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Wallaby Brigade


Gold $454 Silver $8.00 Thursday 2 December, 10pm Sydney

G'day. The silver market certainly knows how to draw attention to itself, doesn't it? I certainly expected $8 in due course, but 3 hours later was a little bit much! Just goes to show that just when you think everything is nice and quiet and sort of settled down, things get interesting and quickly. Silver should now have great support around the $7.60-70 level and my hope for $7.35 pullback looks highly unlikely before Xmas.

Everyone seems shocked by the move. I was way more shocked by the oil move lower. I think this 45-46 bucks a barrel level is gonna seem very cheap in 3 or so months. The winter hasn't started as yet. In silver, I think there is significantly more room to advance than many give credit for. Silver has monetary value as well as its industrial worth. The physical silver situation is not as rosy as many would like and it should be remembered that we are still some 10% off the high earlier this year, yet gold is some 5% higher than the recent high. The silver/gold ratio is at about 57 and it was 51 earlier this year. A return to that same ratio would put silver at close to $9 with gold at $455. Just some stuff to think about when looking at where we are, where we could go and why. I have mentioned many times that I think being long silver/short gold up near 70 is a very low risk spread trade, but just my opinion and note that the ratio has been over 100 in the last 30 years.

The silver shares did bugger all on the back of such a decisive and aggressive move. I am a little worried we slip back to $7.85ish for paper silver, following such a bust out. That silver can rally over 3% on the day and the associated equities actually fall, beggars belief. The Amex Gold Bugs Index (HUI) can't buy a mate at present. It seems that the metal equity arena has a pox cast over it. Every other equity in the place is going nuts for some reason. I can't fathom with Nasdaq going bonkers because of oil (so someone on the idiot box said today...excuse me??), yet the stocks with positive exposure to the best performing underlying asset get hammered. Go figure that one out. I expect a very sharp re-rating of these silver stocks in the next few weeks(should start today!) as people start to get comfy with 7 or 8 dollar silver. Most analysts are still looking for a sub $6.75 average for calendar '05. My hunch is that that level may be about the LOW for the year. Just thinking out loud again.

The gold shares are sucking wind. Dunno what will put a rocket under them. My best guess is that we see some consolidation here around 230-240 HUI and then spike aggressively through to 275-85 in quick time. So much money sloshing around and such a small space to deploy capital should see some seismic shifts in attitude to and performance of the sector.

I can find nothing in the public domain regarding Golden Star Resources(GSS:AMEX) and their abysmal share price performance this past few months. This issue stinks when compared to nearly anyone in the space. In the interest of full disclosure, I own them both professionally and personally and am increasing my exposure. Let's check the facts. The shelf registrations didn't help nor did the corporate joust with Iamgold (IAG:AMEX). Their financial results for 3rd quarter weren't flash but there were extenuating circumstances like minesite flooding contributing to higher cost and lower revenues. Sovereign risk is unchanged from what I can gather. Management is unchanged as is the geology or the extraction circuit. I have said many times that I look for investment in metal companies that look dodgy on face value. I buy high cost producers as they provide the most leverage to the actual gold price. It's all about reserves and resources and at what price they are economically recoverable. Valuation all comes down to the realized gold price that you plug in your formulae. A share price is a future value calculation. Simple. Nuthin's changed as far as GSS and "their gold" is concerned, from what I understand. It's still just a matter of commercially viable extraction. The risk in investing in this company is similar, in my view from all publicly available information, as to what it was 6 months ago with the share price double where it is now (as long as any dilution from their registration creates value - a risk for sure) . Just my opinion and thought process and in no way constitutes advice. (I chose GSS as an example only. I could have picked a few others but none so dramatic an illustration of different perception of value).

Gold looks like it wants to try for the $460 level although I think there will be a great battle around $457-8 and I would like to see a close above $460 to get me comfy that we are then putting in a solid base around $445. Seems we are just lifting weekly ranges by $10 or $12 every week or two. Close below $450 required to get much concerned about a serious breakdown.

I reckon Oil looked cheap yesterday at $49. Its bloody cheap at $45.75! I think we will have seen a new high by March '05. The oil producers of the world won't want to take the haircut that a devaluing dollar presents. Oil for gold... hmm, someone may think about it one day.

This general equity market is out of control, IMO. Obviously the massive excess liquidity has found a home. A lot of capital flowing in has sent these markets way higher than I expected. Wait till you see what a little capital flowing into metal equities does! When it turns into a lot of capital, then the fireworks will begin.

Range for next 24 hrs 10pm Sydney, IMO:

Gold $453-459
Silver $7.85-8.08

Enjoy the day.

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position in gold, silver, gss

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