World Of Wallstreet

Getting Started With Gold Investing

For me, the key to investing success has been to find resource companies that:

• are terribly undervalued at current prices and
  
• produce a resource for which I am bullish and
• have catalysts coming which will reduce the undervaluation.

Since the crash that has been Gold (and Silver to a lesser degree) Jr producing mining companies. Exploration companies are a whole nother kettle of fish that I am trying to spin up on.

Aside: I believe someone can make 50% a year (or more) if they don't have too much money to invest (say less than 5M$) and if they truly obsess over what they are doing and have paid, say, 3 to 5 years of dues (obsessing over investing) and are good at strategy games. That's me. It isn't nearly as much fun as my day-job and I'm not completely obsessing this year. It will be interesting to see how it impacts my results.

A friend of mine asked me how to get started spinning up on gold and precious metal investing.

Its a difficult question because there is a lot to learn and there is a lot of B.S. to wade thru.

I'll answer by listing the resources (in priority order) that I find and have found useful and try to dig up some "greatest hits". This post is probably worth more than anything I've posted in the last year. Finding the good information / analysis resources is probably the most important thing I do.

www.lemetropolecafe.com's daily midas column - covers the gold market every day in detail from the GATA perspective. This is the single best source for covering the precious metals markets in general. Costs $300/year. Worse than no help when it comes to stock picking. Cost is $299/year. For me, the most valuable part is watching whether they are importing gold in India or not. As long as the Indians are importing the price of gold is supported. The insights about the price suppression (and what days to look for it) are also turning (with some filtering) into a valuable futures trading resource.  

http://investorshub.advfn.com/boards/board.aspx?board_id=5834 - best stocking picking board I know of which is currently on gold and silver miners. Listen to anything Bobwins or Cl001 says. These guys make a tonne of money. 

http://jessescrossroadscafe.blogspot.com/ - who I want to be when I grow up. Analysis that is so true, so deep and with such a good spirit. And he covers precious metals occasionally. 

http://www.kingworldnews.com/kingworldnews/King_World_News.html - does great interviews (with a horrible web site, google "king world news" and interviewee names if you can't find what you are looking for) often about precious metals. The Ted Butler weekly wrapup will introduce you to the commitment of trader reports and how to interpret them (look out below when the commercial shorts and longs develop huge positions). Here's some other good interviews that should provide a good introduction to gold and miner stock picking:

• Jim Sinclair
• Pierre Lassonde
• Rick Rule

www.goldseek.com, www.321gold.com - have tonnes of commentator posts to wade thru. You'll have to learn you brings value and who doesn't.

http://harveyorgan.blogspot.com/ - provides a long daily piece with material stolen from all over the place including most of the good stuff from www.lemetropolecafe.com (but for free). 

I don't have any books to recommend. I'm currently reading Jim Dines' Gold Bug (pretty expensive) which is probably the best book I can recommend, but I'm not thru it enough to really say.

John Doody has a nice, safe methodical way of picking gold stocks (which is pretty much what I use only with smaller, off the beaten path stocks). I don't subscribe. IKN provides some great insight and has a true edge with micro-cap Latin America stocks. I do subscribe. I also subscribe to Bob Hoye's Institutional Investors (great pattern-matching technical analysis) and, because I keep feeling dazzled, I just got a Jim Dines subscription. I also am subscribed to Gary Biwii's news letter to learn a new form of technical analysis (and to keep from going off a cliff if something unexpected happens). Biwii's letter is cheap and seems very much worth it to me.

MontyHigh, www.worldofwallstreet.us

What I'm Thinking About The General Markets, Gold, Copper

I hear the Jay Taylor, the news letter writer is all gloom and doom on all stocks (including gold miners). I presume he's calling for deflation.

I'm:
o Watching gold closely. If it goes below $1040 (what Indian govt paid) and stays there I'll start selling Jr miners hard.
o Bearish on copper - short something like 20% of my portfolio in the copper futures market. If support at $3.00/lb breaks down then look out below. Inventories are still ramping up at around 10000 tonnes/week. Yikes!
o Bearish on the general market - at least until the next round of quantitative easing is complete.

There's a lot of people using the financial trouble in Greece to their advantage:
o Germany - want the Euro to go down to boost their exports.
o USA (Bernanke) - wants the dollar to go up so that he can announce another round of QE.

o China - wants the dollar to go up (pulling the renimbi with it) to quench growing inflation.

The way I currently look at the inflation / deflation debate is as follows:

o Threatened or incipient Deflation promotes inflation - when deflation looms its ugly head then...

o The central bankers start printing money (via their governments going crazy with deficit spending and with the central bankers monetizing that debt by buying the government bonds)

o Resulting eventually in a reflation (inflation) trade.

Right now we are in a threated / incipient deflation wave.

I expect this trend (deflation) to continue for around another month at least. Will back out of the copper shorts if another round of QE is announced. Will continue to get shorter as long as inventories are rising the price of copper keeps falling. I think the price of copper has been trending strongly and will continue to do so.

I think there's a decent chance that the fundamentals for gold (central bank and investor buy, especially in China and India) will stop the gold price slide very soon. We'll see.

That's how I see it.

MontyHigh

Gold Chart Is Bullish In 5 Ways

I lightened up today (around 4%) based on a general feeling of elation together with an expected interventional takedown for tomorrows unemployment results.

Looking at the above, I see a pretty bullish chart:

• Bullish 50 day moving average confirmed breakout.
• Bullish MAC crossover.
• Bullish crossover of the last fibonacci thereby targeting the recent 1224ish high.
• Bullish RSI 50 crossover.
• Bullish trend-line recovery.

I actually don't see anything bearish in this chart. I expect I'll put that money back to work tomorrow aftenoon if all of the above are still holding after 1:30 PM. 

I guess we'll see.

MontyHigh, www.worldofwallstreet.us

Relative Importance Of Stock Picking Vs Being Right About Resource Prices

This chart shows the performance of gold itself (GLD) and my top holdings since the recent top in gold on 12/2/2009. I'm showing all my top holdings so as not to self-aggrandize any supposed great stock picking.

As you can see, only one of the above stocks has been positive, Gold Resource Corp (GORO.OB), even though it suffered a dilution during the period and is failing to get its mine going in 2009 as it "targeted". I believe that this is because Hochschild (mid-tier silver producer and investor in GORO.OB) is anxious to up its investment (because it deems it to be quite a good investment) and is thus supporting the price. 

What I see in the other stocks is that, even with my best stock picking, they have fallen roughly 50% more than gold itself (15% vs 10%). I take this to mean that even with my best stock picking, stocks fall significantly harder than gold and basically no amount of stock picking expertise can be expected to produce profits while the price of gold is falling.

In contrast, the same stocks during the dramatic bull run (from 9/1/2009 to 12/2/2009) are up around 50% compared to roughly 25% for gold itself. I take this to mean that my own stock picking (the best I can do) gives better leverage to gold during upswings (and smaller losses on downswings) and the overall leverage is some where around 2 to 1 on upswings.

I guess it means that being right on the price of gold (or any resource) is of foremost importance, while picking among stocks for a given resource adds leverage and value. Stock picking is good, but is not worth as much as being right about the basic resource. Is that how you see it?

Your mileage may vary. Hope this is useful and not self-aggrandizing. It is not meant to be.

MontyHigh, www.worldofwallstreet.us

What If Copper Buyers Aren't Insane?

Inca Kola New's Otto Rock keeps ranting about LME copper inventory levels (click here): "The LME copper inventory level is not an elephant in the room. It's 470,800 elephants in the rooms."

This has been going on for months. Its long past time for saying that the market is wrong and that copper should not be priced above 3$/lb (and rising) and its time figure out what the market is saying.

Seems to me that there are two possibilities here:

• Copper buyers are insane given that copper, at current prices, is obviously in over supply and they are going to get murdered as soon as reality sets in.
• Something else is going on besides just the supply and demand of copper. Something having to do with what copper is priced in, U.S. dollars.

Here's what I think is going on:

• The ballooning copper inventories means supply exceeds demand. But the copper price (in US dollars) keeps rising. 
• To my mind this means that the supply of dollars is exceeding demand faster than the supply of copper is exceeding demand.
• Now, 400,000 tonnes of copper at 6,000$/tonne is 2.4 B$. This means folks with real money think its better to have at least part of their money in copper, even though it is obviously in oversupply, than in dollars. Its a big vote of no-confidence in the dollar. That's how I see it and am placing my bets accordingly (in the anti-dollar, that is gold, leveraged by owning Jr producing gold miners). 

Now, I could be wrong and the guys buying copper at current prices are flat out wrong and this is a case of gross stupidity. That could certainly be the case, given the same kind of stupidity that we've seen with real-estate recently (and worthless Internet bubble stocks a year ago). If that's the case at some point the price of copper will collapse. If I see that I'll go short on copper big time, but until then I'm thinking that something very bad is happening with the US dollar that will come out of hiding sometime not too far in the future.

MontyHigh, www.worldofwallstreet.us

A New Thought On Inflation Vs Deflation Debate And Gold

Here (click here) is the best piece I've read lately about the fundamentals of gold investing. Its buy some guys (and an organization) I've never heard of before: QBamco, Lee Quaintance and Paul Broadsky.

Here's a quote that says a lot about the inflation vs deflation debate and the price of gold:

"gold anticipates contracting total bank credit (continued debt deflation), which requires further monetary inflation to be administered by central banks."

Pretty profound. I recommend reading the whole thing.

MontyHigh, www.worldofwallstreet.us

Russian Central Bank Buys 30 Tonnes Of Gold... All We Need Is Brazil To Join The Party

and we'll have a complete BRIC.

I'm surprised this didn't make a bigger splash on the message boards and gold comentators. It seems pretty important.

The story (which has been out for a day or two) is available here and many other places.

It means that, in the biggest economic downturn ever since the world changed (WWII), three of the four biggest, fastest growing economies (Russia, India and China) all still have excess cash and are using it to buy gold.

 

I think that says a lot. 

 

The extra cash means that economic leadership is definitely shifting and that these three are outside of the claws of the banksters. The buying gold when times are tight probably means accelerated gold buying should times get flush and a multi-buyer price support under gold.

 

Seems pretty important to gold investors.

 

MontyHigh, www.worldofwallstreet.us

When To Exit Gold Mining Stocks? Look To Dr. Copper

Here's a response to the

www.investorvillage.com Precious Metals Stock Picking Year-To-Date Results

post that I got from someone I respect:

"TIME TO EXIT... I remember being part of a board where everyone's picks were up 100, 200, 400% on the year, and everyone's picks had another double or three left in them...where every hot junior miner with a prospect was going to be a "sure thing" double. 

 

It was a great time...to be selling, and locking away the bubble gains. 

 

This time its different? "

He's referring to the fantastic run we had in base metal mining stocks in the first half of 2007. I was there, became a rich man and went back to middle-class by not exiting at the right time.

Here's a pair of my unedited responses:

First Response: "'This time its different?'

 

No, its probably the same scenario, but there's no telling where the top is. I'm going to use TA to get me out in time this time. 

 

Last time I held even after the commodities turned. That won't happen again. But, just as Nickel went from $6 to $14 it kept on going to $22. So, gold could easily keep cruising for quite some time. There's no fever like gold fever.

 

The best of the gold miners have the same valuations as breakwater [zinc miner that seemed really undervalue and then tripled], etc. at the start. As long as the price of gold holds up they are undervalued."

Here's The Second Response: "Also looking to Dr. Copper

Here's another thought on timing the gold stock exit.

 

Copper right now is operating as a monetary metal. This is crazy, but it keeps going up (along with gold) even though the LME warehouses are brimming and you get these stories of Chinese pig farmers warehousing it in their barns as a speculation. People are obviously warehousing copper as a safe-haven and/or inflation/currency hedge.

 

Just about every copper miner in the world can print money at $3.20 copper. Its going to be a lot easier to crank up the supply of copper than it is to crank up the supply of gold, so I suspect copper will run out of momentum and turn down before gold does. When copper turns down it will be time to look very closely at gold."

So, what signals do you expect you'll use to determine when to exit the gold stock trade? I'm serious. How will you know when the jig is up? Things can't go "crazy good" like we've seen over that last month  forever.

MontyHigh, www.worldofwallstreet.us

www.investorvillage.com Precious Metals Stock Picking Year-To-Date Results

A rising market makes everyone feel like a genius and I'm not the only one having a very good year. If you look closely you'll see I didn't enter the contest.

What do you make of this?

MontyHigh, www.worldofwallstreet.us

A Rapidly Rising Price Of Gold Is Not Good

Its excellent for my own net worth but its bad in this sense:

A rapidly rising price of gold means the system is badly broken. It means, generally, there is nothing better to do with your accumulated wealth then to hide it somewhere. It means there are no good opportunities for investing in projects that produce genuine win-win value (improve overall conditions for the investor and the general population).

The last time the USA had a rapidly rising price of gold was in the 1970s a time when unemployment was high, the economy was not growing, inflation and high taxes where draining the standard of living and the Soviet evil empire was expanding its influence (Afghanistan, Nicaragua) and wearing down West Europe.

The price of gold peaked right about the time the combination of Volcker's interest rate rises and Reagan's deregulation and tough foreign policy "fixed" things somewhat.

I apologize for getting political. I am not a huge Reagan fan-boy, but as someone who lived thru the period I can say that conditions for the average guy got noticeably better after the price of gold took it on the chin and that things were looking scarier and scarier (and the economy was getting worse with no known path to improvement) up until the time the gold price peaked.

Today's problems are different from the 70s, but I don't see any signs of fixes yet and I expect things to get worse and the price of gold to continue rising. I'm actually looking forward to the day when I can move my portfolio out of gold and invest in something that provides win-win value.

I find today's gold price jump to be pretty scary.

MontyHigh, www.worldofwallstreet.us

My Stock Holdings...

Somebody asked me on a message board what I was holding. Here's my reply:

My Stock Holdings... In descending order of size in my portfolio. My retirement account is all-in these stocks (although I've got some diversification  with a lucrative, secure day job and paid off house).

I wish I had about four more names I really liked.

GORO.OB - excellent rocks, stock-holder friendly management, promising real dividends, reasonably politically secure (never meet their "targets", not enough NI43-101 resources).

OGC.TO - straight out undervalued on a price to annual oz basis. Didipio half-built mine is a hidden asset play.

TRY.TO - dividend paying gold miner with mines in Australia, Brazil and soon in Argentina. Very competent and stockholder friendly management, decent but not great rocks.

DMM.TO - great rocks, very undervalued in politically risky Ecuador (but rapidly trending less risky location). Seems to be having trouble getting the first mine working. The rocks are so great I'm willing to wait.

CGA.TO - straight-ahead, excellent sized (200K oz/year) gold mine starting up in the Phillipines. Little risk, very undervalued relative to peers, great institutional support, exploration upside in the Phillipines and an excellent 2nd mine candidate project growing in Nigeria. Quite a tasty morsel for a takeover.

SMF.TO - an undervalued mid-tier turn-around where they've been meeting guidance for about three quarters and are rapidly being revalued upwards.

FRG.TO - best Nevada advanced development project exploration company. Lots of good gold with more coming. Moving towards production. Very competent management.

MAI.TO - 49% owner of a producing gold/silver mine in Argentina. Very undervalued with great exploration upside and Rob McEwan as stockholder friendly CEO. Big downside is that the 51% owner (Hochschild) has ticked off the Argentine workers who are sporadically going on strike. I think it will turn around.

LMA.TO - has partial ownership of three marginal (IMHO) mines with Huge exploration upside at the Sudan (yuck) mine. Basically as self-funded exploration play in my view. Looks very undervalued as a producer, but I just don't like the quality of the producing mines.

XAU.TO - an explorer than owns half of one of FRG.TO's best projects.

That's it. Hope you find this helpful. At this point I'm pretty satisfied with each of my stocks, but wish I had more names as I remain overconcentrated in GORO.OB and OGC.TO. Do your own Due Diligence.

As time goes by I've been giving more weight to the stockholder friendliness of management (hard to judge, but important to get right) and having better than average rocks.

P.S., Having gold go up 2 days in a row while the dollar went up and the stock market went down with a option expiration day approaching is a pretty crazy-bullish divergence. Gold and my stocks are way overbought, but I think they are going to keep going nearly straight up for quite a while (say thru the end of the year). The fundamentals (supply vs demand) for physical gold seems really bullish. The indians were buying last night at $1145/oz. That means the price can't fall far as Indian buying will kick into high gear as soon as it starts falling.

MontyHigh, www.worldofwallstreet.us

On Topic, Very Funny: As Seen On TV

Minera Andes (MAI.TO), Both Sides Of The Story

Here (click here) is a recent, tell-the-positives-only message board post telling the Minera Andes (MAI.TO) story:

"Mineas Andes-setting the table for big upside

Go to the website thru google finance and just enjoy reading all the positives with this company. It found a rich ag/au deposit now called the San Jose mine, which has 15 OUNCES per ton ag and 6.6 g/ton au; and is making money with it's 49% ownership of that mine. It discovered and has brought to a pre-feasibility study stage one of the world's richest cu deposits which has a NPV of $3 Bill with cu at 2.90/3.00 pound. The total deposit is expected to produce 11 billion pounds of cu, and may due so with open pit mining.

It has precious metal veins and seams that are undergoing, or are about to undergo, more definition drilling. All of which are 100% company owned.

Best of all it has a principle stockholder (33% of company bought at $1C price) who is CEO that has a GREAT business history as the founder of Goldcorp, and who is taking NO SALARY and he levels with his fellow stockholders. His name, you may recognize, is Rob McEwen. The Yahoo board is actively discussing this company; and you will be thrilled with the company website.

All of the assets are in Argentina which is now a stable, relatively fully predictable environment.

Straight lining the lastest qtrly earnings report and using a 20 multiple gives me a $1.6 price level for the shares. The sell today for 65 cents US. An amazing baseline and wonderful bargain."

Here's some negatives that aren't mentioned:

• The operator of their 49% owned mine (Hochschild) has managed to tick off the workers in Argentina where strikes are a respected and ongoing tradition. McEwan has already indicated that Q4 production / earnings will be down due to labor actions that have already occurred.
• The operator of their 49% owned mine (Hochschild) is operating the mine in strictly its own interest and it may be a long time before Minera Andes gets any actual cash-flow from the mine. It will be even furtherout, if ever, that stockholders get a slice of that cash-flow in stock-buybacks or dividends.
• XSTRATA, which knows more about mining copper in Argentina than anyone else, decided not to buy into that "3B$ NPV" copper project at triple the exploration cost to date. I'd call that an indication that the project isn't anywhere close to that 3B$ value. 

Still, the poster is right that the 49% owned mine is a great asset. I estimate a price to operating cash flow from that mine for 2010 at $1000 Au and $16 Ag at 2.1 making MAI.TO (leaving aside the copper project and other exploration project values) roughly undervalued relative to its peers (e.g. Minefinders [MFL.TO/MFN] by a factor of something like 3 to 1.

I bought back in yesterday at $C.67 (only 1% of my portfolio) because I'm a value investor at heart and it seems, even with the negatives above, way too undervalued.

MontyHigh, www.worldofwallstreet.us

Apollo Gold 10Q Review

Apollo Gold, one of my holdings, posted their quarterly results yesterday. I look at Apollo Gold as a value investment, specifically as a speculative turn-around play. The story is as follows:

• Apollo Gold was a reasonably successful mining company with a gold/zinc mine in Montana which became depleted.
• Apollo Gold has a nice property (Black Fox) in Canada with good, but not fantastic gold grades and they have opened a mine which starts as an open pit mine which is to be supplemented with underground production starting next year. By the way, they have excellent exploration upside (with some drill results that are comparable to Black Fox) immediately adjacent to Black Fox.
• Apollo Gold had to get financing for the new mine around this time last year at the heart of the credit lockup. The stock price fell to around 1/5th its current value. They managed to get financing without too much dilution, but with pretty hefty interest rate payments (around 8% interest) and hedging 1/4 of the next four year's production at $875 gold. CAD$ / USD$ currency risk is also hedged.

So, the key part about the turn-around play is, Apollo Gold must get Black Fox working well enough to pay off that debt or bad things happen (initially in the form of hefty dilution) to stockholders. The thing to watch, in my view, is the amount of gold being produced, the cost of production, the cost of gold (of course) and the balance sheet's current assets.

During Q3, there was a production hiccup, where the grade of ore run thru the mill did not match expectations. The reason why I'm an Apollo Gold investor is because I was very impressed by the way management handled the hiccup. They were very straight-forward about what happened, provided a tonne of technical detail in a way that showed that they loved mining and know it backwards and forwards and that they knew what the problem was and how to fix it. Quite a contrast to many other companies. New Guinea Gold (NGG.V) comes to mind as the exact opposite.

So, that brings us to the 10Q. I'm not a finance / accounting guy. I'm a software engineer who is trying hard to spin up on his investing skills. I realize that a major step forward in increasing my stock-picking skills is to be better able to interpret financial filings. Here's what I see.

Balance Sheet:

Total Current Assets: 22.6M$, Total Current Liabilities: 53.2M$... Yikes, that's why this is a speculative stock. But of the current liabilities, 8.6M$ is derivatives (gold hedges). That's not a problem. The big hitter is "Current portion of debt (25.8M$)". Leaving those aside, Apollo Gold is in reasonably good shape.

Digging into "Currrent portion of debt (25.8M$)" in note 8a, we see that the project facility (the debt) has to make monthly interest payments and "repayment of the principal amount in unqeual quarterly payments". Apollo Gold missed the first principal repayment (yes, this is a speculative investment). The banks have agreed to defer payments to allow the banks to "complete an ongoing technical review of the Black Fox project with the object of rescheduling quarterly repayment installments". The entire debt is to be repaid by Mar 2013.

So, as far as the balance sheet is concerned, I conclude that the banks are happy getting the Libor plus 7% payments on the debt (with decent principal repayment) and things will get the financing worked out provided the mine produces relatively ok.

The total debt is 67.65 and interest payments at 8% / year is 1.35M$/quarter.

Income Statement, Etc.:

Black fox produced 19,848 oz in Q3 and is guiding for 20K oz in Q4. With this in mind, let's look at the income statement. 

Revenue was 19.1M$ or 962$/oz. That sounds right. Summing Direct operating costs, General and administrative expenses, we get a "cash-cost, including G&A" of $630/oz.

This means that going forward into Q4 with gold averaging, say $1050/oz and 1/4 hedged at $875, Apollo Gold should have an average sales price of gold of $1,006 /oz. 

So, at 20K oz for Q4 with the above sales price and the same "cash cost", Apollo Gold should net 7.5M$ operating cash flow. This would allow them to easily make the 1.35M$ interest payment on the debt as well as make a substantial principal payment. Production is expected to increase by 11% in Q1 2010 (or more with increasing gold grade). Equal quarterly principal payments to complete principal paydown in Mar 2013 (14 payments) would be 4.83M$/quarter. Together with interest, debt repayment (with equal payments) for Q4 is = 6.19M$, leaving = 1.34M$ for exploration, misc and contingencies. 

Factoring in a falling cash-cost (as the mine is optimized) and increased production (with mill thruput increases and with higher-grade underground ore), Apollo Gold should be able to have greater margin against debt repayment going forward.

CONCLUSION: Apollo Gold should be able to make its rescheduled debt payments, but there is little margin for error for the next couple of quarters. Apollo Gold is a speculative investment that depends on management competence. It should be highly leveraged to the price of gold and to meeting (or missing) management guidance. I don't think that exploration success is that significant over the next two or three quarters.

I'm not really that expert at this kind of analysis, but I'm trying to improve. Tell me what I'm missing. There could be out and out mistakes. Do your own due-diligence.

MontyHigh, www.worldofwallstreet.us

Jim Sinclair's Dollar Countdown Ends Around November 7, 2009

Jim Sinclair has been talking about a "Countdown To The Implosion Of The Dollar" for quite a while (click here).

Here Jim Sinclair reveals what his "dollar countdown" has been about:

"When Push Comes To Shove

Posted: Oct 27 2009     By: Jim Sinclair     

Dear CIGAs,

October 30th the Fed is planning to curtail QE regarding Treasury auctions.

November 4th is the FOMC meeting most likely to contain discussions of timing for the exit from economic stimulation.

November 7th is the G20 meeting at which BRIC nations will anticipate a cessation of QE and a commitment to establish a currency alternative to the US dollar...

So fasten your seat belts because our long discussed rock and hard place will be reached shortly.

Can the Fed provide the Chinese with their demands of middle July at the USA/Chinese Washington Financial Summit in a deal to buy US Treasuries so as to let the Fed back off their US Treasury instrument auction QE?"

I thought it was interesting to finally find out what he has been talking about with his count down. I have mixed emotions about the guy, but one of the things I like is that he has made specific, testable calls. On the down-side, his "This Is It" and "This Is It And It Is Now" calls have pretty consistently been made at temporary gold price highs (when fear is running at a fever pitch). The way to deal with the gold market is to buy when the fundamentals remain good but when sentiment is bad (like yesterday). Buying breakouts has not seemed to work well (particularly for short plays with tight stops).

MontyHigh, www.worldofwallstreet.us

Gold Resource Corp (GORO.OB) Rant

I found a really nice Yahoo private message board for Gold Resource Corp (GORO.OB) investors. Leave me a comment (where I pick up your email address) if you'd like an invite. There are no bashers. There's a lot of good in-depth information. There's too much enthusiasm.

Someone asked what it was about GORO.OB that sets them apart from the rest. Here's my answer. I'm pretty breathless (don't you think)? Do your own due-diligence. Remember that there are good reasons you don't want to invest like me.

"The thing that really separates GORO.OB from the pack is the targeting of significant dividends. The method of skipping NI43-101 "official" resource definition and going straight to production is also pretty unique. I think they are "good", but they are also lucky. The property is better than they could have expected. The lack of an NI43-101 leaves this as a "hidden asset" which makes GORO.OB a hidden asset play. The dividend target makes it a straight ahead value play. The low cash cost also provides a big margin of safety against falling metal prices.

I've only been in mining Jrs since 2006, but from my experience there:
o have been other companies that found really great deposits and had their stocks sky-rocket (e.g. Hathor (HAT.V) found a really great uranium deposit, Noront (NOT.V) found a spectacular nickel with lots of other byproduct metals). GORO has excellent drill holes with more to come, but has production coming.
o were a bunch of base-metal companies going into production targeting equivalent profits at current prices (e.g. Tamerlane Ventures (TAM.V), CML.V, SRS.TO, etc.) but then base metal prices went down and they never delivered those profits. They never talked about dividends. They also didn't have low enough cash costs to survive a metal price downturn. GORO is different. Its ore is so rich it can make decent profits even when 3/4s the gold miners out there are losing money.

I'd say the closes thing I've seen to GORO.OB is SanGold resources (SGR.TO) which was a struggling gold mine reopener (losing money, diluting all the way) which got lucky and found a truly excellent deposit right next to their mine). Their stock has more than tripled, but they still aren't making profits yet. The news letter writers were all over that one (Jay Taylor and a bunch of other ones). The stockhouse message board was a mess (with endless pumping and bashing). I stayed away because I didn't like the soap opera. Should have bought because it has tripled since I started watching it. SGR.TO has great rocks, has production, but... even they aren't talking dividends. 

If Jay Taylor and a few others jump on board, GORO.OB could see a double just from their pumping. I would think that they would wait until the right time (going into production or waiting for first quarter results with proven / probable reserves on the way with an AMEX listing to follow or something).

Troy Resources has not promised, but delivered and is delivering dividends. But its rocks are not as good as GORO's and they don't have the exploration upside. So again, GORO.OB seems to be unique.

I've got something like 40% of my retirement savings in GORO.OB at this point, so I'm a true-believer. I believe management is great at promoting (isn't that web presentation fabulous?), but that they consistently over-promise on schedule (which cost us that last dilution). As a result, I'm kind of expecting the 2011 limit on Hochschild to bite us leaving us without having produced anywhere close to the targeted first year oz. Getting a mine started and producing properly is hard and most companies have hiccups that cost them a couple of quarters.

Exiting when production is announced and reentering after the first round of problems is usually a good strategy. A 30 or 40% hit is not unusual when the problems show up. I don't expect trade out and back in with GORO.OB because the stock is so illiquid that I'm afraid I won't be able to build up the kind of position I currently have.

I think startup problems could easily happen here. That may let Hoch get control before the stock hits the targets this board is expecting. But if GORO can get some production going, get some genuine SEC approved proven-probable reserves (with lots more coming) and an AMEX listing I expect we'll see a double before that Jan 2011 limitation falls off and releases Hochschild to buy more than 40% and gain control of the company.

Having Hochschild sitting waiting to buy this stock is not really a bad thing. It already got us a double. It should support the stock price going forward. The start of production and more exploration results should also push the price up.

But getting on the AMEX, where the story can be pumped to all those USA investors will be a really big stock price driver. GORO.OB could be a gold stock that a bunch of non-goldbug news letter writers pump to show that they are hip to the gold bull market. The AMEX listing is crucial. Its probably worth a double in and of itself. Its the reason why I think Minefinders (MFN/MFL.TO) has roughly double the P/E ratio of its comparables. To get an AMEX listing, GORO has to get into production and get proven / probable reserves.

Hope this is helpful (sorry for rambling),

MontyHigh"

Junior Gold Miners I Like

In this post I give you the "good stuff", the results of my fundamental analysis of Jr Producing Gold Miners. I have been keeping this list up-to-date with information from the companies as they produce it, but have not spent a lot of effort searching for new names. The ones I like are so undervalued that they should very likely produce very good returns provided my macro view is correct. That view is that the price of gold should be well-supported at current levels.

I believe that the combination of due-diligence effort summarized in these tables together with an ability to invest in these smaller companies and my hopefully on-target macro view is my "edge", what allows me to expect superior investment returns. Of anything I put on this web site, this is what I think has the most value. My entire portfolio is invested in the stocks covered in this post.

The following charts are all based on last Friday's prices and assume $1000/oz gold and $16/oz silver.

Here's the table for "mainstream", well-run, mid-tier producers that I compare my holdings (and candidates for holding) to. These are Alamos Gold, Minefinders and New Gold. As you can see, at the assumed gold and silver prices these miners have very attractive price to EBTDA (and price to operating income) ratios. The stocks I like (and hold) are all even more attractive.

The table that follows has my favorite gold miners. Each of these holdings constitutes more than 10% of my investment portfolio. As you can see, they are all undervalued relative to the reference miners above. They all can expect, if they meet their guidance, to "grow up" to the same relative size as the reference miners and eventually receive a comparable valuation.

Gold Resource Corp (GORO.OB) - my top holding. I really love the superior ore grades (which should result in a very-low cash-cost) and the stock-holder friendly management which is "targeting" one-third of operating cash-flow to dividends.

Troy Resources (TRY.TO) - I really like the stock-holder friendly management which has a record of delivering dividends to its stockholders.

Dynasty Metals And Mining (DMM.TO) - Dynasty has superior rocks (ore-grade) and a lot of it. I know there is political risk with its Ecuador location, but I think the valuation overestiamtes that risk.

Oceana Gold (OGC.TO) - While having significant debt, I like Oceana Gold purely on the basis of its valuation. Where else can you find an estimated price to EBTDA ratio of 1.5 from a mid-tier producer.

Here's the stocks that I hold, but which I have smaller holdings. I find each of them attractive, but not as attractive as my favorites above. The stocks are Minera Andes (MAI.TO), Apollo Gold (AGT, APG.TO), La Mancha Resource (LMA.TO) and Semafo (SMF.TO).

Finally, here are some other miners I like but do not hold. The three I'm watch most closely are CGA Mining (CGA.TO) which isn't quite undervalue enough, B2 Gold (BTO.TO) where I don't like the political risk associated with their exploration properties and Rusoro Mining where I don't like the political risk of Venzuela. I used to hold Capital Gold Corporation (CGC.TO) and Castle Gold (CSG.V), but I have given up on their "growing up" and getting the same kind of valuation the reference miners get.

I hope you find this post of use. I've shared my best stuff with you.

Leave me a comment if you think I left out your favorite holding and give me a profile of what you really like about your favorite.

MontyHigh, www.worldofwallstreet.us

P.S., This post does not constitute an investment recommendation. Every one should do their own due-diligence before investing, especially in relatively risky Jr mining companies like these.

Year-Over-Year: India Consumer Price Index At 11.9%

The above graphs which come from bloomberg via www.ritholtz.com seem to shed light on the gold market in India. As you can see, the economy is growing at 6% year over year so there is more wealth being generated. This wealth is being generated in a situation where the investment of choice for the majority of the population is physical gold. That seems bullish for gold.

The India consumer price inflation (CPI) is 11.9%. This seems a like a good explanation for why gold is the investment of choice for the majority of the population (rural farmers). Gold is a way for rural farmers to protect themselves from very real inflation. As best I can tell by googling about there is no sales tax or only minimal sales tax on gold (perhaps 1%) when a farmer buys or sells gold. Even if there is a 1% sales tax, I wonder how often it is accurately collected in rural India.

Gold must look like the only good investment if one is rural farmer in India wanting to protect one's savings against 11.9% inflation. Probably the only really practical alternative is a bank savings account and yet the banks offer less than 6% interest. The stock market must not seem very practical given how volatile it is and given that a rural farmer doesn't have the tools (Internet access, etc.) necessary to do a good job with stock investing.

It seems to be a sure thing that as long as these conditions persist there will be significant gold buying in India. The chart shows India's deficit as second overall at 5.6% of GDP. This seems like a good indicator that inflation in India will persist.

Overall, this chart gives me a renewed appreciation for why Indian's invest in gold and why this can be expected to remain bullish for the global price of gold. I would be obliged if you would leave me a comment if you can add anything to or correct my understanding of the factors that affect the attractiveness of gold as an investment for Indian citizens.

MontyHigh, www.worldofwallstreet.us

Chinese Gold Mania

http://www.sovereignman.com/finance/gold-mania-in-china/

Nice story. Money quote: "Second- the government has stepped up its promotional campaign, and Chinese consumers have responded on cue. Gold demand has grown dramatically just this year, particularly as savvy local investors are starting to view Chinese stocks suspiciously."

Here's a longer bit: "You can buy gold in China at any bank– even tiny banks in tier-3 cities sell gold.  More importantly, however, the government is setting up official Chinese Mint stores all over the country.

On the inside, they look like jewelry shops– armed guards, glass viewing cases, etc. But instead of diamond crusted earrings and white star sapphires, you see bars. Lots of bars.

The government mints bars in sizes ranging from 5 grams (which are so tiny they’re actually cute) to 1 kilogram. The prices are updated instantly– they have a Bloomberg screen which tracks the spot price, generally indexed to the Renminbi price in Shanghai rather than New York or London (another sign of Chinese financial independence).

The bars are all serialized and 9999 purity, the same as you would get from Switzerland.  They are also certified by the gold exchange, which validates the quality. There is no tax, and the premium runs 10 renminbi per gram, or roughly $30 (US) per ounce.

We went into several stores and saw Chinese people buying like crazy… all with cash. The most popular denominations were 10 grams and 50 grams– and I’m surprised the mint shops didn’t sell out at the rate those bars were flying off the shelf."

Now, this is a major game-changer for the price of gold if it is true that the Chinese people are "buying like crazy" or even just buying more than before in increasing amounts. There's no telling where the price of gold will go with central bankers turning from sellers to buyers and with a giant population ramping up its investment buying. 

Are there any ways to verify how much of this report is accurate?

MontyHigh, www.worldofwallstreet.us

Markets At A Major Turning Point?

I've noticed that the markets make major turns and they often take place at predictable places in the calendar.

Just going from memory, here's some that I recall:
o July 1, 2007 - End of Q2 and the jig is up for commodities after a fantastic run. That is, when Q2 07 ended, the trade shifted from the "stronger for longer" BRIC countries taking over the world to a "recession is coming" pull in your horns world.
o Sep 1, 2008 - End of summer and the start of the stock market crash of 2008.
o Mar 6, 2009 - The beginning of the green shoots rally. Not especially aligned with the calendar.

I think the Sep 1, 2009 end of summar calendar event is probably another major turning point. A good indication of this kind of turning point is when the reaction to a news story changes. Since Mar 2009, any "better than expected" news item triggered a major uptick. This changed yesterday where "better than expected" news on industrial production and pending home sales resulted in a hard market-downturn.

Now, what's really interesting for me is the fact that gold and the U.S. dollar went up when everything else (US stocks, Asian stocks, European stocks, crude oil, copper) went down. I think the market turn is from a "green shoots rally" to a flight to safety theme. This time gold is a safe haven and not a commodity to be dumped.

I believe it may be different for Jr producing gold stocks this year. Last year they were dumped with everything else as leveraged hedge funds dumped their commodity holdings to raise cash to meet fund redemptions and margin calls. I don't think the hedge funds have been in this neighborhood this year and individual investors hold these stocks without margin. So they could easily launch if gold does step up.

As I write this, 9:30AM, gold is up hard at $966, breaking thru major resistance at $960 while the S&P 500 has fallen through the psychologically significant 1000 support. If this holds there could be quite a flight to gold.

MontyHigh, www.worldofwallstreet.us

Big Picture On Gold

Here's (click here) an excellent gold chart and commentary. I put the chart here, but recommend reading the accompanying commentary (again, click here). 

Nice post. I'm waxing a little philosophical on gold today. Here's my thoughts on big picture what's happening. Ithink there's a good chance:
(a) The Global economy has bottomed. That the rest of the world has finally "diverged" from the USA and can grow without it.
(b) The USA economy is still in real trouble and the amount of government debt being created makes the dollar's position risky (whether it collapses or not).
(c) Gold will benefit from a flight from safety from the USA's dollar.
(d) Other commodities might be a more profitable place to be, but I'm more sure my little gold miners will be printing lots money (generating big profits) than any other other investment avenue I know of. I'm more sure that gold has a price floor below it that my miners can make money on than any other resource. Put the other way, I'm not as confident that copper, oil, natural gas, silver, etc. can keep their extraction companies grossly profitable the way gold can for my little energy companies.

So, that's where my money is (with a pretty big short the USA stock market position in S&P futures. Those futures are back underwater at this point).

MontyHigh, www.worldofwallstreet.us

Indian Rupee Price Of Gold 1 Year Chart

Most of the gold world is focused on the US dollar gold chart and the magic $1000/oz level.

Here's the gold chart that I think is most important at this point: the price of gold in Indian Rupees. This price chart is very important because Indians buy actual, non-paper, physical gold and are very price sensitive. They don't want to over pay for it. They are not "momentum" players; they are buy the dip buyers.
 
As you can see, looking at the price from Sep 08 thru the end of Mar 09, the price of gold in Rupees experienced considerable volatility. Since then it has been in an ever tightening trading range with higher highs and steady resistance at the 46000 level. Its been within a 4 to 5%  trading range since the end of Mar 2009.

That's probably a narrower trading range than just about anything else on the planet during that period.

The rising, flat-top, triangle formation in the above chart is a bullish continuation where the probability is that the price will continue its rising trend.

I expect you'll see a big move in the price of gold in US dollars take place when a breakout takes place in the rupee price of gold. The Indian, buy-the-dips approach to gold buying provides support for gold, but does not provide the impetus for an upside breakout. Only something fundamentally important can push the price of gold beyond the point where Indian buying falls off, in this case, 46000 rupees /oz.

Something important will be happening, when the price of gold moves outside of the chart's trading range.

Indian buying is seasonal and seasonally the buying picks up right around this time of the year. There's a good chance that the break out will come soon. The triangle formation indicates that something should happen within the next month.

This chart is yet another bullish data point for the price of gold. There are others which are outside of the scope of this post.

MontyHigh, www.worldofwallstreet.us

Pretty Useful Charts: Indian Price Of Gold [Gold Price In Rupees]

The price of gold in Rupees is pretty important because Indian buying represents support for the price of gold. The really useful thing to know is the separation between the Indian price of gold vs Indian legal import price of gold. The only source I've found for this is the very valuable Midas column at, LeMetropoleCafe, the subscription website.

Googling around I found this web site (http://www.goldprice.org) with Rupee graphs.

Here's a couple of useful ones from that site:

1 Year - As of 5/30/2009, gold is trading at the top of a range in rupees. Indian's like to buy when the price seems low, so we can't expect much support from Indian buying right now.

www.kitco.com provides a 24 Hour gold Rupee gold chart. As you can see, its pretty small. My best guess after watching it a bit is that it does not update the USD / Rupee conversion price in real time. Not so useful.

I've been watching, up until recently, the standard USD gold chart (provided further below) and have found that when the price of gold starts consistently rising overnight (while Indian trading dominates) that Indian buying has kicked in and the price of gold has found support. This Indian trading period seems to start around the Hong-Kong open and ends when gold opens in London. This also seems to be a tradeable pattern. I expect I'll be paying more attention to the Indian 24-hour gold chart now that I've found it. 

The following is Yahoo's Indian Rupee vs the dollar 5-day chart. When this graph goes up, the Rupee falls in value and Indians are less eager to buy gold. Comparing the percentage moves in this chart to the one that follows provides a way of guesstimating whether the Indians will be buying on any given night.

The graphs in this page are linked to the automatically updating originals. Revisiting this page (and doing a page reload) should give you up to date prices.

Hope you find this useful. I'll be adding this page to my browser's "favorites" aka bookmark lists.

Leave me a comment if you have something useful to add.

I'm not planning on doing much tonight as the price of gold is down roughly 1.3% while the Rupee is also down something like 1.3%. There's no reason to think, for tonight, that Indians will find gold to be much of a bargain.

MontyHigh, www.worldofwallstreet.us

Myth: "Gold Bullion Has No Third-Party Risk"

Here's a quote from a recent article that got my attention: "The great advantage of gold bullion is that it has no third party risk." This kind of statement is made frequently in the gold investing world.

This is clearly not true. There is always third party risk with Gold Bullion. The risk is that third parties will steal it.

There are two ways of "owning" gold bullion:
(a) Storage Service - you own the gold and enter into a contract with someone to store it for you. This kind of gold ownership has counter-party risk in that the service provider may, in one way or another, be unable to provide your gold to you when you want it. The service provider may abscond with it, get robbed and not have insurance or have the government come in and confiscate it, etc.
(b) Personal Possession - you own and lock it up or hide it (or both) in something you own. This type of gold ownership does not have any counter-party risk as there are no contracts involved. It has a much higher risk than an ordinary bank account of someone entering your home and pointing a weapon in your face and demanding that you hand over the gold.

So, let's not kid ourselves. Life is risky. There is no risk-free way of preserving wealth on earth. We need to evaluate the risk and reward trade offs associated with any vehicle for preserving wealth and select our vehicles appropriately. The reduction or absence of counter-party risk may make bullion attractive in some cases, but it clearly has some "third-party risk".

Here's an interesting thought on the subject: "Do not store up for yourselves treasure on earth, where moth and rust corrupt and where thieves break in and steal but rather store up for yourselves treasure in heaven where moth and rust corrupt and where thieves do not break in and steal. For where you treasure is, there will your heart be also."

A really important question is: Is the Lord Jesus a third-party I can trust with my treasure?

MontyHigh, www.worldofwallstreet.us

Semafo (SMF.TO) Buys 40% More Of Samira Hill At Bargain Prices

Here's lead of the press release (click here):
"Montreal, Quebec, July 22, 2009 - SEMAFO Inc. (TSX: SMF) today announced that it has acquired from Etruscan Resources inc. (TSX: EET) their minority interest in the Samira Hill mine located in Niger. SEMAFO now holds an 80% interest in the mine with the balance held by the Government of Niger.

Etruscan’s 40% participation in the operating subsidiary, comprised of preferred shares, loans and common shares, was purchased for $3 million along with a 1.5% net smelter royalty. The royalty comes into effect after which time the mine has produced 750,000 ounces, calculated as from July 1, 2009. SEMAFO has been accorded a right of first refusal should Etruscan decide to sell this royalty."

Here's my quick analysis:
Semafo just bought 40% more of Samira hill for $3 million dollars.

Samira hill is a 65k oz/year operation with measured and indicated of 1.3 million oz.

That means they just bought that 40% at 115$/annual oz and 6$/measured and indicated oz.

That is a steal! For comparison, CSG.V is valued at roughly $1000/annual oz and $50/measured and indicated oz. CSG.V should be a 50K oz/year producer in politically more stable Mexico and is about as undervalued a producer as any I know of.

What a steal! Nice going Semafo! It looks to me like Semafo just bought over 20 million $ of mine for 3 million $. Etruscan will soon be out of business if this is any indication of their level of desperation.

MontyHigh

Disclosure: I'm not holding any Semafo right now. I have in the past and probably will at some time in the future.

Dynasty Welcomes Ecuador Vice Minister of Mines to Its Zaruma Gold Project

Click here for the full story. Here's the money quote: "Vice Minister Dr. Serrano, commented: 'The National Government considers this project important. It was constructed using a high percentage of Ecuadorian labour and will provide future jobs in the area. For these reasons, Dynasty has our support to commence production as soon as possible. The country needs these projects to help generate employment and economic revenues for the state.'"

FWIW, DMM.TO is my fourth largest holding gold mining holding (after Gold Resource Corp (GORO.OB, Oceana Gold Corp (OGC.TO) and Castle Gold Corp (CSG.V)). Very undervalued, in my view, apart from political risk. This story backs up the idea that the political risk is overrated. Do your own due-diligence.

MontyHigh

Gold Junior Producing / Near Producer Mid-Year Update

This post provides a mid-year update of my take on Jr producing and near-producing gold mining stocks.

The tables below are based on my forecasts for the companies for 2010 assuming $800 / oz gold. In this edition I provide a Price to  EBTDA(Earnings Before Taxes, Depreciation and Amortization) ratio column. I hope to increase my fundamental analysis powers over the next 6 months to be able to include an EBDA column including expected taxes. NOTE: If the price to operating income column is the same as the Price to EBTDA column then I have not yet truly calculated the Price to EBTDA column. I intend to complete filling this column in as Q2 results are announced.

I'll provide updates on individual companies as they appear in tables.

Here's my list of reference gold miners. These are miners which, ideally, are steady producers in the 100 to 300K oz/year range. For this update, I had to remove Western Goldfields which I replaced with its buyer, New Gold (NGD). I'm looking for another reference miner because NGD and AGI.TO seem overpriced to me.

Here's my current favorites list (no particular order).

Here's the latest on my favorites:

• Castle Gold (CSG.V), which has executing according to plan, has announced that it is in the final stage of getting takeover / merger bids from three bidders and "plans to make a final decision no later than July 10, 2009.". Seems like an easy trade would be to buy on the next down gold day and sell on July 8 or 9. I expect they probably will sell the company for a 30% gain, but who knows.
• GORO.OB continues to move towards initial production but has not gotten that final permit. They did just sell more shares (diluting themselves) to Hochshield at $US 4.00 / share. I expected this and they now appear to be finally cashed up to get into production. They are my favorite stocks, because they have excellent rocks, competent share-holder friendly management and promise significant dividend payouts, but I have to admit they never hit their schedule milestones.
• Troy Resources (TRY.TO) is not as cheap by the metrics as some others. Its still a favorite because they are stockholder friendly and pay dividends and are very competent and execute on their plans. The recent news is still under the radar, but politically they look well set to get permitted on their next mine in Argentina and to get it in production even faster than they had previously hoped for.

Here's the list of other Gold producers / near-producer miners I'm holding. I've been adding to these positions.

Here's the latest on these:

• DMM.TO - no news here. Still has excellent rocks, competent management and is very undervalued except for political risk, which Otto Rock of Inca Kola News assures me is overly priced into the stock. I found DMM.TO and Troy Resources through Otto and think his news letter is well worth the price if you are interested in Jr mining stocks. His edge is being on the ground, fluent and really understanding what's going on in Latin America. I think its a real edge.
• OGC.TO - The most undervalued gold producer I know of assuming gold can stay above $800 and nothing really crazy happens in the currency markets to the New Zealand dollar.
• CGA.TO - Bought a little the other day because the price just seemed too low. Not much and I don't know how long I'll hold it.

Here's the other gold producers / near producers that I'm watching closely and considering whether to buy. For one reason or another I'm not holding.

New to the list are:

• Semafo (SMF.TO) - I sold my Semafo because the chart looked like it was breaking down under $2.00 and I promised myself I would use technical analysis to avoid big losses and to retain profits. It immediately shot back up. Its a very admirable company, but not quite as undervalued as some others. Its also reasonably liquid and tracks the price of gold well, so I will probably use it to trade in and out as I gain / lose confidence in gold.
• Apollo Gold (AGT, APG.TO) - This is a board favorite over on the Investor's Hub Junior mining board. They are opening a new mine in Canada. Seems pretty well undervalued. I'm not sure why I never bought, perhaps because I don't want to run with the herd.

Hope you find this helpful. Please leave comments.

MontyHigh, www.worldofwallstreet.us

NOTE: Stocks covered: Alamos Gold Corp, New Gold Corp, Minefinders, Castle Gold Corp, Gold Resource Corp, Troy Resources, Dynasty Metals And Mining Corp, Oceana Gold Corp, CGA Mining, Semafo, B2 Gold Corp, Apollo Gold Corp, Capital Gold Corp, La Mancha Resources, New Guinea Gold Corp.

Gold Seasonals: A Look At Mid-Year

This post takes a look at what has happened to the price of gold from mid-year to the end of the year. It uses GLD (the gold ETF) closing prices for this year (year-to-date) and the previous four years. The graph below tells the story. It shows the price moves for each year relative to mid-year (well actually relative to 6/26 or 6/27). In the graph, all of the lines are at zero at the point marked "you are here", that is, 6/26.

Of course, all of the discussion in this article is based on this year and the previous four years and there are no guarantees that what we see here is a genuine pattern or that the pattern will continue going forward. Even though past performance is no guarantee of future results, commodities do have seasonal patterns. I suspect this graph may provide some insight into gold's price action going forward.

The first thing I see when I look at this graph is that the lines are more bunched together before "you are here", that is, in the first half of the year than in the second half. This means that the bigger price moves take place in the second half of the year. Even though there have been some pretty big price moves in the first half of the year, the move from the start of the year to mid-year in all five years range falls in a pretty small range, between roughly +2% and +7%. The moves in the second half of the year range from roughly minus 1% (last year) to almost plus 30% (2007). While there is a bigger range in the second half (more risk), there has also been bigger average profits (+13.9%). Based on this four-year record, it seems that being invested in gold in the second half of the year is a good place to be.

In general, the idea of summer doldrums for gold (at least starting from mid-year) doesn't have a lot of support from this chart. In three of the four years, gold immediately popped up from mid-year. This made mid-year, over the last four years, a good time to enter into gold investments. In three of four years, gold never fell more than 5% below its mid-year price. I would say a 7% closing price stop, on the surface makes sense for me for gold investments this year. With gold (not GLD) having a close on Friday of $938 that would have a stop of $873. Given that there is a lot of support in the chart at $880 this $873 seems like a reasonable stop. 

In all four years, gold has ended the within 5% of its high for the second half. It seems to me that it makes sense to skip having a trailing stop with gold and rather use only that $873 as an entry stop.

Finally, let's look at 2008 again. The maximum fall in gold in 2008 from midyear was around 20%. In my mind, anything can happen and almost all commodities had bigger falls than this last year. Gold could, although I don't think it will, plummet this year like the other commodities did last year. I'm watching the gold market carefully and I am not going down with the ship by "holding" my Jr gold producers all the way through a breakdown like I did last year. If the chart turns sour, I intend to get out, especially if it goes sour because the economy looks like it is rebounding. 

Overall, this study gives me a bit more confidence in my gold investment than I had prior to initiating it. What do you make of golds prospects for the second half of 2009 and what is the basis for your outlook?

MontyHigh, www.worldofwallstreet.com

Inca Kola News' Otto Rock On The Gold / Silver Ratio

[Editor's Note: World Of Wallstreet welcomes an article by Inca Kola News' Otto Rock. Gives more insight (and in just a few words) about the relationship between silver and gold than anything I think I've ever read. I stay on top of Inca Kola News every day and am a paid up subscriber to Otto's subscription news letter.]

Chart of the day is

...the Gold / Silver ratio (GSR), year to date.

The last time i put up the GSR, a mailer asked me to explain a bit more as to why it's an interesting chart to follow (for me at least); here we go.

Watching the GSR is a good way of noting fear versus greed...to a certain extent that is. Basically, the more nervous people get, the more they'll prefer to hold gold over silver. This is because gold is money, gold is the long-standing store of wealth, gold is the safe haven metal etc etc.

And silver is......well, it's silver. The pretend precious metal. The one that claims brotherhood with gold but is mostly produced as a by-product of base metals (zinc and lead, usually). Neither fish nor fowl, silver maintains a positive beta relationship to gold.

When times are good, silver will appreciate faster than gold as people buy into the precious metals side of the metal. When times are nervy, silver exasperates its fan club (the dreaded silverbugs; people that make goldbugs look normal) and sells off at a faster rate than gold (supposedly due to Goldman Sachs using massive put positions on Comex and despite being the metal about to be used in the new Mexican currency, or the Amero, or whatever other tinfoilhat theory is fashionable).

All this can be summed up in one simple phrase: People trust gold more than silver.

So due to all that, we can use the GSR to gauge market sentiment. Right now the GSR is rising from a recent 62X (one ounce of gold buys 62 ounces of silver) and stands at 67-and-bitsX. However, the 200dma is flat and the 50dma still points lower, so the trend is still downwards.

Mixed signals between the very short term and the short term, then. Further fear will send that line up, more greed will send it down. DYODD

Otto Rock, Lead Latin American Analyst

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

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

In the same article, Kachanovsky makes the case for silver better than most (click here). He claims the the ratio of silver to gold in the earth's crust is 15 to 1. I'd like to find his back up for that [NOTE: Wikipedia provides three values that are approximately 70, 25 and 18 to 1, click here]. With the current price ratio (gold to silver) is over 50 to 1 while, Kachanovsky expects the price of the ratio to, over time, revert to his 15 to 1 ratio. He argues that the rapidly falling above ground silver inventories (that are approaching zero compared to historical stockpile levels) implies that this narrowing will occur relative soon.

This seems to be a pretty good argument to me, although that 70 to 1 Wikipedia value leaves me with less than full certainty.

The way I look at it is on the basis of the cost of production which, with gross simplification, becomes a grams / tonne comparison for a common mining method. Nearly all silver mining is underground mining, so I compare two underground miners, Impact Silver (the best silver Jr miner according to Kachanovsky) and Dynasty Metals And Mining's Zaruma project (a high-grade underground gold project). I compare the most recent headline drill hole announcement from Impact Silver with the Zaruma project's Measured and Indicated Resource as follows:

• Impact Silver: "204g/t silver across 8.5 meters and 280g/t silver across 4.5m".
• Dynasty Metals And Mining's Zaruma Project: "Measured and Indicated Gold resource of 1,110,200 oz at an average grade of 13.93 g/t*."

The resulting Gold / Silver ratio is thus 20 to 1 [280 / 13.93]. Of course, different projects will have different ratios, but I think this is reasonably representative.

So, I conclude that there is a reasonably good argument for the Gold / Silver price ratio falling and for silver to rise in price relative to gold. I'm much more heavily weighted into gold Jr miners right now because of the clear expectation of high profits at current prices. I may shift more money into silver as a result of this analysis.  

MontyHigh, www.worldofwallstreet.com

Pretty Useful Charts: Indian Price Of Gold [Gold Price In Rupees]

The price of gold in Rupees is pretty important because Indian buying represents support for the price of gold. The really useful thing to know is the separation between the Indian price of gold vs Indian legal import price of gold. The only source I've found for this is the very valuable Midas column at, LeMetropoleCafe, the subscription website.

Googling around I found this web site (http://www.goldprice.org) with Rupee graphs.

Here's a couple of useful ones from that site:

1 Year - As of 5/30/2009, gold is trading at the top of a range in rupees. Indian's like to buy when the price seems low, so we can't expect much support from Indian buying right now.

www.kitco.com provides a 24 Hour gold Rupee gold chart. As you can see, its pretty small. I've been watching, up until recently, the standard USD gold chart (provided further below) and have found that when the price of gold starts consistently rising overnight (while Indian trading dominates) that Indian buying has kicked in and the price of gold has found support. This Indian trading period seems to start around the Hong-Kong open and ends when gold opens in London. This also seems to be a tradeable pattern. I expect I'll be paying more attention to the Indian 24-hour gold chart now that I've found it. 

The graphs in this page are linked to the automatically updating originals. Revisiting this page (and possibly doing a page reload) should give you up to date prices.

Hope you find this useful. I'll be adding this page to my browser's "favorites" aka bookmark lists.

Leave me a comment if you have something useful to add.

MontyHigh, www.worldofwallstreet.us

Technical Analysis: Inflation Being Signaled

The commodities I follow are now over their 200 day moving averages. Copper crossed recently and crude oil crossed just today. Gold and silver have been there for a while. I'd say this signals inflation.

My definition of inflation is: an overall rise in prices [not an increase of of the money supply although the increase of the money supply is typically the cause of inflation].

The dollar and long-term treasury interest rates also have 200 day moving average crossings that are signaling inflation. They are also moving in the direction of (but have not gotten wild enough to really signal the start of) a combination currency crisis / economic collapse ala Argentina 2001.

Inflation is what I, very probably, see coming. The Argentina-style currency collapse / economic collapse I see as very possible. I'm not willing to say its probable, yet.

Are you ready?

MontyHigh, www.worldofwallstreet.us

Here's the charts:

Jr Gold Producers And Near Producers

To celebrate gold's recent move, the tables I put up today have price to operating income values based on $950/oz gold (the current price). The tables are based on 2010 guidance.

Here's some recent notes on the various stocks in the table:

• Gold Resource Corp (GORO.OB) - BULLISH: recently announced a drill hole that significantly increases the size of their deposit. BEARISH: Still not in production with half their cash burned in the previous quarter. A dilutive financing is probably coming. OUTLOOK: My biggest holding by far, nothing has changed as they will print money, are safe against falling metal prices and intend to give stockholders dividends.
• Castle Gold (CSG.V) - BULLISH: recently announced a drill hole that is near the surface, 109m think, same grade as they are mining with $420 cash cost. This should lead to a significant increase in reserves and resources at the mine that is ramping up production. OUTLOOK: Extremely undervalued and moving towards increasing even further annual production.
• Rusoro Resources (RML.V) - BULLISH: recently announced a feasibility study for a major increase gold output. OUTLOOK: A pure speculation due to political risk, but more undervalued than any other mid-level gold producer I know of with excellent, high-grade rocks.
• La Mancha Resources (LMA.TO) - has had a major price move up recently.
• Oceana Gold (OGC.TO) - has had a major price move up recently.

Here's the reference Jr producers. These are all steady producers with no big risks that are well-known. As such they provide a basis for comparison to other investment opportunities.

Here's my "blue-chip" (no significant political, financial or execution risk) favorites other holdings (significant chunks of my portfolio are in each of these):

Here's my list of speculations. I have relatively smaller positions in each of these. Each is severely undervalued but has at least one major risk item (political, balance sheet, etc.):

Where else can you find stocks with price to operating cash flow ratios well under 3 (and some under 2) at current commodity prices?

MontyHigh, www.worldofwallstreet.us

Quite A Day Technically For Precious Metals

Here's some charts that seem noteworthy.

The US Dollar has broken down through key support and is targeting the low from Dec 2008. This is very bullish for precious metals.

30 Year Treasury Bonds are in a confirmed up-trend. The signal we are looking for as far as a major US currency crisis like Argentina experienced in 2001 is an major uptrend in long-term interest rates and/or and major fall in the US dollar. Both are happening, but have not reached the fevered levels needed to signal such a crisis.

Gold confirmed its earlier trend line and 50 day moving average breakout and has gotten to the 50% fibonacci. It is not yet overbought.
Silver has broken through nearby resistance and is targeting this year's high at $14.63. After that the last fibonacci to the $19.50 high from last summer is at $15.30. If it crosses that $15.30 it targets that previous $19.50 high.

The $HUI large-cap gold stock index has broken through the last resistance anywhere to be seen and is set to rise hard.

The $HUI/$Gold is in a nice up-trend and has broken out of a bearish rising wedge. It has broken through its %50 fibonacci number. Together, this means large-cap gold stocks are outperforming gold and look set to continue to outperforming gold.

The CDNX (proxy for Jr gold miners) looks overbought, but it broke through its 200 day moving average. There is no visible resistance in sight. Jr gold miners could really launch. How many indices can say that?

Overall, these charts are quite bullish for precious metals at a time of year where this is unexpected. I'm already "all in", but with almost no margin in my favorite precious metal Jr producers and near-producers.

I closed my silver short for a loss today, but my accounts closed with a new high for the year, up over 40% year-to-date.

MontyHigh, www.worldofwallstreet.us

Indian Gold Buying: Indian Real Interest Rates Are -5.5%

From an Ambrose Evans Pritchard article (click here):

"Maya Bhandari from Lombard Street Research cautioned that Delhi had let rip on spending in the build-up to the election... 'Both monetary policy and fiscal policy are grotesquely loose. Real interest rates are minus 5.5pc,' she said."

Negative interest rates like that imply significant inflation. How can a poor Indian protect herself/himself from inflation? Historically, he/she's done it by buying gold.

By the way, knowing what's going on with Indian gold buying has been just about the most important "fundamental" to watch for short-term gold trading. The only place I've found to monitor this is in Bill Murphy's daily commentary at www.lemetropolecafe.com. When they are buying in India, there is support under the price of gold. The fact that they have recently begun buying when gold is over $900 is the most bullish short-term fundamental I've seen lately. 

MontyHigh, www.worldofwallstreet.us

FWIW: I'm Short Silver July Futures, Entry At $13.96

The trading system is: Waiting until the $GOLD:$SILVER ratio RSI crosses upwards over 30 (indicating no longer overbought) or until it gets darn close to 30 and turns up. Hold until that RSI touches 50.

Here's the entrance:

The back-tested results (with very little if no curve fitting) were surprisingly good. For that last 5 years, 16 of 17 trades were winners with an average winning percentage gain (without leverage) of 4.71% or, at current prices, approximately $900 per contract.

The thing I don't like about this system is the lack of stops. Some of those winning trades stretched out for more than a week with the trade going adversely at least part of the time.

MontyHigh, www.worldofwallstreet.us

Chart Of The Day: US Dollar Dangling By A Thread

 
One more down day and that last fibonacci is broken targeting 78. I don't see anything bullish about this chart. Here's the bearish items I see (left to right):

1. 50 day moving average breakout failure - mid-April.
2. Trend-Line breakdown - late April.
3. First fibonacci break down - late April.
4. MACD bearish cross over - late April.
5. Support just under 84 break down - early May.
6. Support around 83 break down.
7. RSI still not oversold.

Would be very bad for the dollar and good for gold if tomorrow closes with an 81 handle. So bad, that I expect a bounce and a little consolidation, but we'll see.

MontyHigh

Update: 9:13PM EDT, US dollar breaking down having an 81 handle right now at 81.93. The stock market didn't even go down today and I'm feeling as scared as I've felt since early March. We'll see what happens.

Report: Mining Risk In Latin America

Inca Kola News provides a link (click here) to a really valuable report on mining risk in Latin America.

The report is a little hair-curling as it is provided by a company (Kroll) which "is the world's leading risk consulting company". Kroll is thus like anti-virus software providers. Every PC (when you load the free anti-virus diagnosis software) has multiple "infections" all of which are made to sound pretty scary. Kroll highlight's each country's risks in a way that certainly doesn't minimize them.

Still, getting a nice summary (with details) on what is happening in each country is pretty darn valuable. It also gives hints and tips regarding which provinces within a country are "safer" or "riskier" than others.

I'm planning on referring to this closely prior to buying any Latin America mining company.

One more thing, this report is the best reason to buy Metanor (MTO.V), which is in Quebec CA, that I've seen lately. Same thing goes for other Canadian producers, e.g. SanGold (SGR.V). I don't own either, but they are on my radar screen.

MontyHigh, www.worldofwallstreet.us

Precious Metals: What I'm Thinking And Doing Intermediate To Long Term

We are now in "sell in May and go away". My account values are close to their yearly high, but I could have done much better if I had ridden the bounce that started early March. I regret not making significant money on copper stocks as the LME inventory levels have been falling most of the time since March and I should gone with a combination rising price / falling inventory trend.

Anyway, I'm sticking with my Jr gold producers (and near producers) because:

• Gold looks like it has strong support at $880/oz as that is where Indian (and other Asian) buying kicks in.
• The fundamentals for gold continue to look great (negative real interest rates, central bank money printing, high and rising government deficits, falling mine supply, falling central bank selling and, just recently, acknowledged Chinese central bank buying). 
• Gold miner costs (fuel, labor, drilling, materials) are flat or falling.
• Great valuations at $800 and higher gold (with decent valuations substantially below $800). 
• There's no telling when the general stock markets (along with other commodity stocks) will roll-over. I think that other stocks are overbought and overvalued.

Overall, I'm more confident with what I'm holding now than anything else I know of that has significant upside. I expect roughly a double (from here) by the end of 2009 provided gold can stay above $850 and end the year above $950. I think this is reasonably likely, but the portfolio is undiversified and is all Jrs so I could face significant losses should gold turn south hard and I have to exit.

For what its worth, here's my updated table of Jr gold producers (and near producers) that I'm following closely. All values are based on 2010 forecasts with price to operating cash flow ratios are based on $800/oz gold.

First here's the reference gold miners. Their valuations have risen since last I published this table. This provides more room for the stock prices of the Jrs I actually own to rise.

Now, here's my favorites. Castle Gold Corporation (CSG.V) has made the biggest move among these stocks. With each of these favorites there is no unusually high risks and they are all very undervalued relative to the reference producers.

Now, here's the next tier of stocks that I own. They either have a more significant risk than my favorites or are not quite as undervalued. Ocean Gold Corpartion's (OCG.TO) risk has fallen significantly with another profitable quarter of meeting or exceeding guidance recently completed. I'm looking forward to LaMancha Resources (LMA.TO) earnings which come out this Friday.

Finally, here's some stocks I like, but currently do not own because of their valuation. Capital Gold Corporation deserves as a closer look as their $430 cash cost is actually a trailing cost including all operational costs. If you go with their stated "cash cost" their valuation is a lot closer to Castle Gold Corporation's.

If you are astute, you might have noticed that a couple of stocks have dropped out of the above tables. They are not mentioned because my mother used to tell me: "If you don't have anything nice to say, don't say anything". 

By the way, the only non-gold miner I hold right now is Impact Silver (IPT.TO). I bought into them because they are profitable and because I really like their stockholder-friendly, build it organically modus-operandi. This is one stock I'm holding not because of its valuation but out of pure affection.

Hope you continue to find these tables useful.

MontyHigh, www.worldofwallstreet.us

Gold: Lightening Up For A Wave Of Interventionals

What happened to Gold today? And what's coming up soon?

Here's what happened today (gold must not be permitted to question the B.S. coming out of the head of the fed):

Here's what's coming Thursday (gold must not be permitted question the health of the big banks):
TAKE-A-LOOK- US to unveil bank stress tests on May 7

Here's what's coming on Friday (gold must not look like a safe haven when folks are afraid): ‘Great Recession’ Will Redefine Full Employment as Jobs Vanish ... The government may report May 8 that the jobless rate jumped to 8.9 percent in April, the highest since 1983

Learning to play the "interventionals", the times when the Gold Cartel classically "takes down" gold, I lightened up this morning on my gold stocks (about 5% of my portfolio) and expect I'll trade back in around 1:30 or  2PM on Friday after the coast is clear when gold is likely to be back in the $880s.

MontyHigh

Gold Stock Strategist Index (GSSX) Up 40.6% Year-To-Date

This index, created by the Gold Stock Strategist web site, is the closest of any index to the stocks I cover. Click here for the full article. But the picture that follows gets the message across. The Gold Stock Strategist has not been posting frequently of late, but when he does its worth listening to.

MontyHigh, www.worldofwallstreet.us

Gold: Pre-FOMC Takedown

Ok, this (price action in purple) is what persuades me that the Gold Antitrust Association (GATA) is right and that the powers that be are suppressing the price of gold.

I just got a fairly big chunk of dry powder and I expect I'll be putting a sizable (for me) long position in gold futures prior to the FED Open Market Committee news release which comes out at 2:15 today (provided another takedown occurs prior to then).

MontyHigh

Chinese Gold Buying: A Dialog With Inca Kola's Otto Rock

Inca Kola's Otto Rock shares his perspective on Chinese gold buying (click here). My summary of his thoughts are: its not that big a deal and it clearly demonstrates how the gold investing world is filled with less than useless "pumpers" who shamelessly seek attention by seizing on any idea (whether consistent with earlier pronouncements or not) to back the idea that gold is going to the moon.

Editor's Note: That kind of telling people what they want to hear to get attention perfectly fits the bill of the false prophets which Jeremiah and other bible prophets rail against.

In general, I agree with his perspective. And as usual, Otto's thinking  got me going. Here's the reply I left him (with some revisions):
"I like your post because it brings out the data and tries to put it in perspective. I also really admire your BS detector.

I agree that the supply / demand shift (from Chinese buying) is not that significant (although it is bullish). But I think the psychological factors are what are important.

From your data 81 tonnes is about 3% of mining supply. When the Magellan Mine in Australia closed the world lost 3% of mined lead (pb) supply and the price of pb more than doubled.

So a 3% swing for a normal commodity is a big deal if the demand is inelastic. Here's where your discussion of gold being different is important.

Because of the huge above ground inventory, I agree that a 3% swing in mine supply isn't as important for gold as it is for other commodities.

Still it helps, along with the falling mine supply every where else except China.

But what really counts is the pschological factors and whether someone holding that inventory will want to let go.

I think the psychology is 'if the Chinese (who are pretty smart) are diversifying into gold more then maybe I (a country, an institution or a private investor) should diversify into gold more thus increasing investor demand'.

Finally, the fact that China is buying as much gold as it can without sending the price "to da moon, Alice, to the moon", provides protection against IMF and central bank dumping. I think we can count on the Chinese, with their trillions of rapidly being diluted dollars, to mop up as much as anyone is willing to dump as real protection against a price collapse.

This cuts both ways as, the Asians aren't momentum investors (I'm told) and only buy when the price is low. So, in general I think Chinese buying is bullish but will not lead to any kind of parabolic, to the moon scenario, and would tend to dampen any such move.

So, its the psychological factors that are important here.

Hope this rambling adds a little light and some new ideas."

Overall, I consider the Chinese buying to be fundamentally, long-term, a bullish thing, especially if you are investing in gold in a way where you make money with steady gold prices rather than requiring large upward moves. That's what I'm doing with Jr gold mining producers and near producers.

MontyHigh, www.worldofwallstreet.us

Noteworthy Charts 4/25/2009

I know that everybody and their brother has blogs with technical analysis. I do this primarily so that I actually pay attention to what the charts are telling me. I hope you, dear reader, find some value here. I think a couple of them are reasonably unusual and informative.

Two weeks ago the gold chart was looking pretty bearish. Here were the bearish factors I saw:

• Double-Top - reasonably well formed with the tops in Mar 08 and Feb 09. This bearish factor is still in place.
• 50 day moving average breakdown.
• 61.8% fibonacci breakdown (where the fibonacci high of Mar 08 and the low of Nov 08).
• Trendline breakdown.
• Psychologically important $900 round number breakdown.
• RSI turns down from 50 moving towards, but not beyond the 30 oversold level. 
• Break down of support that looked like a ill-formed head and shoulders pattern.

The fundamentals improved a little over their already very strong situation (monetary growth, negative real interest rates, etc.) with:

• The return of Indian buying with the price of gold under $900. This puts a floor under the price of gold.
• The unveiling of ongoing Chinese buying and the movement of that bought gold into their monetary reserves (see previous post).

The technical situation has also improved with:

• A double-bounce off the 50% fibonnacci and 200 day moving average - the results of a bounce off the 200 day moving average has been very bullish for gold over the last few years (check for yourself). The double bounce also indicates a double-bottom. If the double-bottoms were further apart they would be more significant. I think this double-bounce is based on the fundamental fact that Indian buying kicks with gold under $900.
• A jump back above the psychologically important $900 value.
• A jump back above the 68% fibonacci number targetting a retest of the all time high of $1034.
• Bullish MACD crossover.

I know that some pretty respected commentators (Jeffrey Christian in Puplava's Financial Sense podcast today, David Morgan and others) are short-term bearish on the price of gold, but I'm somewhat relieved and am planning on holding at this point.

Large-cap gold mining stocks (as seen in the $HUI) look better with 50 day and 200 day moving average crossovers and with the RSI moving above 50 and with the $HUI forming a higher low.

The $HUI:$GOLD ratio chart shows the relative strength of large-cap gold mining stocks compared to the price of gold. It looks to me that the performance of gold mining stocks relative to gold itself bottomed last November and is reverting to historical levels. Its nice to see that trend line hold and the 200 day moving average cross over. At this point, I see, based on the last few years that commodities and financial markets have been strongly trending and that the 200 day moving average has been pretty good at capturing those trends. I expect, given the huge moves made recently that the next set of moves will also be large and that this trending factor will continue. As such, I have been paying more attention to 200 day moving average crossovers.

Here we have a look at the Dow Jones Industrial Average ($INDU) comparing the 2000 Internet Bubble crash with the 2008 Housing Bubble Crash. The S&P 500 chart looks very similar. Would be interesting to look at this in real (inflation adjusted) dollars, but I don't know how to do that. Any way, here's some observations:

• The 08 crash (so far) is worse than the 00 crash (at least for $INDU).
• The 00 bottom was shown to be in when there was a downturn that made a lower low. It occurred around 4.5 months after the lowest bottom. We have yet to see any kind of a higher bottom from the 08 crash, much less anything that far from the Mar 09 low.
• My conclusion is that the bottom is probably not in. 
• NOTE: The volume bars (coming in from the right) show that there are a tonne of people who will heave a sigh of relief at not being losers and sell their stocks if the DJIA makes it between 10,500 and 11,000 anytime soon. If we actually get there it would be a good place to go short.

Silver looks pretty good having broken back above the 200 day moving average and the 61.8% fibonnacci line. Its also at a critical point and, if it can get above the 50 day moving average (and thus above that trend line) it will look very strong to retest that $14.5 recent high.

The USD, short-term, looks like its in trouble and a down day Monday would probably confirm it. Here's what's bearish:

• Popped over the 50 day moving average and immediately broke back down through it.
• Tested that 61.8% fibonacci number and immediately crashed down through the 50% and 38.1% fibonacci number. This targets the recent low just below 83.
• Broke through that trend line and closed just below it.

It seems likely to me that if the USD closes lower on Monday that it will go all the way below 83 which, in the longer term charts, would signal and even lower fall.

Currency markets are supposed to be the most driven by technicals of any of the markets so we could see a significant down-turn in the $USD. This has classically been bullish for precious metals.

30 Year US Treasury interest rates are taking an ominous turn upward breaking out above recent highs and the 200 day moving average. If this continues (or worse yet accelerates) its bad for lots of things:

• The US Dollar, as who is going to buy long-term US treasury bonds when rising interest rates cut their value. Argentina's 2001 currency collapse was preceded by rising interest rates.
• The US government deficit as rising interest rates mean higher payments on existing debts.
• Any kind of housing or commercial real-estate as a rising 30 year treasury pushes mortgage rates higher.
• The overall economy as rising interest rates slow down economic activity.

Copper is at a strategic point having completed its first down week in quite a while. It bounced off the psychologically important $2.25 level (having been pretty overbought as seen by the RSI), bounced right off that 200 day moving average and is clinging to that psychologically important $2.00 level. Another couple of closes below $2.00 could be bad.

Fundamentally, I see short term copper being strong because the LME inventory levels continue to fall. On the other hand, just about every existing copper mine can stay open at $2.00 copper. So long term, I just don't see copper staying above $2.00 until the global economy picks back up. I just don't see how the price can stay at a price that maintains supply when demand has fallen so much. We'll see.

Well, that's just the indices and the commodities. I may post a set of charts on individual stocks tomorrow.

MontyHigh, www.worldofwallstreet.us

In Case You've Been Living Under A Rock: China Announced It Has Been Buying Gold

and has added them to their monetary reserves. This announcement came out yesterday. This seems like a step towards making their currency a global reserve currency (like the US dollar and, to a lesser extent, the Euro).

http://jessescrossroadscafe.blogspot.com/2009/04/china-admits-to-significantly-building.html

Its clear that this is bullish for gold, because China has a tonne of US dollars ($2 Trillion?) that it wishes were invested in something that will hold its value. They would also like to increase the stature of the Yuan and backing it (at least partially) with gold serves this purpose.

This means, as I see it, that they are buying and will continue to buy gold. Should the IMF (or some central bank) dump gold on the market, China will be happy to buy it all. That puts a big floor under the price of gold.

But, there's another way of looking at this. A very successful investing strategy over the last few years has been to invest in resource companies that produce things that China buys. This has included miners (iron ore, coal, copper, zinc, lead, platinum, etc.), oil, fertilizer (e.g. Potash Corp), etc. Now we find out that this also includes gold miners. It seems likely that, unlike these other resources that have taken quite a hit due to falling demand, the Chinese are likely to continue to accumulate gold.

So, again, we have a big floor under the price of gold.

Overall, this reinforces my investing strategy which is to invest in resource stocks which are set to make a tonne of money at current resource prices when the outlook for their resource is bullish. With this strategy, I don't need the resource to go up in price, I just need it to stay relatively close to its current price. If that happens, the stocks should go up as they benefit from those big earnings.

Right now, I'm in Jr producing gold miners and this floor under the price of gold serves to protect that investment and increase the probability that they will continue to "print money".

MontyHigh, www.worldofwallstreet.us

Minefinders (MFL.TO / MFN): Want More Than Just The Spin?

I've covered Minefinders quite a bit here, primarily lately as a reference for comparing valuations with other Junior gold producers.

I just read the Otto Rock (of Inca Kola News) No BS report and it opened my eyes quite a bit. It only costs $10. If you've been following Minefinders and have been tracking what various commentators (e.g. Jim Puplava of Financial Sense and John Doody of Gold-Stock Analyst) were saying about the protests that slowed up the mine opening, you'll learn quite a bit (about both Minefinders and those commentators).

Here's the link to Otto's No BS site: http://www.incakolanews.blogspot.com/2008/09/ottos-nobs-bespoke-analysis-service.html

MontyHigh

P.S., World Of Wallstreet is strictly an educational project and I get no financial benefits from this recommendation.

FWIW: What I've Been Doing And What I'm Thinking

Well, its pretty clear that:

1. I missed a pretty big pop in the general markets and in copper stocks that began around my birthday in early march.
2. That I missed a good chance to trade out of precious metal stocks around the time David Morgan suggested doing so.
3. New Guinea Gold Corp (NGG.V) is right up there with Golden Star Resources as a stock that has deeply disappointed its stockholders including me. I sold the rest of my holding yesterday after they announced dismal Q1 production from their starter mine (bringing into question their solvency once again) and announcing, as I read it, that they don't really know what is wrong. 

For what its worth, I got a big enough pop early in Q1 that my brokerage accounts are up 16% since the start of the year, which is not bad at all.

So, what am I doing? Well some things haven't changed:

• I'm diversified in that I have a quite lucrative, seemingly secure day-job and that I hold a paid-off house that is still worth a couple years pre-tax wages of the above lucrative day-job. 
• I'm still almost entirely investing in Jr producing gold mining stocks.

When I look at the gold situation I see:

• The technicals look bad short-term (but are strong long-term).
• Sentiment is bad short-term as the general sentiment is growing that the worst is behind us with the global recession reducing the attractiveness of the safety trade.
• The fundamentals are still strong as Indian buying is kicking in to support the price of gold and as the global recession has not yet, in my view gotten close to the bottom. Finally, central banks are printing a bunch of money that I think will show up in inflation. I expect the inflation to really show up right about the time the year-over-year energy prices stop falling (late 2009). 
• The interventionals are short-term improving (as there is no immediate threat of a gold-break out triggering a loss in confidence in the fiat-financial system) but have not noticeably changed long-term with the "no change we can believe in" Clinton-retreads in control of Obama's economic policy.

Right now I'm reading "Ahead Of The Curve", by Ellis. Its a book about economic forecasting. The guy makes the following points (going from memory):

• Consumer spending is roughly 70% of the USA economy and thus drives the USA economy. 
• Whenever you see any kind of economic number you need to look at the change in the number year-over-year to eliminate noise (and, in my view, spinning in the form of seasonal adjustments).
• The quarterly GDP numbers Personal Consumption Expenditures (PCE) is the key leading indicator for the USA economy. It has been plunging and year-over-year is negative (very rare) and below anything on the chart. This indicates that the worst for the economy is not over.

In addition, I believe the banking profits (which are what has been driving the stock market recovery) are bogus as the latest accounting rules changes allow the banks to hide their losses. Further more, house prices are continuing to fall hard with a build up in a new class of mortgage resets coming this fall and lasting for more than a year. That's bad for banks and bad for consumer spending.

So, I'm planning on going with the long-term outlook and sticking with my gold positions (since they are so illiquid) at least as long as the Indian buying continues and will revisit this decision should the gold 200-day moving average get punctured.

By the way, I'm short a copper future with an entry at $2.174 and a stop at $2.25 and a target of $2.01. Will exit early if the LME inventory levels don't fall next week.

MontyHigh, www.worldofwallstreet.us

Valuing Open Pit Gold Miners, Part 4: Semafo(SMF.TO)

This post continues the series on Open Pit Gold miners begun here, continuing here and here and now profiling another open pit gold miner that I consider undervalued and hold as a significant part of my portfolio.

Semafo (SMF.TO) is a three-mine, emerging West African open-pit gold miner. Semafo has, after some troubles, successful online brought its third and biggest mine and is producing at an annual rate of 230 K oz/year. Semafo expects to ramp up to 300 K oz/year for 2010. The management is very competent at both proving up resources cost effectively and bringing that gold into production having opened three mines. With its large exploration concessions Semafo has considerable room to grow beyond 2010.

Semafo is located in West Africa which has a long tradition with gold mining. There is political risk, but not like the risk found in Central and Southern Africa. Offsetting this risk is the risk reduction coming from the diversification across multiple mines the relative lack of execution risk. Semafo has no additional mines to open to achieve its 2010 guidance, it just has to ramp up existing mines. 

I consider the risk to be roughly a wash with our single mine-references, especially Minefinders which still has startup risk. I have very recently become concerned about political risk in Mexico, especially Northern Mexico (near the USA border) and have been moving some investing money out of Mexico to other places. I bought more Semafo yesterday at $C 1.70.

The updated to today's close valuation table of the mining companies considered below immediately follows:

Being larger than our reference gold miners, Alamos Gold, Western Goldfields and Minefinders, one would expect a higher valuation for Semafo. Being larger, I also consider it to be a better takeover target than any of the reference gold miners. Semafo is clearly superior as far as price to annual oz and price to operating cash flow, the metrics I rate most highly. Overall, I consider Semafo to be more undervalued than any of its peers in the above table, except the much smaller, single-mine Castle Gold (CSG.V). Being a bigger, more liquid company I feel comfortable holding a larger position in Semfo than in Castle Gold. 

The chart shows that Semafo has been on quite a tear lately. I think I got in around $C.85, so I've got somewhere around a two-bagger already. Here's what I see in the chart:

• BULLISH: Semafo clearly has broken out of a three year downtrend.
• BULLISH: Semafo has recently crossed over both its 50 and 200 day moving averages.
• BULLISH: The 50 day moving average has just crossed over the 200 day moving average.
• BEARISH: There's some resistance to be dealt with right around its current $1.62 as "bag holders" breath a sigh of relief dump shares that have finally gotten to break-even after being underwater for months. 
• BULLISH: After that I don't see much near term resistance as it will be above its 52 week high. 
• BEARISH: The RSI and MACD look a little overbought.

Overall, I think Semafo may take a breather here for a bit, provided gold does not resume its upward march. As you may recall, I try to invest in stocks that don't need a metal price rise to occur to allow significant upward repricing and only then in metals that I'm bullish about.

Again, where can you find a commodity stock with a sub-3.0 price to operating cash flow ratio guidance at lower than current commodity prices? Especially one with forecast sales of 240 million dollars and three different mines. If you know of any, leave me a comment. 

At this point, I'm pretty comfortable with the Semafo portion of my portfolio.

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 website and related financial documents. As you know, I am a software engineer, not a financial advisor.

MontyHigh

Gold Bubble Could Be Quite A Bubble, If It Takes Off

The thought in this post may be obvious (I wrote something similar about a year ago when I was a complete gold newbie), but it struck me as fresh and relevant today.

Here's a quote from LeMetropoleCafe: "If Gold can continue this week’s outperformance of all other asset classes, investment demand for Gold should continue to accelerate."

What happened when there was an Internet bubble? It was ultimately extinguished by the supply of Internet Stocks (in the form of IPOs) exceeding the demand for stock. Then the bubble popped.

What happened when there was a real-estate bubble? Home builders ramped up home building and the bubble was ultimately extinguished by the supply of houses exceeding the demand for houses.

Now, let's consider gold as a potential bubble. Suppose "investment demand for gold continues to accelerate". There is a limited amount of gold in the world. Wikipedia reports that there has been roughly 158,000 tonnes of gold over all history. At $1000 / oz and 33.1 grams / troy oz that is 4.8 billion oz and 4.8 trillion dollars.

By comparison, Global GDP is around 48 trillion dollar / year. US household financial assets (as of a year ago) were roughly the same size.

The supply of gold (mine production) is increasing at the rate of around 110 million oz / year or 2.3% of all gold ever mined per year. Again at $1000 /oz that is 110 billion dollars / year or roughly .2% of global GDP.

A key observation here is that even a dramatic increase in gold mining (say a 50% increase) would not significantly change the amount of gold in the world. A gold bubble, unlike the Internet and Real-Estate bubbles, cannot be extinguished by a dramatic increase in supply. The European and USA central banks, with their allies, have been suppressing the price of gold for years by selling their stores of gold into the market. Should that Cartel be broken, either by various members getting cold feet and refusing to sell (as seems to be the case with European central banks) or by members running out of gold to sell or by investor demand, from a flight to safety, simply overwhelming this central bank selling a genuine gold bubble could begin.

The western investor psychology is momentum investing. So, if the price of gold should rise, western investors will not want to sell their gold while it is rising. If we model gold price as existing holders not selling and a fraction of GDP or US household financial assets moving into gold (say 1%) we have roughly 480 billion dollars chasing 110 million oz of new gold and a price of gold of 4,400$.

Similarly if we see 5% of financial assets moving into gold (in a mania or panic) with our model we see a price of gold of 22,000$. That would be a genuine gold bubble as all the gold in the world would then be valued at roughly twice global GDP (110 trillion $). This is not sustainable, but a shift of a significant fraction of financial assets into gold could definitely kick off a gold mania pushing prices to extravagantly high levels.

The point is, that if a gold bubble takes off, there could be quite a parabolic rise in the price of gold.

Of course, a negative momentum could similarly kick in. This could happen at that point, whenever it is, when the global economy is suddenly considered "saved" with low inflation. As momentum turns a significant fraction of "all the gold ever mined" could be sold driving the price of gold down to rediculously low levels.

The  more likely event that could create such a negative momentum would be the coordinated outlawing of gold ownership by the USA and EU (and allies) where confiscated gold would be sold into the market pushing the price down (way down, potentially). I am certainly not underestimating the likelihood of this happening. This is not seriously addressed by gold pumping analysts even though it happened at the beginning of the FDR's administration in the great depression. 

I expect you've heard Ghandi's famous quote: "First they ignore you, then they mock you, then they fight you, then you win."

If any serious confiscation rumors surface I'll be jumping out of gold miners. I'm expecting that the demonization of gold and gold mining as an ecological disaster and a waste of precious resources will precede such a move. I expect that hearing that kind of buzz on the mainstream news media will be a warning sign that the jig may be up. That will only occur after gold has made quite an extravagant move, in my opinion, as the central bankers and G7 governments remain in the "they mock you" stage of fighting gold bugs (with central bank selling and other manipulations as a hidden form of the "they fight you" stage). The demonization of gold mining and gold will mark the beginning of the open "they fight you stage".

So, even though many think of gold as a safe-haven, I conclude that it is certainly not completely safe. I'm watching it closely to see what happens. If I knew of any other businesses generating profits with a sub-3 price to operating cash-flow at current market prices, I would certainly be diversified into them. For now, I'm in Jr gold producers because they appear to be the best money-making businesses open to passive investors.

MontyHigh, www.worldofwallstreet.us

Valuing Open Pit Gold Miners: Castle Gold (CSG.V)

This post continues the series on Open Pit Gold miners begun here, continuing here and now profiling another open pit gold miner that I consider undervalued and hold as a significant part of my portfolio.

Castle Gold (CSG.V) is very comparable to Capital Gold (CGC.TO). Up until its recent doubling it was clearly way undervalued relative to Capital Gold. I got lucky and got in near the end of the year in the low twenties before the breakout happened.

I believe that Castle Gold is the result of the merger of two gold mining companies. I was not following the company when this occurs, so there may be errors in this company history. One had a project, El Castillo in Mexico, with a lot of open-pit heap leachable gold, but without the financing to get it into production. The other had a little cash and a short mine-life, high-grade open pit mine in Guatemala. The strategy was to use the cash-flow from the Guatemala mine to get the big long-life open pit mine into production.

This makes Castle Gold pretty similar to another gold miner I hold, New Guinea Gold (NGG.V), click here and here for more. The risk of going to zero has receded for NGG as they have closed financing and seem to be getting decent production from their starter mine. In my opinion, there is still more pop to come for NGG.V as the next quarter's production results confirm that the company is no longer in danger.

Castle Gold became extremely undervalued because getting the starter mine going in Guatemala took a lot longer than expected. As a result, during the height of the commodity crash and credit crunch last fall it became really unclear whether Castle Gold would run out of money and fail to get El Castillo into production and "Go To Zero". The stock price touched $C 0.15 multiple times in Q4 2008.

Finding similar companies (in danger of running out of money but with genuine assets) has been a path to quick profits recently. If you know of any such companies, please leave me a comment.

Castle Gold has apparently turned the corner having announced (click here) December 2008 production 6928 oz of gold. That's 80K oz of gold annualized. The Guatemala mine runs out in the forth quarter and so does not factor into my 2010 projections. Even so, El Castillo, produced 5386 oz which annualized is over 60K oz. Castle Gold is projecting 50K oz/year annualized going forward from El Castillo after having increased production by increasing its fleet of mining vehicles. The fleet increase will have to be financed. More about that later.

Comparing Castle Gold to Capital Gold, I find that even with Castle Gold's stock price doubling (with Capital Gold's stock price rising 50%) that Castle Gold remains the most undervalued of the Open Pit Miners discussed so far (see chart below) in terms of all three of our key metrics: price to annual oz, price to operating cash flow and price to resource oz in the ground.

 

Castle Gold is so nicely undervalued that even another 50% increase in stock price (or as takeover premium) leaves Castle Gold clearly an accretive acquisition to any of our three reference gold miners: Alamos Gold, Western Goldfields and Minefinders with the side benefit of moving them from a single mine story to a multiple mine story. Companies with multiple mines have lower risk and are typically awarded higher valuation.

The main thing I don't like about Castle Gold is that, at  50K oz/year, it isn't really big enough to be a clear takeover target. Castle Gold currently doesn't have a clear story about how it will "grow up" big enough to be a take over target (to say, 100K oz/year). It has enough oz in the ground to increase production beyond 50K oz/year, although some of it is sulphidated and will have to be run through a mill (CAPEX needed). They also have a decent exploration project, La Fortuna, which might also be used to increase production. The lack of a clear timetable on either forces me, as a conservative mining company analyst, to value Castle Gold at 50K oz/year.

At this point I'm planning on holding my Castle Gold position at least until another 50% gain is received relative to its peers. The chart below shows that Castle Gold's train has left the station. Technically it looks overbought in a parabolic rise and is not at the resistance coming from its recent high in Aug 2008. It took me a week to edge into Castle Gold with my current position of roughly 100K shares. Its expensive to get in and out of these small stocks, so I'm going to ride Castle Gold for a while. I'm expecting a bit of a pullback when the financing needed to increase El Castillo's fleet is announced. You might want to look for that as an entry point. Of course, if gold keeps rising I expect Castle Gold to continue its parabolic rise and there may be no better entry point that the current price.

I think Castle Gold still has an easy 50% value increase relative to its peers based on valuation and the relative low-risk associated with executing its El Castillo to 50K oz/year expansion plans. Of course, there is more upside in the form of the overall revaluation of gold mining stocks relative to the current price of gold (e.g. the XAU/Gold ratio argument) and from further upward revaluation based on possible further price increases. 

Once again, show me any other business where you can find a sub 2.0 price to operating cash-flow ratio. These junior gold producers are in position to flat-out print money at $800 gold. Castle Gold seems undervalued to the rest of the gold miners and gold miners seem undervalued relative to the rest of the market by quite a few multiples. 

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 website and related financial documents. As you know, I am a software engineer, not a financial advisor.

Finally, as an individual investor in illiquid stocks you cannot expect me to announce when my sentiment changes about a stock or announce when I am entering or leaving a stock. There's only room for one at a time to enter and leave these stocks.

Best wishes to you.

MontyHigh, www.worldofwallstreet.us