To 321gold home page

Home   Links   Editorials

Metals Comment

Bob Hoye
Institutional Advisors
Dec 10
, 2007

Base Metal Prices: Last week, we noted that metal prices could recover with the stock market.

Our index (less nickel) tested the July high of 826 with a run to 811 in the middle of October, and then it died taking out the low of 691 with the initial financial panic.

The decline continued to 637 on November 22, and the bounce took it to 680 on Friday. Then it slumped to 632 today.

Some firming is still possible with the stock market recovery.

As the changes came into the credit markets in May, we thought it could be a cyclical turn, which suggested as each metal made its high it could mark the end of a cyclical bull market, and the beginning of a cyclical bear.

The resumption of credit distress in October provided confirmation, and our index reached lows last seen in February on the way up. Our index, including nickel, is back to the level last seen in July, 2006.

This is impressive and has yet to adjust to a higher dollar.

Golds: In Early November as the play in gold and the senior gold stocks was becoming measurably overbought, our advice was that bullion could take a modest correction. With this we would sell senior golds in order to buy smaller caps on opportunity.

Gold declined from a high of 848 to 773, from which it has swung up to 837 and down to 783. This week's rally seems tied to the rebound in crude, which had suffered a very good whack.

However, still to be factored in is that the dollar has further to rally and crude can decline further.

However, one aspect of the credit squeeze is still on as the treasury curve continues to steepen and the latest move includes long rates going up. We have been anticipating this aspect and it started on Tuesday. This suggests that long treasuries may no longer be an attractive investment.

The feature of a post-bubble contraction is that the usual investment assets, such as stocks, bonds, and real estate decline relative to gold. In this regard, our measure of gold's relative, or real price is our gold/commodities index. This had a low of 143 in May, which is when the credit contraction started its inevitable course to considerable distress. In July we described the outcome as "The greatest train wreck in the history of credit."

With a number of corrections, gold's real price has worked its way up and at 210 has exceeded the last high of 200 set in early November. This is very constructive for the sector and it is uncertain as to when this will inspire the very beat-up exploration sector. However, the setting is very depressed so there is little downside risk-other than dead money. With all of this in mind, it seems appropriate to begin accumulating well-managed gold exploration stocks. A big discovery would be very constructive.

Novagold (NG) collapsed on news that construction of its large mine was halted due to adverse prices. This could be taken as yet another depressant for the exploration sector. In a word - No! Albeit dramatic, it fits into the pre-production category. And although it's been ages since it was up on the discovery euphoria, recent strength was essentially on - well, the reasoning is elusive.

The way it really works is that an exploration stock is driven by drill results and peaks as the street decides it has a terrific ore body. Then it takes considerable pre-production work and construction to get to start up. This can take years and typically the stock can decline to about one-third of the exploration high. Although extended over a very long time, NG has been in the pre-production category, not exploration.

Gold/Silver Ratio: This continues to flirt with the 56 level and rising through would not just resume the uptrend, but it would be part of the next acute phase of credit concerns.

On a full-blown credit contraction, the ratio could get as high as 100.

The following quotation provides some appropriate insight on the nature of a panic. It could be instructive on the next phase of this contraction.

"Panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works." -John Stuart Mill. 1867


-Bob Hoye
Institutional Advisors

Hoye Archives

The opinions in this report are solely those of the author. The information herein was obtained from various sources; however we do not guarantee its accuracy or completeness. This research report is prepared for general circulation and is circulated for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized.

Investors should note that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to future performance. Neither the information nor any opinion expressed constitutes an offer to buy or sell any securities or options or futures contracts. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investment mentioned in this report. In addition, investors in securities such as ADRs, whose values are influenced by the currency of the underlying security, effectively assume currency risk. Moreover, from time to time, members of the Institutional Advisors team may be long or short positions discussed in our publications.

321gold Ltd