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Metals With McGuirk: The REAL Price of Gold


Gold and silver are all the talk these days in financial circles.

G'day - The metals continue their inexorable march to 23-year nominal highs. Wait till people catch onto "inflation adjustment" and see just how cheap these metals really are on a historical basis. We won't go into the comparisons between the late 70's and today's macro picture but it's a truck-load worse now than it was back then. By ANY measure, you might like to have a look at it. On the other hand, some economist will come out with some mumbo-jumbo that things are somehow better today. Maybe it's the "total net household worth in U.S. Dollar terms," or something equally disingenuous. There's always a statistic, somewhere.

But we know the true picture. Hint: check the twin deficit and debt levels in the U.S. since 1971 (when Nixon defaulted on the International obligations of the U.S. Dollar). It was a currency default - plain and simple, yet it is never discussed in such terms. That was just 30 years ago and the reasons for such have certainly magnified in the past 30-35 years, give or take the medicine dished up by Mr. Volcker. Sir Alan will have a lot of explaining to do in 10 years time, I reckon.

Gold and silver are all the talk these days in financial circles. Gold is $600 an ounce. Silver is getting pimples and about to enter high school-just like a teenager. So what? It's only the funds and "smart investors who are even close to "in." None of my old mates have bought any silver or gold recently. Some might have dabbled in a few metal shares but many just see it as a blot on the landscape that has no real legs. It certainly can't end up as I have suggested over the years… "They just can't let it happen" is an oft-heard reply. I strongly disagree.

A little bit of time is all that it takes to think a little more outside the box. Some spend 4 hours reading a racehorse form guide every Saturday morning, yet can't be bothered (or don't think it important enough) to do some research on economic/financial market history. If you don't know where you've been and how you got to where you are, how can you possibly know where to go (or where not to go)? It truly startles me when/if I hear someone say they have read Bernstein's "The Power of Gold" or has heard of the Austrian School of Economics (or can spell Ludwig Von Mises). But I digress…

The Silver-Gold ratio has fallen to about 47. You all know from previous posts that I reckon this goes to 12-16 in the years ahead. It was 62 when I last wrote that, I believe. I'm taking 30% of this trade off at these levels and will reset on a pullback. I think we could well head back to the mid-high 50's again, but no way would I say this can't be at 40 by the end of the month. The short-term risk-reward coupled with desired long-term position building is key to my deliberations and action.

Asia is open and gold is up at $603 in the spot market. I am still to see a London Fix above that level. That's the REAL PRICE OF GOLD, where physical gold in large volume changes hands. The FIX sets the price and so to my mind, we still haven't traded above $600. The spot market is still controlled by paper players. The FIX isn't in such a dominant fashion. I reckon we get our first $600+ Fix in about 6 hours. Yippee. Don't get cocky.

People are jumping since gold is moving $6-10 in a day and silver does 30 or 40 cents. Another big "so what?" No one said boo if gold moved $3 or $4 when gold was $300 a couple of years ago or silver moved 10 cents. It is still just the same percentage moves.

I am concerned with the share price action. The shares are behaving like the metal has nowhere to go but down. Silver is up 70c in a 24 hour period and Pan American Silver (PAAS) and Silver Standard Resources (SSRI) are down on the day. This suggests to me that people don't see these metal prices as sustainable for any length of time going forward. The equities have been great tells over the last few years and maybe we are in for a bit of a cleanout in metal prices. Either way, I think HUI will be 10% higher or lower at the end of the month - I'm guessing lower on sentiment/technicals, but higher on fundamentals--if that makes sense.

I don't pretend to know where metal prices are gonna be tomorrow or next week but--I would be surprised if we don't see gold $545-55 and silver $10.20-40 again before summer really heats up in the Northern Hemisphere. That's where I'd be hoping to set some more positions. I like some OTM puts as a way to play the swing as I would loathe shorting either metal outright, via futures. Remember a short metal futures position means that the seller MAY be required to deliver PHYSICAL metal to the Long. Do you know where you will get your physical gold or silver from, should buyers demand delivery? There is about 7 times the number of ounces "committed" to be delivered via futures than there are in the COMEX warehouse. (Open Interest s at 10/4/06 =150,000 contracts at 5000 oz. per contract versus 120million oz. held.) Just a thought.

The London AM Gold fix was just set. US$599.50….. I guess we must wait for the "REAL" price of gold to trade above $600 for another couple of hours.

Lisa and I just got home from The Australian Museum's Member's night opening of Pearls-Opulence and Obsession Exhibition. It was a very impressive exhibition. I noted that nearly every pearl was presented either by itself, or set in gold, silver or platinum- whether 500 years old or just a few years. Hmmmm.

Lots on - back soon

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Position in gold, silver, PAAS, SSRI

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