From the August 24th Edition...
Special Alert: Gold Tanks… Markets Roar to Life, Look Set to Rally
In the face of all this bearish sentiment on global markets, global recession fears and debt Armageddon in Europe… the markets are now overextended to the downside and are set for a fierce rally. Over the last 3 weeks strong support for the S & P has appeared at 1120 where investors have clearly drawn a line in the sand. At the same time a big technical buy pattern is forming in a double bottom that looks to be shaping up in favor of the bulls.
This market has been driven on emotions, not fundamentals. The machines are manipulating your emotion creating huge swings in volatility. One thing is very clear in my mind, no one wants to sell below 1120. With gold tanking making a classic top, that signals fear is coming out of this market for now. It is time for clearer heads to prevail and value hunters to go out and find bargains.
It is time for a rally.
Gold was a huge fear trade and today signals a change in sentiment. There is at least $100 to $150 dollars of fear built into this trade and ther fear needs to unwind before gold can go higher.
It is now time for a general market rally.
The market has priced in as much bad news as it can over the short term including Ben not announcing further QE measures. A lot of selling on the North American markets was investors preparing for a worst case scenario in Europe. Fears that Ben will not announce more asset purchases which is what the market wants has markets really spooked. Asset purchases deal directly with debt monetization which is what the market wants the FED to do. If congress can’t deal with the looming debt problems, then the obvious choice is for Ben to deal with it. As bad as this sounds, no better news for the markets will be than for Ben to announce that he is printing a trillion dollars to pay down the debt to help mitigate what the retards are doing in Washington.
Many traders and speculators seemed much more confident Ben would announce QE3 at Jackson Hole this Friday. That sentiment seems to be waning in favor of Ben hinting at other forms of QE inlcluding maniupulating maturity dates which in my opinion is just dumb. In essence what that does is just extend the time that one can borrow which just adds to the interest burden and does not get to the crux of the problem which is paying down the debt. Ho Hum.
Start the printing presses and pay off the debt while you still can!
This is really what all this is coming down to… QE is about manipulating the US debt situation so they don’t default. It is not about stimulating the economy. IF the economy was doing well, debt service problems woudln't be an issue. Just print the money and pay it off please. That is what the markets want. It is better than the alternative in my opinion. At least you allow for growth. At least you allow the banks to continue to lend, (for the first time in years there has been an imporovement). Bank lending means small business is back in business which is a huge part of the economy that needs a big lift that Ben and Barak always seem to ignore. It is also a part of the economy that won’t automate and will continue to hire with they have the funds to expand. You snuff out the banks, you snuff out any hint of a small business recovery for at least the next 2 years.
All I know for certain is that another round of bond purchases is coming at some point. Jackson Hole may or may not be the date he lets it slip, but make no mistake, more bond buying is coming. They may try other things but what they will find is that they are wasting time not buying their bonds while they still have the authority to do it.
Look at the banks… they will not survive without another injection.
The charts on America’s finest institutions say it all. Ben has no choice, he has to shore up the banks again so they don’t fail. Bank of America is about to fall off a cliff if it goes under $5 and Citigroup isn’t far behind having been rolled back and now losing 40% of its value again. I recall many calling Citigroup a buy at $30 in 2008. Are there any takers this time around? Certainly with the reprot going out on B of A today... no one wants to go near this sector. The US banks are a bunch of lepers.
Even the bad boy investment bank Goldman Sachs is looking anemic and in further peril over the next quarter without an injection of tailored made steroids for the markets. The question on my mind is will Ben be proactive and shore up the banks now or will he be reactionary waiting until the last possible moment like the Europeans? Something tells me that if Europe fails, there will be contagion on our shores and without the banks getting through the mortgage crisis another blow to their balance sheets from the Euro debt crisis might put them over the top... or under. The only banks I would recommend are our Canadian Banks which are a cut above the rest. They are great buys on these dips with BMO beating the street today, that reinforces just how strong our banks are.
Most argue that inflation is too high for Ben to announce bond purchases but I would argue that Ben will say those are lagging indicators and deflation is much more a risk over the short term to medium term than inflation. I am sure he will use negative language about the economy, although I doubt Ben will admit anything is structural because that starts to begin to tread on the Obama’s department. If Ben admits things are more than transiroty he admits his role at the Fed is less important and this is somethign beyond what the FED can fix. All this bad data gives Ben the ammo he needs to do what he wants.
The government embarked down this road of QE when they probably should not have. They should have let all the bugs work through the system the first time and we would be clear sailing or closer to a real recovery insteading of risking goign back into recession. They cannot pullout now or the effects on the economy could be dire and truly send us back into recession like the 30’s except this time inspite of a recession and deflationary conditions, we will still see rising prices in the face of defaltionary conditions. Don’t think so? Just look at what gold has done. All money in the world is dong the opposite to gold.
If the markets can get traction the rest of the week and Ben can give us a carrot, markets could track back to challenge the popular moving averages. I doubt downward momentum is done, but at some point you have to separate reality from emotion and the reality of the current situation does not call for market to go lower. Ultra low interest rates guarantee that... there are too many risk adverse retiring baby boomers that will take the 'percieved risk' and the yield of an equity or over the 'illusion of safety' and no yield with governemnt debt. The last place I want to be is tied up in a 10 year bond while we have simlutaneous curency and debt crisis going on.
All is Quiet on the European Front
Europe needs to fall apart a lot more for Armageddon to happen and I doubt that Europe is going to fall apart over the next 3 weeks. In fact, negative sentiment in Europe is waning as well. The European Union is there for good and leaders will do what is best to save the union as it is to everyone’s advantage to remain an economic block. Germany has taken a hard stand for a negotiating position, but they are no dummies, they need the Euro as it benefits them for trade keeping German quality priced at American prices. If they want to kill German industry, then leaving the Euro is an obvious choice. That is not going to happen. Not only does Germany have the best advantage of all nations from participating in this union, they get to bully everyone else around. They are truly the rulers of Europe. 100 years later, who would have thought that all the Germans would have to do to achieve their dreams of continental domination was to lend their neighbors money for profit.
Comments on Gold
I am relieved to see gold top out. It means it is not going parabolic yet, but is creating a new trading range. It also means that there is much more to this gravy train for the rest of the year and 2012 because it is not going parabolic yet. The last thing I wanted to see was gold going parabolic. If you look at the silver chart which went parabolic in March, it took almost 2 quarters to start to heat up again, gold going parabolic and collapsing at this point would see a major correction and take momentum out of the whole sector once it crashed.
I expect gold to come down to at least $1780 before it starts to gain upward traction again. I have even deeper targets of $1750 and $1640. It formed a classic top, opening higher than yesterdays high, then closing below yesterday’s low. Gold is not done, but it has made its highs for August. I expect that at some point in September we will be challenging recent highs. What is great about the gold trade is there is always a bottom much higher than most analysts expect and predict. If people are telling you $1600, starting buying anywhere in the $1700’s.
The fundamentals for the long term gold market have not changed although if I was an investor I would have my eye on leveraging out of the metal and into the miners and developers and premium explorers were they can still benefit from a rising market. As long as our leaders keep on taking the current approach to the problems at hand, which is for European leaders to stick their heads in the sand; the long term debt problems are here to stay until we default, monetize or grow with fiscal responsibility out of our debt problems.
The last minute solution will always be to print money and monetize.
With the fear trade coming out of gold, it gives the markets room to rally. The last $150 in Gold was all fear and then silly momentum.
Option Trade for the Month MCP $49 Sept calls (unhedged)
I am introducing a new feature for the letter, a monthly option trade. Last months trades on the G and AEM were very successful. This month’s trade is MolyCorp. The premium on this company is a much more than compared to Goldcorp which is priced the same, but the range that MCP trades in is much more than Goldcorp and could easily run up to $70 or $80 in a relief rally whereas G will have a hard time breaking $55 to $60 until next quarter. MCP blew away earnings and is a growth story that has earnings growth, high margins, and is ramping up production of rare earth’s. They are they name to go with in the sector. I am recommending this buy on a chart pattern.
Q2 earnings for MCP were $0.52 a share which beat even the highest analysts’ expectations of about $0.40 cents a share. Phase one, which is targeted to be in full operation early next year is expected to produce 20,000t of rare earths a year. Phase 2 planned expansion will double that to 40,000t production by 2014.
This is a buy low sell high trade. I found MCP at an attractive valuation yesterday at $49 and the chart is indicating strong support at $50 and a potential double bottom with markets. MCP will grow no matter what the market does over the long haul being showing very nice profits already without being in production. It also bounced off its 50week moving average which is another strong area of supprot for stocks.
I bought the $49 contract yesterday while it was just in the money for a price of $4.69. I plan on exiting my $49 calls over $60 this week or next. Don’t let the premium scare you away unless you plan to hold this till expiration. MCP moves $5 a day and if the markets get a lift then MCP will benefit in a big way. This is another really cheap growth stock based on forward earnings. In times like this I find the big stocks are just as volatile as the little guys and a great way to get exposure is to play the options.
Breakout Gold Stock…
Calico Resources CKB-V $0.56
Premium @ $0.35 +$0.21 / 60%
Calico Resources has been a top gold pick in the explorer category since the spring. It has been range bound in anticipation of the drill program starting up at their 1 million ounce Grassy Mountain Property they optioned off Seabridge Gold. On August 10th Calico announced they had started drilling, targeting a rich area on the property. The team at Calico speaks of class as they announced options on August 22 at $0.60. The directors could have easily given themselves cheap out of the money options in the $0.30’s, but instead gave themselves options where they believe the fair value is. If you look at the drilling history of the property there is a very nice high grade core that may extend to depth which could support an underground mine. Seabridge Gold had some very rich hits that will make this tiny $13M market company look like a steal at current prices, especially with 1M ounces under their belt.
The global resource grades around 1 g/t so it is not classified as a high grade deposit, but when CKB announces results from the initial drill program, the numbers will be very lucrative. Historical results at Grassy Mountain include 67.67 meters grading 9.78 g/t au and 38.89 meters grading 12.44 g/t au. That is 661 and 484 grammeters.
When evaluating an underground operation you want to see consistent intercepts of atleast between 25 and 50 grammeters. An open pit operation can generally operate 10 – 25 grammeter ratings. A real quick rule of thumb… if a company consistently turns in 100 plus grammeter ratings on any type of proposed deposit, generally that will be a mineable deposit.
CKB-V is a top 2011 spring/summer high grade gold pick along with GWY-V, NCG-V, GCM-T, NES-V and MGP-V. I advocate buying a basket of gold stocks as buying 5 to 10 gold stocks will mitigate any risk that one poorly performing stock will have without diversifying away your leverage.
Make like Warren Buffet and buy iron ore…
The most beat up sector is iron ore. Within this sector there are companies like Cap-Ex CEV-V and West Africa Iron Ore WAI-V who have some of the most sought after land in their respective regions, initiating low risk exploration programs and are set to add material value. These companies scream long term value with multimillion dollar potential. Picking up stocks that traded at 80% off their high from the spring represents the best value anywhere in the materials market.
The long term fundamentals are still in place for global iron ore demand to double over the next 10 -15 years. One of China’s main industries is steel production and any time the iron price comes off in an anticipated recession, it is number one on the Chinese list of commodities to buy. The Chinese ramp up their orders to take advantage of the lower prices in times of recession as their long term growth plans include a lot of steel for Chinese and other developing nations controlling over 60% of the world’s steel production.
If the Chinese doesn’t want the Big 3 (Vale, Rio, and BHP) to do to them what the they are doing to the rest of the world with rare earths, the solution is to develop their own long term supply chains. Several Chinese companies have already done this making strategic investments in both the Labrador Trough and in West Africa. CEV and WAI represent low risk exploration adding material value for shareholders, when the global economy kicks starts into gear after this current stall, iron ore will again snap to life. The 2 places in the world that have can support long term supply growth of iron ore is in West Africa and the Labrador Trough. Australia’s reserves are depleting at an alarming and Brazil and India are nations that need to support their own internal growth demands for the raw material.
CEV will have a steady flow of news this summer and fall that will hopefully lead to a big discovery on Block 103. Rumor has it that CEV’s magnetite potential on Block 103 might as large as NML’s massive deposits. They are also higher grade at around 32%. If CEV can prove a higher grade resource next door on Block 103, they may jump the queue in front of New Millennium’s NML-V Lab Mag and Ke Mag deposits simply because of location being closer to Schefferville and infrastructure and having a higher grade.
Cap-Ex announced the first results of the year outlining high grade hematite zone at their Porky Lake Property over a 750 meter strike length with a 91 meters thickness. Samples graded 54% and 62% iron respectively and the high grade sampled return very low silica content which is important for DSO.
Ethiopian Potash FED-V $0.76
EPC is back in play having recently announced they successfully intersected potash horizons on the property in the Danakil Basin. They are 6 months behind Allana Potash and arguably have a higher grade resource amenable to open pit mining. Allana also disappointed on their grades from historical results so EPC has an opportunity to better AAA’s resource on grade. Ethiopian Potash is my top potash pick and I expect now that assays are less than a month away that this one will start to run. The warrants provide great leverage as the strike is at $0.75 which means that once FED is over $1, the warrants should trade penny for penny with stock. Ag stocks also seasonally start to run at this time of year.
When looking for resource development plays like FED or WAI or CEV. I am looking for a strategic area that can support major development. I also look for a strategic commodity that a country will need in the future. Potash and iron ore are 2 materials that the developing world cannot live without. Copper comes in third and may end up being one of the most fought after commodities in the future. It is key to grid development and the world is slowing going electric no matter how addicted we are to fossil fuels.
Some news this week…
Pretium Resources Inc.: Brucejack Project Drilling Update
Prophecy Drills 49.5 Meters Grading 1.27 g/t PGM+Au, 0.71% Ni, 0.45% Cu within 472 Meters Grading 0.43% NiEq at Yukon Wellgreen Project
GALWAY RESOURCES LTD. | Galway intersects 138 g/t Au over 1.1M, 44.7 g/t Au and 1,120 g/t Ag over 1.2M, 26.8 g/t Au over 1.9M, and 7.5 g/t Au over 7.6 M at Vetas
AUREUS MINING INC. | Multiple High Grade Intercepts from New Liberty Project - Deposit Open to the East
KOOTENAY GOLD INC. | Drilling Success Continues at Promontorio as Kootenay Hits 205 meters of 117 gpt Silver Equivalent in Step-Out Drilling in Southwest Zone that includes 169 gpt Silver Equivalent over 50 meters.
PMI GOLD CORPORATION | Further Strong Drilling Results from Obotan Gold Project, Ghana
Have a great rest of the week!
Beat the Market Stock Picks