February 5 2007

The Predictable Bounce

When we talked about the gold market in early January it was almost a hand holding exercise, something we have done a few times in the past year.  We’re happy to say that our timing with those (we hope) calming missives has been pretty good and the early January message was no different.  As the Kitco chart below clearly shows, the year end selling did indeed prove to be short lived.  After gathering itself for a few days at the $610 level, gold moved relentlessly back towards $650 by month end.    Gold was briefly knocked back in the past couple of days but, again, this has more to do with short term profit taking and sell stops getting hit than it does with anything fundamental.

As we moved through the second half of the month there were a number of stronger than expected US statistics, notably Q4 growth and Consumer Confidence but they caused barely a ripple in the Gold market.  As we predicted a month ago, employment numbers indeed weakened significantly in December.   We stress again that we don’t expect the US economy to fall apart but it should be weak enough to forestall rate hikes, if not to generate any near term cuts.   That alone should be enough to keep a lid on the Dollar.

Most short term trading is technical in nature.  All commodity markets have seen more liquidity in the past 18 months than any time in the past 25 years.   This sort of money flow into markets that are really not that large by world standards is guaranteed to make them more volatile.  Much more.   That is simply a fact of life that traders of metals and the equities that track or produce them are going to have to deal with. 

The best suggestion we can make is that you stay focused on the long term trends and let volatility be your friend.  How?  By letting others chase prices higher and taking some profits when they do.  By not panicking when short term traders desert the field.  Letting them make the metals and shares you like cheaper and having the conviction to buy them when they are priced low. 

Notwithstanding the gyrations of the past few months the fundamentals for metals remain very strong.  That is especially true for gold. New retail investment markets have opened up in the world’s most populous countries in the past couple of years. Buyers in those countries have been responding to gold’s unique wealth storage and insurance aspects and buying more physical metal.  Central banks with the largest holdings are either holding pat or selling under continued agreements that limit the sales volumes to levels that can be absorbed by the markets.  More and more investors are attracted to EFTs that are taking gold off the open market to back their growing unit holdings.   Last, but certainly not least, the gold production sector is proving the point we have been making for years; good large deposits are hard to find and slow to put into production.  In the face of the best prices increases in over two decades overall mine production has been falling. Yes, you read that right, falling. How many economic goods are no ones liability, and reacting conversely, so far, to the traditional laws of supply and demand?  Not many and only one we’re concerned with in this column. We can’t think of a much better recipe for a bullish market.  To paraphrase the old adage about real estate “Buy gold. They aren’t making any more of it (yet)”

*****

David Coffin and Eric Coffin are the editors of the HRA Journal, HRA Dispatch and HRA Special Delivery publications focused on metals exploration, development and production stocks. They were among the first to draw attention to the current commodities super cycle and have generated one of the best track records in the business thanks to decades of experience and contacts throughout the industry that help them get the story to their readers first. Please visit their website at www.hardrockanalyst.com for more information.

If you would like to be added to the HRA FREE mailing list to get notifications about articles like this and other free analyses and reports just add yourself to our list HERE

The HRA – Journal, HRA-Dispatch and HRA- Special Delivery are independent publications produced and distributed by Stockwork Consulting Ltd, which is committed to providing timely and factual analysis of junior mining, resource, and other venture capital companies. Companies are chosen on the basis of a speculative potential for significant upside gains resulting from asset-base expansion. These are generally high-risk securities, and opinions contained herein are time and market sensitive. No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer, solicitation or recommendation to buy or sell any securities mentioned. While we believe all sources of information to be factual and reliable we in no way represent or guarantee the accuracy thereof, nor of the statements made herein. We do not receive or request compensation in any form in order to feature companies in these publications. We may, or may not, own securities and/or options to acquire securities of the companies mentioned herein. This document is protected by the copyright laws of Canada and the U.S. and may not be reproduced in any form for other than for personal use without the prior written consent of the publisher. This document may be quoted, in context, provided proper credit is given.

©2006 Stockwork Consulting Ltd. All Rights Reserved.