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Metals With McGuirk: The Oil-Gold Ratio

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High oil hurts gold stocks but on the other hand, lower energy costs do little for them judging by the price action.

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G'day. An earlier than usual posting today due to the big soccer match against Uruguay down here tonight. The weather is abominable here in Sydney and that may help the Aussies due to the fact that most play in England and therefore are used to such crappy weather.

What's the deal with precious metals equities these days?? The equities have been a lead indicator of the metal for the last 3 or 4 years. Is the gold price headed back to $385 given the share-price action of many issues?? I dunno, but there are many issues that look like crap on any chart and appear to be indicating such a decline in the metals! Interestingly, not one has had any change in their reserve base apart from natural depletion from production; in fact some have increased reserves.

Hecla Mining (HL), Golden Star (GSS), Goldfields (GV) and Nevsun (NSU) Resources in the HUI all copped a flock of uppercuts last night and averaged about a 6% fall on the session. Larger-cap stocks like Newmont (NEM), Barrick (ABX), Meridian (TMR) and Kinross (KGC) only got touched up for a few percent. DRDGold (DROOY) was unchanged which is astounding given their leverage to the gold price. It appears that the small and mid-cap producers bear the brunt of the selling and it appears be a function of liquidity. Sentiment regarding some issues is terrible and there is nowhere else to look but at poor management. Interestingly, non-producer Silver Standard is hanging around the $14 level and looks very well supported. Smiling.

What do I make of it? Take your pick--either the gold price is $75-$100 overvalued or many equities are significantly undervalued on a forward looking basis. I suggest the latter due to what we know about the former. At what stage do we just throw our hands in the air and say "buggered if I know" and take our money off the table? When I can buy gold or silver saucepans at Sears!

We've talked about the oil/gold ratio for such a long time and have discussed the fact that energy is the biggest floating cost in a gold mining operation. High oil hurts gold stocks but on the other hand, lower energy costs do little for them judging by the price action.

My retirement portfolio has taken somewhat of a hammering the past year due to the exposure to GSS. One exposure has effectively eliminated all gains from the rest of the portfolio. Hmmm. Daily or weekly revaluations are largely irrelevant given the timeframe being managed. I need to worry about the reval in about 2030!! Thus I want as many reserves for as little outlay as I can get--especially if the reserves aren't being chewed up at speed. I am yet to cover my personal account sale at $3.47 and am in no hurry to and I mentioned the other day that they are becoming a big fat old target for someone looking for increased reserves and geographical diversification. This company has been a huge disappointment this past year, although my break-even for them is still south of $1. Stocks that halve in value when their underlying produce has risen 25% are not very welcome in any portfolio and I trace it all back to the ill-conceived/advised attempt to "get big" when all that corporate crap was going on in Q1-2 2004. Management is squarely to blame, IMO, they should just stick to what they know and leave the rest alone!! I think Anglo is a prime candidate to snaffle them up. Not advice and no edge.

I noted last week that I was disappointed that GSS management would be raising debt to fund expansion just weeks after announcing their recent takeover and it appears that Ex-Goldcorp CEO Rob McEwen agrees. Debt is not the way forward for mining companies, IMO.

Some thoughts on reserve depletion and reserve replacement.

So what's cooking in the metals? Not much. There are many sellers above $470-72 in the paper market and very determined buyers below $460 in the physical market. What will be the circuit breaker? I dunno and am happy to see a period of consolidation above $450. I am in no rush.

Silver continues to bash its head into the apparent ceiling at $7.80ish. Platinum had a small breather from its record breaking run up to 25 year highs and it looks to be just a matter of time before we see a four figure price. The silver /gold ratio is still just hanging around 60 and buying silver/selling gold at 68 a few months back looks a great entry. I don't think there is much risk in such a trade and we are set for the long haul.

I was just watching President Bush talk in Japan. I heard something that made me chuckle and then I was just plain outright gob-smacked. He was talking about Japanese GDP being stronger and how good it is for their trading partners - fair enough but then Bush said - word for word--"it's hard to trade with someone who's broke." Surely his word choice is misplaced? Japan is so far from being "broke." He should know who owns all "his" debts. Surely a closer inspection of US finances would place the shoe on the other foot. Interestingly gold is up $3 since he spoke!!!

Minyan Brian offered the following on silver -

Laurie,

I want to share my take on silver. So far this month, November monthly and quarterly "trend" numbers are pushing the market higher. However, the market is running into resistance at 7.865 in the December futures which is causing it to stall. That resistance will disappear in December and allow the market to trade higher "with ease." I'm expecting prices above $8 next month. My initial targets are 8.235 and 8.500. If the November monthly close is below 7.645, then I'd be a bit less certain that the $8 level will be attained in December, but still bullish big picture. All numbers are basis December futures.


Brian

No argument here, Brian old mate.

This new timezone is really screwing me around. The Comex doesn't open till half past midnight and finishes at 5.30am down here in Sydney. This is as bad as it gets for me and, by default, Lisa's sleep patterns. People ask "how do you do it" and so I thought I better share how the 24hr clock works down here? It isn't that hard. I sleep from about 2.30am till 5am on the sofa (unless I get woken due to call levels on given stocks or the metal itself). This ensures I am awake for late Asia, all of Europe and I get the first 2 hours of Comex(where everything happens). Check your charts and note that moves in Comex metals price occur in the first hour of trading and the last 30 mins of trading (unless event driven). I also get the first hour of equities trading and the last 2 hours of same. I then sleep from 8am till about 11am and start the same procedure again although cat naps in the late afternoon are often required.

Local News

Lisa has just swanned in following a wander around town and reports that 1 in 5 people on George Street are wearing their Gold jersey or shirt in support of the Aussie Soccer Team. It is a pretty big event down here. She also reports that the pubs are full to overflowing already, and it's just 3pm. I'm late!

Enjoy the day and hopefully will be back later to report the big win in the soccer match!

Laurie.

position in gold/silver/gss/nsu/nem/ssri/mdg/kgc/anglo/drooy

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