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A Very Torrid Match

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Hey Meehan, where are those movers?

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Gold $421 Silver $7.14 Friday 20th May, 8pm Sydney


G'day. Well it certainly looks like that $6.80-90 level in silver is gonna be a tough one to break down through. There is significant tightness in the physical market and we saw earlier in the week that the very notable $7.22-25 level is again going be a tough resistance level. I'd suspect silver to pull back to the $7.05-08 level again and then attempt another break higher (not advice), but maybe the little pullback yesterday was it?? My target level of $7.35-45 is only a day or two's price action away, especially having noted the size and speed of the move up from $6.88 to $7.20.... but I don't expect all one way traffic. More volatility, but within a fairly well defined range appears to be the order of play. Watch the moving averages.

The gold market is running into very concerted selling here around the $420-422 level with the COT's indicating somewhere north of 20 tonnes of new longs being added in the last week, yet we only see a rise of $3 or $4. I dunno who would be selling that sort of size, in that manner, especially if one was looking to maximize revenues from said sales. Of course, someone looking for lower gold prices would see this as "liquidity" for which to dump into. I reckon that could be a very dangerous trade. The physical markets are telling me that the downside is very limited and the physical markets have been correct for the last 4 or 5 years. When the paper markets get too excited and the price runs too hard, too fast, the physical markets have warned us. We see the physical markets just stop buying. It is the best "tell" you can get, IMO. The physical buyers of the world are fine with gold down here. Sure gold can be pushed lower but it will take a lot of physical metal to keep it there. Ignoring the physical market and the levels that it "sets" is hazardous to one's financial health.

I keep reflecting on what ex-fed-head Paul Volcker said the other month about the late 70's inflation mess, high interest rates and all that..." the mistake we made was not controlling the gold price". Taken with what "Helicopter Bernanke" had to say last year about running the printing presses and other "unconventional measures" at the Fed's disposal, and it is hard not to wonder what's going on in gold. The seller of size recently, at $440, $428 and now at $422 certainly doesn't appear interested in maximizing returns, it looks more like price control to me. Notwithstanding any nefarious goings on in the "paper" precious metals, the physical market will win in the end: just like with the London Gold Pool back in the late 60's which led to the biggest currency default in history; the U.S. Dollar. History has a habit of repeating itself and it appears to me that we are thundering down the same road.

There could certainly be a significant further strengthening of the dollar, especially against the Yen. I had a beer the other day with a currency guy who knows his stuff and he thought we could see the Yen at 125 in a year's time. That sort of talk should have the Japanese back looking at gold. We know India is just sitting on the bid and taking whatever gets thrown their way. Reuters reported the other day of 3 and 4 times recent average volumes of gold sales, on this recent dip. Vietnam hasn't missed out either. My mate in Thailand says he went to the large jewelery sector and couldn't believe the robust sales, especially of plain 18-22ct chain. I'd better get Hong Kong Long to have another snoop around and see what's going on in his neck of the woods. It seems that there is no shortage of people throughout Asia, queuing up to get the real stuff.

Speaking of printing money, back in 1998 we had a political party called One Nation that was causing all sorts of ripples across the political landscape. It was headed up by a woman by the name of Pauline Hanson, who was an independent elected member of our Federal Parliament. She was "out there" for sure.

She was very much a "populist" and some of their "ideas and views" were unusual to say the least, whilst others were just plain straight out red-neck stuff. Anyways, this political party won a bunch of seats in the Queensland election and they had to be taken somewhat seriously. When the Federal election loomed, she talked about the economy and finance and at one stage she suggested that the "poor" should be able to get cheap funds through the formation of a "Peoples Bank". When asked how it would be funded, it was put forward that the money would just be "printed".....the quote was something like "2% loans from the "People's bank" can be financed by simply printing more money". This was the beginning of the end of that particular political party. She was laughed off television screens, derided in the press and basically totally marginalized as a "loopy". But, if you are a Fed Governor and say the same things, and then actually do them, no one says boo. I don't get it. What has changed since 1998 in the world of economic theory?? Surely if it was a silly idea from down here back then, it's just as silly now, no matter where one sits?

It is somewhat disconcerting to note that many of the biggest gold producers are in strife with gold above $400. In South Africa we are seeing mines shut, workers losing their jobs and significant production declines. The social ramifications could be disastrous. The cost of production has risen along with the Rand. The natural economic law of supply and demand will dictate that the price must rise or else production will grind to a halt. South Africa hasn't produced this little gold in 70 odd years. I bet production will not stop. The price must rise.
The Amex Gold Bugs Index (HUI) is still staggering around the 170 level. How one reconciles this level with the gold price is beyond me. I note that Barrick (ABX) is only off about 10% compared to say Nemont (NEM) down 30%. This makes little sense in the prevailing market conditions as the hedge book of Barrick has not been a help to them in this period. The market obviously loves them (or is it more appropriate to say they hate them less?). I don't and won't own a hedger of the price of the metal that I want 100% exposure to, but that's just me. Others disagree and good luck to them. The long NEM/short ABX scenario, based on the biggest non-hedger versus biggest hedger, looks very attractive, again. Just sharing my view on things and not intended as advice.

The silver producers are just as badly affected. Some simple price comparisons of silver issues using the same silver price is very disturbing, but also enlightening. Hecla (HL), Silver Standard (SSRI), Pan American (PAAS), Apex (SIL), Coeur (CDE) for example, are all off somewhere near 40% from a year or so back, when silver was actually lower! Go figure. Pan American is the "least affected" only down some 25% (and quite rightly so), but the rest of the sector just acts terribly. I can't help but think that these issues are "gifts" at current levels, but what would I know, I'm copping the rough end of the pineapple on near enough anything I own. Thank goodness I'm not thinking of retiring this year.

Today Lisa and I were volunteers at the school canteen. We don't have school cafeteria's like in the U.S. system and so the parents run a small "tuck-shop" on Monday, Wednesday and Friday. The kids get fresh sandwiches and lavosh wraps and hot food like meat pies, sausage rolls, chicken nuggets and mini pizza's. Fruit, milk and juices (no soda cans) and all that, keeps it relatively healthy. The new "slushie" machine is a super addition and more than one reference was made to our "adult slushies", where a shot of vodka made the day go so much faster. It's all done on an "order system" where they put their money in a bag, drop it off in the morning and the volunteer parents then fill the orders. We make all the sandwiches to order and it was a lotta fun. (My old "McDonalds" training from back in 1979 was a big plus). I was the only bloke of the 7 people on duty and it was fun to hear all the "mothers gossip". I learn't a lot!

The kids love it when "their" parents are on duty as they get heaps of "freebies". They don't quite understand that a freeby to them comes straight out of our wallet, but it's a great treat and they feel very special. Little Jacqui had a heap of "friends" today. We also do some work at the school with the assisted reading program for her class. Lisa takes a group of 4 boys in grade 1.(I have a group of 6 girls, including Jacqui). They are typical little boys and can be a handful at times. On Wednesday, she played the trump card and told them that she was on "tuck-shop duty" on Friday. They were perfectly behaved, of course, and at lunchtime today they all appeared to "collect" their bribes. Nothin's changed since I was at school all those years ago.

A very big rugby match is in Sydney tomorrow night with the New South Wales Waratahs playing in the semi-finals of the Super 12 competition.. We won't be at the stadium, rather, we'll catch it our local watering hole. Our team is favoured to beat the visiting South Africans and it will be a very torrid match. I think we'll just get the victory and the right to play the best team from New Zealand for the championship, next weekend in Christchurch. Those blokes will be nearly impossible to beat, especially in their own backyard. Rugby - the game they play in heaven.

Enjoy the weekend...

Laurie

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Position in gold, silver, nem, paas, ssri, abx

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