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Indecent Exposure


What time?

Gold $433 Silver $6.88 Monday 2nd May, 10pm Sydney

G'day. What a nasty couple of weeks for the metal equities and we may cop some more in coming weeks, justified or not. It has been an educational period for many, whereby valuation has been overridden by sentiment. We have seen similar moves in the last few years but that was with significant moves lower for the price of gold. I'd love to be able to state that there is a bottom in place at around this $180 level, but that'd just be guessing on my part, at this juncture.

Today, FYI, I sold some physical gold from my personal stash, and am throwing it at selected metal equities. The leverage to further gold price rises is much greater in the equities. Mind you, the sale of some of my physical is not seen to be a long term trade as physical metal is the ultimate monetary/financial asset in my books. Silver Standard Resources (SSRI), Newmont (NEM), Goldcorp (GG) and Pan American Silver (PAAS) are high on the shopping list. I'm gagging on my GSS exposure at present and am not gonna add to that one at this particular time. It all comes down to risk profiles. Not advice, just sharing the process.

Gold has been very solid above the spot $428 level. The physical markets are soaking up real metal on any dips. I would expect, though, that if we head below $428 we'll be back at $422 in quick time, not advice. The paper gold market continues to run the game at present, and we could well see a nasty sell-off on some panic liquidation, even as far down to $408-11. That said, I see that many of the bullion banks daily commentaries are talking of very good physical demand at current levels. Maybe the physical market is actually in charge, because there was enough pressure put on the futures market late last week that it probably deserved to develop into a nasty, momentum-driven liquidation. The physical market will ultimately win, just like back in the late 60's with the London Gold Pool. Maybe this capitulation liquidation is still coming, but if it does, there will be a lot of physical gold being bought by the usual suspects. I'd love to see a sub $400 price again so I can get some physical back but I don't hold out much hope. The gold shares surely can't get hammered much more, even with a $400 gold price, but these are interesting times for the metals markets.

Oil back under $50 again makes little sense to me and am looking at the $48.70 area as a good, low risk level to enter the market from the long side. Opinion only and never advice.

Silver sucks at the moment and there's lots of talk that it's heading back to $5.50. Fair enough, differing opinions make a market. I'm very comfortable buying in the $6.65-6.85 area, with the risk that we may see down to $6.35ish. Talk of the "Indian Government sales" of physical metal affecting the market is more hype than anything, I believe. There has been a supply demand deficit (approximately 80-100 million ounces per annum) for the last couple of dozen years. Massive government sales of silver have artificially depressed the silver price for the last 30 or 40 years. The U.S. government silver stockpile is gone. There aren't many other government stockpiles in the world, certainly none of significance, that I know of anyway. The Indian Government sales of about 70million ounces, as recently announced, will just balance the supply-demand equation for this year. This is just another source of physical silver that won't be around in another year. This effectively delays the arrival of natural supply and demand forces, which should see massively higher silver prices in coming years. Silver gets used and we don't get it back in most instances. New applications for silver are appearing all over the world in many different forms and its uses in superconductivity and nano-technology will see demand for the metal continue to be robust. There is no natural supply coming on stream until we see much higher prices. Remember that silver is mostly a by-product of lead, copper and zinc mines. These mines are running flat-stick at present so there can be no significant incremental increase in silver production, whilst the new "pure" silver mines of the world won't get up and running till we see closer to $10 an ounce. Just my opinion.

The metal shares have certainly disconnected from the gold price. Newmont is a prime example of the mess we are dealing with. Current share price is some 30% lower than a year ago. The underlying gold price is higher. I know there's all sorts of issues with some cost increases, litigation in Indonesia and some production issues, but 30% with gold above $430??? NEM isn't even close to being amongst the hardest hit, with others down some 60-70% from their "04 high. But we can't fight the tape and we take our licks. Even the long NEM / short ABX trade based on the biggest hedger versus the biggest non-hedger, looks awful. Do we see a $375 gold price again? Not for my money, but that is what many of the shares are indicating and they have been a very solid leading indicator for the actual price of gold over the last 4 or 5 years.

Reserves, reserves, reserves is what I'm concentrating on, going forward. Reserves in the ground suit me just fine, but only unhedged reserves. Sure, everyone's production costs are rising (and will probably continue to), especially fuel costs, which are one of the larger floating costs associated with gold production. Wage pressures will also start to kick in as the current monetary inflation takes effect. If people hedge the gold price but not their hedgeable floating input costs, there's a big risk of further serious profit erosion.

I did some analysis a few years back on one gold producer and found that for every 1 cent per litre rise in diesel price, they had a one dollar erosion of their profit margin. If you are only making say, a $50 margin, the diesel price is nearly as important as the gold price! Diesel is a big issue for the low-grade, high tonnage earth moving operations very common down here in Oz, as well as in power production for their processing circuits. Diesel price rises can relegate marginal production to totally uneconomic reserves, very quickly. Hedging any floating price inputs like electricity/power, diesel, arsenic, interest rates if there is any debt involved, or exchange rates, is something all producers should be looking at. Options are bloody cheap, but there aren't many producers willing to pay the premium, yet they will happily spend millions on insurance for plant or equipment. That logic is seriously flawed, IMO.

Sentiment regarding the precious metal sector is appalling and I don't wanna even guess what will turn it around. It will, certainly. But when? Buggered if I know.

I'm outta here to go do "the Streak" down Walker Street. It is the main street of the North Sydney CBD but Monday night should be pretty quiet. The perfect weather that we have enjoyed here for the last 10 days or so, has changed for the worse and significant shrinkage appears likely. But, a bet is a bet and I'm sure any innocent bystanders will get a chuckle. The close proximity of North Sydney Police station (one block away) should ensure a elevated heart rate for this runner. How long do you get for indecent exposure?? The photos will not be posted today, as Mondays are difficult enough to get through without being subjected to viewing my old white arse!

Lisa made me a big pot of chili today and, as she lived a few years in Texas a while back, it has some grunt and tastes fantastic. It was decided that the safest course of action would be to delay eating said chili 'til after running the street!
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Position in gold, silver, oil, nem, abx, gg, ssri, gss

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