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Minyan Mailbag: Big Moves in Gold Juniors

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Be wary the long gold, short shares trade.

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Hi Lance,

I've been following your posts on Minyanville for some time. You have a great beat on these mining shares. I'm sure you're getting a lot of the same question, but could you explain the action in Golden Star (GSS) over the past couple of days?

Also, with last week's carnage in the metals, what's your working thesis on the short metal shares/long gold trade you thought the hedgies were using?

What is going to break that trade down?

Thanks for the insight. I'll be reading MV for your post in case you respond there.

Jeremy

MJ,

Thanks for the question. Several of the juniors had wild moves late on on Thursday. In addition to GSS's 24% rally, Minefinders (MFN) melted up 8% in the last hour, while Metallica Resources (MRB) fell 15% in the finaly two minutes of the session. My guess is that a long/short fund was being liquidated by the margin clerk in the final 30 minutes. But who knows?

Whatever the reason, the lack of sellers in the final 30 minutes Thursday that allowed GSS and MFN to rally so much does sort of confirm that many of these juniors have simply become too cheap and are probably sold out. Even yesterday, both GSS and MFN hung onto much of their gains from Thursday, and likewise, MRB bounced back from its losses.

As for what will break the long/short trade that many hedgies have on (long gold/short the gold shares), the shares moving up faster than the metal will tend to cause that trade to unwind. So, we merely have to keep an eye on the XAU/gold ratio. The faster it rises out of this current hole below 0.2, the more likely the rally will feed on itself and cause that trade to unwind.

That still seems to be the highest probability going forward in my opinion, given the valuation compression that has occurred over the past two months in the shares.

Despite the fact that everybody seems to think inflation suddenly went to zero because oil slipped back to $100 and gold slipped back to $910, inflation is just as much of a problem now as it was a week ago, and the Fed continues to feed it with rate cuts.

The environment is just as stagflationary today as it was a week ago. The fact that the financial media desperately wants to believe otherwise after four straight days of selling in the commodity complex and a rally in equities is just more confirmation that trend remains well in place.

For more on the gold trade, check out Hoofy and Boo's exclusive interview which tipped off Minyanville early to Gold's surging price.

Position in Gold, Gold shares mentioned above.

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