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Gold $449 Silver $7.84 Friday 3rd December, 11.45pm Sydney

"It's not the drop off the cliff that kills you, it's the sudden stop at the bottom that does it."

(Someone a long time ago)

G'day. Still mopping up the blood from the floor here. The reaction of metal equities to a new high in gold and recent silver strength, was to strip 10% off many mid-sized issues in a session. I don't have much to say really. If ya didn't sell yesterday then ya didn't crystalise any loss or reval loss. It may get worse, it may not.

Colleagues think we may be in for some longer term pain in the metals and I don't disagree entirely but I also do think that this is a pimple on an elephant's arse when looking at this bull market progression. I like to remember that the metal in the ground didn't disappear overnight, nor did the costs of mining increase 100%. The underlying income stream, metal sales, was basically unchanged. So what part of the valuation equation changed to give such an abnormal move? Liquidity, Sentiment and expectation - intangibles!! This sized move is nothing to do with rational valuation. Moreso the size of the emergency exit / entry doors to the sector and people's lack of patience or skill. This type of move will happen both ways and I s'pose this is what everyone was looking for and became self fulfilling.

I was contemplating whether the recent gold ETF could have had much of an impact. It may well have. People may well be ditching equity exposure to the metals extraction from the earth and opening an exposure to something that follows the price of gold. There are still a few questions I have about the ETF and don't play with it at present. There could be something to this regarding the equity selloff. Will keep digging around on that one. Watching for snapper to pop his head into the gold sector in the short term but we could easily drop another 15$ from here in quicktime, so I am discounting nothing (not advice). The situation you don't consider or given scant attention to, is the one that will hurt you, not just in market situations either.

I'm gonna just stick the teeth-guard back in and lead with my chin because this ain't right from where I'm watching! Gold must be due for $30 selloff if the equities are the lead mover. I don't like those chances, given the demand for physical at prices higher than these yesterday and it seems today. The Amex Gold Bugs Index (HUI) is some 15% lower than January with gold some $20 an ounce higher. Stuffed if I know what's going on. Why pretend to know when there is no rational explanation. Wherever this heads down to, it won't stay there very long, IMO. It's just whether it's at $445 or $435 or lower still. I repeat that I will be amazed should gold trade sub $432 before Xmas , but hey, I reckoned oil was cheap yesterday at $45/6 so what would I know??? (I still reckon in a few months 45$ oil will be cheap, but I'm way wrong at present!)

I'm still a little shocked at the metal equities performance of late but I suppose that's the world we live in these days. Bundaberg Rum made the day a little more bearable (a local fire water that you can read about below). Traditional market responses to events, are not happening. Too much liquidity looking for a home and it is all done "at speed", which amplifies the moves. I suppose the metal equities could retest 202 on the HUI if we see some real blood-letting, but given the market dynamics at present coupled with the macro-outlook, I give this about 2/5ths of bugger all chance of happening. Unlike LTCM, though, we see that there is such a risk, although very small, and I am positioning accordingly.

We mentioned a few weeks / month or so back that I thought there were some small cap mining companies that to me looked seriously undervalued around who control old mining districts and may have massive upside potential. I came across some information (here is an article) on one such animal. There are others in very similar position to Bendigo. Not advice - take a look and decide for yourself.

I am putting in these recent articles my expected range for the next 24hrs from time of writing. My colleague, Andre, drives the trading ship through the NY session so I only want to be waken when it hits the fan, either way. This "expectation" provides a guide and gives an idea that something's doing something strange that wasn't in my deliberations earlier. Either way, compare where current market is to my expectations and that will indicate how I'm leaning but in no way advice. I suspect it won't help anyone, anyway!

Expected range next 24 hrs as at Sydney 11.30pm:

Gold $447 - $455
Silver $7.78 - $8.02.

We may get some more follow-through selling for a nasty weekly close but again I can only stress the physical market's ability to absorb a lot of real gold at these levels. Real gold is changing hands and it is headed from the West to East. Who owns all those U.S. bonds and stuff that everyone is talking about? They've got the bucks to buy a truckload of gold, even from Central Banks of the West who can't seem to get rid of it fast enough? Fridays can be very nasty for gold, especially after London closes and there isn't a physical gold market open for 72 hours. Makes a bear raid very inviting.

Bundaberg Rum is an Aussie legend. It is a dark rum made in the sugarcane region in Queensland. It has 2 strengths, underproof and overproof. UP is wicked. OP is terminal.

It is a spirit that is either loved or loathed down here. There is no middle ground. It all depends on how bad your experience was at your first crack at it! Many people cannot stand the smell due to previous encounters. I'm sure many in North America have a similar thing with Tequila and Europeans with Ouzo or something like that. Not only is it potent but it has the added bonus of making people very aggressive! 20 people and a few Bundy and Coke's will ensure a riot. My best mate has placed a Bundy ban on himself. He can have 20 beers, no worries, but after 1 bundy he has issued standing instructions with all of us that he must be put in a cab home. Ration it to an army and who needs weapons? They are the chief sponsor of the Wallabies Rugby team. Very appropriate. We're kinda a weird mob down here.

Big outdoor concert in Sydney tomorrow called "Homebake". It's a big festival of Aussie rock music with 4 stages and a few hundred thousand punters in the city centre. 11am-midnite makes a long day. JET headlines the gig and will be pretty wild I think. I must be getting too old for all this stuff, my smart-arse 5 yo daughter offered me some earplugs! How embarrassing!

Enjoy the weekend and here's to a close above $450 and $8 ... a nice thought but am prepared for disappointment.


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position in gold, silver, bgomf

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