We'll see Laurie!
Gold $430 Silver $7.22 Friday March 4th - 8pm Sydney time
G'day. The CRB is out of control with oil and base metals leading the way. What is notable is the reluctance on the part of the precious metals sector to participate in this very powerful upswing. Oil touches $55 a barrel, again, and gold heads south??? This action doesn't hold true to historical form. The oil/gold ratio could be worth looking into for those who (not advice).
Oil for gold is a fine ratio to look at over the past 80 or so years. How many barrels of oil buys an ounce of gold? Historically it has been around 17 barrels per ounce. Today with gold at $430 and crude at $54, it is less than 8. The Istanbul Gold Exchange reports that recent demand has been as high as they have ever recorded which, as it is the gateway to the Middle East physical gold markets, suggest that this trade is occurring in the physical market/real gold world. I have mentioned before how good a trade this is for the oil producers to swap finite resource for infinite money / store of wealth. This is a massively low risk trade, in my opinion. I contend that we will be back at the historical average, somewhere north of 15, before too long. Exit timing isn't that important on this trade, the entry will make all the difference. I don't see the oil price below $44 or so any time soon, with the massive demand of China and India, so that puts gold somewhere north of $650 as the only other variable in the equation. Maybe this historical relationship has irrevocably broken down? I doubt it and I'll back history every time, especially with such "paper gold" games being played this time around. I have mentioned on numerous occasions in the last few years that I believe we are repeating the 1966-71 London Gold Pool debacle and that eventually the physical market will overpower the paper players. It's just a matter of time. Opinion only as usual. Take a look at some history on the London Gold Pool.
I note Elmer has put his hand up and acknowledged what we have discussed for years. That the U.S. is writing checks that it can't cash. The Social Security and Medicare issues are just too big and must be addressed eventually. Maybe after Sir Alan has left the building?
Down here in Oz, we have debt that has just gone through 7% of GDP. I'm waiting on the IMF or World Bank to have their 2 cent say on the matter. Is Australia in danger of becoming the famous "banana Republic", a phrase used in 1986 by our then Treasurer, Paul Keating, which took about 20% off our dollar in a few weeks? Interest rates went up 25bps this week and you should've heard the moaning from the politicians. What will they be like at 8% or worse?
On the subject of the World Bank, I see that someone has seriously proposed that the recently resigned computer saleswoman from Hewlett Packard (HPQ) be the next President of the said Bank. I never laughed so much in a long time. Selling Computers, CEO of HP, President of World Bank ... of course, the logical career progression!! Whatever.
Gold has range traded the past week and is obviously capped at the $436ish level. I guess it is an official seller. Why else would there be such a divergence in the CRB components? Something appears amiss and I expect we could get a breakout in the metals. The physical markets have provided a solid floor between $428-430. A break below $428 could well see us back down at $422 in quick succession although again, excursions lower should be quite limited in timeframe. The odds of long periods below $420 are negligible, in my opinion, as too much gold will have to be delivered to satisfy the appetite of a voracious physical market, that continues to grow in the face of slowing mine production. Central Bank gold will and must make up the shortfall and I doubt that there are many Central Bankers willing to sell their physical metal at present. The IMF gold "sale" talk is just talk, IMO.
Psycholgically damaging in the very short term but, as I have contended, I doubt an ounce would ever see the light of day. Too many Asian Central Banks have the capacity and inclination to diversify out of dollar denominated PAPER assets and this would resolve a few of their "headaches".
Indian premiums suggest that imports are still economically viable at these levels. Turkey continues to act as the distributor to the Middle East and volumes are historically very high. We know Dubai jewelers are doing a great trade in high end, high carat stuff. I suppose that we will see further evidence emerge from places like Vietnam and Thailand in coming weeks that demand is better than robust.
Silver is hanging around the $7.22 support level noted a week or so back. There have been a few little sharp dips below but nothing of any tenor or consequence, yet. I am concerned we may see another test below $7 but the fundamentals don't support such a move, IMO. Let's just wait and see but I suspect a dip to $7 and then another run up to and through the $7.50 level, maybe next week. (Not advice)
The Amex Gold Bugs Index (HUI) still can't break the 220 level even with the CRB making all time highs. There must be a significant sentiment change before we think of heading towards the most recent 260 highs. What that catalyst presents itself as is anyone's guess. I'm looking forward to seeing the short interest in some of the more damaged issues.
I note Durban Deeps (DROOY) is looking at shutting down approximately 35% of its production due to low prices. Appropriately, the Board is discussing putting their troubled high cost mines in South Africa on care and maintenance, something we briefly touched upon on Monday. Furthermore, as a top 10 global gold producer this would just make the supply-demand equation more unbalanced. Supply is very inelastic yet demand is not. This can lead to fireworks as we saw following the collapse of the London Gold Pool. I see DROOY at sub $90c as being a very cheap call option on gold, especially in that gold could move dramatically higher in a few sessions, given the optimal conditions. These conditions exist everyday! The risk of DROOY going into receivership doesn't concern me all that much as receiver's don't just sell mines in 3 weeks. The process takes time and time is what you want with this entity. Gold could easily double in a year, say like the Rhodium price has this past year. DROOY are certainly back in the gold business if we see a move like that, and with very large and growing reserves. The maturity of the call option is at maturity of the company!! It's a case of how long they are alive. I'm personally betting (small!) that they are around long enough for what's coming in the gold markets. NOT ADVICE.
There's plenty happening around the East Coast of Oz this weekend. Some big Rugby matches are being played across the country. The big races are on here in Sydney and tomorrow there is a chance that the family fortunes may get a little boost. My broodmare is currently on the market but at MY price. We have discussed MY price in previous missives. Her ¾ sister, Vouvray, runs in the big Grade 1 race here on Saturday for a stake of $500,000, and a win certainly will help the value of my mare. Vouvray must beat the current favourite for Australian Horse of the Year honours, Grand Armee. The field is very small and I am pretty confident that she can do it (and my bank balance is bloody hopeful that she does)! The big Sydney Mardi Gras is on this weekend as well. This year's theme is Freedom and Tolerance. My brother is involved with one of the floats and has asked Lisa and I to be on their "crew". We get to hand out water bottles to their troop, run interference and keep photographers out of their way and generally just party up the parade route, but on the other side of the fence to the massive crowd. I reckon it will be a blast (although he hasn't told us what we have to wear as yet). At the opposite end of the entertainment scale, for the rev-heads we have the Aussie Formula One Grand Prix down in Melbourne. Lots going on around the traps for sure!
Access was very quiet today and maybe that will continue into the weekend. And pigs might fly.
Enjoy the weekend...
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