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Go for Gold?


Gold $397 Silver $6.20 Monday, April 25, ANZAC Day

G'day. Gold was pretty quiet down here today on a perfect Autumn public holiday, ANZAC Day. It's a day where we have services commemorating our war dead and it falls on the anniversary of the landings of the 1st Australian Imperial Force at Gallipoli in 1915. That it was a tragic military screw up by the British Command, that slaughtered tens of thousands of soldiers on both sides, all for about 2 square miles of useless, hardly inhabited land, is ironic. A dawn memorial service followed by the parade of veterans and then lots of beers and rum. Our traditional gambling game of "two-up" is legal for the day in the pubs and clubs and everyone gets stuck into it. Great fun, once the serious part of the day is done.

First Bloomberg message I got tonight from one of my physical gold contacts says he is seeing "VERY strong physical demand throughout"..(his use of capitals). India is at the forefront. I see by the Indian premiums that there is serious demand below $400 and that gives me some confidence in at least looking at trading from the long side again. The Indians have a booming currency and stock market and the "wealth effect" is certainly in play over there. The big difference to the mega- bubble in Tech of the late 90's is that the Indians save in metals, gold more prominently, and silver. Sure they will still buy the TV they want to watch the cricket on, but they also put their earnings in real money. Physical metals prices are currently set by the paper players, but we know that sell side premiums are way skewed in all instances, in the physical market. For how much longer the paper will control is any one's guess. For my own view, I just think it is prudent to be long physical metal and wrong, than not have any at all, at this juncture (not advice).

The CFTC data suggests there has been long liquidation pressure building the past few months. The large decline in the long position by the large speculators could provide some relief to any remaining bulls, after the last few days pounding.

There will certainly be a time to genuinely sell gold and go somewhere else with your investment capital, but I can't see it on the horizon from where I sit at this point. Sure there will be some serious days of self doubt and questioning, such as the last couple of days, but I'm looking at a much bigger picture than a $30 weekly move in gold or $2 in silver and my time frame is years not days or weeks. Fundamentals don't change overnight, in general. They evolve. I think short term trading opportunities can sometimes cloud the big picture and the big picture is basically unchanged. Again, just my view.

Technically, gold could well test the $385ish level but lots of physical will be picked up down there so I would be surprised to see it significantly lower than there although there is a train of thought that we could well go back to $355 but that would require something outta left field, I think. A break of $404 is required to look for the $415 level. Silver could test $5.85ish and I would never say never! A break back through the $6.60 level is required to repair the serious technical damage done in the last few sessions. Let's have a look and see what gives in the next couple of days.

Option expiry at Comex tomorrow may see us stay in a tight range until maturity. Think we could see higher in both metals once they are gone, but I am happy to see some consolidation and a few quieter days where I can grab a cup of coffee and the time to take a leak!

I believe we may now be finding a good base on the HUI. Some stocks have been murdered in 10 days. We are currently up about 2% today at 198 and require another 30% to get back to our January high of about 260. Gold is less than 10% off its decade long high.

The main silver producers are, in my opinion, currently well undervalued. Any stock price is determined by the future revenues of a given company, generated by the production of whatever good or service the company is involved in. Not advice, do your own research as you may learn something, I did.

Mining companies are some of the easiest to value, in my opinion. It just depends on what gold or silver price you plug into your income stream calculations. Most companies cost base is relatively stable and has been for the last 7 or so years where costs have been slashed to the bone to offset the crappy commodity prices (the South Africans, Canadians and Aussies have some currency exposures that affect cost of production and thus are more exposed to cost variance).The optionality involved in mining companies is rarely valued correctly. Get your hands dirty and have a dig around.

High cost and highly stressed producers with high reserve conversion at higher prices are the most attractive to me, if I think the price is headed north. I tend to forget companies who hedge any more than about 25-35% of 1-2 years production, as the upside participation in rising prices is eroded by the hedges. Although if they pay for plain old simple put options, fine, that's a hedge with 100% upside and I'm all for them! In 14 years in Derivatives I can only recall a handful of occasions that companies actually bought options and kept 100% of the upside. Finance Directors don't like writing out big fat premium checks, so they generally do "zero-premium" structures which always limit the upside participation of the company to the rising commodity price. People buy metal producers to get an exposure to the price of that metal. Hedging erodes that exposure.

Reports today that Norilsk Nickel are gonna have a crack at GoldFields (GFI:NYSE) sooner or later, my guess is sooner, judging by the airplay. They picked up 20% the other day. The Russians may be buying the 4th largest gold producer in the World. Hmmm, wasn't this country bankrupt 10-15 years ago? I reckon someone over there sees things similarly to the Austrian Economists among us and are "going for the gold" while they can. They have been increasing reserves aggressively the past few years and on top of their own goldmines, GoldFields is a pretty juicy target. I suppose sovereign risk isn't so much of an issue if you are Russian, and GFI is fairly well geographically spread, I suppose. Just me speculating, of course.

Oil is still causing problems for the US economy and inflation. I see that petrol (er, I mean gasoline) is now about $1.85 a gallon. That is way too cheap. We pay 75c US per litre !! Driving season starts soon and all those SUV thingy's will start chewing up the juice (and what little disposable income anyone has left after all the debt repayments). Those interest rates are looking all the more critical in the coming couple of months/years to the outcome that Sir Alan Greenspan is trying to engineer (Queen Elizabeth of England made him an honorary knight a couple of years back!). Just my opinion, but I reckon he may not be seen in the history books to be published in the future, as one who should receive the adulation he currently enjoys. Anyone remember a guy called John Law in France in the 18th century???

Fairly quiet at 12.45pm NY... let's see what the last 45 minutes brings.

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