 INSTITUTIONAL ADVISORS DECEMBER 7,
2007
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
email: bobhoye@institutionaladvisors.com
website: www.institutionaladvisors.com
Hoye Archives
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