CDE and UXG Positioned for Strong Gains

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.

The COT Report and An Emerging Uptrend

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

Bargains Abound in Precious Metals Equities

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.

Combating SPAM

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.

Don’t Believe This Drop

The selling in physical gold and silver is overdone. With a rate cut looming at the end of October, this week and more likely today will be the best time to get in on precious metals equities. Everything is sharply down. Pick up some strong names like Silver Wheaton [[SLW]] or Yamana Gold [[AUY]] as they are moving 10%+ down. I expect that gold prices may edge close to $800 by the end of the year.

Hyperinflation and Gold Momentum Investing

I’m expecting to see some major moves in precious metals stocks in the next two weeks. We are building up momentum toward another possible rate cut at the end of October. I’m guessing that we will see a quarter point cut at the end of the month. The USD depreciation is startling. I’ve been telling friends of mine that I expect to see hyperinflation take hold at some point in the next 5 years. As people lose confidence in the USD they will make a move to real assets. This means people may move into physical assets like gold or property. This will inflate the prices of everything.

I expect to see things pan out in this order:

-Negative consumer sentiment creates temporary deflation
-Fed drops rates and prints more money to improve consumer confidence
-US consumers borrow more as money gets cheap
-Prices go up
-Foreign governments increase local currency rates
-People lose confidence in the USD
-Inflation takes hold
-Fed increases rates to fight inflation
-The rates needed to restore confidence in the USD grow to double digit levels
-Hyperinflation takes hold

At the moment gold is hovering at $750-$770 levels and silver is holding at mid $13 levels. The USD Index recently hit low $77’s, a startling level when you consider how hard it was for us to break under $80. I’ve guessed that the next critical support level for the plunge protection team to hold was $75-$76.

Many precious metals stocks are trading at or near 52-week high’s. Stocks I like at current levels, purely as turnaround momentum investments include:

Gold Fields Inc. [[GFI]]
Tanzanian Royalty Exploration [[TRE]]
Silver Wheaton [[SLW]]
Helca Mining [[HL]]
IAMGOLD [[IAG]]
Goldcorp [[GG]]
Yamana Gold [[AUY]]
US Gold Inc. [[UXG]]

Pay special attention to the last two miners. I expect to see shares of Yamana at $18-$20 and US Gold at $7 levels if gold can break $800.

*Disclaimer: The author currently owns shares of Helca Mining and US Gold Inc.

Precious Metals, Watch Asia

Investors should pay special attention to what Asian gold investors are doing. Ironically while Asia is one of the biggest buyers of gold, media coverage is sparse and sometimes ignored. Why would a gold investor ignore what the buyers are doing?

As gold has risen past $750, gold equities in many major Asian exchanges, particularly in Shanghai and Hong Kong, have risen 300-400%. Needless to say, China is one of the biggest buyers of gold and Asian investors are betting that stock prices will continue to rise. Comparatively since the rate cut on September 18th, 2007, US Gold equities have risen 20-50%. While 20-50% is a great increase, it pales in comparison to the typical 300-400% gains we are seeing in Asia. What this spells out is a difference in expectations. Money is flowing into the mining industry and into gold shares in Asia. Let’s look at Zhaojin Mining (1818.hk), a leading Chinese gold miner I would compare to Barrick Gold [[ABX]] or Newmont Mining [[NEM]].

Shares of Zhaojin moved from a low of $11.40 on August 17th to a high of $44.90 on October 15th, a roughly 294% gain. Zhaojin Mining is a mature gold miner with a P/E of 61. This is definitely not an isolated incident, there are many other Asian gold miners that have also scored a few hundred percent gain in the past two months. Imagine the prices of Barrick or Newmont stock with a P/E of 61, they would both more than double from current prices. Zhaojin Mining is a typical example of what some investors are achieving in terms of investment return.

At some point US equities should play catch up to Asia gold equities. US gold equities may double or triple as investor sentiment experiences a swift shift to irrational bullish momentum.

UXG Is One to Watch

With gold prices hovering above $750, US Gold Corporation [[UXG]] is definitely one gold exploration stock you want to keep your eyes on.

Check out my updated chart for UXG.

uxg chart

UXG still has a number of positive fundamental and technical points in its favor.

US Gold controls one of the largest land packages in Nevada next to major gold producers.
A high percentage of insider shares is owned by Rob McEwen, the former CEO and Chairman of Goldcorp [[GG]].
The chart points out that we are in oversold territory according to RSI and approaching oversold territory according to MFI.
The price is going down without a large short position.

I would wait till I see a bullish centerline crossover before adding more shares or opening a new position in UXG. When we see a crossover I am guessing UXG will very quickly rise to $6-$6.50 levels. It makes no sense to try and catch a falling knife when there are plenty of quality gold producers that I consider undervalued.

*Disclaimer: The author owns a position in UXG.

Watching Taiwan Semiconductor Manufacturing Company Options

I’m currently watching Taiwan Semiconductor Manufacturing Company [[TSM]]. Shares of this well managed company have been dropping despite strong September sales. I expect to see shares coast to the low to mid $9’s. I like the TSM January, 2010, $5 call option WPDAA.X at $4-$4.50. As I pointed out earlier, there is almost no premium on the 2010 options since the market is pricing in uncertainty over the future of the semiconductor industry. All observers of fabrication companies have generally come to understand that we move in 12-18 month technology cycles for computer hardware and in 3-5 year cycles for consumer electronics.

I’ve written in the past that growth in mobile applications and HD technologies will likely fuel growth in the short-term. I still believe we are at the beginning of a new HD consumer electronics cycle. Adoption rate of HD display and disc technologies is just getting started and TSM as the worlds largest outsourced semiconductor fabricator will likely manufacture a lot of the chips that power the graphics cards and rendering technologies for these HD devices.

An Article You Shouldn’t Miss

Every Raw Greed reader who is invested in gold or silver mining stocks should read this article.

This summary from the article says it all:

Trust the fundamentals, and trust the technical analysis that backs it up.

Cash Vs Bonds

A bond can be considered a loan from an entity willing to pay a certain interest rate until the bond matures. By the nature of a bond, your principal is normally guaranteed so long as the company prevents itself from becoming insolvent.

There are many times when an investor should consider bonds as an alternative to holding cash. A major time to consider a bond investment is when there is significant expectation of an interest rate cut. Falling time deposit rates normally means investors will look for higher yields elsewhere. Many bonds trade similar to stocks and are highly liquid just as stocks. Bonds can trade at Net Asset Value (NAV) or at a discount to NAV. When there is some uncertainty over a rate cut you may be able to buy a conservative bond with a decent yield at NAV or just a slight premium to NAV. Bonds pay a fixed coupon rate (read annual interest rate) until maturity and you are guaranteed to receive your principal back.

Bonds are a great investment when the interest rate spread between fixed deposits and a bonds coupon rate increases. Let’s look at the following example:

Let’s look at a fixed deposit of $1,000,000 growing at an average 4.5% interest rate. We will compound the interest twice a year.

Your final amount in five years will be: $1,249,203.43

Let’s compare this to a bond with a 6% coupon rate. We will also compound the interest twice a year.

Your final amount in five years will be: $1,343,916.38

Your gain over the time deposit would be almost $100,000 or a 1o% increase on your original principal.

When you are faced with a situation with falling fixed deposit rates, every little bit that you can safely increase your yield counts.

There are certain bonds that can be considered safer investments than say a currency exchange, stocks or even real estate. As long as the company remains in business you are certain to receive your interest and principal.

The pinnacle of safe investments are fixed deposits and government treasury bonds. A step above this would be infrastructure bonds. Think of these bonds as being your highway’s, your utilities and your communications. The likelihood of the NYC subway system or Con Edison going out of business is almost unthinkable. If you read through this article you will notice that I stress a conservative approach and consider safety first. With ultra conservative bonds you can only expect to get 1-2% higher than current interest rates. However if interest rates fall you will benefit greatly. As long as the interest rate doesn’t go above your coupon rate, an ultra conservative bond will perform better than a fixed deposit.

The greatest advantage of bonds over fixed time deposits though is the ability to use it as a safe short-term hedge against falling interest rates. Many bonds are highly liquid and can be sold at anytime close to your NAV and at times higher than your NAV giving you a fixed coupon rate and a potential increase in principal if you sell early.

In the worst case scenario you will hold the bond until maturity and simply collect 100% of your original interest back plus whatever your interest rate would be. If you buy at a premium to NAV it cuts into the calculation of your annual interest rate since you only get back NAV at maturity.

If you expect an interest rate cut for example you could buy a infrastructure bond like I suggest above and sell it shortly after a cut takes place. When a rate cut takes place it will drive investors to look for a higher yielding investment which in turn will push up the premium for bonds that pay 1-2% higher rates over fixed time deposits. You get the double benefit of a high yield and NAV appreciation.

In some countries there are monopolistic infrastructure services that are private companies supported by the government. These are the safest short-term investments a person can make looking to maximize yield. Many times you can buy these bonds in your local currency so you don’t face any currency exchange risks. Commission charges are usually negligible.

Raw Greed, Items to Research

Here are a few investment ideas to research going into 2008.

Jet Blue [[JBLU]]

Oil prices are trading around $80 at the moment per barrel of crude. A breakdown for oil into mid $70’s should mean good things for the airline industry. Jet Blue has been hit by a number of delayed flights which has put pressure on earnings. Non-weather related delayed flights should be a short-term operational fix. After a large spate of delayed flights at major airport hubs, airports are now seeking to improve efficiency. President Bush has announced support and new legislation aiming at improving airport infrastructure. I expect things to improve for Jet Blue by early 2008.

I am considering an investment in JBLU at under $9.

Visa IPO

This one is probably going to be huge.

Taken from a AP press release:

A year after MasterCard Inc. [[MA]] sold shares of itself to the public, the Visa credit card network is preparing an initial public offering of its own. Lehman Brothers analyst Bruce Harting said that because MasterCard is the publicly traded company that most resembles Visa, the company’s stock will probably be valued similarly.

That bodes well for Visa. MasterCard’s share price has quadrupled since it went public in May at less than $40.

Goldman was the underwriter for MA. Getting allocation required some good connections or a strong client relationship with Goldman. It is reported that Visa’s underwriters will be Morgan Stanley and Lehman Brothers.

Discover Financial Services [[DFS]]

Discover Financial Services was a spinoff by Morgan Stanley. I would consider an investment in DFS depending on how well Mastercard and VISA perform in 2008.

Investing in Gold, Trust the Famous Executives

When gold is as hot as it is today, it makes sense to watch the actions of top management executives who have proven track records. With that in mind, I am beginning to trade positions in Jim Sinclair’s, Tanzanian Royalty Exploration Corporation [[TRE]] and Rob McEwen’s, US Gold Corporation [[UXG]]. Both of these well known executives have been involved in the exploration and mining industry longer than most of us have been trading mining shares.

Jim Sinclair is a famous precious metals specialist, commodities and foreign currency trader.

Taken from Jim’s website:

From 1981 to 1984, Mr. Sinclair served as a Precious Metals Advisor to Hunt Oil and the Hunt family for the liquidation of their silver position as a prerequisite for the $1 billion loan arranged by the Chairman of the Federal Reserve, Paul Volker.

He was also a General Partner and Member of the Executive Committee of two New York Stock Exchange firms and President of Sinclair Global Clearing Corporation (commodity clearing firm) and Global Arbitrage (derivative dealer in metals and currencies).

In April 2002, shareholders of Tanzanian Royalty Exploration (formerly Tan Range Exploration) approved the acquisition of Tanzania American International, a company controlled by the Sinclair family, for shares in Tan Range. Following this transaction, Mr. Sinclair became Chairman of Tan Range and now leads its efforts to become a gold royalty company.

Rob McEwen is the former Chairman and CEO of Goldcorp [[GG]].

Taken from Rob’s website:

Rob McEwen is Chairman and CEO of US Gold and Lexam Explorations and the founder and former Chairman and CEO of Goldcorp, which is the world’s lowest cost million ounce gold producer. Rob followed his father into the investment industry and developed a passion for gold. In 1990 Rob jumped into the mining industry, where he transformed Goldcorp from a collection of small companies into a mining powerhouse. Since 1993, when Rob started restructuring Goldcorp, its market capitalization has grown from US$50 million to over $10 Billion and Goldcorp’s share price has increased at a 28% compound annual growth rate.

Since July 2005, when Rob became US Gold’s largest shareholder and shortly thereafter the company’s Chairman and CEO, its share price has increased by approximately 1,170% as the company pursues its goal of becoming Nevada’s premier exploration company.

Jim and Rob both have a strong vested interest in their companies success by holding a large number of insider shares. I like what I see from both companies as they are poised to become strong companies on the backs of proven leaders.

I exited a position in TRE yesterday at $5.85 and opened a position in UXG in the past two days under $5.50. I will likely trade in and out of both companies as we lead up to an expected rate cute in October.

Timberland Update

Timberland Company [[TBL]] failed to sustain any meaningful breakout in the last trading sessions. The market was up over 100 points today and Timberland was hovering between high $19’s to low $20’s. I sold my TBL position yesterday at $20.

Investing in Timberland Company

I’ve updated this article over the weekend.

I first started watching Timberland Company [[TBL]] after using Joel Greenblatt’s formula for identifying potentially undervalued stocks. Joel’s formula covered in The Little Book that Beats the Market, centers on picking stocks with a high return on capital and earnings yield. Although it’s not recommended to do this, I use ROE and ROA criteria for comparable statistics due to the ease of research on Yahoo! Finance.

Timberland was among a list of companies I found with a high ROE and ROA. Let’s look at the fundamental statistics I care about:

Total Cash: 97.53M
Total Debt: 0
ROA: 11.62%
ROE: 15.49%
Trailing P/E: 15.36
Forward P/E: 17.01

Timberland is a well managed company with a strong established brand name. The company has turned in a few consistent quarters of declining earnings. Timberland faces some issues about slowing growth that have created a definite cause for concern. In addition to the slowing growth, the stock market has been soft on recommending retail stocks since there are lingering concerns of a credit crunch that may drive the country into a recession. Recent declining earnings and macroeconomic concerns are weighing down Timberlands stock price.

The bullish flipside to this, is the long-term track record of Timberland’s management. To combat slowing growth, Timberland has announced that it will shut down 40 brand name stores in an effort to restructure costs. The management has demonstrated its ability to turn in strong earnings in the past and does a fabulous job at managing debt.

I’ve taken a small 1000 share position in TBL and expect to see shares in the $21-$23 range before the end of the year.

*Disclaimer: The author owns 1000 shares of TBL.