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Clif Droke

Clif Droke

Clif Droke is the editor of the two times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock…

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A Look at Producer Expectations for Gold, Base Metals Prices

The XAU Gold Silver Index closed 1.38% higher on Thursday, Oct. 8, at 177.22. The Gold Bugs Index (HUI) was 1.43% higher at 449.61. October gold closed 1.14% higher at $1,056. December silver was 1.80% higher at $17.81. Gold is at an all-time high and the XAU index has recently achieved a new recovery high for the year.

Is there a basis for this latest gold and silver stock rally in light of the recent 10-year cycle peak (as discussed in the interview with The Gold Report in September)? What would be the justification for it based on the cycles? My answer is that investors are responding to the 10-year cycle peak by running to the precious metals and its related vehicles by treating them as safe havens. The public's fear of a dollar collapse is no secret and has reached the saturation point. According to one recent poll fully 98 percent of the public is bearish on the dollar's prospects going forward. This makes for a crowded trade to be sure but this extreme in sentiment also can create its own momentum and feed on itself for a while. As we've seen in the recent past, fear can become self-fulfilling and while a market move based solely on fear never lasts for long it can be extremely powerful while it lasts.

Gold meanwhile has already reached the $1,040 level which mentioned last month as a conservative minimum upside target. In my previous commentary I stated my belief that $1,040-$1,050 would be the upside target for the gold price before the 10-year cycle peaked. It looks increasingly likely that gold will exceed this conservative target and possibly hit the nearest round number benchmark of $1,100 before running into some resistance.

Gold stock internal momentum (GOLDMO) is sufficiently buoyant to allow some (though not all) of the actively traded gold shares to rally. The dominant long-term and intermediate-term momentum indicators (circled) are still in an uptrend, a positive factor for the golds. However, the sub-dominant interim momentum indicator (orange line) isn't to be snuffed at. It's currently in a downtrend and this is what's going to create some cross-currents among the mining shares in the coming days.

We saw a similar configuration in the momentum indicators earlier this summer and it caused us to become selective with our stock picking since some stocks obviously stand to benefit from the rising long-term and interim momentum while other stocks are more responsive to the declining momentum indicator shown here. Of course the question is how to determine which stocks to choose and which to avoid. The answer is *relatively* simple: relative strength. Those stocks which remain above their rising 30-day and 60-day moving averages can be held (a select few can even be purchased from here) while those that are lagging behind and struggling below the 30-day MA should mostly be avoided.

Speaking to the heads of several junior and mid-tier mines recently, I still get a sense that producer sentiment has done a complete about-face from the year-ago period. Mining company leaders have, for the most part, embraced a growing conviction that the gold and silver prices, including base metals, can continue its march higher from here.

Neil McMillan, president and CEO of Claude Resources, believes that the gold price can continue its march higher. His company was prepared for the credit crisis before it descended and McMillan has a strong track record of riding out storms and coming out stronger. His view of the yellow metal price is admittedly sanguine:

"I'm very optimistic about the value of gold to purchasers going forward. I put it in perspective this way as others have done: in 1980, adjusted for inflation, gold got to over $2,000 an ounce under a set of financial circumstances that people considered quite extreme. Back then it was inflation. The inflation rate was very high and people were really concerned it was going higher and they sought out gold as an asset where they could preserve their wealth in that environment. So under those circumstances gold got to over $2,000 an ounce."

McMillan acknowledges that a "different set of financial circumstances [exists] today," but adds that these circumstances "provide far greater risk to investors and savers than we saw in 1980 and gold is still at only $1,000 an ounce." He concludes, "There's no reason in my view why [gold] won't continue to increase back through $2,000 an ounce over the next 2-3 years as people realize that these financial concerns are not going away and in fact may be getting worse. So I think this is a long ways from being over and I'm not convinced we'll see dramatic changes in the price but I think you can expect a steady march through $1,200 and $1,500 and over the next 2-3 years possibly through $2,000 an ounce."

The president and CEO of Bard Ventures, Eugene Beukman, sees a stabilizing global economy as the key for the molybdenum and base metals price recovery. Bard Ventures is a junior mining and exploration company with mineral interests in British Columbia and Ontario, focusing on molybdenum, copper, zinc and silver.

"I think that's the million dollar question," he said when asked if the global economic recovery would continue. "I do believe that we've actually turned the corner and we're at the stage where there are a lot more plans coming available for venture capital and exploration. We've seen only in the last 2-3 weeks that some of the large financings that have occurred in the sense that $20 to $70 million bought deals have been announced and completed. So we believe that the whole resource market will be turning and we look forward to a great 2010 and who knows what after that but I believe there's definitely been a turnaround.

Ross Orr, president and CEO of BacTech Mining, said he would be happy if the price of gold continued at current levels without rising from here. His company uses bacterial oxidation and bioleaching technologies for separating precious metals from sulphide ores and concentrates for gold mining companies.

Said Orr, "If [the gold price] did nothing from here I would be very happy. I don't need $2,000 gold. This is perfect. I'm looking at projects where I've got production and capital costs and everything all in for say $400 [an ounce]. That is a nice margin. If it goes to $2,000 it's just anarchy out there. It's hard enough finding projects now with the price of gold where it is because everybody just sort of pulls everything close to their chest."

He added, "As the price of gold goes up people's expectations change dramatically. It just becomes more of a greed factor I guess is what it really is. One thing about gold is that it definitely has a mind of its own. I see it has hit a new high again this morning [Oct. 8]. But we haven't seen that frothiness that we've seen in the past. And I don't know if it's because the ETFs are involved now or whatever because it seems that maybe the retail guys have just been handed their rear end too many times and finally said, "You know what - forget it! I'll buy the ETFs instead."

 

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