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Kings Chapel


Gold $423 Silver $7.25 Friday 22nd October, 7pm Sydney

G'day. The physical market is comfortable with gold in the low $420's and that should be very comforting to gold bulls. This is the highest level that gold has traded in the last 20 odd years where the physical markets of India and the Middle East have also been active buyers. The physical market has risen from $350ish to $420ish in little over a year. We must be mindful of where these markets decide that the paper market has gone too far and it appears that we are not close to that level at present. This gives me some confidence that we can see north of $450 before the New Year, whilst not reaching overbought conditions comparative to the physical market (not advice).

Consider when gold was at $430 last time around, India had basically stopped physical gold imports at around $385. The "overbought" condition was about physical plus $50. Prior to that move, the $390 top in early 2003 was about physical (India) plus $45. It appears that the market allows paper to get ahead by about 10-15% or so before it gets slapped back to flat or under the physical market. That being the case, with gold at $425 and the physical market at same, this could lead some to believe that there is some pretty good upside for the paper market to climb aggressively higher. A 15% charge ahead of the physical market would push us closer to $475 at this juncture. Weighing against that is the large open interest positions although it appears that unless some serious technical damage can be done in the near term, this is less of an issue due to the physical market resilience and strength. Just an observation.

Last night saw a nice little dip to trigger a few long side stops before rebounding and closing just about unchanged from the time I left here till my arrival again a few hours ago. Seems we are gonna need some sort of catalyst to break the new $420-426 range and the dollar and bonds could be key. I think bonds are a screaming sell at around the 4% yield area but that's just me. Some suggest if the equities tank we will see a flight to bonds and yields fall. I don't disagree that we could see that but I think that a 1% real rate of return is crap when looking at the risk, especially for 10 years. Yields in the 10 year U.S. bonds should be somewhere north of 5% in my opinion and it won't take much to send them there especially if Asia doesn't turn up with the cash to fund the deficit. Maybe they will spend it on something else instead, like goldmines and copper mines or physical, tangible assets like precious metals. Just a thought.

It appears that the equities are a little tired up here although I see that Goldcorp (GG:NYSE) put on a nice 4%. This company is stockpiling around a third of its production on the expectation that price of gold will rise. Forget the headline about falling sales and revenues. As a long term gold bull I love this. I invest in a gold company to get a leveraged exposure to the price. Why should a gold company sell its product at market if it thinks the market price is too low? The product isn't exactly gonna go "off" like a bag of prawns would. I would rather them hold metal than U.S. dollars in either cash or bonds so it suits my risk profile nicely. This gold company is one of the few gold companies in one's portfolio that is a "must have" as a cornerstone of your precious metal exposure, in my opinion but never advice. Newmont (NEM:NYSE) is another, but I am very concerned about the rumour that they are gonna takeover Newcrest (NCM) here in Oz. CSFB put out a report suggesting they will do this to keep their "biggest" tag in the wake of the Harmony (HMY:NYSE) / Goldfields action. Whatever. I don't buy it as Newcrest is a heavy hedger and the close-out of said hedges could be very costly. Given Newmont's stated "no hedge" policy it would appear contradictory to buy said assets and maintain the hedges. Similarly to the Normandy situation a few years back, we could see a biffo with the hedge counterparties, which could result in a closeout of the hedgebook, thus adding more buying to the gold market. Watching developments with interest.

I think there are a number of high potential takeover targets here in Australia and I expect we will see the advanced exploration sector come to the forefront of corporate activity. Tying up good land positions with advanced exploration in progress will be a priority for the big boys going forward, I think. The big boys haven't spent the wedge to replace reserves on their own and these reserve replacements will only come from takeover of those who have been out kicking rocks and drilling holes. Exploration has been sadly neglected by the majors over the past 5 or so years. Goldmines don't come on stream in a week and they aren't easy to find.

Metals equities appear tired up here and may drift lower as traders become impatient or bored. I have been asked why I don't have Coeur D'Alene Mines (CDE:NYSE) in my silver portfolio. I don't like the management and their recent activities do not endear themselves to me either. I have better places to have my funds invested if I want a silver exposure. Sure they may well outperform but it appears that each time this mob get some semblence of respectability about either their share price or performance, they do something that totaly screws themselves. They had want to outperform these days because their performance over the last decade has been nothing short of abysmal. They have too much poor form in the past to get me excited. Sure I love silver and they are big producers, but any asset run by inferior management is likely to be less than optimally exploited. Trade 'em? Sure, but an investment? Not with my money.

Silver seems happy between $7.10 and $7.35 at present and dunno what's gonna bust it out either way. I am still mindful that we don't get too far ahead of the moving averages but think that is still some ways off.

Today it appears that without any catalyst one would expect gold to hang around the $423 level with a topside of $425.50 and a lowside around 421. Dips below $420 I see as great opportunities although they may "dip" a little deeper than expected but the time spent down is getting significantly less and I expect will continue to do so.

The big race down here tomorrow is the $4 million Cox Plate which has attracted an international field of 13 horses. The field is without a "standout" as far as I am concerned and I am thinking that maybe one of the roughies in the field could surprise. A horse called Kings Chapel from New Zealand has piqued my interest and I think at 33 to 1 he is worth a dollar or two but as I said, it's a very open race and any number of entries could take home the big prize. Vouvray will race again for a million bucks on the 6th November and she will be a very good chance.

Another close baseball game and it is good to see some new faces getting a shot at the title. Boston versus St Louis has a nice ring to it. Someone suggested that the riot squad at Yankee stadium were concerned about getting hit by the ball and that's why they did what they did. Fair dinkum, if it was such dire circumstance that they had to be placed on the field in full helmets and all that crap, then they certainly shouldn't have been worried about a baseball!

Looks like we may be trying the low side of the range early on in Europe but I think we will still see a nice weekly close somewhere around this $424 level. Silver will do nicely to close above $7.25 although think more likely $7.15 is a safer target, FWIW.

Enjoy the rest of your day and the weekend.....

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position in gold, silver, euro, nem, gg, 10 yr bond futes

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