A strange time for listed gold stocks

Batten the hatches: continue shorting gold stocks, and buy . . .

JOHANNESBURG - By now, anyone or anything not predicting that the gold bullion price will continue rising has been hunted off the face of the planet. Never mind a decade of bull markets for the yellow metal (and a near fivefold rise in prices), GFMS this week reckoned the metal could broach $1 600/oz by year-end.

An all time record of $1 431/oz was seen less than two months ago. The strange thing, for which there is no ready explanation, is that investors (and speculators, as always) are broadly selling off listed gold stocks. The metal is currently trading just 4% below its record level, but listed gold stocks have been clobbered for more than a month.

The US-quoted SPDR Gold Shares ETF, the world's biggest gold exchange traded fund (ETF) (market value: $56bn), tracks the bullion price, as ever, and is just 4% off its highs.

For miners of the metal, stocks prices look painfully out of synch. Toronto-based Barrick, the world's biggest gold digger by value and output, has surrendered 15% of its NYSE-quoted market value, now at $47.4bn, since early December, when dollar gold bullion most recently peaked. (more)

Technically Precious with Merv

Gold has hit its lowest closing level (but not yet its intra-day level) in almost two months. The intermediate term momentum indicator is at its lowest level since early August. The price action seems to be developing a weaker and weaker strength, not usually a good sign.

GOLD

LONG TERM

I mentioned the intermediate term momentum weakness in the introduction. Even the long term momentum is showing greater weakness than the price action. The indicator is well below recent levels while the price is still holding its own, but weakening. The long term weekly price/momentum chart shows the two year old up trending channel in the price action and the support line in the momentum. The momentum support appears ready to be breached but the price action is still some distance from its channel support line. The weakening momentum may be more of a sign of intermediate term reversal than a long term reversal. There is still a long way to go for the momentum to get into its negative zone (below 50%). The one thing that this action DOES suggest is that one should hold off on new purchases until things get a little stronger or if one just must buy then one should understand that one is doing so at a time of much greater risk of reversals. Since the indicators are not yet bearish one would not be on the sell or short sell side as far as long term commitments are concerned. Most likely what lies ahead may be a very good new buying opportunity but not yet. The daily and weekly action should tell us when it’s ready to start new purchases again. (more)

Food Strike: Junior Fertilizer Companies on the Rise ( MFM, EPO, FOS )

Doomsayers and economists alike are warning the public of the sharp rise in world food prices that are expected in the near future. Already we can use the record levels hit in December in sugar, grain and oilseed prices as our indicator of things to come. With these trends, many investors are seeking the answer in their portfolio to help soften the blow made by the increased cost of dinner time.

Early in November of 2010, the Canadian Government made a landmark decision regarding the purchase of Potash Corp. [POT - TSX] by BHP Billiton, opting to reject the transaction on the basis of it providing “no net benefit to Canada.” Since the announcement was made, much speculation erupted over what were the true reasons behind the feds' intervention. Potash Corp. currently reigns as the world's largest fertilizer producer, and thus wasn't particularly an entity the government wanted to see handed over to the BHP group from down under. The implied future control over our own food supply is apparently more important to the feds than the foreign entities entering into Alberta's oil sands.

But in the aftermath of the ordeal, potash as an investment focus has gained a lot of steam. The price for the big players such as Potash Corp. or even its provincial rival Mosaic are a little too high for those who follow the higher-yield, higher-risk TSX Venture Exchange. Here are some of the stocks we're following closely as impacts from the global food market weave their investment magic.

Marifil Mines Ltd. [MFM – TSX.V]
Current Price: $0.21
52wk Range: $0.06 - $0.25
Market Cap: $10.88M
Instead of dabbling in the rolling prairie fields of Saskatchewan, Marifil snapped up 47,150 hectares of potash lands in Argentina. The K3 Project as it is called has good potential for salt horizons at depths ranging from 500m to 2,000m, while further analysis in the works from local abandoned oil wells. The site is nearly 50kms NW of Brazilian giant Vale's massive Rio Potasio potash mine, which has a resource of 2 billion tons of potassium chloride. On top of the potash upside of K3, Marifil also has further prospective amounts of uranium, sulfur, lead, zinc and asphaltites on the property. All in all, the company holds over 20 properties that also focus in precious metals, copper, nickel and an oil and gas target called Mina El Carmen. (more)

Precious Metals Default Scenarios

For obvious reasons, there has been a great deal of discussion about actual, formal “defaults” in the gold and silver markets. Among those “obvious reasons” is that informal defaults are apparently already taking place in both markets.

Beginning in the London gold market over a year ago, and now rumored to be occurring in New York’s “Comex” silver futures market, buyers who have legally contracted to take “physical delivery” of the metals they have purchased are said to be accepting large, paper bribes to accept a “cash settlement” instead.

There are many reasons for investors to take such “rumors” seriously. Empirically, we see the premiums being charged for physical bullion (even from large, established dealers) rising to levels never before seen (around the world). This strongly suggests a very tight market for bullion. This is confirmed through the anecdotal reports of both industrial users and large institutional investors (such as Sprott Asset Management) that they are having a great deal of difficulty locating any large quantities of bullion available for sale.

In theoretical terms, we are merely seeing the culmination of arrogant bankers attempting to defy the elementary laws of supply and demand for over a quarter of a century. Even those with no training in economics know the basic rule (since it is merely an expression of common sense): when prices rise, demand falls; when prices fall, demand rises. (more)

THE SHANGHAI COMPOSITE CONTINUES ITS STEADY DESCENT

Investors in mainland China are clearly expressing concerns over inflation and slowing growth that the USA and much of the rest of the world is comfortable ignoring for now. The Shanghai Composite fell -3% on Monday to close almost -16% off its November highs. Investors are increasingly concerned over the government’s ability to contain inflation and steer the economy towards a soft landing.

The Shanghai composite has served as a reliable leading indicator of both commodities and equity prices over the course of the last 5+ years. US equity futures are trading down marginally on the news, however, exchanges are closed for trading on Monday.

Hedge funds bet China is a bubble close to bursting

The world is looking to China as a springboard out of recession - but some hedge funds are betting the country's credit and growth levels cannot be sustained.

For his first-ever speech as Britain’s new Minister of Trade & Industry last week, Lord Green faced a formidable audience of 400 Chinese and British business delegates.

The former chairman of HSBC declared that China’s economic growth figures over the past five years represented an “extraordinary historic event”.

Green didn’t need to go over Britain’s experience during the same period for most to agree that plugging into China’s blistering growth - predicted by the IMF to be 10.5pc this year - was of “vital importance” to the UK.

But even as he spoke a hedge fund manager in Mayfair was poring over spreadsheets of sovereign and corporate credit default swaps, interest rate and foreign exchange options with one aim: to “get short on China”.

The manager, who wanted to remain anonymous, said: “The Chinese delegation has said all week that there will be double-digit growth for years to come and the Brits have lapped it up. But the data doesn’t add up. We think we’ve experienced credit bubbles over the past few years, but China is the biggest. And yet the global economy is looking to China as not just a crutch but a springboard out of the recession. It’s crazy.” (more)

Martin Luther King, Jr. Day

Martin Luther King, Jr. Day is a United States federal holiday marking the birthday of Rev. Dr. Martin Luther King, Jr. It is observed on the third Monday of January each year, which is around the time of King's birthday, January 15. (It will be observed on January 17 in 2011). The floating holiday is similar to holidays set under the Uniform Monday Holiday Act, though the act predated the establishment of Martin Luther King, Jr. Day by fifteen years.

King was the chief spokesman for nonviolent activism in the civil rights movement, which successfully protested racial discrimination in federal and state law. The campaign for a federal holiday in King's honor began soon after his assassination in 1968. Ronald Reagan signed the holiday into law in 1983, and it was first observed on January 20, 1986. At first, some states resisted observing the holiday as such, giving it alternative names or combining it with other holidays. It was officially observed in all 50 states for the first time in 2000.