Wednesday, August 31, 2011

Bullion Baron's Fantasy Portfolio - Update

You can see my original post on the fantasy portfolio here:

Bullion Baron's Fantasy Portfolio - Day 1

Further to the disclaimer that was in that original post, I would just like to point out that the portfolio may come close to being 100% invested at times (currently a little under 50% invested). This portfolio was not setup to reflect the value and weighting of an entire investment portfolio. Depending on your knowledge, capital, age, goals and other factors Gold stocks may only be a small portion of your overall investment plan. In your case 100% invested might only be the equivalent to 5% of your entire capital for example. I do not take any responsibility for your investment decisions, it's a rough market at the moment, do your own research and make sure any decisions to purchase are your own!

Over the last several days I have tweeted some buys during intraday trade, adding the following to the original portfolio:

10,000 MTE at 83c
8,500 CCU at 89.5c
100,000 BSROA at 1.6c (11c strike 30/11/2012 expiry)

The MTE purchase should be no surprise to regular readers following my writeup on it here. I've also written about CCU on multiple occasions. It's likely to be the only pure Silver company I hold in the portfolio for the time being.

BSR (Bassari Resources) is a new one to the blog, this company popped onto my radar the other day (randomly via the ASX precious metals stock announcement feed) when they released the following assay as part of a drilling campaign underway:

7m @ 54.3g/t gold intercept at Makabingui Project

Further reading and I like what I see. 2-3 quarters worth of cash, a new shallow high grade resource which they intend on expanding, further drill results pending (some of which contain VISIBLE GOLD in the drill core), large tenement which is surrounded by other multi-million ounce Gold deposits... I went with the options as there is a reasonable length of time until expiry (15 months) and I think there is easily room for the BSR share price to appreciate to around the 14c level over the short to medium term which would likely provide around a 300% return on the options. Options are high risk, but they can provide some amazing leverage. The position taken for the portfolio is therefor very small and will not be increased.

In the tweet I said I hadn't gone with this trade in my personal account (didn't intend on chasing after thinking I had missed an earlier order), but after inspecting my account later in the day realised the earlier order had gone through, so I'm in at .015 (portfolio purchased at .016).

Here is the portfolio as it stood end of trade today:


I will look at improving the format. Haven't had a lot of spare time the last few days so have just thrown the above together quickly to display where things sit presently.

I am still waiting for the HUI/GDX breakouts to add further positions from here. We could easily see this breakout occur tonight in US trade with Gold holding it's ground and stocks up in the premarket. I suspect when they do breakout (HUI above 610, GDX above 64) it could be the start of a very explosive rally.


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Another classic quote from Christopher Joye

Those who are familiar with Christopher Joye's ramblings are probably well aware that the guy has tickets on himself and they are more than you can afford buddy... Ferrari (pat yourself on the back if you got that reference).

He loves to point out how right he is.

Take this post on his blog for example (LINK) where he retrieves quotes over the past 2 years showing how right he has been this whole time.

What's amusing is that two weeks prior to that post Joye gave some expectations for 2011 in a post titled 'Where to for Australia's housing market?', here is an excerpt:
"If the doomsayers on the domestic economy are right, rates are not going anywhere (I obviously don't agree with them). In this case, we will get mild nominal house price growth over 2011, which will likely underperform inflation (ie, real declines, as we have seen for the last year).
If rates do rise a few times this year (as I expect), nominal dwelling prices will go nowhere or retrench modestly (eg, 0-5% year-on-year), depending on the number of hikes."
Those of you who follow financial news are probably already aware that RPData/Rismark released their housing index figures today (LINK):

Over the first seven months of 2011, Australian capital city home values were down -3.4 per cent.
There's some great analysis of the figures over at MacroBusiness (here and here).

So not only has Chris Joye been wrong on the interest rates which he has been harping on about for the most part of this year (boy who cried wolf much?), but his prediction that we would see nominal house price growth has also been wrong... well that is unless house prices do an about turn and climb back to where they were at the start of the year (seems very unlikely at this point, as pointed out by Data Sword in first linked MB article "The longstanding relationship between house prices and monthly housing finance suggest we can expected falling prices for some time to come").

This is what Christopher Joye had to say on the release of the index results:
"If rates do remain on hold, or begin to fall, we would expect to see Australia's housing market find a base and begin to generate capital gains again. If the RBA has really come to the end of its tightening cycle - which we would find surprising given the high core inflation revealed over the last six months - 2011-12 will likely be judged one of the best buying windows seen in quite some time. The turning point will arrive when otherwise hawkish Australian consumers accept the notion that rates are not going to inexorably increase"
I suspect this will be a quote that we will be able to reflect back on and have a chuckle at in a few years time.


Oh and before I forget... I love how Christopher Joye takes aim at other analysts while keeping the comments to his blog turned off. Poor form CJ.


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Monday, August 29, 2011

Bullion Baron's Fantasy Portfolio - Day 1

Yesterday I mentioned I would be starting a 'fantasy portfolio' and that I would be taking immediate positions in the portfolio with an outlook to increase those positions should we see a breakout in the Gold stocks (see this post).

Many stocks I have mentioned on this blog have climbed 100% or in some cases much more after posting about them (e.g. WCN, MNM, TBR, AYN, SVL, CCU and others), although some have then come back to earth following their dramatic rise. The portfolio that I publish will be an opportunity to (hopefully) showcase the sorts of gains that are possible in this precious metals bull market.

Disclaimer: A reminder that I am not responsible for any personal decisions you make (these trades should not be considered as advice in any form) . This portfolio won't necessarily be a reflection of my personal holdings. It's likely that I will have positions already in the stocks that are bought/sold in the portfolio (but may not). The stocks that I invest in/trade are usually risky & often illiquid juniors which can drop dramatically in no time at all, buy them at your own risk.

Unfortunately having a day job means that intraday posts to the blog are unlikely for updates to the portfolio, but when I can any buys/sells will be tweeted through my Twitter account and then updated in the portfolio and posted to the blog after hours. Where I don't get the chance to tweet a specific price point during the course of trade I may opt to buy/sell based on the VWAP for the day (using Stockness Monater).

Keep in mind this is an Australian based blog and trades will reflect this with all stocks being ASX listed. I may also choose to buy/sell other securities such as QAU (exposure to US price of Gold, AUD hedged), PMGOLD/GOLD (reflects AUD price of Gold) & USD (tracks change in United States Dollar relative to Australian Dollar).

My first trades were tweeted earlier this morning. The following stocks (and amounts) were added to the portfolio:

WCN @ 12c - 20,000 Shares ($2400)
CGT @ 5.7c - 90,000 Shares ($5130)
MSR @ 18.5c - 15,000 Shares ($2775)
SLR @ 2.56 - 3,900 Shares ($9984)
TRY @ 4.45 - 2200 Shares ($9790)

$30,079 used from a total $100,000 available.

I will work on creating a small spreadsheet to update with the trades making it a bit easier to track the transactions that I make.

I won't always be able to provide full rationalisation for the decisions made, though will do my best to when I can. Most of the stocks bought today have been previously covered on the blog (so fundamental reasoning for their purchase should be obvious). WCN & MSR should both soon have drilling results due soon from their respective projects and MSR is also waiting on a mining license and resource upgrade (so may look to sell some of both holdings into news).

CGT is about to go through a share consolidation, so don't let it boggle your mind if it turns into an instant 10-bagger as this is just the consolidation and I will update my purchase to reflect it (obviously)!

Any questions feel free to drop a comment below or an email to bullionbaron at gmail dot com and if you want to keep ensure you don't miss an update then I would recommend subscribing to the blog by email:

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All Miners Aren’t Created Equal

I came across this great article earlier today and thought it worth sharing, here is a small excerpt with some interest statistics which show just how difficult it can be to pick the right Gold stocks:
Research from geologist Robert Sibthorpe shows that only one in 2,000 (0.05 percent) companies would ever find 1 million ounces of gold, and that only a third of those would be able to turn that find into production. In addition, research from Barry Cooper at CIBC shows that these discoveries are becoming even more difficult. There were 51 gold/copper porphyry discoveries of +3 million ounces during the 1990s, but only 24 of such discoveries occurred during the 2000s.
In order to find the diamonds in the rough, I use what I call “The Five M’s” for mining stocks. I discussed this process thoroughly in The Goldwatcher: Demystifying Gold Investing, an investor’s guidebook to gold investing I co-authored with John Katz a couple of years ago.
The Five M’s are: Market cap, Management, Money, Minerals and Mine life cycle.
You can read the rest of the article here:

Valuation Gap Makes Gold Miners Attractive But All Miners Aren’t Created Equal


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Sunday, August 28, 2011

Gold miners about to breakout to new highs?

Gold stocks have been consolidating for the best part of 12 months, even as the price of the metal has moved around 40% higher from the January lows at around US$1300 (closing Friday at almost $1830).

Many of the Gold miners are still priced as if Gold was around $1100-1300 and it's going to be a wild ride if they start to price in higher Gold prices as the metal heads toward $2000 and beyond.

Cerro Resources (ASX: CJO) recently released an investors presentation in which they highlight the NPV of their Cerro del Gallo (Mexico) project, the figures are based on metal prices of: $US1,293Au/$US23.87Ag. It's companies like this whose share price will benefit from a higher average price in the metals. For example CJO is due to release a BFS in the 4th quarter of this year and the project economics are likely to be improved by the higher metal prices. Once the market wakes up to these undervalued companies they are likely to be re-rated.

Another company Argent Minerals (ASX: ARD) late last year was able to increase the size of their resource (at the Kempfield Silver Project) by reducing the cutoff grade due to a rising Silver price.

A rising price of Gold has the potential to multiply profits for high cost/low margin producers by a huge amount. For example take a low margin Gold producer who had total costs per ounce of $1200, they may have only been making $100 per ounce earlier this year (say $3m gross pofit per year if a 30koz pa producer), a move from a $1300 average price of Gold to $1600 has the potential to quadruple that companies profits (and share price/market cap).

The above are just some examples of how a rising price of Gold/Silver can benefit the related miners. Of course there are also many pitfalls to buying the miners and if buying into companies directly there is no guarantee that that your picks will perform as well as a Gold stock index. For that reason some who want to take advantage of the Gold miners may wish to buy into an index (such as the GDX ETF) rather than specific stocks. Unfortunately I have not seen an ETF that can be purchased on the Australian stock exchange. We have a Gold stock index (ASX:XGD), however I haven't come across any way to get direct exposure to it's price.

Both the HUI and GDX are consolidating toward the top of the range they have been trading within for the last 12 months and are looking prime for a breakout (although as I pointed out earlier, until we see the breakout there is risk the pattern plays out as a H&S top):


The GDXJ (similar to GDX, but an index of junior stocks) is trailing the performance of the above indices as the smaller and less developed companies are weighed down with the negative sentiment in the general stock market:


This is made obvious when comparing the GDX and GDXJ directly (see chart below). The GDX has out performed the juniors over the past 4 weeks during the recent astockalypse.

The junior stocks tend to out perform during the good times and under perform during the risky times.


The HUI:GOLD ratio (previously discussed in this post) is looking to slowly trend higher (higher highs, higher lows, see chart below) as the miners finally start to reflect the increase in the price of the metal. There is still a long way for them to go and if we return to valuations similar to that seen earlier in the year (HUI:GOLD @ .4) then we could be in for a quick 20-30% rally in the miners (assuming the price of Gold remains around the $1800-$1900 level) as they breakout of the current consolidation range and move higher.


The price of Gold has run hard over recent weeks. Those looking for exposure to precious metals are probably better looking to the stocks which are cheap compared with the metal and not largely stretched above the 50 and 200 moving averages as the metal is.

On Friday Bernanke made a speech at Jackson Hole (can be read in it's entirety here), the market was expecting QE3 and while they didn't get it implicitly Bernanke suggested that the tools at the Fed's disposal will be discussed in depth at an extended FOMC meeting in September:
In addition to refining our forward guidance, the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus. We discussed the relative merits and costs of such tools at our August meeting. We will continue to consider those and other pertinent issues, including of course economic and financial developments, at our meeting in September, which has been scheduled for two days (the 20th and the 21st) instead of one to allow a fuller discussion. The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate to promote a stronger economic recovery in a context of price stability.
I think the market could look favorably on the wording from the speech and perhaps ease the current rout in stocks and allow the Gold stocks to catchup to the metal.

Starting this week I will be introducing a "fantasy portfolio" of Gold/Silver stocks. It will be similar in fashion to that 'The Speculator' from the Eureka report maintains, except it will predominantly be precious metal based stocks, rather than a mixture of industries. Keep an eye out for it as I will provide further details in the next couple of days. Immediate positions will be taken in the portfolio, with a view to increase them if we see a breakout to new highs in the miners. To keep updated with this portfolio I would recommend subscribing by email (free):

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Friday, August 26, 2011

CME increases Gold margins

A few months ago I wrote some posts about the margin increases that were occurring as a result of the large moves higher in the Silver price. They provide some background to the following post, you can read them here:

CME Hikes Silver Margin Requirements (Again!) - March 25th, 2011

CME Increases Silver Margin Requirements - April 26th, 2011

CME gets aggressive with Silver margins! - May 5th, 2011

Did increasing margins break Silver in 2006? - May 6th, 2011

In August we've seen a couple of large increases (by 22% and then by 27%) in the margins required for Gold as it has recently soared higher by hundreds of dollars.

Once again there have been commentators (and comments on Twitter/Forums, etc) who have accused the CME of using these margin increases as a manipulative measure to control the price of the metals. However, as I pointed out in the earlier Silver posts, margin changes (up or down) are a natural part of a leveraged environment. They will rise and fall with the price of the metal (figures below show that Gold margins were DECREASED in June 2011, prior to their increases in August).

As I suggested on an earlier occasion I don’t understand why a fixed percentage (rather than a fixed dollar amount) wouldn’t be more appropriate as it would take all the guess work out of when the CME will increase margin. If someone more heavily involved in leveraged markets/COMEX trading understands why they don’t do this then I would appreciate you sharing any insight. I assume there is a simple explanation that I am overlooking.

There is speculation that the CME might end up releasing a flurry of margin increases at some point to truly break Gold's sharp spike higher, however I think such a move would be unlikely by the CME unless Gold put in a similar price move to Silver, which climbed by 150% in roughly 6 months. A similar move in Gold from the early July lows around $1480 would take the price to around $3700.

Here are the last 3 changes to COMEX Gold margins:

Spec (Tier 1) - USD
Current Initial: 6,751
Current Maintenance: 5,001
New Initial: 6,075
New Maintenance: 4,500
Effective after close of business Monday June 20th.

Spec (Tier 1) - USD
Current Initial: 6,075
Current Maintenance: 4,500
New Initial: 7,425
New Maintenance: 5,500
Effective after close of business Thursday August 11th.

Spec (Tier 1) - USD
Current Initial: 7,425
Current Maintenance: 5,500
New Initial: 9,450
New Maintenance: 7,000
Effective after close of business Thursday August 25th.

Resulting leverage allowed by above initial margins:

Date: June 20th, 2011
Spot Price: $1540
Contract Value: $154,000 (100 x $1540)
Margin Requirement: $6,075
Resulting Leverage: 25:1

Date: August 11th, 2011
Spot Price: $1760
Contract Value: $176,000 (100 x $1760)
Margin Requirement: $7,425
Resulting Leverage: 24:1

Date: August 25th, 2011
Spot Price: $1765
Contract Value: $176,500 (100 x $1765)
Margin Requirement: $9,450
Resulting Leverage: 19:1

With the last change higher in the margins we have seen a significant decrease in the leverage it allows.

It will be interesting to see how these margins change over the next few months whether we see a further rise or fall in the price of Gold.


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Thursday, August 25, 2011

Miners not following the metal

Micro Trader has posted some thoughts about the recent divergence between miners and the price of Gold. You can read the post in it's entirety, HERE.

Here is an excerpt from the post where some direction is given on how to deploy capital into Gold stocks in the current volatile market:
* Buy large producers in small quantities during the time of crisis and hold as we come out of the large “risk off” event — assuming the price of gold remains high. Investors will be prepared to pay a higher PE and the price of gold will have significantly increased earnings providing a “double whammy”.
* Buy small / medium producers who are likely to already be undervalued and on low forward looking PE’s. These companies may initially get sold down heavily purely on their size. Find companies that don’t need to raise money to begin producing Gold and they will re-rate very quickly once the money starts flowing in and a little bit of risk comes back into the market. These companies will also be takeover targets for larger producers.
The ideas here are quite reasonable.

It was during another large market rout in 2010 (the day after the May 'Flash Crash') that I deployed a large percentage of my Superannuation into ASX300 listed Gold stocks. Today those stocks (as a group) are roughly 65% higher than on the purchase date. Although they can be somewhat boring to watch day to day, the large cap stable Gold producers benefit from an increasing average Gold price as their margins increase from quarter to quarter.

The other important point from Micro Trader's post above is to look for companies who have substantial cash to make it through volatile times without the need to raise capital. I can't agree more with this point. Sticking to producers is obviously the safer option, but whether looking to buy small cap producers, developers or explorers during volatile times, ensure you take a look a good look at their financial position. Their quarterly reports will show their current cash position and expected cash outflows for the next quarter. During times like these you should be looking for companies that have at least 6 months (at their spend rate) in cash reserves, if not 12 months or more (especially for those with no income).

I do think that Gold miners will eventually reflect the price of the metal, but it's far from an easy ride. In the small cap sector especially there are far more losers than there are long term winners. Picking the right companies to back is difficult and it can be especially discouraging when they don't immediately reflect the increase in the price of Gold or Silver. Patience & persistence are going to be required to make money in these difficult times for the market.


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Monday, August 22, 2011

Gold/Oil Ratio - Where is it heading?

A few months back I looked at the historic ratios between Gold/Silver and Oil.

Gold/Oil and Silver/Oil Ratios - Then and Now

Given the recent rise in Gold and fall in Oil price I think it's worth revisiting this ratio as well as reviewing what current events might impact this ratio and their individual prices.

As per the last post the WTI Oil price data came from Economic Research section on the Federal Reserve Bank of ST. LOUIS website (Link) and the Gold price data came from the Perth Mint, I used the monthly London Fix (PM) (Link). For the month of August 2011 (top of current spike) I used spot prices so as to highlight the current ratio.

Here is a chart showing the past 40 years:


There is historical precedence for Gold to head higher versus oil, currently it's sitting at almost 23 ($1875 Gold/$82 Oil). To get to 25 which the ratio has spiked to on several occasions over the past 20 years we could see Gold head up to around $2050 (assuming no change in the price of oil).

However, the ratio has struggled to stay above 21 for long periods of time on past occasions and with each passing day there is increasing risk that the ratio falls back toward the longer term average rather than rising further. The long term average over the past 40 years sits at around 15.6 (15.6 barrels of oil per 1 ounce of Gold).

The price of oil has already fallen somewhat over the past several weeks, likely due to escalation of global growth concerns with awful figures coming out of the US (such as the Philadelphia Fed’s economic index which printed a shockingly low -30.7 in August, the lowest since March 2009)
and other economies. The market is starting to price in the likelihood of a global recession. A scenario of low global growth would see the demand for oil easing, reducing pressure on the price.

Further to this we have news today coming out of Libya that Gaddafi’s Son has been captured and I can’t help but wonder whether we might see the market reduce the risk premium that the situation in Libya has added to price of oil (as discussed in detail by Houses and Holes on Macro Business), that is assuming that Gaddafi doesn’t get the opportunity to cause any further major damage to Libya’s oil infrastructure. While this news is far from the end of conflict for the region, it’s certainly a step in the right direction and the risks to oil supply from Libya should reduce.

If we see oil fall further over the short term as growth concerns dominate and the Libyan situation settles and we saw a price of $75 per barrel, this would suggest that Gold could also moderate in price if historical ratios continue to have influence over the metal.

Oil at $75 (WTI) per barrel (around an 8% fall from the current price) at a ratio of 25 with Gold would present an $1875 price point which is around the current spot price of the metal. A fall in the ratio back to a sustainable level around 20 or lower suggests we could see the price of Gold retreat back to $1500 (and perhaps even lower).

Picking a top in Gold when it’s moving in a parabolic nature like we have seen recently is a dangerous game (as I found out when suggesting we might be close to a top at US$1630 a few weeks ago, LINK), but moves such as this often end up in tears, they tend to correct just as viciously as they’ve moved higher. Those riding Silver’s move to $50 earlier this year would be familiar just how painful the correction following can be.

There is no doubt in my mind that Gold can and will go higher than current spot prices in the future, but it is currently well overbought on a technical basis and the Gold:Oil ratio suggests that the price cannot go much higher in a sustainable manner.

I would struggle with a recommendation to buy Gold at these levels (even though I think it’s going to head higher in the medium term). Now that we’ve seen what Gold is capable of in my opinion the old saying “buy the dips” should be on the fore front of our minds and given the parabolic spike we’ve seen over the past few weeks it could be one heck of a dip that we are about to encounter.

Expectations are increasing that Bernanke may hint further or even announce QE3 at the upcoming symposium in Jackson Hole. A decreasing oil price does make such an option more palatable (increasing commodity/food/oil prices caused by earlier QE programs are in part what triggered revolution in the Middle East), but it is my opinion that we will not have much more clarification on QE3 than was presented in the last FOMC statement (we have the tools and are prepared to use them as needed). My expectation is that the market will be unimpressed with this result and it could lead to the next leg down in the stock market (and it may also have a negative bearing on Gold/Silver prices). Of course I could be wrong.

I have eased back my positions in Gold stocks to around 30% of my capital (after I increased my exposure to 50% as per this post made a almost 2 weeks ago: Gold Stocks – Cheapest since early 2009) as they have lacked direction even with the price of Gold soaring. Should the market tumble again along with Gold then there is still the potential for the topping pattern to play out that I suggested a few days ago (HUI Forming Head & Shoulders Pattern?). The 20% of stocks that were sold was only at a slight profit. I still have positions in the companies that I think are fundamentally sound to ride out a correction in Gold and the markets if it comes.

It's important to remember that the properties that cause physical Gold to rise in price during these turbulent times (no credit risk/no one's liability) aren't necessarily shared by the Gold miner who pulls the metal of the ground. So while Gold miners are set to profit handsomely from a sustained increase in the price of Gold, there is no guarantee that they will rise in tandem with the metal itself and during turbulent times such as these are best held with caution.

The relationship of the Gold price with the miners is clearly reflected in the Barron's Gold Mining Index which continued to rise even after the price of Gold peaked (and fell significantly following) in January 1980. In fact some of the largest moves in Gold stocks occurred after the price peak in the spot price of Gold. Something to consider...


While the miners continue to trade at depressed levels and look cheap at these prices, there are just too many risks present to be "all in" at this time. I will be looking for opportunities to increase my positions again in Gold stocks once the volatility present in the market subsides or if Gold shows that it can sustain current prices and the stocks start to follow it up (a close on the HUI above 610 would be a good start).


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Sunday, August 21, 2011

REIV: 100% auction clearance rate for The Block

REIV is reporting a 100% clearance rate for hit TV Series 'The Block'. "What else would you expect to see?", Robert Larocca was reported as saying. "The property market in Melbourne is still booming and tonight's auction results reflect this absolutely".

Larocca provided the following breakdown showing how the REIV came to their 100% clearance rate figure:

Sold: 1
Unreported: 3
Clearance Rate: 100%

The above is a joke of course (see my previous posts on REIV figures if you don't get it, LINK, LINK). Results are in and only 1 out of the 4 houses from series 'The Block' were sold on auction night. I haven't been watching the series, but came across this article which provides some more detail:
UNDERDOGS Polly Porter and Waz Jones have won The Block because they were the only contestants to sell their house at auction.

The much-hyped grand finale hosted by Scott Cam proved an utter fizzer with three of the four Richmond houses falling well-short of what had been considered very conservative reserve prices.

It could be weeks before a deal is stuck on the three remaining properties.

The auction debacle is also huge blow to Channel 9 and Watercress Productions - which reportedly shelled out $3.6 million for the rundown Cameron St houses.

They anticipated a very different ending to the runaway hit series after thousands of potential buyers turned up to the open-for-inspection days.

The disappointing result also comes on the heels of a Consumer Affairs Victoria investigation into the four agents marketing the properties - Hocking Stuart, Biggin & Scott, Woodards and Jellis Craig - amid suspicion of under-quoting.

Real Estate Insittute of Victoria spokesman Robert Larocca said the shocking auction result was proof the agents had been on the money with their quotes.

Mr Larocca said it was "surprising'' for three houses to be passed in after so much publicity. Herald Sun

The results speak for themselves and it's probably a fairly accurate reflection of the current state of Melbourne's property market (and that of most other areas in Australia also). Buyers are becoming smarter and no longer prepared to pay the ridiculous asking prices that have been achieved in the past.

A lick of paint and snazzy marketing campaign isn't going to see buyers shell out an easy million like it used to.


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Saturday, August 20, 2011

Percentage Gains - Gold - 1970s vs Today

The following chart was created using daily London PM Fix price data courtesy of Perth Mint's historical data.

The chart shows the percentage gain made over the period 1971 to mid 1980 (blue) vs the period 2001 to mid 2011 (red). Daily price data only goes to August 1st (US$1623), so not showing is the larger spike to almost US$1900 (over the past few weeks) which would take the percentage gain to around 700% for the current bull market.


Just goes to show how much more there might be left in the current bull run and how quickly it could play out once the wheels are in motion (if we are to see a similar parabolic move to that made over 1978-1980).


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Friday, August 19, 2011

Mike Maloney Presents "Debt Collapse"

Let me just start by saying that I'm a Mike Maloney (MM) fan. I do agree with a lot of what he has to say.

To some degree I am riding this precious metals bull market as I believe (cyclically) it's time for the metals to shine (as MM is always keen to point out, he is not a gold bug, but a cycles guy), however I also stack physical metals as I believe there is a strong possibility of monetary changes that may require a transitionary asset which will allow a shift of wealth through to whatever system comes next (perhaps a monetary system in which some way is partially backed or measured with Gold).

I do however have concerns about the way in which Mike presents some of his arguments and the people that he is putting across his arguments to.

If you aren't going to watch the entire presentation then just for my sake, skip to minute 55:00. At this point MM asks the crowd "how many here know what a P/E ratio is?", in a crowd of probably 100-200 people there are barely a few (maybe 5-10) that raise their hand and the next question is "how many do not?" gets a much larger show of hands (probably at least half the audience). It's at this point that I realised that MM is not speaking to a group of seasoned investors...

At minute 5:35 into the clip MM says "My company has a mission to get as much Gold and Silver into the hands of the middle class as quickly as possible". Given the response to the P/E question and the type of event that he is presenting at (Wealth Masters International M2 Conference) it looks very much like he is talking to his targeted audience.

There is nothing wrong with the middle class buying precious metals. I would be considered middle class. However, it will be late comers in this class that will likely drive the mania phase of this bull market and get burned if they don't exit before any collapse that could come following the peak.

Whether MM would like to admit it or not he is probably speaking in front of a crowd, some of which will leave, think about buying metals, but not actively purchase them until they are in a run away move at which point they will chase the price all the way to the top.

MM talks about trying to stop people from being slaughtered because we are about to see a huge transfer of wealth, his famous quote being:
This is the greatest wealth transfer in history. Therefore it is the greatest opportunity in history.
But what he fails to point out on most occasions is that we are already well into and possibly coming near to the end of this wealth transfer.

Those getting into the precious metals ahead of the trend where those buying in 2001-2003, not those that started buying in 2009, not those that started buying in April 2011. I started buying/investing in precious metals through 2008 and while I was ahead of some, I was certainly not early to the bull market.

The investor who was ahead of the trend, who was aware of cycles and moved all their wealth from stocks or real estate into Gold back around US$250-300oz is now sitting on a huge profit. Infact speaking of which those investors (specifically in the US) may want to consider moving some of their assets back into real estate (even if simply to purchase their own home to live in) as the ratio (HOME:GOLD) is currently the lowest it's been since the 1980 peak in Gold (as reported by Zero Hedge):

Those who traded out of the Dow into Gold back in 2001 have multiplied their income by 6-7 times (where someone that stuck with the Dow over the same period is barely break even). Sure there is still the potential for them to make a lot more if we do get the much anticipated 1:1 (Dow:Gold), however it's likely that those early to the Gold trade will also make an early (smart) exit.

Most of the wealth transfer that Mike Maloney talks about has already occurred.

Time wise we are probably at least 3/4 of the way through this bull market with only a few short years left to play out (maybe even less).

Any middle class investors getting on the Gold gravy train at this point should be very wary that they are entering the trade so late. If you are getting on now thinking it's the road to riches based on a 'wealth cycle' you need to understand that we are entering the final stage of the precious metal cycle and it's going to be hard to exit when parabola truly sets in. In the final 24 months of the last Gold cycle/bubble Gold rose a factor of 5 times (from $170 to $850) with most of the gains made in the last few months leading into the January 1980 peak.

Gold has risen roughly $450 over the past 5 months (US$1400 to $1850). A move this large (in dollar terms) in such a short time is unprecedented in the bull market to date. Clearly things are heating up. I am still of the belief that we recently entered the 3rd phase of this bull market (as I originally suggested 8 months ago: Gold/Silver entering the 3rd phase of the bullmarket?) so further fireworks should be expected.

Just keep in mind when watching material like Mike Maloney's presentations that we are well into the bull market. There are still fortunes that will be made, but also potentially fortunes will be lost if you leave your exit too late.


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Thursday, August 18, 2011

HUI Forming Head & Shoulders Pattern?

A week ago I wrote about the fact that Gold stocks are the cheapest they've been since early 2009.

I significantly increased my exposure to Gold stocks in the several days leading up to that post as the crashing market provided some good buying opportunities.

I am still holding those positions, although at this point they are still only a little above break even as a whole (the new positions, existing stocks held are still well in the green from where I bought them). Disappointing performance really given Gold's resilience to a large sell off.

At the time I wrote the post the HUI:GOLD ratio was at .31 and in yesterdays trade we'd only seen an increase to .32 (HUI Index since my post has risen from around 550 to 580).

What concerns me is that the HUI is forming a similar pattern to that seen in the early 2008 top where a head and shoulders pattern formed before crashing to roughly 30% of the peak later in the year.

Given that Gold is currently trading back above US$1800 I would like to think that the HUI can breakout and nullify the H&S pattern.

For now I continue to hold open my larger position in Gold stocks, but I would be much more comfortable if we saw a new high & close above 610 on the HUI.


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Wednesday, August 17, 2011

2012 Lunar Dragon Coin Controversy

You can now buy Perth Mint 2012 Lunar Year of the Dragon Silver & Gold Coins at Bullion Money:

Buy gold online - quickly, safely and at low prices
Click this banner or the one at the top of the page to visit.

For background information you can find my previous posts on the 2012 Perth Mint Lunar Dragon coin here:

With less than 2 weeks to go until release of the 2012 Perth Mint Lunar Dragon Coins (Release Date: September 1st), it has been interesting to see some controversies arise as anticipation for the coins reach fever pitch.

Dealer/distributor allocations for the coins have recently been provided with a few dealers and affected customers unhappy with the result, which has seen the number of coins provided to Australian dealers a fraction of what was expected. As mentioned previously on the blog, some dealers had presold coins and have now had to cut these numbers even with some customers having prepaid for the coins.

One dealer on a local forum recently commented:
I was told first hand by one of the Perth Mint's largest Australian wholesale dealers. He told me that when he asked about an allocation for the Dragons; he was told that if he wanted 40,000 coins it wouldn't be a problem. Nothing was written down and he took their word that it was a done deal. Being a smart cookie he sought to maximise sales before the rest of the herd caught up. Unfortunately he did such a good job that he managed to sell 50% more coins that what the Perth Mint will supply him with, which at this stage is about 6000 coins.
Another user on the same forum commented that:
I hear Australian dealers have got next to nothing in terms of 1oz Dragons when they were confirmed last week with something probably like 280,000 of the 300,000 mintage going to overseas bullion dealers. Shameful when you think about it how Australian business and customers have been shafted in favour of foreigners.
With these controversial stories circulating I decided to contact the Perth Mint directly and emailed Ron Currie (Sales and Marketing Director, Perth Mint) to find out what was happening with their allocation of the coins. The crux of the email was these questions that I posed:
Approximately what percentage (or numbers) of the Silver Lunar Dragon Coin (1oz BU) mintage are being sold via Perth Mint direct (via any retail channel), shipped to foreign dealers/distributors or provided to local dealers/distributors?

How similar are these allocations compared with previous years distribution of the same series coin?

If there is a large discrepancy between what is being shipped overseas compared with past years, can you please expand on the reasoning for this (qualifying the blog comment that you will "ensure that our distributors receive a fair quota of supplies")?

Also it may still be too early, but:

Does the Perth Mint have any plans to improve the allocation process given the apparent mess this one has turned into (e.g. provide allocations earlier than 2 weeks before release, ask that dealers don't offer preorders, etc)?
Within a few hours of my email Ron replied with the below:
It would be fair to say that the gold and silver bullion 1oz Lunar Dragon releases are the most popular coins in the world right now. The Perth Mint received expressions of interest from dealers for more than 2 million silver coins and in excess of 150,000 gold coins – that's an incredible response!

I can assure you that the way we calculated allocations given these circumstances has been equitable, honest and rational.

Those dealers in Australia and overseas who have supported the Australian Lunar Series II over the past four years have been allocated coins. The numbers they will receive is directly related to the quantity of coins they have ordered in previous years.

This is consistent Perth Mint policy which we have stated openly in the past.

Please note that we assiduously avoided any temptation to ration coins by adjusting prices upwards or expanding the mintages. Such moves would undoubtedly have dented the credibility of The Perth Mint going forward.

It is total fallacy, therefore, to suggest that wholesale customers in Australia have in any way been biased against in the allocation of popular Dragon coins. I can assure you that Australian dealers have received no less of a percentage of the total mintage than they have in previous years of the series.

The comment that Australian businesses have been "shafted in favour of foreigners" is totally unfounded and, frankly, offensive in the light of our commitment to total transparency and sincerity to all clients.

I would also like to take this opportunity to underline the point that The Perth Mint is a corporation with a charter enshrined in legislation to promote the sales of precious metals "globally". Unlike most national mints, we are a commercial business driven by the requirement to generate income and profits on behalf of our shareholder – the State of Western Australia.

As anyone who reads Gold Corporation's Annual Reports (downloadable at realises, 80-90% of our revenues are consistently earned overseas. This reflects the international standing of Australia's bullion program under the tutelage of The Perth Mint– and why overseas dealers are accounting for the majority of Dragon allocations now.

With this in focus, you'll understand why I have just landed in Chicago after a 36-hour journey to attend one of the world's premier coin fairs to continue to promote our business further.
So it has been confirmed true that a majority of the Perth Mint Dragons (at least those with limited mintages) will be shipped to foreign dealers, however Perth Mint’s justification is that consistent revenues from overseas surpass those made locally. This does ring true with around 75-90% of revenues being exports in annual reports dating back at least 5 years, however that % is probably heavily skewed by large bar and blank coin sales.

Further to the allocations debacle, images of the two dragon designs (Gold/Silver) are now floating around online (I won’t be posting them here until September 1st, unless officially released prior) with one UK dealer having mistakenly posted the Gold dragon design on their website in anticipation of the release (now removed). The Silver design also leaked via Perth Mint’s own FTP site which some weeks ago had pictures of all the 2012 designs (2012 Dragon, Kookaburra, Koala, Kangaroo), they have now been removed.

What I found interesting is that while Australian buyers have turned to watch overseas dealers to see who has the best price and can supply a reasonable quantity, some users on a German forum (one of the countries Australians are looking to source coins from) have made the suggestion they might look to source them directly from Australia. Google translations of comments on the site below:
“The Perth Mint will not chip away 300,000 copies in its speed. So completely stupid are not. And if the dealers want to usury rate, it could still order direct from Australia.”

“Bullion coins in silver or gold, as the Dragons II in 2012, can only be ordered directly from Australia or from Christmas Island in the Perth Mint. But I have a request via e-mail asked.”
I suspect it’s going to be a mad scramble to obtain the coins on release for a reasonable cost. Perhaps this rush will provide a glimpse of things to come… right now it’s only a small group of Silver investors scrambling for a limited mintage coin series. Sooner or later I suspect a similar scramble for Gold and Silver will come, but it will be the general public trying to get a hold of any Gold and Silver they can.

Sunday, August 14, 2011

The Force is strong with these coin sets

New Zealand Mint have started taking pre-orders for what are likely to be popular sets amongst Star Wars fans.

They are releasing two Star Wars themed 1oz Silver Coin Sets (4 x 1 oz Silver coins per set) (link to NZ Mint).

The Millenium Falcon set depicts:

Luke Skywalker & Princess Leia, Obi-Wan Kenobi & Yoda, R2-D2 & C-3PO, Han Solo & Chewbacca.

The Darth Vader Helmet set depicts:

Darth Vader, Emperor Palpatine, Death Star, and a Stormtrooper.

Both sets make a sound when opened (light speed sound/Darth Vader breathing), which is a bit cheesy (and secretly a little bit cool).

What I found most interesting when reading up on the set was the amount of coverage they are receiving outside of normal channels for Silver or coins. Further to this the amount of misinformation that was plaguing the articles. For example we have SMH who claimed that:

"The set will retail for about $A450 and is expected to be hugely popular with both coin collectors and Star Wars devotees worldwide." SMH

Given that the New Zealand Mint has a drop down box showing the cost in multiple currencies that was a pretty poor effort. At current exchange rates it is priced at A$377.17.

How about this from Gizmodo:

"About 7,500 coins will be minted in New Zealand, and each coin has 28 grams of silver, and the image Queen Elizabeth II." Gizmodo

Only 28 grams of Silver per 1 oz coin? Surely they must know that the New Zealand Mint would be producing Troy ounce coins and hence they would contain 31.103g of Silver...

Finally had this to say:

"Coin collectors may be jumping at the chance to buy these, but Star Wars fans will also join the rush to snap up the coins. Only 75,000 copies of each coin will be produced." Geek

They are only producing 7,500 of each coin, not 75,000 as claimed above.

When a partial set of intrinsically worthless Star Wars themed tokens can fetch over US$2000 (eBay link) it's not hard to imagine that these Silver coin sets could appreciate in value once sold out as well, even though they are currently priced well over double the underlying value of the Silver they contain.


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Thursday, August 11, 2011

The Silver price tug-o-war‏

One question I have received a few times over the past couple of weeks is “Why isn’t Silver rising with the price of Gold?”

In all honesty there are probably a variety of factors at play which is causing the price of Silver to diverge from Gold’s amazing rise. I would suggest the main reason currently is that Silver is in the middle of a price tug-o-war.

Unlike Gold, Silver’s primary demand comes from its industrial uses. Given the recent astockalypse I suspect the world is coming to the realisation that we are staring down the barrel of a global recession (potentially depression in parts). I think this reality (reduced industrial Silver demand due to economic slow down) is weighing heavily on the price of Silver and trying to pull the price down.

On the other side of the equation we have systematic risk steamrolling through the Eurozone as the sustainability of sovereign bailouts is questioned, the confidence in their banking system is eroded and rumours/reality of rating downgrades rolls through from country to country. It’s the systematic risk in Europe, US and elsewhere, as well as the search for a currency that is not plagued by an incompetent government/reserve bank that is pushing investors to look for monetary alternatives. Gold has been that alternative safe haven for the last couple of months, making impressive spikes higher as the crowd looks for somewhere other than a crashing stock market and currencies that are being debased. Silver also has history of use as money, so the monetary aspects of Silver are currently trying to pull the price higher with Gold.

So in short:

Silver’s industrial demand & properties are pushing the price down.
Silver’s monetary demand & properties are pulling the price up.
So it sits in limbo, trapped within a small price range.

My concern is that if the nature of metals as a safe haven is questioned (even short term) causing Gold to correct significantly, then we are likely to see Silver get SMASHED. A falling Gold price could also come around from the collapse under the weight of its own parabolic rise or maybe the just announced (or future) CME margin hikes (Gold’s just increased by 22%) will push the price down.

As I have pointed out in the past… following similar price spikes (in Silver) to the one we saw earlier this year, in 2004, 2006 and 2008, the price of the metal remained subdued and consolidated at lower levels for a lot longer than 4 months before moving onto new highs. There’s no reason to expect any different this time around unless we are heading into the final parabolic peak of this bull market.

David Morgan was recently quoted as saying: “You could see gold and silver react to the downside, perhaps dramatically—$5/ounce (oz.) silver is not entirely out of the realm of possibility”.

We need to consider that in the event of another destructive banking or sovereign collapse the instinct of many won’t necessarily be to buy metals for protection straight away. A lot of Silver ETF owners may need to liquidate as margin calls are made on their other assets, which will reduce the amount of Silver held by these funds and increase supply to the market at the same time as industrial demand is waning. This could be the driver of a price collapse and while I think $5 is extremely unlikely (but possible), I do think Silver under $30 is likely at some point in the near future (as previously discussed in this post) when this crisis escalates and before the final parabolic blowoff top that will come later as the public rush in.

All the above said I still hold a core physical position in Silver (roughly 1/3 the value of my physical position is Silver) which I don’t intend on selling until we see much higher prices. I will be looking to add to the position on any significant falls in the price of the metal.


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Wednesday, August 10, 2011

Gold Stocks – Cheapest since early 2009

Australian readers please note: The figures used in this post are primarily US centric. That said our Gold stocks tend to closely follow the lead of their US counterparts (US Gold stocks) rather than form their own trend based on the local price of Gold. This fact is made obvious if you just compare the trend between the Australian Gold stock index (the XGD) and the US Gold stock index (the HUI). Below is a chart comparing their performance over the last 5 years:


You can see the trends are almost identical. In early 2009 the price of Gold locally soared to over $1500 as the AUD collapsed against the USD in the heart of the GFC, but it’s clear our Gold stocks stuck to the trend of their US counterparts and didn’t start rallying until the US price of Gold (and their stocks) took off in late 2009. I’m just pointing this out to show that the below information is probably just as relevant to you.


You might be saying “What? The HUI Index was 300 in early 2009, it is 550 now. How can you say they are cheaper? Their prices are almost double!”. To which my response would be “Take a look at the price of Gold stocks relative to the price of Gold”.

Early 2009 was in some ways very similar to the setup that we have now. The stock market had just crashed. Gold had just rallied several hundred dollars (although in the case of early 2009 the large rally was following a late 2008 collapse in the price of metals).

Looking back at early 2009 and Gold stocks were a good buy. It’s during this period that I first started trading precious metal stocks (after buying the metals themselves heavily into the late 2008 price dip) and to this day I still wish that I had just bought as many as I could at the outlandishly low prices and held them until today.

You might be wondering what I mean by saying take a look at stocks relative to the price of Gold. If you take the price of Gold and divide it into the price of an index we get a ratio that you can use as a measure of fair value to calculate whether it's worth buying the metals or related stocks (using the ratio along with other factors of course). It's much the same as the way some investors divide the price of Silver into Gold (resulting in the Gold/Silver ratio or GSR) to work out whether Gold or Silver is the better value at the time.

Here are charts of both the HUI Gold Bugs Index (HUI) & the Philadelphia Gold/Silver Sector Index (XAU), having divided the price of Gold into them:


As you can see we have seen a large fall in the ratios as Gold has rallied strongly and the precious metal stocks have fallen from their highs made earlier in the year.

So here we sit with Gold stocks as cheap as they were in early 2009.

Now it's important to remember that there is more than one way these charts can reverse to a fair ratio. We can see the ratio move higher if the stocks rise or if the price of Gold falls (or a combination of both).

Gold has moved in a very parabolic fashion with a rise of around $300 in only 6 weeks.

A week ago I posted a chart showing that Gold was bumping up against the top of a channel in which it's traded for 3 years (LINK). Well, we've seen Gold smash through the top of this channel and keep going:


Now don't get me wrong. I still think Gold may be forming a (short term) top around these levels. The run we've seen has been extraordinary. However, let me point out another long term resistance that was recently breached to the upside. This chart is from a post I made in February this year (LINK):


Shortly after breaking past the resistance line (which had been in place for 7 years) we saw Silver spike from $30 to almost $50 in the matter of 2 months. Could it be Gold's turn to make a spectacular breakout from a longer term trend and catch the market off guard?

I'm not suggesting that Gold will see a move as spectacular as that, but I think there is potential for Gold to keep moving higher after the breakout.

Investors/traders have just seen Gold maintain course and continue higher during one of the most volatile market crashes we have ever seen. Surely this will give Gold credit in the markets eyes following the ASTOCKALYPSE that we saw.

If Gold does head higher, a shorter term correction is still likely at some point. A move back down to test the channel breakout would give us a low of around US$1680 and it would be a very healthy move.

Even if the price of Gold doesn't rise, the stocks still need to see a 30% appreciation in price (obviously this would change if Gold were to fall or rise further) for them to return to a fair ratio (e.g. a similar ratio to that seen over 2010 and earlier this year).

There are still many potential risks (the bandaid fixes that are being applied to Europe, US and elsewhere are not going to permanently stop the bleeding), but in my opinion there is a case to go long Gold stocks at this point. This should not be considered any more than a trade at this stage and obviously you would be best not taking a position unless you were confident to read the market yourself as given recent volatility it could be a trade you need to exit quickly and decisively if things took a turn for the worst (market turns down again or Gold returns to earth).

As I mentioned in a post this morning, I have increased my own exposure to Gold stocks over the course of the last few days in preparation for this trade, bumping them up to 50% of my portfolio (certainly not a position for the faint of heart).

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