Gold and Silver Investing and Using Financial Stocks as a Hedge

Posted on May 1, 2008 , Filed Under Stocks | Leave a Comment

The USD Index looks like it may breach the 75 level, if this level is reached, I expect gold to trade under $800. A move by the USD Index nearing 80 levels would signal a major breakthrough for the USD. If we near 80 levels, I expect gold to trade between $600-$750.

A move by gold under $800 would likely mean seeing Yamana Gold [[AUY]] shares under $10. Yamana is the primary gold stock I am watching at the moment. With the heavy volatility in gold equities, I’m going to set a limit order to purchase AUY at $10 good for the entire month of May. If the order executes, I plan to set additional orders at $1 increments with major purchasing happening if AUY drops to the $6-$7 range.

Readers of Raw Greed know that I favor heavy volatility for companies with strong earnings and fundamental prospects. I’ve been able to purchase Yamana Gold for the past two years at prices under $10 simply by standing on the sidelines and setting limit orders at large discounts. I simply wait for the weak longs to liquidate as they enter other sectors.

With gold at $800, I expect to see silver at low $15 levels. If gold were to trade in the $600-$750 range, I expect to see silver between $10-$12 levels. My top three silver picks are:

-Coeur d’Alene [[CDE]] with a staring entry price of $2.50 and heavy buying at any price under $1.75
-Silver Wheaton [[SLW]] with a starting entry price of $10 and heavy buying at $7
-Hecla Mining [[HL]] with a starting entry price at $7 and heavy buying at $5

As a hedge against falling gold, I would invest in a basket of financial stocks. Companies like Citigroup Inc. [[C]], UBS AG [[UBS]] and Washington Mutual [[WM]] are at the top of my list. All three of the stocks are still off over 50% from their 52-week highs. Gold is dropping due to a dollar rally and the prospects of a stabilizing economy. Financial stocks should move in the opposite direction to gold stocks in the short-term, this is a stark contrast to the period simply a year ago with high prices for both financial and precious metal stocks.

I would pick up shares of C and WM at current prices. If the dollar rally lasts until the third quarter of 2008 and we see no major news of new writedowns, I expect to see C rally in the 20-25% range and WM to rally 100% or more. Washington Mutual has a large amount in bonds coming due in September. The bonds traded as much as 30-40 dollars under par when I last looked about two months ago, this denoted a lack of investor confidence in Washington Mutual. Spreads on the bonds have dramatically narrowed showing a partial return of investor confidence in the bank. WM shares are lagging in comparison to the positive performance of the banks bond issues. Bonds are considered the more conservative investment in comparison to stocks, so I expect WM shares to recover quickly as bond principals are paid.

By separating yourself evenly between precious metals and financial stocks I believe you will safely lock in tremendous gains from one or the other by the end of the year. People cycle in and out of sectors with blazing speed, primarily due to greed and oversold conditions. I suspect if my limit orders execute for the above precious metals stocks I would be buying into extremely oversold conditions and at a severe discount to recent 52-week highs. Any bounce in gold or silver prices would then have the momentum to cause any of the above picks to jump 10% or more in a matter of days.

My earliest purchase of Yamana Gold for instance was in 2006. I posted the article Selling Yamana Gold in which I earned 46.52% in roughly 30 days. Since then I’ve recommended to buy in and out of Yamana on the heavy volatility surrounding the stock. In 2007 I purchased shares of Hecla Mining and Silver Wheaton at close to my target prices above. I don’t believe this time will be any different. I am by no means a day trader and I simply sit on the sidelines waiting for opportunity to present itself. At the moment I am concentrating on companies I consider a fundamentally good value in sectors that have been oversold. When everything gets sold down, plenty of opportunities will present themselves. When sectors get oversold there is also a higher probability a rally will occur on any positive news.

*Disclaimer: The author does not hold a position in any of the stocks mentioned above.

(No Ratings Yet)

Loading ...

Gold to Oil Ratio Picture

Posted on April 29, 2008 , Filed Under Stocks | Leave a Comment

I found the image above at kitcocasey.com and it clearly illustrates the earlier gold to oil ratio that I wrote about. In the image, notice how when the red line representing oil, crosses the yellow line representing gold the ratio is approximately 10:1. If oil prices remain strong, gold will have a long way to rebound to match the historical ratio.

I suspect that the USD index may rebound to 75 levels causing a downward trend for physical gold and doubly so for gold stocks.

(No Ratings Yet)

Loading ...

A True China Bear

Posted on April 28, 2008 , Filed Under Stocks | Leave a Comment

With all the talk of a bear market in China, it pays to look at China in comparison to Hong Kong its nearest cousin. I would consider a true bear market as one that drops 80% or more. In 1973, the Hang Seng Index dropped from 1100 to 153 in under a year. Today the Hang Seng Index is over 25,000. China may be a similar long-term opportunity as Hong Kong in 1973. In 30 years, a Shanghai Composite Index at 150,000 points or higher seems plausible if we look at the history of emerging economies that continued growing into a developed economy. In the U.S. the Dow grew thousands of percent as the economy grew between 1930 and 1960.

Since reaching an all time high in October, 2007, The Shanghai Composite Index has dropped nearly 40%. At the moment the best way to invest in China is through Morgan Stanley’s China A Share Fund [[CAF]]. The fund is down from a high of $72.30 to $45.41, a drop of 37.19%. Last month, CAF dropped over 50% to a one year low of $33.51. If the fund were to drop to $20, it would represent a drop of 72%, close to a true bear market and I would enter heavily at that price as a long-term investment opportunity.

*Disclaimer: The author does not hold a position in any of the stocks mentioned.

(No Ratings Yet)

Loading ...

Extreme Gold Disparities

Posted on April 28, 2008 , Filed Under Stocks | 1 Comment

We now have a large number of disparities facing gold investors. Here are a few oddities I’ve noticed and I saved the biggest for last:

- We are now facing the $120 level for oil, yet gold is currently at $890.
- Rice, a staple food for half of the global population, has doubled in price over the past three months, yet gold is falling.
- Currently gold continues to drop when U.S. markets are open, yet overnight gold typically ends up in Asian markets.
- Mid-large cap U.S. gold equities, such as Yamana Gold [[AUY]], Barrick Mining [[ABX]] and Newmont Mining [[NEM]] have roughly dropped 20-25% in the past two months. In Asian markets, many mid-large cap gold equities have dropped 50% or more.
-Many gold equities are trading at prices when physical gold was in the $700-$750 range.

The brilliant minds of the gold investment world have reported about the perfect economic storm brewing for gold and gold equities. To a large extent they were correct as we witnessed a dramatic surge in physical prices from the fourth quarter of 2007 to the first quarter of 2008. All the financial turmoil, rate cuts and rise in inflation should have propelled gold equity investments as a safe hedge against a falling market. What we witnessed with gold equities was an entirely different story leading to a large disparity.

There seems to be a weaker connection between the rising physical price of gold and gold equities, than the falling price of physical gold. When the physical price of gold drops, as we have seen in the past two months, the price of gold equities drops doubly. We are now rapidly approaching heavily oversold territory for gold equity investments. Once financial markets stabilize and capital begins to flow back into equity markets, gold equities have tremendous room to play catch-up. This is contrary to what many people are reading from analysts and the media.

Looking back at gold equities rise in 2005 and 2006, we can see that rising prices had little to do with financial turmoil in global markets. Pandemics, terrorism and natural disasters seemed to push gold equity investments higher than a possible financial collapse. This is why it will be prudent to watch capital markets stabilize before shifting a large share of your gold investments in favor of equities.

*Disclaimer: The author hold no positions in any of the stocks mentioned.

(No Ratings Yet)

Loading ...

Alibaba Versus Baidu

Posted on April 23, 2008 , Filed Under Stocks | 1 Comment

Two of China’s Internet behemoths are oddly trading in opposite directions. Baidu [[BIDU]] has risen dramatically since its IPO. Baidu’s recent 52-week trading range was between $98.45 and $429.19, a positive difference of 336%. Alibaba (1688.hk), listed on the Hang Seng Index, held its IPO on November 6th, 2007. Alibaba has dropped from $41.80 to $12, a negative difference of 71%. The stock is currently trading approximately 10% below it’s IPO price of $13.50.

If we look at Baidu’s stock price shortly after it’s IPO, we can infer that Alibaba’s stock may be due for additional drops as the market digests the first few quarters of earnings. Baidu fell from a closing price of $122.54 on August 5th, 2005, to its lowest close of $45.15 on February 7th, 2006. The stock dropped 63% before going on to gain nearly 895% since February 7th, 2006.

Alibaba faces a weaker international trade environment that is causing investor uneasiness over future earnings. Ultimately the stocks performance will be linked to the companies earnings. If Alibaba can grow at the same pace as Baidu or at the early days of eBay [[EBAY]], investors should be in store for a large jump up in the price of the stock.

According to this Forbes article, the core group of investors in Alibaba’s IPO include, “AIG Global Investment, Taiwanese billionaire Terry Gou’s Hon Hai Precision, Peter Woo of Hong Kong’s Wharf (Holdings), the Kwok family of Hong Kong’s largest real estate developer Sun Hung Kai Properties, Malaysian Chinese media and hotel magnet Kuok Hock Nien, Cisco Systems [[CSCO]] and China’s largest bank, Industrial and Commercial Bank of China.”

Investors should take note that the group above is locked-in to holding Alibaba stock at $13.50 for a period of 2-years since they received a pre-IPO allocation. In the mid-term, Alibaba may be setup to reflect Baidu’s positive performance. I wouldn’t rule out a future Alibaba ADR listing if the company continues its rapid growth and the stock receives favorable interest.

(No Ratings Yet)

Loading ...

Historical Gold to Oil Ratio and How to Monitor the Next Wave of Gold Equity Investments

Posted on April 21, 2008 , Filed Under Stocks | 1 Comment

In September, 2006 I wrote the article, Gold’s downward spiral.

Taken from the article:

Gold appears to be headed down along with the price of crude oil. Historically there has been a correlation between the price of crude oil and gold. Most gold fans and economic historians peg the ratio between the price of gold to oil at 10:1. The price of crude oil is currently $65.71 per barrel. Using the 10:1 ratio would mean that gold should be priced at $657.10 per ounce. Gold is currently trading at $590.40. Gold has not been following the historical ratio as geo-political pressures and concerns over terrorism have contributed to a risk premium in the price of crude. If the historical ratio between oil and gold is to return, either gold has to rise or crude has to drop. I am more inclined to believe that gold will rise. Physical demand for gold tends to be strong going into the fall.

During September, 2006 gold was priced around $590 and oil at $65. The gold to oil ratio was roughly 9:1.

Currently Gold is priced around $920 and oil at $117. The current gold to oil ratio is roughly 7.9:1.

For the historical ratio of gold to oil to remain true, either gold would have to rise close to $1200 levels or oil would have to drop toward $90. There are a number of factors supporting rising gold prices in the short-term. Principally, due to the weakness in the financial sector, the Federal Reserve must continue to lower interest rates to make access to capital easier. The lowering of interest rates is the medicine needed by financials to engage in income producing activities, such as investment in alternative higher yielding currencies, or direct investment in foreign economies. Financial institutions will continue to borrow USD to shore up capital and in order to recover non-performing assets.

If interest rates on the dollar approach 1% levels, the currency will begin to gain strong favor as a carry trade currency similar to the yen. Lower interest rates will inevitably lead to inflation and eventually hyperinflation as we are seeing with rising oil prices. In the short-term, gold will continue to be a strong hedge against inflation and a falling dollar due to low interest rates. In the medium to long-term, I believe we will emerge with a stronger economy and a stronger dollar. This will put downward pressure on gold. For the moment, I expect that we are in the final bullish phase of this cycle and will see continued and escalating daily volatility in gold prices.

I would continue to monitor shares of miners such as Yamana Gold [[AUY]], Gold Corp. [[GG]], and Barrick [[ABX]]. I also see a large opportunity in junior miners and exploration companies such as Northgate Minerals [[NXG]] and US Gold [[UXG]]. Shares of smaller gold companies have barely moved in the past half year in light of rising gold prices. Eventually these companies will begin to rise as capital returns to the market and overall economic conditions improve. Earnings should improve for gold miners as prices remain high for gold. I would pay special attention to companies that begin to hedge their sales in the future. For the past few years, gold miners have de-hedged their sales since they were locked into selling gold at low prices. Gold prices may reach over $1500 by some analysts and authors estimates. We should begin to pay special attention to miners that lock in high sales prices by selling their gold forward. Traded companies that hedge themselves against falling gold prices, will present a big opportunity going forward.

(No Ratings Yet)

Loading ...

Negative Real Interest Rates

Posted on April 18, 2008 , Filed Under Stocks | Leave a Comment

(Click the picture above for a larger view)

The chart above should be a major concern for any serious investor. The data in the chart is supplied by the Federal Reserve Bank of St Louis. The current negative interest rates are calculated by subtracting the 5-year treasury note interest rate from current inflation. Depending on your view of current inflation, we are either in slightly negative territory or approaching double digit negative territory for real interest rates.

(No Ratings Yet)

Loading ...

Raw Greed Hacked

Posted on April 18, 2008 , Filed Under Stocks | Leave a Comment

My blog was sadly hacked by a Turkish hacker. Please click the image above. The hacker broke my upgrade to Raw Greed and replaced the front page. I’ve replaced the missing posts and most of the functionality of the blog. Some of the pages still haven’t been updated with the newer versions.

(No Ratings Yet)

Loading ...

Short-term Precious Metals Investing

Posted on November 16, 2007 , Filed Under Stocks | Leave a Comment

I’m a bit leary of recommending current continued investment into precious metals. The speed at which funds have flowed into and out of physical gold and silver is alarming. Now is the time to begin bargain research for gold and silver equities. I believe there may be a chance for gold to drop back to $750 and for silver to drop back to $14 levels. Investors who accumulated shares of gold and silver miners prior to the last two Fed rate cuts should be holding onto a profit. I would recommend selling half of your positions to lock-in some gains before the end of the year.

We are now in the middle of November and trading tends to be thin in December as we head into the holidays. Gold and silver have both met my 2007 price targets of $800 for gold and $15 for silver.

If gold rises above $830 and silver rises above $15.50 I would re-enter your equity positions. I believe there will be a volatility discount applied to precious metals equities as investors debate whether precious metal prices will stabilize and continue rising into 2008. You shouldn’t lose much in term’s of percentage gain by selling now and waiting to see how precious metals prices react in December, 2007 and January, 2008.

I sold my positions in Pan American Silver [[PAAS]] and Silver Wheaton [[SLW]] and I am waiting for attractive re-entry points.

(No Ratings Yet)

Loading ...

CDE and UXG Update

Posted on November 16, 2007 , Filed Under Stocks | Leave a Comment

Following my October 29th, 2007 article on US Gold Inc. [[UXG]] and Coeur dAlene Mines Corp. [[CDE]], UXG hasn’t followed through with the chart analysis I posted, while CDE has risen dramatically.

Both stocks have fallen in-line with the overall drop in gold and silver prices. UXG continues to be a speculative exploration investment with strong experienced management running the company. I expect the stock to move in-line with the direction of gold prices.

CDE has recently been upgraded by JP Morgan Chase and I suspect institutional investors are developing interest as the company replenishes its silver reserves. Couer is anticipating to be the world’s largest primary silver producer after the acquisition of Bolnisi Gold NL and Palmarejo Gold and Silver Corporation.

CDE has been a top pick of mine and I have posted previous Coeur dAlene Mines Corporation analysis over the past year.

*Disclaimer: The author owns shares in CDE and UXG.

(No Ratings Yet)

Loading ...

Raw Greed Site Upgrade

Posted on November 15, 2007 , Filed Under Stocks | Leave a Comment

Raw Greed has undergone a redesign. I’ve been using the old layout, a modification of the default Kubrick theme, for almost two years. There will be a few fixes while I determine what works and what doesn’t following the upgrade.

(No Ratings Yet)

Loading ...

CDE and UXG Positioned for Strong Gains

Posted on October 29, 2007 , Filed Under Stocks | Leave a Comment

These charts and my annotated notes speak for themselves. I took these screenshots in the middle of the trading day last Friday.

CDE October 26 chart

I’ve loaded up on US Gold Inc. [[UXG]] and Coeur d’Alene Mines Corp. [[CDE]]. I expect to see a major 15-20% move in UXG if the Fed cuts the interest rate next week. A cut would mean a weaker dollar and in turn stronger precious metals prices. With gold currently at $780, we may see a rise over $800 before the end of the year. I started loading up on UXG at prices between $4.40 and $5.5. UXG may top mid $5’s very shortly.

CDE has a very good shot at clearing $4.50 levels as we approach a bullish centerline crossover. The last time we saw a bullish centerline crossover, CDE experienced a nice .70 pop.

As you can see with my previous article about the COT report, there is a large looming commercial short position that will need to be covered if the Fed drops rates. The commercial shorts covering their positions will fuel a nice rise in gold and silver prices. The environment is currently there for strong gold and silver. Precious metals equities are in as good a position as ever to gain 20-30% plus before the end of the year.

I’ve also purchased a large number of January 2008 and January 2009 options in the other precious metals stocks that I favor.

*Disclaimer: The author currently owns shares of UXG and CDE.

(5 votes, average: 2.4 out of 5)

Loading ...

The COT Report and An Emerging Uptrend

Posted on October 25, 2007 , Filed Under Stocks | Leave a Comment

I see a strong emerging uptrend in physical prices for gold and silver. There is now a huge short position built up by commercial shorts according to the most recent COT report. There are only two drastic directions for gold to head at the moment. Gold appears to be overbought and the indication by the COT report is that gold will be shorted down. The opposing view is that a possible rate cut will force the USD into a weaker position bolstering gold prices. The COT report from October 16th, 2007 shows a greater than 3:1 ratio for commercial shorts compared to longs.

Here is the picture for gold from the COT report:

Silver is in nearly a precarious situation as gold with the commercial silver short to long ratio standing at approximately 2.3:1.

My guess is that if a rate cut occurs at the end of the month, the commercial shorts will be forced to cover their positions causing precious metals prices to erupt upward. This wont be your typical pop for gold and silver as the commercial short ratio is quite large.

Here is a note about COT option and future positions taken from this article:

The raw data analyzed below was obtained from the CFTC’s famous Commitments of Traders reports that it publishes weekly. These CoTs are data-rich and offer all kinds of valuable information on long and short positions that traders are taking in commodities futures. Charted over time, the CoT numbers help illuminate long-term futures trading trends that can affect commodities prices.

The official COT summary of options and futures for gold, silver and copper can be found here: http://www.cftc.gov/dea/options/deacmxsof.htm

(No Ratings Yet)

Loading ...

Bargains Abound in Precious Metals Equities

Posted on October 23, 2007 , Filed Under Stocks | Leave a Comment

Time will tell whether my post yesterday over this week being a huge opportunity in precious metals equities will be accurate. I wrote yesterday that it might be the best time for investors to jump into precious metals equities prior to a possible end of the month Fed rate cut. I see plenty of bargains currently. Today I jumped back into Lundin Mining Corporation [[LMC]] at $12.76. Readers can use the search function to read my previous analysis of Lundin Mining. I expect to see LMC back to $13 levels by the end of the week. Jim Cramer pumping LMC is also bound to add visibility and interest to the stock.

I continue to like Silver Wheaton [[SLW]] and Yamana Gold [[AUY]]. I also overlooked Coeur d’Alene Mines Corporation [[CDE]] and Tanzanian Royalty Exploration Corporation [[TRE]]. CDE experienced a 10%+ drop and TRE experienced up to a 20% drop from recent highs during yesterday’s gold and silver correction. TRE at low $5’s is a great bargain with Jim Sinclair at the helm and physical gold prices above $750.

I am expecting to see a technical bounce for US Gold [[UXG]]. UXG is treading in oversold territory with RSI at under 30 and MFI almost under 20. MACD shows a possible uptrend forming as we approach a bullish centerline crossover.

*Disclaimer: The author owns shares in LMC, CDE and UXG.

(1 votes, average: 5 out of 5)

Loading ...

Combating SPAM

Posted on October 23, 2007 , Filed Under Stocks | Leave a Comment

The Raw Greed blog draws a very focused reader base interested in tracking my precious metals and technology stock posts. With a small reader base, I am constantly amazed at the amount of comment SPAM I receive each day. I installed the Bad Behavior plug-in which has helped me fend off over 8000 requests by known SPAM bots each week. I’ve chosen to moderate comments due to the SPAM, so please be patient for your comment to appear.

(No Ratings Yet)

Loading ...