(c) Open pittable heap leach - .5 g/tonne is the lower limit. Higher is better, of course.
(d) Open pittable sulfide - 1.5 g/tonne is the lower limit.
(e) Underground - 3 g/tonne is the lower limit. Anything above 6 g/tonne is quite good.

Of course, there are other issues as well:
(a) Infrastructure - are there roads and power. Is there already a mill (mine reopener). The closer to production with minimal capex the better.
(b) Size - how big is it? The more oz the better. The big boys are looking for 2 million oz or more at this point. This could go down going forward (or if the grades are good).
(c) Strip Ratio (open pit) - I need to learn more here. Any help from the board?
(d) Recovery - 85% seems like "good". Some heap leach operations are in the 60% range (e.g. SMC's nicaragua mine everyone was excited about. They had to switch to a mill).
(e) Management Competence - self explanatory. I consider New Guinea Gold to be competent explorers and incompetent mine developers / operators. First Majestic is clearly competent.
(f) Management Shareholder Friendliness - My opinion of First Majestic has just shifted with this latest dilution. They seem to want to build an empire rather than make money for share holders.
(g) Permits - always a big issue.
(h) Political Risk - will the government put outrageous taxes on it or confiscate it."

MontyHigh

It's Different This Time...

  Recs: 0

I believe this is original, but that you'll be hearing this from genuine "Gold Experts" soon.

 

The market crash we are having is different this time. Different from everything that's been happening since last summer.

 

The difference is that gold, silver and especially gold and silver mining stocks and especially Jr producer gold and silver mining stocks are going up while everything else goes down. Last summer and last fall they were hammered, harder than the general market. Today in particular (and the last week overall) has really been different.

 

I think we have passed a real turning point. The last real turning point, IMO, was Jul 2008 when the commodities (including gold and silver) got killed and the dollar went up.

 

I guess you could say that this turning point is a another significant turn downwards for the global economy. The desparation of the situation is sinking in such that lots of people who never would have dreamed of gold and silver are grabbing for it as a life line.

 

The amazing thing is that the Jr producer gold stocks I follow still have a price to operating cash flow ratio of 3 and under at $800 gold. This means there are clear fundamental to back up any stock price rises. This isn't a mania (yet) unlike the Internet stocks. There is clearly room for multibaggers with these if gold continues to ascend, even gently.

 

I had three of my stocks jump double-digit percentages today and almost all of the rest were up more than 5%.

 

Of course, we'll see and I'm just a software engineer, but I think things have changed. If I'm right and this is a significant, multi-month turning we could see some really crazy-good times like we had with the base metal mining Jrs in the first half of 2007.

By the way, when you are in the middle of one of these things, forget about the concept of "over bought". When Jr producers are seriously undervalued (like the gold stocks are), they can go up nearly every day for a month. That's what happened with the Jr base metal miners in the spring of 2007 and I think conditions are better for the Jr gold mining stocks than conditions were for the Jr base metal miners.

The hard part is going to be knowing when the party is over. In the case of base metals, the LME inventory levels (and even the metal prices themselves) told the story. Maybe the amount of GLD holdings will have a similar role for gold on this run.

 

MontyHigh

Metanor News Release: Drill Results For Hewfran

Well, here's the money part of the news release (click here for the whole release):

"A drilling campaign tested the continuity at shallow depth of the gold bearing zones exposed on surface after the stripping program. Diamond drill hole B-137 returned directly under the stripped area an intersection of 3.72 g/t Au over 4.20m at a vertical depth of 45m and hole B-142 drilled approximately15m to the east returned at the same elevation an intersection of 3.10 g/t Au over 6.0m. On the same section, hole B-143 intersected at a vertical depth of 70m a gold bearing zone grading 3.01 g/t Au over 4.20m. Diamond drill hole B-145 intersected the West zone 75m to the west and at a vertical depth of 90m with a gold intersection of 2.87 g/t Au over 3.15m. At greater depth, diamond drill hole B-128 returned on the same section than hole B-137 and at a vertical depth of 140m, a gold intersection of 3.78 g/t Au over 2.9m and approximately 60m towards the east diamond drill hole B-132 intersected the West zone at a vertical depth of 170m with an intersection of 5.13 g/t Au over 5.15m.

These results indicate that in this sector the West zone is continuous from surface to the elevation 180m below surface where the resources have been evaluated in 2005."

My take is that:
(a) The widths are pretty good (4.2m,6.0m,4.2m,3.15m, 2.9m, 5.15m), but the grades are just ok (3.72,3.1,3.01, 2.876, 3.78,5.13 t/tonne).
(b) This find is not good enough to justify a major new development (mine and mill), but the fact that is that its right next to the existing mine and mill makes it nicely economic. The fact that it starts right at the surface means either starting with an open pit or a decline type mine makes sense which makes it even better.

It should serve to help make up for Metanor's only weakness, a relatively high price to oz in the ground ratio.

Metanor is great (way undervalued) on a price to annual oz ratio and price to operating cash flow ratio (click here), but is only middle of the road on price to oz in the ground ratio.

Overall its a positive result, but I think the market is waiting for confirmation that the current mine is running well and producing cash flow and that there is a good plan for keeping it going (and expanding it). Seems to me production results and an enlarged Barry deposit NI43-101 would give this stock quite a pop.

Now, was the recent pop from the 40s to the current high 50s (nearly 50%) a result of this leaking early or might we see a little more pop from this result? Time will tell. I'm pretty confident about my Metanor investment.

Of course, everyone should do their own due diligence and this is not a recommendation to invest in Metanor.

MontyHigh (www.worldofwallstreet.us)