Sinclair:
UPDATED VERSION OF:"SELL-OFF TODAY DID NOT ALTER STRUCTURE OF LONG-TERM BULL MARKET."
Gold
A Modern Piggly Wiggly Event?
February 12, 2003
The recent sell-off from the $390.80 high in gold has not and, in my opinion, will not alter the structure of this long-term bull market in gold. Gold has always been and will continue to be a market with supply/demand skirmishes between titanic forces with huge interests in the resulting price. The almost straight up action of gold from $371.50 to $390.80, followed by a similar reaction down, has all the signs of a forced, expensive short cover.
Generally, the entity that acts as broker/gold bank for the short cover can be counted on to sell the final ounces SHORT to the covering entity, followed by the gold bank's pounding of the market after the finish of the short cover. Generally, a short cover action is recognized in the market by pro-traders who also seek to fill the final purchases. Everyone tries to pile on the top prices of a short cover to become short themselves, as it always falls hard just then.
You might like to read about the life of the great trader, Jesse Livermore. After he cornered Piggly Wiggly Stores (the then Wal-Mart) on the NYSE and drove the price sky-high, he had a falling out with the Chairman of PWS who retained him to affect the long corner. He quit the operation and sold his final Piggly Wiggly shares SHORT to the strangled short sellers who were forced to buy. Piggly Wiggly (PWS) did exactly what gold did today - exactly. If it walks like a chicken, smells like a chicken, clucks like a chicken, has feathers and lays eggs, it is a chicken. This smells like, looks like, and acts like a short cover. Therefore, we may well have seen the first painful and bloody short cover of a gold producer hedger. Now did this have anything to do with the rather caustic announcement today that Mr. Oliphant of ABX was fired? (More on that below). That is certainly a rough way to announce a parting of the ways for someone who, in truth, did make the company $2 billion on its hedge account during the bear market. To announce a person was "FIRED" certainly is not a compliment.
I expect that this reaction has either ended today at the $351.50 low or worst case scenario, at the next Fibonacci support line of $340 to $343.
The difference between Piggly Wiggly stores and gold is that gold is fundamentally and technically in a long-term bull market. Newmont might be shaking in their boots tonight. The US dollar cannot launch anything but a technical rally from here. There is a $3 trillion budget deficit coming up between the deficit spending plans in place now, the tax cut, and the potential of an Iraq war. There is no way on Earth that the dollar is headed long-term anywhere but DOWN in my opinion!
Add to all this today's news that North Korea has delivery systems that could land a nuclear device in the USA. Personally, I want gold. Period.
As Harry Schultz recently informed his private clients: "We have two choices when a significant reaction in the price of gold occurs. We can be bothered by it or like the Asian/Islamic interests welcome the bargain." Personally, I see this as an opportunity. I took what I see as advantage of it today in bullion. I will do it again if the cartel of common interest continues to push their luck.
There are two lessons for today's activity:
1. Those of us that trade must lessen our activity. We have to be willing to step into the abyss when it is being hammered, guided by Fibonacci mathematical concepts.
We must also be willing to supply markets that appreciate at the angle of ascent we recently witnessed. I am referring to the most extreme power up trend. You can view this on the chart I have posted on www.JSMineset.com
2. Volatility this early in a long-term gold bull market means that we haven't even seen the smallest part of the extreme activity we are in for. It is an indication that the price of gold is more than likely going to $590 as an early indication of objective. The implications of that are most unwelcome in terms of what it means to other markets.
Conversations with the pros:
KA noted today that: "Surprisingly, silver lost none of its long-term internal strength on this decline, even though it failed to get through the $4.98 to $5.12 key overhead resistance." That speaks well of silver's future.
MM said: "The pure gold shares opened lower, rose, and then held around their modestly lower opening. This is the first time that the gold community in those shares was not stampeded. That is a good sign for them for the future."
Click on chart to view enlarged version
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This story by Mathew Ingram appeared in today's edition of Canada's Globe & Mail. It's well worth reading and illustrates the tenuous position that management of some gold mining companies are finding themselves in because of their hedging policies.
Barrick gives Mr. Hedge the boot
By MATHEW INGRAM
Globe and Mail Update
Live by the hedge, die by the hedge. It's not as catchy as "live by the sword, die by the sword," but the point is the same: once you become identified with something, if it falls out of favour, chances are that you will too. Barrick Gold's now-departed CEO, Randall Oliphant, is the latest example. Having become synonymous with Barrick's hedging strategy, his star has fallen along with the market's interest in that strategy.
There have been other things that have made life difficult for Mr. Oliphant lately, mind you, including missed production targets and weak results. If nothing else, Mr. Oliphant's sudden departure reinforces the fact that Barrick is joined at the hip with its founder and chairman Peter Munk, and if Mr. Munk sees you as superfluous --- however integral you might have been beforehand --- you might as well polish up your resume. The man Mr. Oliphant replaced, Paul Melnuk, suffered a similar fate.
Certainly, Barrick's stock has been in the doghouse lately, largely because of its hedging program. But, apart from the fact that he is the chief executive, is it fair to give Mr. Oliphant all the blame for that? Not really. For one thing, although he is often given the credit for it, Barrick's hedge program is hardly the work of a single man. In fact, the man who has replaced Mr. Oliphant --- Gregory Wilkins --- was Barrick's chief financial officer in the late 1980s when the hedge program was created.
Nevertheless, as he rose to become chief financial officer in 1994 (replacing Mr. Wilkins) and then chief executive officer in 1999, Mr. Oliphant became the public face of Barrick's hedging program. When Barrick consistently turned in better results than most of its major competitors, Mr. Oliphant got the credit, and when critics complained about the company's hedging approach, Mr. Oliphant was there to explain everything.
So is the market's dislike of Barrick's hedging program well-founded? In some ways, yes --- in other ways, no. Much of the criticism comes either from wild-eyed conspiracy theorists who see the company as in cahoots with some sort of global cabal, or from those who don't understand it. At the same time, however, the market correctly sees Barrick as benefiting less from rising prices than some other non-hedged companies.
Hedging is something many commodity companies do, including oil and natural gas producers, because it protects them from swings in pricing. Aggressive hedging, in which large amounts of a company's future production are "sold forward" to lock in a price, makes sense when the price of a commodity is in a downward trend, as gold was for much of the 1990s. During that period, Mr. Oliphant looked like a genius.
Just as some oil and gas companies have found themselves underwater on their hedges, however, so some gold producers wound up in serious trouble due to their hedging --- including Cambior Gold and Ashanti Goldfields. Both were forced to buy gold at high spot prices to fulfill their contracts, and that helped to give gold hedging a black eye.
Barrick has consistently --- and correctly --- pointed out that it is protected from that kind of event because of the way its "spot deferred" hedging program is structured. Since it is one of the globe's largest producers, it has been able to negotiate long-term futures contracts on very favourable terms with "bullion banks." Those banks loan Barrick gold, which it then sells forward, and then the income is invested. These loans are then later repaid with gold produced from Barrick's mines.
Theoretically, if the price of gold rises above the price of these contracts --- most of which are held at about $350 (U.S.) an ounce --- that creates a liability for Barrick. However, the company has the right to push its obligation forward by up to 15 years, thereby delaying the point at which it has to provide the gold. That allows it to sell more of its production into the spot market to take advantage of price jumps.
Mr. Oliphant has argued that Barrick is just as happy when the price of gold goes up as when it falls --- since it is not only able to capture some of that increase through spot sales, but also sees the value of the gold it has in the ground increase, boosting the company's value. That glosses over two things, however: one is that Barrick can't defer its contracts forever, and the other is that Barrick's annual production isn't enough to defray all the liabilities that are implied by its hedges.
Are some of the criticisms of Barrick's hedging program valid? Yes. However, it allowed Barrick to make more than $2-billion it would otherwise not have made, cash which it used to make a number of worthwhile acquisitions. In the end, of course, all that matters is that Mr. Oliphant has become synonymous with both hedging and missed targets --- and with a declining share price --- and that is enough to do him in.
February 12, 2003
Q&A
What to put your IRA money into/Remonetizing gold,its effect on real estate and your debts
Q: Based on your thoughts about the HUI and the XAU, it would seem fairly obvious that gold mutual funds in essence aren't much better and should be treated in the same fashion. I have sold my gold fund, still have gold coins, but am in a quandary as to how to best reestablish some type of position. I know that the $8,000 in my IRA isn't a lot but it's what I've got. I haven't had a satisfactory result trading paper gold options. Does investing in a GG or AEM or pure plays where I can own a few hundred shares make sense? It has become very confusing trying to listen to those you trust and getting discombobulated.
A: In general you are absolutely correct. Front-running pure gold shares is the best way in my opinion. Let's face it, 100% of your funds is serious money. Options do not work well in a sideways chop because you pay for time which constantly deteriorates from the moment of purchase. Royal Gold on weakness is another item in the pure gold category as a gold royalty company. AEM has a shelf offering so if you like it, I would suggest that times like now, when the gold sector is under pressure, is the only time to commit. Where there are known water sources, it is better to drill one bore hole 500 feet down than 500 bore holes one foot down. Therefore, why not select one source you believe in and hang with that source rather than go to 10 sources and end up without a point of view, without courage, without commitment, and without profit.
My credentials include a 43-year continuous involvement in gold. I have had positions of responsibility and have been a public person in gold. If you think I might know what I am speaking about and your point of view and my point of view agree then try me and see if I give you the guidance you want. If I do not, then find someone else. Bouncing from one point of view to another is the problem with web browsing and investing.
Q: How will the treasury arrive at a value for gold when they remonetize it? What happens to people's debts if inflation of the currency is ended? Will real estate take a nose dive? That is the American public's main asset.
A: Remonetization of gold in the form of a renewed and revitalized Federal Reserve Gold Certificate Ratio tied to M3 will not fix the price of gold at any specific level. It will simply function as an alarm mechanism concerning over expansion of the monetary aggregates, in my opinion, when over 3% per annum.
The value of gold at the time of the election of this mechanism will simply be deemed that amount which is required to support the total outstanding monetary aggregate. It will no longer be in the interest of the US Fed to see gold significantly lower or higher than the level at the time of election. As such, other central banks will not be motivated to be active in the gold market. Investors will still take positions according to the "5 Fundamental Elements" of gold that are traditional drivers of the gold price.I see no drastic effect on personal debts and real estate but these items will continue to affected by the fundamentals common to them.
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