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Metals with McGuirk: Distractions


Sometimes things just get out of hand, don't they?


G'day. An early one, sent through just as Europe opened. I read a great quote today that is so applicable to precious metals-

"Formal education will make you a living. Self-education will make you a fortune" - Jim Rohn

There's plenty of distractions everywhere in the markets that appear to have thrown up some significant risks that weren't there a few weeks ago. A lot of the risks that everyone has just ignored are still there and still being ignored. The flow on effect could unlock some of these previously ignored or underpriced risks. Sometimes things just get out of hand, don't they?

The Refco mess could get really nasty. If counterparties start invoking MAC (material adverse change) clauses in derivative or loan documentation, there could well be some very interesting developments. There is a lotta water to flow under this bridge and as Prof Succo said yesterday, containment is the key objective for those to trying to work this mess out. Could this be an LTCM revisited? I dunno, but one can't discount anything these days. Prof Zucchi made the point that Elmer might just have one more little bail out to organise before he hangs up his boots in January. These are gunna be a long 3 months, hey, Sir Al?

How about the "price manipulation" stuff in the D-RAM markets that hit the screens hard yesterday? This stuff is happening across all sorts of markets and products and has for as long as anyone wants to go back. In the last 10 years or so , off the top of my head, price manipulation occurred and was being exposed in powdered milk products, vitamins, medicines, copper, U.S. Govt Bonds and I'm sure I'm missing plenty of others- whatever. This one is a beauty, though, as it has many "high profile" participants and those "hurt" are no small beer either. What did Toddo say at Ojai? "The difference between manipulation and intervention is communication". Hmmm. Doesn't Central Bank intervention in currencies etc. do the same thing? Someone's a winner and someone's a loser. It's all about gaining an advantage versus the free market price of a good or service. Either way, free markets are textbook theory these days, in practice it appears very different.

Gold did well to close above $470 spot in Comex after testing that $467 level early on. That it held in the face of the stronger dollar was impressive. The downside looks shallow at present- with buyers lined up on the dips. Same range as yesterday for gold from what I see, $467-78 but, with all the Refco stuff going on, all bets could be off in seconds. That's how potentially explosive this could become and all this "uncertainty" shouldn't spell trouble for the metals, but nothin' would surprise these days.

We have made mention many times of the tiny size of the precious metals market and that any small allocation of paper to metals can have dramatic effect. It appears Bridgewater agree.

India is having a tough time in the markets. The Indian stock-market copped a bit of a touch-up yesterday, off some 2% and the currency is quite weak. They are still buying gold from all reports. Maybe a bit of paper "fear" in India could send a few more citizens of the world's largest gold consumer off to their local gold dealer. Hmm.

Minyan James made a good point yesterday in a quick email exchange, that maybe the lag in the HUI (vs. 2004) is being caused by increased costs due to fuel- effectively eating away the recent benefits of the gold rally by increased operating costs. Indeed some of that would certainly be true, especially looking at the oil/gold ratio. At 6 or 7, gold producers certainly cop the rough end of the pineapple. Historical average of nearer 17, which I believe we are headed back to in due course, makes a huge freaking difference. $50 rally in gold would generally trump a $25 rise in Oil, all things being equal, but sure it would hurt high-cost/low margin folks. Goldcorp couldn't give a toss!! Sentiment is still no great shake in gold or silver at the moment.

The gold stocks copped a caning early on with the HUI down some 3 percent and I see stuggling old Golden Star Resources (GSS) traded down to 2.77- a dollar lower than 2 weeks ago with gold still above $470. Sure the corporate thing is messy and 1+1 doesn't necessarily equal 2 in these matters, but 1+1 equaling less than 1 is a little disconcerting! Maybe I'm missing something but nothing has changed to their reserve base which is what I am most interested in. I think the corporate activity with the poor past record in such endeavours has many spooked. I think there will be a chance to pick up some at up absurd levels, down near that recent 2.40 low, as people are just getting fed up with them. Fair enough too. I have cut half my trading position at 3.47 and am still waiting to take them back. I'd prefer to own Silver Standard Resources (SSRI) and am looking for opportunity to start building the position. But, re GSS, my retirement portfolio still owns them. Operating issues being addressed will help, but maybe not 'till 2nd half next year. There are better short-term gold vehicles to park dollars in, at this juncture, I believe.

I saw that Newmont Mining (NEM) was downgraded by someone yesterday due to valuation. Sorry?? I guess they are using a $435 gold price or something going forward. It all depends what gold price ya plug into your expectations. NEM is a 15+year deal, not some dodgy little mine with 2 or 3 years of life. What "valuation" does $525 gold throw up? Or maybe even $700, or let's be really daring and look at the historic high of $850. (it is really about $2200 in today's dollars but let's play dumb like everyone else, for argument's sake). $45 a share is not overvalued in today's market, in my opinion. But, as always, it depends on your time horizon and risk tolerance.

We've talked for some time about this stuff. A few good charts for illustration as well.

Does this number concern anyone? Anyone? It bloody well should. Was it $59 BILLION deficit last month? That's freaking enormous. Not that long ago, if someone suggested that the U.S. would consistently be running such deficits, their sanity would've been questioned. Now it is par for the course. If any other country in the world followed such reckless economic policy, the ratings agencies would be up their arse so fast with a downgrade, the IMF and World bank would be carrying on and who knows who else would have plenty to say. It happened in Australia in 1986ish. One day this madness is gonna stop. Can anyone hunt down for me a month by month deficit since, say, 1995?.

Note that the world's biggest mining stock- BHP Billiton (BHP) has been lashed for over 13% in the last few weeks. You'd think the metals complex had collapsed rather than copper sitting just under 3900. They are also a sizeable oil player so maybe that could've kicked them in the guts some. They also have the world's biggest silver mine at Cannington in North Queensland, but it is so small in their balance sheet that you can't get an exposure to silver (or gold) through BHP. They should float out the silver assets of the company, IMO. I'd be all over that stuff if it happened!

Land down under

The big races are on in earnest down in Melbourne for the next 3 weeks, culminating in the $5million Melbourne Cup, run on the first Tuesday in November, annually since 1861. Just to get a feel for it, here's what the Aussie Govt website says about the day.

Tomorrow is Caulfield Cup day, a mile and a half race under handicap conditions, for $2.5 million prizemony. I have a serious interest in it. No 14 - Vouvray - and a win would add greatly to my mares value, as I own the ¾ sister. She is one of the favourites and got a good write up in the newspaper today. She is tipped to win by the form students at "Bet Busters" as well. Hmmm.

It's probably as close to owning a runner in the race that I'll ever get, so it is pretty exciting. My mate, Brent Taylor from Trelawney Stud in NZ, bred and owns her and he is one fine horseman. He bred my little mare too.

I am flying to Brisbane at 6 AM tomorrow to be with my kids to watch it all unfold at the races up there. Sure the big screen isn't the same as being "there" at the game but it's a close second. Little Jacqui (6yrs) has her dress all picked out- red, green and a dash of yellow - the same colours as Vouvray's jockey silks! She is that keen on the horses it's not funny. She tells anyone who asks "when I grow up I'm gonna be a jockey!" She demands (and gets) a kiss from any jockey who is legged aboard any of our horses, always before the race, and the TV camera's always pick that up. She has snogged the best jockeys in the world and a few now know her by name. I think I may have a problem child developing!

Speaking of good horses, there's another Aussie horse heading across to the Breeders Cup meeting at Belmont. His name is Starcraft and he goes pretty good. He won the Australian Derby a season ago and a few other big races here and then went to Europe. He took some time getting acclimatized and didn't excel in his first few starts in Europe, but appears to have "turned the corner" and has won his last two starts- both Group 1 races over a mile- the big one in France and then back to England where he won the Queen Elizabeth Stakes beating a very good field. Anyways, he is a bloody big animal (probably 17 hands) and on his day is super impressive. Just a heads up for those that care.

Enjoy the weekend - I will.


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