FSU Contributor: Gold Hits $480 And Nobody Notices? by Dave Ramsden 12/02/2004

GOLD HITS $480 AND NOBODY NOTICES?
Dave Ramsden
December 2, 2004

Mr. Market Sure Likes to Fool With Us

The big news the past little while for precious metal investors has been the divergence between precious metal spot prices and the stock prices of the companies which mine them, or look for them. Put more bluntly, the seniors are languishing and the juniors are dead.

Here's what I mean. The daily price of Silver Standard, SSRI, compared to the spot price of silver.

SSRI, one my favorite silver stocks, has been dropping for quite a while, and relative to the price of silver, it's taken quite a tumble the past 2 months, as the figure shows.

Despite a 30 cent up move in the price of silver today, SSRI was actually one of the few silver stocks I follow which was up (but almost nil). The situation is the same for most other silver and gold stocks. One silver equity I bailed on yesterday, Western, WTZ, has really take it on the chin the past two weeks. I got stopped out of SSRI a few weeks ago, but reentered today, only to see it sell off in the face of a rampaging spot silver price.

For many of the juniors I follow, the situation is much worse. Many of them are 50-70% off their February highs and are trading miniscule amounts of shares. It's a true bear market in a large minority of the juniors. Low volume, slow sags in the prices, nothing happening. Very few of the juniors have printed new 52 week highs in the past few months, but many are printing new lows.

For investors in the sector, days like these are frustrating, for traders, they are much worse than that. Well, nobody said life in the markets would be easy, and there has been no shortage of theories advanced as to why we are seeing this kind of behavior.

1. Gold ETF sucking up investment dollars.

2. Commercials at record short positions indicating correction is imminent.

3. Failure of gold to make progress versus other currencies.

4. Higher costs of production eroding profit margins of producers.

5. Who needs gold while EBAY is running!

6. Too many people burned in the April sell off.

At times like this, I find it very useful to compare short and long term charts. Let's look at the same chart as above for a two year period.

And compare it to another silver stock, Pan American, PAAS.

A different picture emerges from these two figures. The precious metal stocks tend to blow hot and cold, and right now they appear to be cold. The leverage between the stocks and the spot price is within channel parameters (highs and lows) established the past year in this spot price range. We are merely at the low end of speculation for the sector for SSRI, and in the middle of the range for PAAS. Good for investing purposes, not so good for quick trades.

Turning to gold, when we look at a good quality producer like Glamis, GLG, relative to the gold price.

It's doing just fine. Again, it appears we've hit a soft patch of speculation recently, a situation which will eventually revert to the mean (and probably overshoot it) if the metal spot prices continue to make progress.

I think the juniors being dormant is indeed a reflection of the inability of gold to break out versus the Canadian dollar and a lot of people having gotten burned in the speculative frenzy of earlier this year (I know, I got caught up in it. Should have known better by now, but that's the way it goes). In 2001, the better positioned producers and senior explorers had to get hot before the juniors came to life, and I expect we'll see something of a similar nature unfold in the days ahead. When the Goldcorps and Glamises really start to break out, then the juniors will start up again.

How about that move in silver today?

Is silver going to do another fall off the cliff thing pretty soon? I wonder what's happening at the Chinese silver conference? It'll be interesting to see if Dave Morgan lets any cats out of the bag when he gets back. I have this fear the Chinese have some kind of ulterior motive for inviting so many North American commentators ("experts?") to the show. Kind of a misdirection Manchurian Candidate thing. To be fair to the Chinese, who is transparent and totally honest in their silver dealings these days?

I thought of Dave today because he predicted $8 silver again in 2004 (correctly, as turns out). Of course, a lot of us had the same feeling, but who would have thought we'd be losing money on it so far. Ted Butler also predicted a big move of some kind after the December options expired last week. Also correctly, it's beginning to appear.

I chose the title of this article ($480 gold, and nobody notices) partly to be tongue in cheek, but also as a distinct possibility. Indeed, with general markets running lately and bond prices holding up well, there is a possibility we could put on a further 5-10% move in the spot prices of gold and silver and hardly raise an eyebrow. Gold is actually showing signs of breaking out versus the Euro (see long term chart, below), so we could be on the threshold of a big bull move which might go relatively unnoticed.

With the huge wall of worry in front of the precious metal sector for all the reasons listed above, could a sharp rise in the spot price be in the cards instead? Who knows. Such is the wacky way we try and make money.

What to do

At times like this, you want to think about long term versus short term strategies. Long term (12 months or greater), I think there's only one direction for gold and silver prices, up, so this is actually a good time to take some positions and ride them out (when isn't it a good time to to buy for the long term these days?). If your focus is on trading and shorter term profits, some judicious entries are indicated here, and be prepared to jump on the junior stocks if they turn hot again.

I've reentered a few seniors today, have a few juniors which have done well lately, and a few "teaser" positions in other juniors, but am also carrying a lot of cash. Good investing doesn't mean you can't also "trade the tape" if you're willing to put the time into it.

Other than that, it's a new adventure every day. Good Investing and Trading everyone.

Contact Information
Dave Ramsden
Victoria, BC, Canada
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